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Welfare States R.I.P.

This post appeared over two years ago, but remains relevant today.

“The worst thing in the world next to anarchy is government.” Henry Ward Beecher

Bloggers post what they claim to be the “scariest economic chart” or the “chart of the century.” Indeed, many data sets are frightening, but none more so than the one to the left. Modern government has failed. These countries are insolvent and will default.

Jagadeesh Gokhale compiled these figures on European debt. This data shows incontrovertibly that all western democracies are on death row. The unlimited welfare state is the cause. Some governments are delusional, believing they can continue on their present paths. Others cling irrationally to hopes of some miraculous reprieve. All are dead men walking.

Government has always been inefficient and mostly ineffective. For most of history that was inconsequential, because governments had limited roles. Monarchies and various forms of authoritarianism had no reason to buy votes. That changed when participative government was instituted. The dangers of participative government devolving into democracy were well understood:

“A democracy cannot exist as a permanent form of government. It can only exist until the voters discover that they can vote themselves largess from the public treasury. From that time on the majority always votes for the candidates promising the most benefits from the public treasury, with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship.” – Alexander Fraser Tytler, 18th century Historian and Jurist

“Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself. There is never a democracy that did not commit suicide.” — John Adams

Otto von Bismark

Keynes

In the 1880s Otto von Bismark instituted the first welfare state. Other governments followed with varying time lags. The Progressive Era in the US created the Federal Reserve and the Federal Income Tax, both in 1913. They provided powers never intended by the Constitution. In the late 1930s the US started a social security system, the last developed country to do so.

Once democracy was unleashed, citizens voted themselves benefits. Keynesian economics assisted politicians in their quest for votes.  James Buchanan and Richard Wagner observed in Democracy in Deficit:

“With the completion of the Keynesian revolution, these time-tested principles of fiscal responsibility were consigned to the heap of superstitious nostrums that once stifled enlightened political-fiscal activism.”

The last barrier to fiscal irresponsibility was removed in 1971 with the introduction of universal fiat currency. In the last 50 years, the US has not had a true surplus. Keynes’ theory, which envisioned deficits in slow economies offset by surpluses otherwise, was co-opted by the political classes. In less than seventy-five years, all welfare states were insolvent. The graphic below depicts government debt to GDP ratios around the world:

From Financial Armageddon

Reinhart and Rogoff, based on their 800-year study of sovereign bankruptcies, determined that 90% of GDP was a critical level of debt and usually ended in sovereign bankruptcy. The US government has $12.5 Trillion of funded debt, almost 90% of last year’s GDP. The above graphic only shows debt held by the public. In the case of the US, about $5.5 Trillion is held as IOUs in the Social Security “trust fund.” That fund is no longer producing cash but demanding it as of this year.

The following chart provides actual and projected figures for major countries:

From Zerohedge

As bad as these numbers are, it gets worse. While serious enough, funded debt is not the big problem. Unfunded entitlements (Social Security, Medicare and Medicaid) are. In the US, these were estimated to be $106 Trillion. The GDP of the US was $14.1 Trillion last year, meaning total debt was 840% of GDP. The table at the upper left shows the US at 500% of GDP rather than 840%. That number reflects the present value of the unfunded liabilities out to 2082. The larger number, provided by the trustees of the plans, is based on an infinite time horizon. Jagadeesh Gokhale provides the rationale why this horizon is proper.

The same table shows European debt at 484% of GDP, but this figure seriously understates liabilities. European numbers are only reflected out to 2051. Were the numbers calculated to 2082, they would be larger than the US number. Furthermore, if the calculation were done on an infinite time horizon, it would exceed the US figure of 840%.

Because the data were unavailable, precise numbers cannot be determined. Three important reasons support the conclusion that they are worse than the US:

  • The US unfunded liability for Social Security, when calculated to 2082 is only one-third of the liability when calculated to infinity. Total US unfunded liabilities to infinity are 100% larger than the 2082 number.
  • Europe’s economy grows slower than the US, exacerbating its welfare burden in the future.
  • The demographics in Europe (fewer young people supporting the old) are more severe, imposing more imbalances on social systems in the future.

Based on these considerations, it appears that the European average of 484% would be substantially higher than the US figure of 840% if calculated comparably.

To illustrate insolvency, the US will be used. Similar calculations apply for the other countries. The numbers are actually far worse for all countries when shown against tax revenues, the means by which government can service their commitments. In “Spiraling to Bankruptcy” it was shown that the US cannot possibly service their commitments. The analysis used numbers from one year ago, less unfavorable than current numbers. From that post:

Send in an Additional $1,525,000 With Your Tax Return: To further put the problem into perspective, the Federal Government owes about $112 TRILLION in actual debt and social promises. Assuming a total population of 315 million people, the portion of Federal Government debt that is owed by every man, woman and child in this country is about $381,000! Or, a family of four owes $1,525,000 of which they are unaware. This amount is in addition to whatever mortgages, credit card debt, car loans or other loans a family might have.

Would You Give This Man a Mortgage? … The Federal Government collects about $2.5 Trillion in total revenues a year. That is from all sources of taxes and fees. Think of that as an individual’s annual gross salary. The debt owed by the Government can be looked at as a great big mortgage. Thus, we have a family that has a mortgage 44.8 times greater than gross salary. That would be the equivalent of a man earning $50,000 gross salary having a mortgage of $2,240,000! An interest-only mortgage at 6% would require the family to pay annual interest of $134,000 per year. A conventional mortgage would be much higher. The example becomes even more ludicrous when one recognizes that taxes, food, clothing, savings, etc. all have to be subtracted from gross pay to determine what is left for debt service.

