The welfare state's death spiral

What we're seeing in Greece is the death spiral of the welfare state. This isn't Greece's problem alone, and that's why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven't fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies, says columnist Robert J. Samuelson.

The welfare state's death spiral is this:

Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession.

By allowing deficits to balloon, they risk a financial crisis as investors one day – no one knows when – doubt governments' ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates.

Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy; perversely, that would make paying the remaining benefits harder.

Greece illustrates the bind:

To gain loans from other European countries and the International Monetary Fund, it embraced budget austerity.

Average pension benefits will be cut 11 per cent; wages for government workers will be cut 14 per cent; the basic rate for the value added tax will rise from 21 per cent to 23 per cent.

These measures will plunge Greece into a deep recession; in 2009, unemployment was about 9 per cent; some economists expect it to peak near 19 per cent.

If only a few countries faced these problems, the solution would be easy, says Samuelson. Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states. They might defuse the dangers by gradually trimming future benefits in a way that reassured financial markets. In practice, they haven't done that; indeed, President Obama's health program expands benefits. What happens if all these countries are thrust into Greece's situation? One answer – another worldwide economic collapse – explains why dawdling is so risky.

Source: Robert J. Samuelson, The Welfare State's Death Spiral, Washington Post, May 10, 2010.

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First published by the National Center for Policy Analysis, Dallas and Washington, USA

FMF Policy Bulletin/ 18 May 2010

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