The Welfare State Fantasy

Free Enterprise Zone, Guest Columnist, Chris Clancy

I met a couple on holiday here in China. They were from the UK. They spotted me in a crowded department store and needed some help. Rather than give them directions I escorted them to the shops they needed. We agreed to meet up for dinner that evening.

We had a pleasant meal. They talked about how things in the UK were going and I told them about living and working in China. The both worked in the public sector. He was a teacher and she was a social worker. As we exchanged email addresses at the end of the evening he remarked that they had five laptops at home. They both laughed – a kind of silly-isn’t-it-but-there-you-are kind of laugh. When I asked why they had so many they said that as their careers advanced and they moved to different positions and places they just “picked them up”. They were not properly accounted for, no checks and balances, no tracking mechanisms – they just got … sort of … “ lost in the system”.

Having worked in the public sector this did not surprise me – nor did their seeming indifference.

Both had come straight through the system – from state school to university to the public sector. They were obviously aware of words like “costs” and “revenues” and “profit” and “loss”, but neither had ever worked in the private sector – a world where such words have plenty of meaning.

Of course, the public and private sectors are very different. In the private sector revenue has to be earned and it has to cover costs. If not you’re in trouble. If revenue does cover costs, then the difference, “profit”, is taxed by the government and spent.

The productive end pays for the non-productive end.

Employment and spending in the public sector is initiated off the backs of those working in the private sector – and it pays for all sorts of things – like laptop computers.

This is just one example and I know people could give innumerable examples of waste and inefficiency in the public sector – of incompetence, ineptitude and downright corruption.

Unfortunately, such outcomes are inevitable.

When people are given leave to spend other people’s money, rather than having to go out and earn it themselves, it’s no surprise that it is not spent wisely. It is not surprising that rent seekers and carpetbaggers head for the source of this bounty. Not surprising that powerful special interest groups get involved. Not surprising that in such a race for the trough corruption rears its ugly head. Not surprising that the worst do indeed get to the top.

Not surprising that government profligacy would lead us into one mess after another.

How was it possible that they were let get away with it for so long?

The answer is a zero understanding of monetary economics by the vast majority of the so-called “eloctorate”.

If governments were to restrict their spending to what they raised in taxation things would be very different.

Unfortunately such thinking has become a pipe dream. Governments will always overspend and finance the deficit by borrowing and, if need be, by creating new money (i.e. inflation).

This amazing ability to create money from thin air lies at the heart of our present woes.

By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. J M Keynes – 1919.

This can simply be interpreted as a statement of fact.

A few lines later Keynes went on to say:

There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.

This was more than a statement of fact. It was a warning. Keynes believed in government interventionism; by all means run deficits in downturns he argued, but, reverse them once recovery was established.

In the post WWII period this increasingly did not happen. Governments in developed economies started running deficits in both good and bad times in order to fund, primarily, their respective welfare states.

Deficits just grew and grew. When they could no longer be sustained a devaluation followed – after which they’d continue where they left off – making empty vote-winning promises paid for with funny money.

However, there was a fundamental flaw in the whole concept of the welfare state:

Welfare states face an inescapable paradox: The level of production needed to sustain a welfare state cannot be sustained by a welfare state. This paradox is created by policies that encourage the redistribution and consumption of wealth while discouraging its creation. In the face of such perverse incentives, living standards must fall even though, for a time, they may be maintained through borrowing. The paradox is not unique to Greece or California, nor is it a function of who is in charge. It is, rather, inherent in the internal contradictions of the welfare state itself. Richard W Fulmer.

The full article lays out very clearly why the idea of a welfare state was always an unworkable fantasy which would inevitably fall apart.

And this is what we are seeing now. The ediface is crumbling.

Europeans marching in the streets, protesting about austerity measures, waving banners, shouting slogans and, in some cases, resorting to violence, will do nothing to solve the problems.

In the US the day of reckoning is coming – quantative easing, rather than austerity measures, will see to that.

Rather than default on their debt the government has chosen to destroy the currency.

When this does happen the consequences hardly bear thinking about.

It won’t be the end of the world but it will be the beginning of a long and painful road back to the ideals of the Founding Fathers. In this respect Ron Paul’s “Pillars of Prosperity” is a must read.


Self-Educated American Guest Columnist, Chris Clancy, has been living and working in China for the last 7 years. He is currently employed as associate professor of financial accounting at Zhongnan University of Economics and Law, Wuhan City, Hubei Province, PRC.