The High Price of the Welfare State

by Sydney Williams Debt when used for constructive or necessary […]

by Sydney Williams

Debt when used for constructive or necessary purposes is a positive. For individuals, equity-producing mortgage payments substitute for rent; student loans (within reason) permit greater earning power. Corporations borrow, as do governments when they invest in infrastructure and R&D. When the United States borrowed to defeat Fascism in the 1940s and Communism in the 1980s, it was money well spent. But borrowing money simply to live better today carries consequences for tomorrow. That is true for an individual, business or government.

 The birth of our modern welfare state was made possible because our nation had become rich.

Mandated spending, which includes Social Security, Medicare, Medicaid, CHIP, interest expense, etc., represents 60% of the Federal budget, versus 40 % in 1980. For the past few decades, Federal spending has averaged approximately 20.5% of GDP. Revenues depend upon economic conditions, but have averaged about 19% of GDP over the same time. Concomitantly, discretionary spending has declined as a percentage. The largest component of the latter is defense, at 19% of the budget. The defeat of the Soviet Union in the 1980s provided a “peace dividend,” but instead of reducing overall spending it was used to expand welfare. The GAO (Government Accounting Office) estimates that in the next twenty years, if we stay on the current track, mandatory spending will consume more than 100% of government revenues. The price of the welfare state, as presently constituted, means limited options for the American people.

 With Islamic Jihadism on the rise, there is little room for defense spending to increase, unless taxes go up or mandatory spending comes down. We could, of course, continue to borrow, but there is a limit to that. Federal debt, for the first time since World War II already equals 100% of annual GDP. Debt has thus far been affordable because of an accommodative Federal Reserve, but that game has limits. Over the near term the Fed can control short rates and influence longer rates, but in the end, money, like any commodity, is priced in the market place. When credit risk is perceived to exist, interest rates move higher. If rates today were at their twenty-year average, interest costs would consume about 12% of the federal budget rather than the 6% they currently do. While inflation is good for debtors (borrowers like to pay back with dollars worth less than those they borrowed), it is bad for creditors. It is also in the interest of the government to talk up the threat of deflation, as that encourages investments in bonds, which keep rates low.

 The consequence is that we have fewer options at a time when Islamic extremists have become increasingly bolder. In fact, they have declared war on the West. They did so several years ago, long before the attacks on 9/11, but we either failed to understand what was happening, or simply chose to ignore the seriousness of their intent. Other than a brief flutter following 9/11, the West has played ostrich to their leopard. Appropriations in the Defense budget for Afghanistan and Iraq are still carried under the euphemism, “overseas contingency operations.”

 The recent attack in Paris brought clarity – if one was needed! – to the evil that is Jihadist’s intentions. The hacking of CENTCOM’s twitter and YouTube accounts (Why would CENTCOM have twitter and YouTube accounts?) suggests the Islamists are becoming more sophisticated. To President Obama, war against Islamists terrorists is inconvenient because it questions his belief in multiculturalism and it thwarts his goal of “transforming America.” (In my opinion, the reason Mr. Obama did not join the “march for solidarity” in Paris was because it would have meant a tacit acceptance that the enemy are not simply terrorists who misuse the Muslim religion to justify their actions, but are actually Islamists who believe that nonbelievers should be killed.) Like it or not, we are in a war for civilization, and it is likely to last a long time.

 Reasons for the West to declare war on Radical Islam were laid out by former Connecticut Senator Joseph Lieberman, in an op-ed in Tuesday’s Wall Street Journal. Theirs, Mr. Lieberman noted, is an ideological war whose aim is the destruction of the liberties that are fundamental to Western civilization – the rule of law, freedom of expression and freedom of religion. President Bush was more realistic about the enemy and more committed to its destruction than has been President Obama, but even he underestimated the Hydra-like ability of al Qaeda to re-appear in different and multiple forms – Islamic Jihad of Yemen, Boko Haram, ISIS, Hamas, Hezbollah, Al-Shabaab among others. We cannot shrink from a showdown with an ideology that is intolerant of tolerance.

 The expansion of the welfare state has limited our options in other ways, not just defense. We see it in the crumbling of our infrastructure. Airports, highways, bridges, tunnels and schools are badly in need of repair. It is manifested in polls that suggest America’s best days are behind – that the next generation will not be able to live as well as the current one. We talk about the “greatest generation,” certainly an appellation well deserved, but it ignores those who answered the call of their government and fought the spread of Communism in Korea and Vietnam, and more recently fought Islamic terrorism in Iraq and Afghanistan. Greatness is not confined to just one generation. For two centuries, Americans have risen to face challenges asked of them. America thrives on the spirit of optimism and faith that made that possible. It must endure if the nation is to endure.

 As a society, we need safety nets. We need them for those unable to care for themselves. We need them for the aged and the indigent. But compassion without proper funding is a lie, a political lie when the promise emanates from government. Our major entitlements are on a path to bankruptcy, which is unnecessary and wrong. Europe provides a preview. Its more exaggerated social welfare system has resulted in slow economic growth, a bloated bureaucracy, and apartheid-like “no-go” neighborhoods. Compassion should be without sunset provisions. But we must acknowledge that we cannot correct every wrong. We must be immunized against the seductive “Omelas” of Jeremy Bentham’s Utilitarianism, which promotes the concept of the greatest good for the greatest number, but is anti-democratic, as it risks harming or ignoring the endeavors of the few.

 There is no easy way. No answer will be perfect. But we should be honest about the impediments of the course we are on. We could let government become an ever larger part of the economy, but that, too, bears a cost; it is, after all, the private sector that allows the economy to grow. The price we pay for the welfare state is unknown, but it is not free, it is high and it is constraining.


The views expressed on austriancenter.com are not necessarily those of the Austrian Economics Center.

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