A Referendum on Austerity

When Mitt Romney chose Paul Ryan as his running mate he exercised the same kind of professionalism and integrity that has characterized his presidential campaign thus far. But he also transformed the election with one stroke of the pen: up until Saturday morning, the election was primarily about Obama’s competence and skills as president and his weak record from the past four years. Now the election is going to be about how to close the federal budget deficit – an issue that to some degree neutralizes Obama’s shortcomings and failures.

That does not mean that Obama can escape from his own role in creating a trillion-dollar gap in the budget. But it does mean that Obama can contrast his tax-and-spend strategy against an alternative that for the most part is yet undefined in the eyes of the American people.

Whoever gets to define that alternative will win the election.

Paul Ryan has already laid the foundations for defining his and Romney’s alternative. He did so in his plan A Path to Prosperity and in the 2013 GOP budget that passed the House early this year. Both these documents explain that you cannot cut government by simply slashing spending – you need structural, long-term reforms that change the cost parameters of government programs.

In short: change the scope of the welfare state from free-for-all to a limited purpose of poverty relief.

In this video I contrast this Paul Ryan approach to the business-as-usual (or, more accurately, spending-as-usual) attitude of the Democrats. I explain the point with structural reforms and how such reforms can help us shrink government without running in to the desperate problems that Europe is facing.

Which brings us to the hotly contested point in all this: the concept of austerity. As readers of this blog know, austerity is not a desirable policy strategy. It is an ugly and destructive combination of panic-driven budget cuts and equally panic-driven tax hikes. Its consequences, on full display in Europe, are devastating and we want to do everything we can to avoid bringing them here. The challenge for the Romney-Ryan team is not going to be whether or not they want austerity in America – they don’t; it is very clear form an analytical viewpoint that Paul Ryan’s fiscal policy strategy is not an austerity strategy. The challenge is instead going to be about defining their strategy for less government in contrast to what is obviously going to come from the Obama camp.

Obama is going to try to define Romney-Ryan as the door openers for Europe-style austerity in America. He has already used Europe’s destructive austerity policies in his own campaign rhetoric, depicting himself as the very alternative to austerity, and more or less America’s guardian against drastic, panic-driven budget cuts. It is a given that he will equate Paul Ryan’s fiscal strategy to the kind of fiscal torture that the European Union, the European Central Bank and the IMF have subjected Greece to.

There is no such resemblance between what Ryan wants and what Greece is going through. On the contrary, the Ryan strategy, especially as outlined in the 2013 GOP budget. Back in March I explained:

The second compelling part of the budget’s welfare section is its recognition of a need to transform the current welfare-state model in a more sustainable direction. There is a tendency in the general public policy debate to propose clean-cut immediate closings of welfare state programs. Such measures are, however, likely to cause more economic problems than they solve. They will also do harm to vulnerable citizens in the bargain. Therefore, it is refreshing to see that the GOP budget recognizes the need for transitional elements in welfare reform.

This transformation comes in the form of redefined funding mechanisms – block grants – and of more use of measures to assure that people are only temporary consumers of welfare programs. As technocratic as this may sound, it outlines a strategy that will avoid the pitfalls of European austerity:

  • the purpose of Europe’s austerity programs is not to change the scope and ambition of the welfare state, but instead to keep the general, redistributive welfare state as intact as taxpayers can afford it to be;
  • the Ryan plan wants to redefine the role of the welfare state as a safety net of last resort.

A structural redefinition of the welfare state as a last-resort safety net allows for a reduction of both spending and taxes to a point where there is enough surplus in the private sector to build prosperity. By contrast, the European austerity plan to save the welfare state means that the government grabs whatever it can to save its redistribution programs – even if that means that there will be no margins left in the private sector to build prosperity.

This contrast is fundamental and it is absolutely critical that the Romney-Ryan team understands it in full, and can articulate it to the American people.

It is not sufficient to do what Ryan has been doing thus far, namely to tell the American people “as it is”. Thus far he has shortchanged the true significance of his own plan, possibly because he himself has not fully grasped how powerfully the Obama camp can challenge him by pinning Greece on him.

Let’s bring this problem down from the abstract analytical level to where the rubber hits the road. A recent CNBC report captures the dilemma for the Romney-Ryan team very well:

As the euro zone debt crisis deepens and austerity measures take their toll across Europe, the number of young children and babies abandoned across the region has increased, according to local charities. The rise in the abandonment of infants across Europe is most visible in the spread of “baby hatches” or “boxes” across Europe, where unwanted infants are left anonymously. The phenomenon was previously more prevalent among immigrants, but it is becoming more widespread among financially desperate members of the local population.

