Collapse of the Welfare State
Politics / US Politics Jan 09, 2011 - 05:57 AM GMTBy: Gary_North
Rock a bye baby in the treetop,
When the wind blows the cradle will rock,
When the bough breaks the cradle will fall,
And down will come baby, cradle and all.
I have never understood the setting of this nursery rhyme. What is a cradle doing in a treetop? Why is a baby in it?
This nursery rhyme is more appropriate today than ever before in Western history. Politicians around the world have passed laws that offer free cradles. "Put your child in a government-funded cradle high in a tree at no risk. Your child can enjoy the rocking of the cradle for hours. Put wind power to work for you free of charge! This frees up time for you."
Politicians know that the hand that rocks the cradle rules the world. They want to get mothers away from the cradles as early as possible. Mothers, who think they have better things to do than rock cradles, agree. They hand over their children to a series of strangers whom the government has certified as professional cradle-rockers.
All over the world, governments pay for these cradles. Most governments have laws against private cradles. Those few cradles that are allowed are heavily regulated. As for cradles at home, in Europe this is illegal. In the United States, it is regulated.
The cradles are placed in government-funded trees. Each year, the growing children are placed in larger cradles higher up in the trees. The boughs droop. Caretakers put up wires to keep boughs from breaking. But anyone with eyes can see that the boughs are sagging badly in most trees. There are too many cradles and not enough boughs.
Critics complain that the trees don't look as healthy as they did 50 years ago. Critics of trees 50 years ago offered the same complaint.
What is the government's solution? Another field of trees. Keep the kids in the cradles for another round of rocking. In the United States, higher education is a $400 billion a year industry, and most of this is tax-funded.
Parents are told to pay for part of these costs of higher education. It takes five or six years to graduate, and close to half who enter as freshmen do not graduate. The average student has $20,000 in debt when he graduates. Those who don't graduate have a little less debt.
The boughs have now visibly broken in the social sciences and humanities. The entry-level job market is rotten for college graduates. They have lost five or six years, and they are only marginally more qualified for entry-level jobs than a high school graduate who is 18.
The nearly two-decade system of cradles, boughs, and trees is failing to deliver the goods: qualified candidates for high-output, high-income entry-level jobs. The system rolls on, because politicians know that the content of education remains under state control. The cradles produce voters who have faith in the existing political order.
The trouble with cradles is that they are designed for young children. Parents move their infants out of cradles and into beds at a young age. The state doesn't.
People who have spent almost two decades in cradles perched high in treetops look for safety nets. The state offers lots of safety nets.
Here is a great irony. In 1890, about 200,000 American students attended high school: 7% of the population, ages 14–17. This rose to 1,000,000 in 1910 and about 2,000,000 in 1920: one-third. In 2010, most students graduated from high school and about a third started college. After a decade more of tax-funded education than most students had in 1890, voters clamor for more safety nets, more comfortable safety nets, and more compulsion to pull more taxpayers into funding safety nets.
What the state has provided is an education system that imparts fear of risk. A system of tenured teachers with secure salaries creates students in its own image.
SAFETY NETS FOR ALL
Western governments ever since the late nineteenth century have steadily adopted a series of economic safety nets for citizens. This process accelerated after the introduction of the income tax: 1911 in Great Britain, 1913 in the United States. Voters have demanded this. They do not like the risk-distribution associated with the free market, where individuals reap the rewards of successful risk-taking but suffer losses when they fail. People are generally more afraid of losses than they are eager to make gains. There is always a risk of failure. People are afraid of failure. So, they want to avoid these risks of personal failure at zero cost or at least at a below-market cost.
