Lessons to be Learned from Dismantling Welfare-Entitlement States

Greece went broke. Now it's Italy. Who's next? Perhaps Spain, Portugal or even France?

What happened to cause all this turmoil, and what is the fundamental lesson for Americans?

The basic lesson coming from Europe is simple and straightforward--don't become a heavily taxed and slowly growing entitlement state.

Although our country is clearly headed in the wrong direction, we still have time to change course. If we do what's necessary, we'll begin to reduce the size of government and entitlements. We'll also adopt behaviors as individuals and households by which we begin to live within our means.

It won't be an easy transition to make after all these years of carefree and often reckless spending, but it's an absolutely necessary one. It will make us a better country and a happier people as well.

Europe's Entitlement Reckoning provides an explicit warning and heads-up about the negative consequences associated with a high-tax, slow growth, welfare-entitlement state. Here's an excerpt:

"In Italy, as in Greece, Spain and Portugal and eventually France, the welfare-entitlement state has hit a wall. Successive governments on the Continent, right and left, have financed generous entitlements with high taxes and towering piles of debt. Their economies have failed to grow fast enough to keep up, and last year the money started to run out. The reckoning has arrived.

If the first step in curing an addiction is to acknowledge it, there is little sign of that in Europe. The solutions on offer are to spend still more money, to have the Germans bail out everybody else, or to ditch the euro so bankrupt countries can again devalue their own currencies. France's latest debt solution includes raising corporate, capitals gains and sales taxes.

Yet Europe's problem isn't the euro. If it were, Hungary, Iceland and Latvia—none of which use the euro—would have been spared their painful days of reckoning. The same applies for Britain. Europe is in a debt spiral brought about by spendthrift, overweening and inefficient governments.

This is a crisis of the welfare state, and Italy is a model basket case. Mario Monti, who is tipped to lead a new government of technocrats, once described the Italian economy as a case of "self-inflicted strangulation." Government debt is 120% of GDP, making Italy the world's third largest borrower after the U.S. and Japan. Its economy last grew at more than 2% a year in 2000."

Now that we've agreed that Europe is a mess, what's the outlook for the U.S.? The article says this:

"An unhappy byproduct of a welfare state is that it creates powerful interests that will fight to the last to preserve their free lunch, no matter the cost to the country.

But now hard choices can no longer be postponed. And the solution to Europe's debt crisis must begin with reforming, if not dismantling, the welfare state. Europe rose from the economic grave in the 1960s, it rode the Reagan-Thatcher reform wave to more modest growth in the 1980s-'90s, and it can grow again. A decade ago, Germany was called the "sick man of Europe," bedeviled by Italian-like economic problems. But a center-left coalition, supported by trade unions and German society, overhauled labor and welfare codes and set the stage for the current (if still modest) export-led revival in Germany.

The road from Rome may now lead to Paris, Madrid and other debt-ridden European countries. But this is no cause for U.S. chortling, because that same road also leads to Sacramento, Albany and Washington. America's federal debt was 35.7% of GDP in 2007, but it was 61.3% last year and is rising on an Italian trajectory. The lesson of Italy, and most of the rest of Europe, is never to become a high-tax, slow-growth entitlement state, because the inevitable reckoning is nasty, brutish and not short."

In the U.S. we currently borrow about forty cents of each dollar spent by government. As the Europeans are learning, that's unsustainable and dangerous, too.

Will we learn from Europe and seize the opportunity while there's still ample time to do so? That is, will the U.S. now fundamentally address its debt, deficits, low growth, taxes and welfare-entitlements? Will we pay for what we promise to ourselves?

If we do, all will be well. If we don't, our day of reckoning will come, just as it has in Europe.

Our American problem is a very simple one. We've been spending money we don't have by borrowing it. And we've piled on debts which will be difficult to repay.

But making an already difficult situation even worse is the fact that we won't achieve sufficient economic growth anytime soon which would enable us to "outgrow" our financial mess. We have ahead of us many years of deleveraging, and all that entails, as a result of our past spending sprees.

If we continue down the welfare-entitlement road, we'll need to raise taxes dramatically and across the board on all U.S. taxpayers. That means we'll be sentencing future Americans to a lower standard of living.

Of course, there's another and much better option available for us to choose. If we opt out of the welfare-entitlement state model, we'll embark on a much needed and very serious downsizing of government and entitlement spending. The result will be stronger economic growth, reduced unemployment and a higher standard of living for all Americans. We'll be leaving to future citizens what was left to us--a better America, the land of opportunity.

That better America is there for both current and future Americans. And that's the real lesson coming from Europe today.

The choice is ours, as always.

Thanks. Bob.