"The most significant threat to our national security is our debt," Admiral Michael Mullen, Chairman, Joint Chiefs of Staff, August 27,2010


Monday, October 1, 2012

The Economic Model for the American Welfare State

About 45 years ago, America set about to become a welfare state.  The several key identifying characteristics of a welfare state are:

·         A mentality that there is a government solution to almost every possible real and imagined issue that some person or group or business identifies or embraces

·         In that process, fundamentals leave the arena – fundamentals such as setting priorities; balancing budgets; directing government toward those limited priorities and a constant philosophy of discipline – discipline the citizenry and, more important, disciplining the government

·         Once fundamentals leave, the vacuum created is filled with welfare state concepts – great society; war on hunger; war on poverty; equal opportunity for all; better education; endless, affordable health care and spreading democracy to everyone to name just a few

·         Laws multiply – lawyers multiply – lawsuits multiply – lots of groups try to get into the game – get their piece of the action – government employment multiplies and budgets are no longer balanced so debt rises until the only buyer of the debt is the government itself.  They print money.  And it devalues.  Business – making something; growing something finds more attractive surroundings elsewhere

·         Finger pointing – aka the blame game – supplant discussion and debate that used to focus on the fundamentals.  Now it focuses on who did what to whom and rhetoric replaces rationality – if something goes wrong there must be someone to blame as long as it is not me/us

·         Once rhetoric rules – examples would be political correct nonsense; hope and change; best times ahead of us; and references to economic theories (Keynesian, Austrian, Bulgarian, monetarism, socialism, etc.) all is lost – the welfare state is now firmly established

We actually got a brief reprieve in the 90’s because of the so-called technology revolution.  New products, services, efficiencies, businesses – all came along just as we Americans were embracing the welfare state.  The timing was good and not good.  Good for those who wished to believe that we could ignore fundamentals and build this great society and that we were on top of our game and our best days were ahead of us.  Bad because it was temporal – passing and once it ran its brief course all we had were the fixed costs of the welfare state.  The costs were firmly in place; the revenues; the money to pay for all the welfare goodies didn’t/couldn’t keep up. 

Any economic model for business or government includes revenues and expenses and the revenues must be adequate to pay for both the fixed and the variable costs.   And fixed costs are always the problem – they exist even if there is no revenue.  The variable costs at least only show up when there is revenue.  You can only do as much as you have the revenues to cover the costs.

America doesn’t.  The larger the welfare state – in pure numbers, the more discipline required of welfare state operators.  China could not run a welfare state – neither can India; Indonesia, Russia and even large portions of Europe cannot afford high cost welfare states.  The business model doesn’t work – not enough revenues to cover the costs.  The costs are mostly fixed.

If you wish to build a welfare state, keep it small – think Switzerland or Sweden or the Netherlands.  Japan built one and it is dying.  The United States built a big one – Clinton thinks he had it solved when he was in office.  He owes it all to the temporary benefits of the technology bubble.   Bush II can thank the real estate bubble until it burst during his last year in office.  Obama is foolish enough to think all we need do to get it back on track is raise taxes on the well to do. 

If only it were true.  The solution to our problem?  Simple – we need a new technology revolution or some other bubble – Bernanke is trying to build one in the stock market and endless government bureaucracy.  Maybe someone can invent a formula to convert sea water into oil or perhaps friendly space aliens will arrive with robotic slaves dedicated to meeting our needs and then some.  You get the idea. 

Next time you want to build a welfare state, run the business model first.  And, watch out for those fixed costs.

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