The reason why these “members of the local population” – i.e., young mothers and families – are financially desperate is that they have become dependent on government for their daily survival. Now that governments in more countries than Greece are panic-cutting spending under harsh austerity plans, there is no time for legislators to discriminate who will get hurt and who won’t. But more importantly, there is on time for those same legislators to create a path for these welfare-dependent mothers out of dependency on government.

That is where the Ryan plan makes a difference. It takes the first step toward thoughtful, structural reforms to the welfare state. It is a necessary first step, but far from a sufficient one. We will need much more comprehensive reforms that can assure, for the foreseeable future, that the costs of government will never ever run amok again. But the key is to do so without letting the most vulnerable among us pay the price: the very problem with austerity is that it puts the burden of shrinking government on those who have been lured into dependency on government and have nowhere else to go for their daily bread.

We can do this. We can combine less government with a morally acceptable path to self reliance for everyone, including the poor and needy. I explain how this can be done in me book Ending the Welfare State: A Path to Limited Government That Won’t Leave the Poor Behind.

If we don’t distinguish between the structural reform path to less government, and austerity, we will end up losing the battle over America’s future to spending-as-usual statists. If they win and continue spending, they will most certainly bring us to the point where we run out of credit as well as taxpayers’ money. Once there, the statists will be the ones who bring panic-driven austerity to American shores. At that point we will go down the same path of fiscal and moral deterioration that Europe is on today – and we will see the same things happen here as the CNBC story reports is now happening in Europe:

The hatches are sensor-activated so when a baby is placed, an alarm is activated and a carer comes to collect the child. Despite the practice being widely viewed as contravening the 1953 European Convention on Human Rights, of the 27 EU member countries, 11 countries still have “baby hatches” in operation, including Germany, Italy and Portugal. In those countries where hatches are illegal, the number of infants abandoned in hospitals, clinics and churches has also risen, raising concerns among European charities, the UN and the European Commission that austerity measures and increasing social deprivation are the catalyst for the rise in child abandonment.

Romney and Ryan better get ready to counter attacks from Obama and his ethically challenged cohorts that the GOP ticket is going to slash welfare and force young mothers to abandon their babies in hospitals. They better outline a strategy for explaining how it is Obama’s spend-to-oblivion policies that will cause austerity and open baby hatches in America.

According to SOS Villages, a European charity that attempts to help families in financial hardship before abandonment occurs, in the last year alone 1,200 children in Greece and 750 in Italy have been abandoned. That is almost double the 400 children abandoned in Italy a year ago, and up from 114 children abandoned in Greece in 2003. With the cost of raising children estimated to be 20-30 percent of an average household budget (per child) in Europe, more families are now struggling to cope with the costs.

Austerity is a big part of why the cost of living is going up. Austerity raises taxes, thus draining the private sector of its life blood, and cuts spending, thus taking away the last lifeline for the poor and needy.

A structural reform plan, by contrast, cuts taxes and deregulates while slashing spending. The combination opens a path out of government dependency without deprivation and despair for those who depend on government today.

George Protopapas, National Director of the charity’s Greek division said that parents already struggling with keeping a roof over their heads  are now barely managing to keep their children clothed and fed, if at all. Protopapas cited the example of a four-year old child left at a nursery by her mother with a note that read: “I will not be coming to pick up Anna today because I cannot afford to look after her.  Please take good care of her. Sorry.”

Keep in mind that this is happening in countries where the governments are doing their very best to save the welfare states.

“In the past year, SOS Greece has had a 150 percent increase in applications for all kinds of support, mainly [for] financial reasons, and 87 percent of applicants are Greeks,” Protopapas said. Data from the Hellenic Statistical Authority shows that 27.7 percent of Greeks are now facing penury.

In other words, not just poverty, but extreme poverty. This in the middle of one of Europe’s most generous welfare states.

Stergios Sifnios, Director of Social Work in SOS Villages, told CNBC that in his 30 years of working for the charity he had not seen a societal crisis similar to this, prompting him to believe that things can only get worse. “We are really afraid that in the future we will have a big number of families that cannot manage to keep their own children because of these problems.  We are trying to be ready for this,” he said, but the government must keep on funding social welfare services.” “[The government must] stop downgrading services in the name of the austerity measures.”

Which it can’t do. The austerity measures have themselves caused the economy to continue its plunge from recession to depression. As a result, there is no way that the government can save the economy and the welfare state – yet if it tries to do away with the welfare state in the midst of a depression, there won’t be any prosperity in the private sector to provide a pathway out of government dependency.

It’s different in a regular recession. There is enough economic stability and prosperity still in the economy to build private alternatives to government dependency. This is why America still has a chance to structurally reform away the welfare state.

By choosing Paul Ryan as his running mate, Mitt Romney made the November election a referendum on austerity. His running mate has outlined the first step toward avoiding austerity. All they need to do now is explain how they can protect America against the European disaster – and how Obama is the one who will bring Greece to America.