Beginning in late medieval Europe, the development of statistics has enabled people to protect themselves against certain kinds of failures through insurance. These failures are set-backs that happen on a predictable basis in large populations. The famous law of large numbers allows risk-averse people to pool their assets in a way that their joint venture pays money to victims of individually unpredictable events. Insurance is one of the greatest discoveries in the history of the West. The political problem arises when people go looking for participants in the pool of risk-sharers who pay more than their statistically fair share of the premiums. Sick people want entry into the pool at rates charged to healthy people. But what company will offer this opportunity to all sick people? None, unless they are compelled by law to enroll them. The state can make this compulsory.
Then there are lots of healthy people who would like taxpayers to cover a portion of their premiums. That can be arranged. It is called Medicare. The typical payment per Medicare beneficiary is approaching $11,000 a year. Medicare runs a deficit. This deficit will grow.
A safety net is a wonderful thing when it is available on a voluntary basis. But when it is imposed by law on people who are unwilling or unable to buy one, a series of questions arises:
Who holds up the net?
Who repairs the net?
For how long?
At what price?
For how many people?
There is no such thing as a free safety net. If anyone gains access to a safety net at a below-market price, this increases the likelihood that the net will break if more people are pushed into it than the design of the net will bear.
WIDE NETS, CHEAP ROPE
As the number of nets has increased over the years as a result of political intervention into the market, the cost of funding these nets has increased. Taxpayers do not want to bear this expense. So, they seek to pass on a portion of these expenses to others. Well-organized small groups that receive a subsidy vote in blocs and are more successful than larger groups that are dispersed. The larger groups pay for benefits received by the smaller groups. Democracy produces a system of rule by well- organized minorities.
Medicare and Social Security are the big ones. The political success of the present recipients is based on these factors:
Better political organization: "Vote for money."
Guilt manipulation: "Pity the aged."
Hope: "You'll get yours someday."
Larceny: "Get taxpayers to pay for your granny."
Ignorance: "Free lunches are possible."
Naïveté: "Debts do not come due."
As the population ages, more people fall into the safety nets. The government must borrow more money in order to pay for these new arrivals. The lenders assume that they will be repaid, even though it is clear from the statistics that this is not possible in the long run. The investors think: "I'll get out in time. I will pass to someone else the old maid card." As with love in the case of a man who marries a woman with six ex-husbands, desire is stronger than probability statistics.
The crisis will hit when there are few lenders at low rates. That will come sometime in the next decade, and perhaps in the Administration of the President elected in 2012. At that point, politicians will have to find ways of paying for the repair of the nets or else reduce the level of protection. Some government budgets will have to be cut in order to continue the funding the safety nets.
The other major area of frayed nets is the state and local pension system. The crisis is even more obvious. There are legions of retirees who have fallen into the retirement safety net. They are dependent on this net for their lifestyle. They are out of the labor force. Their skills have become rusty. They no longer have the emotional will to go back into the classroom. In any case, the jobs are not there. The teacher glut is enormous and will not be reduced, given the continuing flow of certified teachers from the colleges. Police forces are not hiring 70-year-old men. Fire departments are not hiring retirees.
The nets are going to break. Yet people who are resting in a net do not want to look at the quality of the rope, the strength of the support bars, and the distance to the ground. They prefer to believe that a government promise is as good as gold.
BACK-UP NETS
State and local politicians are hoping that Congress will intervene and come up with money to fund their safety nets. But Congress can see that this will be a permanent demand. The size of the population of people resting comfortably in state and local safety nets will get larger. The demands by local politicians will be perpetual. If local politicians are unable to solve the long-term pension problem this year, they will be unable to solve it next year, either.
The safety nets associated with old age are not only continuing, they are expanding. The age distribution of the population works against the net system. A lot of the baby boomers are already on Social Security. They took early retirement at age 62. Medicare kicks in by law this year for the first year's cohort: at age 65 for people born in 1946. This will continue at an escalating pace until 2025. The peak for American births per woman was in 1957: almost four children.
The safety nets constitute most retired Americans' source of revenue. They have no private pensions. They do not want help from their children. Their income has fallen. Social Security or a municipal pension is all the institutional safety they possess.
