France and Greece have thrown out their governments, primarily over economics. The fundamental issue — simple, albeit highly volatile — is this: what is the best way to deal with the challenges arising from the steadily increasing unsustainablity of the entitlement state? I choose the term "entitlement state" rather than "welfare state" because there is a significant difference between the two.
Welfare payments are tied to meeting basic needs. However, if you hire a man to work for you, he is entitled to be paid even if he is rich and doesn't need the money, and you are obligated to pay him even if you have to borrow to do it.
After World War II, European Countries embraced the entitlement state with gusto. Government entitlements were bestowed on people because they were born in the country, or reached a certain age, or entered whatever other condition the government decided was deserving of entitlement status, regardless of their needs. The number of entitlements grew as governments that were providing them stayed in power. It worked for a while, as European economies expanded in the post war period, but eventually the expense of maintaining the system, along with the amount of government borrowing needed to fund it, started to get out of hand.
Greece is the poster child for what happens when that occurs. Greece is also the poster child for what can happen when corrective cutbacks must be immediate and severe. The Greek economy has virtually collapsed, and continues to contract, which means lower tax revenues, which means that the deficit doesn't disappear. Because drops in spending have been accompanied by larger drops in tax revenue, their budget deficit is now larger than it was before the austerity started. Some say this proves that they should have moved more slowly, but the Germans, who were putting up most of the money to stabilize things, wouldn't permit that.
The Greek situation was so bad that the Germans may have been right. There is no "golden mean" of policies to bring entitlement spending down at just the right rate to achieve a soft landing. The driver behind entitlement unsustainability is demographics, whose trends are very difficult to change. The longer a nation waits to address the unsustainability of its entitlement state, the more difficult it is to solve the problem.
Europe's demographics have been giving off warnings for a long time. Its birth rate is well below replacement level; for decades, its population has been getting older and living longer. That means, proportionately, fewer workers and more retirees, which means lower tax revenue and more spending. Had Greece recognized those trends years ago and stopped being so generous with entitlements for those who don't need them while funding the system with borrowing, their predicament today would be much more manageable.
America's entitlement benefits are not as generous as Europe's, and, thanks to immigration and a higher birth rate, our population is growing and younger. Still, entitlement spending is now roughly two-thirds of our federal budget, dwarfing everything else. We, too, should have started addressing this issue years ago.35 comments on this story
Many Americans cannot survive without entitlement payments, and immediate drastic cuts will hurt our economy. However, huge savings are available over time through recalculation of the rate of adjustments for those at the top of the economic ladder, adjustments that won't hurt anyone very much. Warren Buffett will get his check, but he will survive if his rate of annual increase above the present level is lower than that given a retired janitor.
The path is political and tricky, but clear. Let's not wait as long as Greece.
Robert Bennett, former U.S. Senator from Utah, is a part-time teacher, researcher and lecturer at the University of Utah's Hinckley Institute of Politics.