Saving the Welfare State: From Austerity to Authoritarianism

The European welfare state crisis continues. The austerity measures currently under way in several European countries have not yet had any discernible effects. The efforts to stabilize Greece with a massive bailout have, if anything, added insult to injury. As a sign that the fiscal panic is rising, there are now calls for an even bigger bailouts and even more of taxpayers’ money to be shoveled into the insatiable welfare states.

America better pay attention. Where Europe is today, we will be in a few short years. The only way we can avoid repeating the European mistakes is to get started, preferably yesterday, on a structural reform program to shrink and eventually eliminate our welfare state.

Doing nothing about federal spending is like asking for a kick down into the European dungeon, where there is a growing political backlash agianst fiscal austerity. This backlash stretches from mild-mannered calls for distributing the burden of austerity more evenly, to demands for tax increases – to a disturbing rise in support for authoritarian political parties.

First, the mild-mannered response to austerity. In an interview with the EU Observer, a representative for Europe’s labor union federation declares that the austerity policies must come to an end because they are hitting the most vulnerable citizens. This argument is eerily similar to how the Democrats in U.S. Congress responded to the 2013 GOP budget. This is not to say that the GOP budget was an attempt to launch an austerity campaign against the federal deficit. On the contrary, under Congressman Paul Ryan’s stewardship the Republicans in the House produced a thoughtful, well designed budget that hints more of long-term structural spending reform than of austerity panic.

This does not mean that we can keep austerity away from American shores. On the contrary, it is entirely possible that Democrats see it as the only alternative to higher taxes. Those who want to preserve the welfare state think in those terms. Unfortunately, there are enough Republicans on Capitol Hill who also want to preserve the welfare state to force us into the choice between panic-driven austerity and tax hikes.

Austerity panic means across-the-board, more or less indiscriminate spending cuts executed in as short a period of time as possible. It is driven by the need to balance the government budget, and is often perceived as the only route to less government spending. This is, again, wrong, but the fact that there is a third alternative is a well-hidden secret to the Europeans (and, again, to Democrats here at home). As a result, there is now a strong political backlash in Europe against austerity. Consider, e.g., what the representative of the European labor union federation says two minutes in to the aforementioned EU Observer interview says: he, his organization and other left-leaning organizations are effectuating a shift in policy away from austerity toward “a better redistribution of the burden.”

Tax increases, in other words. Part of the political backlash in Europe against austerity comes in the form of a call for a financial transactions tax. In other words, those who want to save the welfare state are shifting tactics: instead of cutting the spending programs to make them fit within tax revenues they want to adjust taxpayers to the welfare state. Either way, the welfare state remains in place and will continue to cause recurring, even persistent, budget problems.

As a hint of where the European continent is heading, the OECD has issued a stern warning to European governments:

The eurozone needs “the mother of all firewalls” if it is to protect the EU’s single currency from debt contagion, the Organisation for Economic Co-operation and Development (OECD) has warned. Angel Gurria, OECD’s secretary general, urged EU finance ministers meeting in Copenhagen on Friday to increase the eurozone’s bailout fund to at least €1 trillion (£835bn). “Weak financial conditions, fiscal consolidation and economic adjustment are restricting demand in the short-term before the long-term benefits on stability and growth are felt,” he said.

What he is saying is that the austerity policies have caused consumers and businesses to scale back spending. This in turn has reduced the short-term outlook on GDP growth. However, the OECD Secretary General does not draw the conclusion that the error lies with the austerity policies. He is fully those policies – he just wants a stronger commitment to them:

“Decisive action to restore confidence and support demand is needed now.” Germany is trying to hold down any increase to €700bn but Mr Gurria stressed a big fund, the bigger the better, would be needed to fight a eurozone crisis that is not yet over. “When dealing with markets you must overshoot expectations,” he said. “The mother of all firewalls should be in place, strong enough, broad enough, deep enough, tall enough, just big.” The International Monetary Fund has made the increase the pre-condition of increasing its resources to provide credit lines to the euro area, which is facing turbulence on the bond markets.

This is, again, a policy we are already familiar with here in America. This bailout fund is the EU’s version of the Obama administration’s ARRA Stimulus bill, the purpose of which was to prevent spending cuts in entitlement programs run by the states. It would have been more upfront to call the stimulus bill a “state bailout bill”, which is precisely what it was.

In retrospect it is safe to say that Obama’s state bailout had absolutely no positive effect on employment and economic growth. By the same token, the European economy will not benefit from their bailout, no matter how large it becomes.

The bailouts on both sides of the Atlantic ocean may have delayed or alleviated the austerity policies that defenders of the welfare state otherwise see as inevitable. But this has not prevented the emergence of a disturbingly radical political response to the austerity policies already implemented. There is a surge of support in Greece for outright authoritarian political parties. According to the Wall Street Journal, this is in direct response to the government’s panic-driven austerity programs, with possibly dire consequences in the upcoming parliamentary election (emphasis added):

The election, not yet scheduled but expected in April or May, is shaping up as a public revolt against Greece’s political establishment, which has backed the austerity policies that are the price of financial life support from Europe and the International Monetary Fund. Mainstream politicians are increasingly painted as leading Greece into a debt trap, then impoverishing it in trying to escape. As a result, Greece’s major parties, which have promised Europe they will enact yet another round of deep public-spending cuts by summer, are struggling for support. Half the electorate plans to vote for radical opposition groups, ranging from Soviet-style Communists to anti-immigrant neo-Nazis, according to recent opinion polls. That could lead to growing political instability even if the established parties cling to power, undermining Greece’s ability to enact the drastic spending cuts and economic overhauls its creditors demanded. … The austerity measures “taken under pressure” from Germany “are exceptionally adverse for the Greek people,” said Giorgos Karatzaferis, head of the nationalist party Laos. Extra austerity measures due in June “are completely repulsive,” he said, vowing to fight them.

Is this type of backlash against austerity unthinkable in America? We will not see any emergence of an outright Communist movement in America, but the radicalism displayed by leading Democrats over the past few years is reason enough to ask how seriously one should take:

  • The efforts of liberal politicians to protect the welfare state;
  • The ties between the Democrat party and unions;
  • The role that the Occupy movement may play, primarily in the election this fall and secondarily down the road; and
  • Whether or not middle-class Americans who now support the TEA Party movement are willing to stand by their demand for smaller government once austerity comes knocking on their doors.

It is worth noting that the largest demonstrations that have taken place in American in recent years have been in support of lower taxes and a smaller government. They have been in protest of efforts to take America deeper into the fiscal quagmire known as the welfare state. This is encouraging. But we should also keep in mind that we have not yet seen even a fraction of the austerity policies that have plagued many European countries for a long time.

Let us keep in mind why politicians take to austerity. The reason is not that they want to somehow permanently reduce the size of government. Instead, it is their way to try to save the welfare state by shrinking it to fit in the box of tax revenues that taxpayers can produce. This goal puts austerity policies on the same shelf as tax increases: the former tries to reduce spending but keep the government’s entitlement programs in place; the latter tries to increase revenues to keep the spending programs.

The third alternative, to structurally reform away the welfare state, is never mentioned in the public policy debate. It needs to be part of the American debate, though, before austerity comes ashore.