There is no real sense of concern yet. There is a vague gnawing away at people's confidence in the reliability of the nets in general. There is no clear indicator that Congress will allow the actual default of a large state, such as California. Always, lenders have come to the rescue in the past. Meredith Whitney has said that there will be defaults this year by dozens of state and local governments. This prediction has been universally dismissed as extreme. The experts insist that this is not going to happen. Someday, yes, if things don't change, there will be a default by this or that small city, but not soon and not many. The capital markets do not send an indication of trouble. But they did not in late 2007, either.
It will happen, and the dominoes will begin to topple. It will happen in this decade, maybe in this half decade. The Federal government's existing nets are so full and so frayed that it is not likely that Congress will cave in to the requests of state governments to rescue them from a default on their bonds. If it does, there will be no effort made by other local governments to escape the problem by radical cost-cutting and higher taxes. If Uncle Sam says to one state, "Nets repaired here, free of charge," there will be a lot more nets to repair.
The easy way out for a fiscally busted city will be a declaration of bankruptcy. When this finally happens, and nothing serious happens to local services, the way of escape will be clear to all: let the safety nets break. Let the pensioners sue in court. Let the lawyers argue. The courts can declare anything they like. How can they enforce their rulings? Will a governor send in state troopers? To do what? To freeze local bank city accounts? Then what happens? The schools will close. Then a state court will declare that the state must take over the funding of the closed schools. After all, there are state compulsory attendance laws on the books. The governor now has the tiger in his lap. He will have to come up with the money out of his budget. The next fiscally hard-pressed city council sees the light. "Cut the nets." The governors will figure out fairly soon that replacing local nets at state expense is bad politics.
Local voters in a defaulted city are not going to see local services cut drastically for the sake of the retirees who thought their futures were secure because politicians in the 1980s promised. Those who bought municipal bonds are rich people trying to escape Federal income taxation. They have no politicians openly in their corner.
NO SAFETY NETS IN ASIA
Asia has only one net: central bank inflation. The central bank keeps the national economy running. If it stops inflating, the recession will hit. There are no safety nets. There are tanks to deal with rioters.
The competitive position of Asia is obvious. The employers pay no Social Security taxes, no unemployment insurance taxes, no retirement programs. They can price their exports accordingly, and do.
American manufacturing is declining. The large firms see the future: plants in Asia. Why pay taxes here for workers who want promises? Better to hire workers who are glad to get jobs without pensions.
The safety nets have become straight jackets. They were set up by politicians to protect voters from the failures in life, and foreign workers now make American businesses an offer they don't refuse: "Don't pay for expensive safety nets. We will walk life's tightropes without them."
Politicians assumed that if they passed laws constructing safety nets, they would make life less risky. They ignored international competition. Foreigners can sell goods to Americans at prices below domestic goods' prices. Costs are lower in Asia, and they will remain lower for as long as Asians walk the tightrope of economic life without government-funded safety nets.
It is now more risky to be an American worker in manufacturing than it would have been without the nets. The politicians promised workers greater safety. The result: less safety. This is one more example of Ludwig von Mises's warning: the outcome of government intervention is the opposite of whatever the intervention was officially declared to achieve.
CONCLUSION
The governments' various safety nets will not hold. To the extent that you are planning your future in terms of any of these nets, you will be disappointed. To the extent that you rely on such safety nets to produce safety, you will find yourself less safe.
In review:
Rock a bye baby in the treetop,
When the wind blows the cradle will rock,
When the bough breaks the cradle will fall,
And down will come baby, cradle and all.
Under this system, cradle-to-grave security is more risky than politicians and educators have told us. If you are in a government-funded safety net, get out and climb down the tree. Don't stand around under it, either.
Gary North [send him mail ] is the author of Mises on Money . Visit http://www.garynorth.com . He is also the author of a free 20-volume series, An Economic Commentary on the Bible .
© 2011 Copyright Gary North / LewRockwell.com - All Rights Reserved
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