Policy: Entitlements

Europe has declared the welfare state dead

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With Congress and President Obama in full battle mode over Obamacare to complete the conversion of the United States into a European welfare state, Dutch King Willem-Alexander delivered a nationally televised speech Sept. 16 in which he declared the European welfare state dead.

The message, written by the Dutch government, acknowledged that current levels of state spending for unemployment benefits and subsidized health care are unsustainable.

With Moody’s credit rating agency threatening to downgrade Dutch debt, the King announced that Dutch citizens soon will be expected to create their own social and financial safety nets with much less help from the state.

Economists define a welfare state as when 20 percent of a nation's GDP is spent on welfare and education. America has never hit that level, but welfare and education spending rose to 19.4 percent of GDP in 2012. Implementing Obamacare will make America a genuine welfare state for the first time in our history.

The welfare state promising cradle-to-grave well-being for its population is uniquely a European creation. It originated in Germany and took root in Britain and Scandinavia during the Great Depression.

The 1958 European Economic Community treaty legally required “promotion of employment, improved living and working conditions ... proper social protection.”

The 1993 Maastricht Treaty adopting the euro currency requires that signatory states provide high living standards and good working conditions.

Historian Tony Judt stated that the European social model “binds Europe together” in contrast to the “American way of life,” which sociologist and former communist Will Herberg defined as so individualistic “it stresses incessant activity on [the individual American's] part, for he is never to rest but is always to be striving to ‘get ahead.’”

The objective of the welfare state is “limiting the reliance of family and market” through equality of opportunity and an equitable distribution of wealth.

This requires income redistribution transfers to provide services and pay direct individual benefits. Former first lady Hillary Clinton argued in her book “It Takes a Village” that communities are superior to parents at raising children.

Similarly, Peter Lindert in “Growing Public” argues that state “investments” contribute to economic growth.

But according to a study by the Bruegel think tank, “Europe suffers from a mutually reinforcing interaction between limited productivity gains, protracted de-leveraging, weak banking sectors and distorted relative prices ...

"This combination contributes to an overall weakening of economic growth and threatens to turn into self-perpetuating stagnation.”

The report demonstrated that 30 years ago European economic output was 15 percent higher than American, but by 2017 output will be 17 percent lower.

The International Monetary Fund warned April 18 that Europe’s “structural unemployment” rate – unemployment that won't go away even if the crisis ends – is expected to average a staggering 10.1 percent, up from 7.4 percent when the European crisis began.

Dutch and German AAA credit ratings backstopped EU borrowings that rescued Portugal, Ireland, Italy, Greece and Spain from bankruptcy.

But on July 23, Moody's put Dutch and German premier credit ratings on negative watch, anticipating possible downgrades.

Moody’s increased the stress Sept. 3 by changing the credit outlook to negative for EU debt the Dutch and Germans guaranteed.

King Willem-Alexander’s words are highly symbolic, since center-right and center-left European elites have resisted challenging the welfare state as the social contract between Europe's rulers and those ruled.

Massive state borrowing allowed Europeans to enjoy decades of lush welfare benefits without paying the full cost of those benefits in taxes. But if the Dutch and Germans pull credit guarantees, many European welfare states will collapse like houses of cards.

All of this should serve as a ringing endorsement of the American way of life. But just at the moment of triumph for America’s market and family friendly economic model, Obama and his Democratic congressional allies want the U.S. to be bound together with the collapsing European welfare states.

Chriss Street is a radio talk-show host, financial writer and public employee pension plan administration expert.
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