Wednesday, January 16, 2013

Europe's Current Welfare State ... Our Choice for the Future,Too?

We the People are beginning to catch on to the fact that we can't afford to allow government spending to continue as high as it is without taxing more.

And choosing the higher taxation route won't involve only the relatively few fat cats among us. The "middle class" will be paying much more as well unless we finally get serious about government spending reductions and are willing to control spending on entitlements such as Social Security, Medicare and so forth.

To put it bluntly, something's gotta give. It's either substantially less government spending, higher taxes on all of us minions or a combination of both. That's the future we must pick for ourselves and succeeding generations.

And which path we choose will have a tremendous influence on the the future well being of ALL Americans, rich and poor, young and old. And the middle class and middle aged among us as well. Everybody.

That's because of one straightforward fact of life --- the economic growth upon which prosperous societies depend relies on private sector investment, and the high taxes necessary to support a welfare state deprive the private sector of those investment funds needed to fuel that economic growth.

We only ever have available to spend and invest 100% of what we produce as a nation. That portion which is taken by the government reduces the amount left to the private sector to invest in our economy and create jobs and prosperity for our citizens. It's that simple.

And for a free lesson in government spending and its impact on economic growth and jobs over a long period of time, the post World War II European model provides us with a great example of what happens to societies who choose the welfare state.

As for America, my bet is that soon enough of our "public servants" will be convinced that the big spending welfare state approach of free lunches for one and all must end and that the big spending government knows best high taxation way of life isn't a sustainable way. But the desired outcome is by no means a certainty, and meanwhile the clock is ticking and the debt bomb is closer to going off.

Let's turn to Europe for that lesson now.

Europe's Bankrupt Welfare State has much to say to all Americans:

"The euro survived 2012 intact, and once again Europe's leaders are declaring victory in the fight to preserve the single currency. In a speech in Portugal Monday, European Commission President Jose Manuel Barroso said the existential threat to the euro was a thing of the past. If only. . . .

But the euro-zone unemployment numbers out this week are a reminder that the euro crisis is not so much over as quiescent. Joblessness in the single-currency bloc hit a record 11.8%. Youth unemployment stands at 24.4% and is above 50% in Spain and Greece.

Some observers will blame the joblessness and lack of growth in the euro zone on the austerity supposedly being imposed on the Continent by Berlin. But the real story is more ominous.

Europe's vaunted social model has struggled to generate growth or jobs for decades. Prior to the creation of the euro, national governments masked this problem with a combination of deficit spending and devaluation. The borrowed money would help pay for generous welfare benefits for those driven out of work by inflexible labor-market rules and economic stagnation. . . .
The euro closed off that release valve for Europe's most sclerotic welfare states. But because it also lowered their borrowing costs initially, it facilitated a spending binge that kept the party going for a time. More sober economic observers warned that if the euro was to survive, reforms were necessary in countries for whom beggar-thy-neighbor devaluations had become a way of life. But until Greece stopped the music in late 2009, political leaders in most countries largely disregarded the warnings.

Germany was a notable exception, pushing through painful reforms of its tax system, labor markets and welfare benefits in the euro's early years, and it is now vilified for its trouble, even as it outperforms its neighbors and helps keep the euro zone afloat.

The discovery of Greece's serial budget deceptions also helped close off Southern Europe's other main release valve—permanent deficit spending. It is commonplace to say that Europe can't afford to keep borrowing and spending the way it's done in recent years, but it's closer to the truth to say it could never afford it. What's changed is that the biggest spenders have run out of palliatives.

And this is Europe's present and continuing danger. Budgets are being cut in places like Greece, and there are halting, reluctant signs of reform around the edges of the welfare state. But there remains no clear consensus, at least outside Germany, that the European way of welfare itself is bankrupt, that it never worked as well as its defenders pretended, and what we're witnessing is the coming due of all the checks kited over decades to keep it afloat.

The euro zone may be enjoying a respite. But the economic evidence shows how little has been fixed. Mr. Draghi's (European Central Bank President) blank check addressed the symptom, but not the cause, of the euro zone's economic woes. And unless those are addressed—with more flexible labor markets, a smaller state and lower taxes—the crisis will be back in the form of social unrest, political populism and a generation of young Europeans who don't know what it is to be able to find a good job."

Summing Up

The truth is the truth. More government spending equals less private sector investment.

And less private sector investment equals less economic growth for a society.

And less economic growth equals a stagnant economy, fewer jobs and less prosperity for the citizens of that society.

For prosperous nations, welfare states are unsustainable. But then again, out-of-control and continuous deficit spending by government is unsustainable as well.

The bills are finally coming due, and We the People will have to pay them.

There's no other way out of this.

But while digging our way out, we should at least take the time to learn the many valuable but painful lessons available from the experience of Europe.

By so doing, we can right the American ship and save the America we know and love for future Americans.

That's my take, my wish, and my view, too.

Thanks. Bob.

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