European Welfare State R.I.P
Nicholas Vardy | June 9, 2010. | URL: http://wp.me/pScck-2J
“Nothing focuses the mind like a hanging.”
— Samuel Johnson
Like a criminal confronting his imminent hanging, governments across Europe in recent months have been reluctantly forced to focus on the uncomfortable reality of their out-of-control fiscal spending. It turns out the Greek bailout was just the beginning of the end. Although neither are members of the eurozone, new governments in both the United Kingdom and Hungary suddenly discovered that their fiscal house was in greater disarray than they had first believed.
The good news is that just within the last six weeks, there has been a sea-change in attitudes of many European governments toward their relentless spending habits. “Denial” and “Anger” are slowly yielding to “Acceptance” in mourning the passing of the boondoggle that was the European welfare state.
Europe’s State of Play
While the headlines trumpet on the fiscal irresponsibility of PIGS like Greece, it turns out that “responsible” governments like the United Kingdom were scarcely better.
The slow creep of government in the United Kingdom over the past 13 years of the Labor government’s rule under Tony Blair and Gordon Brown has been as relentless as it has been surreptitious. The services that the U.K. government provides to its citizens are close to ludicrous. Among my favorites: baby massage classes for all new mothers; free taxi transportation for all middle school students who live farther than two miles away from home in Devon; and state-of-the-art climbing walls to keep neighborhood kids off the streets — and away from their homework.
But it’s the cultural change that has been most nefarious. “Doing nothing” has become socially acceptable, even among the educated classes. Consider the case of a 50-something judge I know of. Perfectly healthy, he has been “on benefit” for the last seven years. He receives well over 50,000 GBP ($72,500) a year while the U.K. government pays the rent on his house in Richmond, a tony suburb of London. His malady? His wife has lost all sexual interest in him. Today, his routine consists of seeing a pretty young psychologist once a week (compliments of government healthcare, of course) — visits he squeezes in between trips to the National Ballet, where he is a season-ticket holder. Under a progressive labor government, being a wussy now counts as a debilitating illness. No wonder there is little incentive for your average Brit to pry herself away from the Telly.
Signs that the public sector in the United Kingdom has spiraled out of control abound. Public sector wages have soared in the past decade. Ten years ago, you’d have to look long and hard to find an administrative public sector job that paid more than 40,000 GBP ($58,000). Now, the starting point seems to be around 120,000 GBP ($174,000) — plus generous benefits. Meanwhile, the basic salary for a banker in the City of London rarely exceeds 100,000 GBP ($145,000). Yet it is the evil “private sector” that is bearing the entire burden of the economic slowdown — job losses, pay cuts, and de-leveraging process — even as government employees spend their days in meetings giving each other raises.
The State of Play in the United States
As Irwin Seltzer pointed out yesterday at The Henry Jackson Society here in London, if you set the basic indicators of the macroeconomic health of Greece, the United Kingdom and the United States alongside each other, but took off the labels, you’d be hard-pressed to tell the difference among them.
Seltzer failed to point out one big difference, though. Both Greece and the United Kingdom’s new government now realize that their fiscal profligacy can’t go on. Former Greek prime ministers suddenly are finding themselves in poorly lit rooms, interrogated about their undeclared wealth and property. Newly minted British Prime Minister David Cameron is warning Brits that their lives will change substantially as a result of deep government spending cuts.
Yet, there is no similar sense of urgency on the part of the White House. Never having met a problem that couldn’t be solved by a committee of “top experts,” President Obama has set up “The National Commission on Fiscal Responsibility and Reform” to address government spending. Yet, back in the real world, government spending is spiraling out of control and economic advisor Larry Summers is floating the prospect of a second stimulus package. More obscure Keynesian professors are wielding their pens in the Huffington Post arguing (with a straight face, no less) that “Payments on Treasury securities are a matter of data entry, not a financial burden.” Unlike on the rest of planet earth, in Keynes’ (and Obama’s) world, life is one big economic free lunch.
What Is to Be Done?
For all the hand wringing by pundits and politicians, the solution is surprisingly simple — but not easy. If all the diets that work can be reduced to four words — “eat less and exercise” — then the equivalent for the United States is: “Cut spending and raise taxes.”
If real “change you can believe in” is to happen, here’s what it will look like:
Step one: “The situation is much worse than we expected. ”
Step two: “We have to take radical — and painful — action.”
This is exactly what happened in crises-ridden Hungary last year. It’s what is happening in Greece today. And it’s the road the United Kingdom’s new government is about to embark upon.
In contrast, the impetus for any serious government spending cuts in the United States is essentially zero. After all, this is tough work — and can be taken on only by the political equivalent of a kamikaze pilot. Plus, it’s hard to look cool doing it. It’s only taken two weeks in office for the boyish 43-year-old British Prime Minister David Cameron to start looking his age. And Obama can’t risk ruining his youthful profile for that coveted spot on Mt. Rushmore.
The good news, according to Seltzer, is that people in the United States — in contrast to the government — are getting fed up. Although deficits were already out of control under Bush, no one really got that excited about it. Now, thanks to the Obama administration’s off-the-charts profligacy, they have. The irony is that in a White House chock full of expert committees, former Harvard Presidents (Larry Summers) and Stanford Nobel Prize Winners (Steven Chu), it’s the great unwashed of the Tea Party movement that is the last and best hope of the United States.
As Winston Churchill observed: “The Americans will always do the right thing… after they’ve exhausted all the alternatives.”
Let’s hope he’s right.