Debt Death Spiral: The Federal Government is in what is known as a Debt Death Spiral. They are unable to pay the actual and implied interest on their debt. Hence, the unpaid balance is added back to the amount owed, making the problem worse next year. This debt spiral is growing exponentially. There is no way to escape a certain mathematical end.

The US is insolvent. Mathematically, it is impossible to service the obligations without defaults. It is highly improbable that inflation can solve the problem, although that will probably be tried. Europe is in a worse condition. Japan, not shown, is in a similar state.

In the US, the numbers are even worse than they appear. Gimmickry extends beyond accounting. For a sampling, see “Government is 79% of the Economy.” In addition, more than unfunded entitlements are unaccounted for. Per the Wall Street Journal:

The bigger issue is that all of Fan[nie] and Fred[ie]’s liabilities, whether kept inside the companies or hidden in a dark corner of the Treasury, are now Uncle Sam’s responsibility. Moving their bad assets into a new Baddie Mae would only preserve the fiction that there is a difference between the government’s obligations and those of Fan and Fred. Not even Barney Frank could believe that any more.

Proper accounting for Fannie and Freddie would add over $5 Trillion of additional government debt. That would raise the debt obligation of the US government to $18 Trillion, well above the 90% of GDP that Reinhart and Rogoff consider critical.

The welfare state, a relatively recent historical concept, has failed miserably all around the world. The inability of politicians to say no or not play Santa Claus appears to be universal. It has every welfare state headed for bankruptcy. It is unlikely that politicians will act to head off this problem, but markets will eventually put these states out of their misery. Unfortunately, more damage will be done while we await markets to ring the bell that tolls for the welfare state.

It is ironic that the first democracy, Greece, may also be the first casualty. But then, they went through this process before, eons ago.

Monty Pelerin published an earlier version of this article on PajamasMedia.

8 thoughts on “Welfare States R.I.P.”

  1. Kinda stretched truth there a bit, huh? I´m not saying things are rosy but lying about doesn´t help your cause…
    First, comparing todays debt with the GDP of ten years ago is grossly unfair and dishonest. Just in the case of the USA, GDP is about 50% higher nominally and debt is nominal. I´m sure the other countries are similar.

    Secondly, you forgot to insert a green dot just about where my country Sweden is in the debt/GDP map. I haven´t got the latest number but socialist Sweden has about 34% of GDP in debt.

    And third, my biggest peeve with this article: future obligations can not be compared with mortgage obligations. Compare it with utilities or health insurance. It does not run up interest and can be negotiated, inflated or ignored.

    I have zero debt but a future utilities obligations of $50,000. Would you lend me money?

  2. Our “democracy” is a fascist slum, run by corporate welfare queens. There have been few real democracies outside Switzerland, with its national initiative process empowering the people.
    Also, the founders were raised on Cicero et.al and the stories of Roman and Greek slave owners who greatly feared the vote of the common man and slaves being freed. So their railing against democracy is bogus because they were all privileged inhabitants of slave states states and never experience any real democracy.

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  4. The “welfare state” you describe in your article should first start with the corporate welfare and military industrial complex state. Corporations regularly pay next to no taxes. Military contractor (mercenary) and ridiculous make-money projects fueled by the Cold War and the nonexistent, made-up “War on Terror” have drained the world economies; the fraud and theft of investment bankers has done the rest.

    As for so-called entitlements like Social Security, workers paid into this program whether they wanted to or not, only to have the money stolen by the government. Now it’s called “entitlement.” Rubbish, that program was funded. Government malfeasance and corruption are the reason for the bankruptcy of world governments, along with the fractional-reserve banking system which guarantees unending debt. “People voting themselves benefits” is disingenuous and dishonest, as the peoples “representatives” control what benefits they get; they do not just vote for these things and receive them automatically. The pilferage of the government and corporate-welfare state along with fractional-reserve banking and derivative market criminality are the culprits for the bankruptcy of modern government, period.

  5. Good article. As a European though it`s pretty clear that it`s much more than the welfare state that`s been the problem for the past 150 years. I recently read one of the books of von Treitschke regarding the need for governments to be “absolutely immoral” in the divine pursuit of making the state strong and powerful. No matter how many innocents it had to trample, the government was good if it increased the power of the state. The German Reich followed the guidelines laid out by scholars like this guy, as well as Fichte, Hegel and Marx until it`s collapse in 1918, and Hitler`s regime added a few more people like Nitzche, Gobineau and Chamberlain to the mix to get a racial mythology going. This is at least a good part of the explanation for why the Nazi state was so systematically criminal.
    But when you look at every European government since, and every American government since 1913, it would seem that this is the working principle still. With a few changes, such as an insane focus on “sustainability”, depoplation, destroying the nation states and a limp wristed political correctness nothing has changed today. Apparently the goal of the current world government structure is to lie, steal and kill as much as possible, and start illegal wars once a year if possible. No moral arguments penetrate either in governments, the media or in academia. Meanwhile these diseased doctrines and systems of thought are what have shaped the bureaucracy that is at the foundation of the welfare state, and what fuels quackademics and prestitutes everywhere. It is and always has been about social control, not welfare. Which is why it hasn`t failed at all but triumphed. The social structure of the entire west and much of the rest of the world has been permanently damaged if not totally ruined, making us easy prey to fascist criminals from the top and communist criminals from the bottom.
    God help us….

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  7. This article is more than “relevant”, it now has the benefit of a couple of years of hindsight to add credence to its thesis. Indeed, the $12.5T in debt mentioned in the text now pales in comparison to current reality in which we have just crossed the $16T threshold. Proof positive that despite the clear indicators of a fiscal crisis, nothing has been done- nor will it be done- to control this suicidal trend.
    There will be in our nation a rebirth of self-reliance and life independent of government handouts simply because there is no alternative. I hope all Monty’s readers see this clearly enough to prepare for the inevitable.

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