The Half-Life of the Welfare State

A while back, Peggy Noonan wrote that "unsustainable" is the "word of the decade." She's onto something. From the debates over Social Security and Medicare reform, to the Greek debacle in Europe, to the pensions of state government employees, to the higher-education bubble, we are saddled with institutions that are economically unsustainable. They are doomed to collapse by the ruthless certainty of arithmetic.

What do all of these things have in common? They are manifestations of the modern welfare state--and that is what is unsustainable.

I could rehearse the statistics. Social Security is projected to completely use up its trust fund in 2036 and Medicare in 2024, but both systems are already going into the red because there are no actual assets in those trust funds. As Social Security and Medicare begin to pay out more than they take in from payroll taxes, they are swallowing up the entire federal budget and guaranteeing a steady increase in our already dangerous debt. For some state governments, like California, insolvency is looming. For others, it has already arrived; Illinois hasn't paid its bills for years. And where we're all headed is demonstrated by Greece, where government debt now equals more than 175% of the country's annual economic output, well above the threshold (roughly 100%) where debt starts to become impossible to service.

Everyone has already had plenty of time to absorb these statistics. What most people haven't absorbed yet is the basic economic unsustainability of the welfare state.

The welfare state is taken for granted as the "normal" state of affairs, as if it has always existed. At least, it is assumed that the welfare state has been around for so many decades that the current crisis is just a temporary aberration, a rough patch that we can get through with only minor reforms. But the actual economic history does not bear this out. The welfare state "as we know it"--that is, at its current size--is a product of recent decades. In all of its branches, it has vastly increased just in the past 30 to 40 years. So the current crisis is not some temporary aberration. It is cause and effect. It is a direct consequence of the modern welfare state

Let's take a look at the major branches of the welfare state, particularly the ones that are in crisis. They are: education, government employment, health care, and retirement.

The first two are interconnected. State governments are in crisis, not because of firefighters and policeman, but mostly because of salaries and pensions for public school teachers. Government spending on all levels for public education has more than doubled since 1970, after adjusting for inflation, with no improvement in the system's results.

Something similar has been happening in higher education, mostly through the indirect mechanism of student loans. I recently had a conversation with some folks who went to college in the 1960s. When they went to school, none of them had even heard of such a thing as a student loan. It is an institution that grew in the 1970s, with vigorous government encouragement and guarantees, as part of an effort to make college education an entitlement. By the time I went to college, in the 1980s, student loans had become ubiquitous. Since then they have become ruinous. Subsidized loans have fueled decades of rapid growth in tuition, an increase that makes the housing bubble look modest.

Now let's turn to government employment. This, also, is an integral part of the welfare state. It has long been a means for politicians to provide jobs, salaries, benefits, and pensions to blocs of highly motivated political supporters. Here again, we find that the large-scale looting of the public treasury is relatively recent. Consider a recent report about the origin of disastrous pension and health-care obligations for city employees in Providence, Rhode Island. In 1989, the city's Retirement Board, which had been packed with a majority of union representatives, discovered it had the power to unilaterally increase pensions and disability payments--and they proceeded to do so. An exasperated city official rushed into the mayor's office to report, "They just broke the city." A new report, in the New York Times of all places, describes a similar shakedown effort, "Operation Domino," in which representatives of government employees' unions in California went town to town bullying government officials into voting for ever more generous wages and benefits.

And then there is the great example of Greece. We're used to assuming that the Europeans are a bunch of socialists, but the Greek welfare state is actually relatively recent, dating to the rise to power of the Panhellenic Socialist Party in 1981, which created comprehensive entitlements to health care and old-age pensions. The system immediately caused a crisis, particularly a shortage of doctors and hospitals. But serious reform was put off by Greece's entry into the European Union. One of the main functions of Europe's monetary union was to allow the welfare states of Southern Europe--the so-called PIGS nations, Portugal, Italy, Greece, and Spain--to ride off of Germany's good credit and borrow enormous sums of money. They used this debt to delay the day of reckoning, which has finally arrived.

