Thursday, February 12, 2009

The welfare state's tipping point

Libertarians have never grown tired to criticize the welfare state, and rightly so. Instead of helping the poor to get out of poverty, the incentive structure behind the welfare state tends to lock them in a state of poverty to create additional needs for all kinds of welfare programs that will, in turn, generate funding for those presiding them. It's not that the welfare state is some enlightened institution designed to eliminate poverty - it's just another government scheme to keep its subjects pacified while at the same time creating a pretext for massive increases in taxation, obscure redistribution practices (keep in mind, most redistribution happens from bottom to top, not the other way round) and lots of tenured employment down the road.

The good news is: this cannot go on forever. Since there is no material incentive to actually decrease poverty for those who are "working against it" (if there was no more poverty, they'd all lose their jobs) and governments tend to be expanding, the amount of money spent on welfare programs tends to increase. This makes honest work increasingly unattractive due to punitive taxation and non-wage labor costs. The ranks of net welfare beneficiaries tend to increase, thus creating a vicious circle.

Government ponzi schemes such as Social Security or Medicare are even more sinister - since an individual is forced to pay money into the system for those who currently receive benefits out of it, there is an expectation for future reimbursement; however, this expectation rests on the willingness of future generations to also participate in the system, in other words, today's confidence in Social Security rests on the firm belief that there will be enough willing payers in the future. If you need 1+x persons to finance 1 retiree - and make no mistake, you need much more than one payer per retiree -, every family needs to raise at least 2+x children. Looking at world fertility rates, quite a leap of faith is required to hold on to this belief in the western hemisphere - starting with 2,05 children per woman in the United States, it goes all downhill from there to 1,23 kids in Poland.

Which means that while western countries are struggling to hold population levels, their inhabitants cling to a retirement system that is based on rabbit-style fertility rates. Combine that with the many disincentives the general welfare state creates when it comes to honest work, and you'll hear the demographic time bomb tick. Tick-tack.

Western politicians are naturally hostile to accepting these facts. Their incentive is to keep the system going until their term is over so they can benefit from generous Congressional pensions. Besides, talking about abolishing the welfare state is fiercely unpopular; "welfare reform", the desperate gluing-together of an inherently broken system that's falling apart everywhere until the respective politician is able to retire, is the politically correct choice.

However, this will not change reality. Reality is that at some point in time, redistribution, government ponzi schemes and high taxes/inflation/deficit spending will destroy western civilization. Literally. If there is noone left to produce and nobody willing to trade, society falls back to primitive living standards. It's likely that before total destruction occurs, the welfare system will break apart - however, this will cause unimaginable suffering among those who are really dependent on it and disillusioned hatred among the many free riders. Not a pleasant prospect.

It may be too late already to ensure a smooth abolition of the welfare state, but the only chance for preventing absolute mayhem is to start the gradual end of the welfare state now. First, all citizens need to be able to opt out of the system with a clear warning that if they stay in, they will probably lose everything they pay into it. Those who are dependent on the system (e.g., the elderly and the sick) need to be taken care of by diverting tax funds away from less useful projects. At the same time, welfare bureaucracy needs to be cut drastically so there is no influential group left to lobby for budget increases. That's what can theoretically be done within the state framework.

Should this process not be enacted - and that's the most probable scenario -, our best option is to find a safe spot to watch the welfare time bomb go off. It won't be pretty, but all we could do was warn ahead of time.

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