When Will the Welfare State Fail?

The welfare state is not a response to technological or economic conditions that produce hardship and an underclass. The welfare state is created by politicians who institute it. It is politically driven. They could not accomplish this without the existence of a cash cow of productivity growth, but the latter doesn’t fore-ordain that a welfare state be brought into being. Productivity growth doesn’t produce unemployment and people who cannot survive by their own work. There are prices for all sorts of labor, if the labor markets are left to adjust freely.

Productivity growth, brought about via capitalism, brings down the prices of goods needed to survive, but central bankers inflate. This creates differential effects on people in different classes. Inflation robs those most, the lower classes and less-educated, whose earning power is marginal and who do not have the knowledge to cope with its effects. It penalizes “thrift and hard work”, Rothbard tells us. It aids those most in a position to hold wealth in real assets, those who are well-connected and educated.

“Spending and going into debt are encouraged; thrift and hard work discouraged and penalized. Not only that: the groups that benefit are the special interest groups who are politically close to the government and can exert pressure to have the new money spent on them so that their incomes can rise faster than the price inflation. Government contractors, politically connected businesses, unions, and other pressure groups will benefit at the expense of the unaware and unorganized public.”

The welfare state can only expand as long as the value of the “nation’s assets” outpaces the value of the “nation’s liabilities”. Wealth growth has to exceed debt growth in order to create a cash cow. When and if this condition fails, then the welfare state halts its growth. Demographics alone can cause this to occur. Wars can deplete the assets. Over-expansion of benefits causes excessive debt growth. Poor economic policies that stymie capitalistic policies cause decline in productivity. These are the kinds of factors that place a strain on the welfare state.

Politicians are myopic, and they tend to their own self-interest. They do not listen to the David Stockmans of this world until they run headlong into a crisis.

When the cash cow fund stops growing, benefits stabilize or decline. Taxpayers feel the squeeze. The welfare state goes into reverse when the nation’s liabilities exceed the nation’s assets. The producers of wealth feel the pinch as taxes rise and the recipients find benefits declining. The longevity of the welfare state depends on productivity and the levels of financing of welfare payments by debt and taxes.


8:52 am on May 11, 2018