Add all of this up and we can roughly measure the half-life of the welfare state, its rate of fiscal decay. The time from the creation of a generous welfare state to its fiscal collapse is about 30 years.

Yes, many of the institutions of the welfare state were in place, both here and in Greece, for longer than 30 years. But they had not grown to full size. Social Security, when it was first adopted, provided benefits only for the last few years of the average person's life. These institutions were just the camel's nose in the tent. It is primarily in the past 30 years that the camel has nosed itself all the way in and filled up the tent.

In the US and Northern Europe, the process of decay has arguably taken a little longer. That is partly because we started with a much more productive economy, and also because we have benefited from a stronger political opposition, which slowed the expansion of the welfare state. This has delayed the inevitable collapse, but it has not fundamentally changed our direction.

The overall conclusion remains: the generous welfare state is a relatively recent experiment, and it is in the throes of a spectacular, world-wide economic failure.

I remember when the financial crisis hit, two and a half years ago, hearing a decrepit old British Marxist declare that this would do for capitalism what the fall of the Berlin Wall did for socialism. He had it completely backwards. By accelerating the financial collapse of the welfare state, the economic downturn will provide the second half of the lesson we should have learned when the wall fell. Back then we learned that full-blown, totalitarian socialism was a failure. Now we are learning that the moderate, "democratic" welfare state is a failure.

The only question is: why did anyone think otherwise? That's especially true when you recall that defenders of capitalism warned decades ago about all of the consequences we are seeing today. Why did everyone think we could avoid them?

Here is what I think is the big picture of the rise and fall of the welfare state. The welfare state arose as a reaction against capitalism. Capitalism was a system built on individualism and self-reliance, and it came up against reflexive resistance from a traditional moral code that mandated self-sacrifice and the subordination of the individual to the needs of "society." It was in the image of this opposite moral code that the welfare state was conceived.

And yet the welfare state was also a reaction to capitalism's achievement. No one in any previous era would have imagined that everyone could be provided with lifelong health care, or have the luxury of spending much of their youth in school, or live in comfortable idleness for decades during old age (or, in some enclaves of the welfare state, from late middle age onward). It was only the unprecedented wealth created by capitalism that made the welfare state seem plausible. In particular, the post-World War II boom in America and Europe supported the illusion that we were rich enough to afford a lavish system of "cradle to grave" government largesse.

But it was an illusion. It was a system that depended on a vigorous engine of wealth-creation--but it punished wealth-creation and the virtues of the wealth-creators, while encouraging and rewarding the exact opposite. In the welfare state, supporting oneself through one's own productive effort is considered both morally and practically optional, while living off the largesse extracted from those who do produce is considered both a moral and a legal right. So you get less of the first kind of action, and more of the second.

Hence the now-familiar life cycle of the welfare state. Lavish benefits are decreed by the government and millions rush to claim them, leading to shortages of doctors and soaring prices for health care and education, which the government scrambles to limit with regulations, price controls, and an ever-increasing bureaucracy. Meanwhile, more people are taken out of the productive sector of the economy, into four years of arcane and useless classes at school, or extended early retirements, or whole lifetimes in make-work jobs or on "disability" pay, while taxes spiral upward on the remaining producers. Yet it is still never enough, so government makes up the difference with chronic deficit spending and an ever-increasing debt, until we reach--well, until we reach where we all are now.

The big task of our era--which we are beginning to see in the austerity measures in Europe, in state-level votes to curb unions and slash the pay of government employees, and in proposals for reform of the big middle class entitlements--is a slow, painful, reluctant unwinding of the welfare state.

What we need to realize is that the modern welfare state is a temporary aberration, historically, economically, and morally. It was a brief historical holiday from the basic principle that wealth is earned through work. It was a system that could not work because it tried to defy the laws of nature. We need to grasp that basic lesson now, and proceed deliberately and quickly with the task of dismantling the welfare state and rebuilding our economies on the secure footing of individualism and capitalism.