Cut, Cap, and Balance - The Welfare State's Day Of Reckoning Is Here

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Subject:	"Cut, Cap, and Balance" -- The Welfare State's Day Of Reckoning Is Here
Date:	Sun, 4 Dec 2011 10:43:02 -0800
From:	Jas Jain

"Cut, Cap, and Balance" -- The Welfare State's Day Of Reckoning Is Here

Dem's strategy is to force a tax increase in lieu of a cut or freeze in social welfare, so that the Dems cannot be blamed for raising taxes, because, Seee! the Repubs did it, too.  That's the "logic," as we drive off the cliff.            Dean

OK, Dean, how come we don't have a single Repub candidate who is promising to seriously weaken, let alone dismantle, the welfare state? The article that you sent is simply statement of facts.

As far as the Repub position is concerned there is no need for an Amendment to implement the Cut, Cap, and Balance program if Repubs really are serious about it. Cut, Cap, and Balance targets the revenue and the spending at 18% of the GDP. Currently, the revenue is 15% of the GDP and the spending is 25% of the GDP. This means that the spending has to be cut by 28% and the revenue has to be increased by 20%. Has any Repub proposed a plan that would cut the spending level by 28% and raise revenue by 20% compared to the current spending and tax levels? The problem is elections, or democracy, no?

Forget about balancing the budget; all paths to reduce the annual federal deficits below $1Tr. would have to go thru recession followed by depression. The only thing that is keeping the US economy growing at the anemic rate of 2% is deficit sending of 9-10% of the GDP, or $1.35-1.50Tr., annually. The situation for the US is lot worse than Italy. By 2013 all three credit rating agencies would downgrade the US sovereign debt because there would be no agreement to reduce the deficit below $1Tr. annual rate and all the promises of reducing deficits in the future would be proven to have been lies.

The partisan blame game is utterly dishonest. The fact is that the democratic politics breeds dishonesty.

Jas

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The Welfare State's Day Of Reckoning Is Here

By ROBERT J. SAMUELSON Posted 12/02/2011 07:05 PM ET

We Americans fool ourselves if we ignore the parallels between Europe's problems and our own.

It's reassuring to think them separate, and the fixation on the euro — Europe's common currency — buttresses that mindset. But Europe's turmoil is more than a currency crisis and was inevitable, in some form, even if the euro had never been created.

It's ultimately a crisis of the welfare state, which has grown too large to be easily supported economically. People can't live with it — can't live without it. The U.S. predicament is bit different.

Government expansion was one of the 20th century's great transformations. Wealthy nations adopted programs for education, health care, unemployment insurance, old-age assistance, public housing and income redistribution.

"Public spending for these activities had been almost nonexistent at the beginning of the 20th century," writes economist Vito Tanzi in his book "Government versus Markets."

The numbers — to those who don't know them — are astonishing. In 1870, all government spending was 7.3% of national income in the U.S., 9.4% in Britain, 10% in Germany and 12.6% in France. By 2007, the figures were 36.6% in the U.S., 44.6% for Britain, 43.9% for Germany, 52.6% in France.

Military costs once dominated budgets; now, social spending does.

"Survival of the fittest" no longer sufficed. Europeans have never liked markets as much as Americans do. In the 1880s, German Chancellor Bismarck created health, old-age and accident insurance: landmarks regarded as originating the welfare state.

The Great Depression discredited capitalism, and after World War II, communists and socialists enjoyed strong support in part because they "had formed the backbone of wartime resistance movements," writes Barry Eichengreen in "The European Economy Since 1945."

To flourish, the welfare state requires favorable economics and demographics: rapid economic growth to pay for social benefits; and young populations to support the old. Both economics and demographics have moved adversely.

The great expansion of Europe's welfare states started in the 1950s and 1960s, when annual economic growth for its rich nations averaged 4.5% compared with a historical rate since 1820 of 2.1%, notes Eichengreen. This sort of growth, it was assumed, would continue indefinitely. Not so. From 1973 to 2000, growth settled back to 2.1%. More recently, it's been lower.

Demographics shifted, too. In 2000, Italy's 65-and-over population was already 18% of the total; in 2010, it was 21%, and the projection for 2050 is 34%. Figures for the European Union's 27 countries are 16%, 18% and 29%.

Until the financial crisis, the welfare state existed in a shaky equilibrium with sluggish economic growth. The crisis destroyed that equilibrium. Economic growth slowed. Debt — already high — rose. Government bonds once considered ultrasafe became risky.

Switch to the U.S. Broadly speaking, the story is similar. The great expansion of America's welfare state (though we avoid that term) occurred in the 1960s and 1970s with the creation of Medicare, Medicaid and food stamps.

In 1960, 26% of federal spending represented payments for individuals; in 2010, it was 66%. Economic growth in the 1950s and 1960s averaged about 4%; from 2000 to 2007, the average was 2.4%. Our elderly population was 13% in 2010; the 2050 estimate is 20%.

What separates the U.S. and Europe is that (so far) we haven't suffered a backlash from bond markets. Despite high and rising federal debt, Treasury securities still fetch low interest rates, about 2% on 10-year bonds. Will that last?

It's true that cutting spending too quickly might threaten a fragile economic recovery. But President Obama and Congress can't be accused of making this mistake. They do little and excel at blaming each other.

The modern welfare state has reached a historic reckoning. As a political institution, it hasn't adapted to change. Politics and economics are at loggerheads. Vast populations in Europe and America expect promised benefits and, understandably, resent any hint that they will be cut. Elected politicians respond accordingly.

But the resulting inertia poses an economic threat, one already realized in Europe. As deficits or taxes rise, the risk is that economic instability will increase, growth will fall, or both. Paying promised benefits becomes harder. Or austerity becomes unavoidable.

The paradox is that the welfare state, designed to improve security and dampen social conflict, now looms as an engine for insecurity, conflict and disappointment. Facing the hard questions of finding a sustainable balance between individual protections and better economic growth, the Europeans have spent years dawdling. The parallel with our situation is all too obvious.