Friday, 14 May 2010

NY Times: The Twilight of the Welfare State?

The New York Times has an interesting discussion piece:
The debt crisis in Greece may have been temporarily eased by the European Union’s infusion of aid, but many analysts think that Europe’s debt problems and America’s are just beginning. Several analysts have noted that the welfare states in Greece, Spain and Portugal were greatly expanded in the 1990’s, leading to an extraordinary rise in the standards of living in those countries but also unsustainable spending. David Leonhardt of The Times and Robert Samuelson of The Washington Post this week compared the welfare state obligations in Europe to the entitlement burden in the United States.

How much should Americans fear the national debt as an aging population demands more services? What’s to be learned from the Greek experience, if anything?
As usual for their "Room for Debate" pieces, they have input from a number of economists with varying perspectives, so we're treated to some dangerous Socialist-Keynesian nonsense from James K. Galbraith:
the national debt is not a “burden.” By accounting, public debt is private wealth. Relabel that debt clock the “savings clock” –- penny for penny the numbers would be the same.
But this is counterbalanced by some useful insights from Jeffrey Miron:
The debt crisis initiated by Greece’s near default has subsided for the moment because of a trillion dollar bailout package from the European Union and the International Monetary Fund.

This is only a temporary respite, however; debt crises will recur soon, in more virulent fashion, and they will affect not just Greece and the other less economically robust countries of Europe but the United States, the rest of Europe, and high-income countries like Japan.

The fundamental problems are the interactions between demographics, technological progress in medicine, and entitlement programs.

The demographic “problem” is that life expectancy is increasing in rich countries while birth rates are low. So the fraction of the population receiving retirement benefits and subsidized health care is growing relative to the fraction that is paying taxes to support these benefits.

The technological “problem” is that medical innovation continues apace, but new medicines, devices, and procedures are expensive. So if policy provides state-of-the-art care to everyone at taxpayer expense, government health expenditure will grow without bound.

The retirement and health policies in rich countries are thus not sustainable over the long term, making debt crises inevitable.

Tax increases will not fix things, moreover, because they will mainly generate evasion and retard economic growth. Only major cutbacks in entitlements can avoid fiscal collapse.

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