Why is the West bankrupt?

August 8, 2011

By Laurence Copeland. The opinions expressed are his own.

The UK, USA, the PIIGS (Ireland and Italy are together in the same stye), France is in poor fiscal shape  – OK, Germany is ostensibly living within its means, but it looks a lot less solvent when you remember that it has underwritten the rest of the euro zone (in large part, to protect its own irresponsible banks). In any case, as I have argued in previous blogs, this or a future German Government is likely to cave in to the pressure from its own electorate and from inflationist economists at home and abroad to join the party and spend, spend, spend. Only Australia and Canada, riding high on the commodities price boom, and a handful of small countries, look stable.

Where will it all end?

With inflation, almost certainly, but beyond that, it is hard to say. However, there is one prediction I would offer for the medium to long term outcome, and it applies not only to the euro zone, but to Britain and America too – in fact to the whole of the comfortable, complacent industrialised world – and it is this.

We are living through the death throes of an ideal, a dream which has turned into a nightmare – it is the end of the social democratic welfare model.

I am referring to the whole panoply of benefits (entitlements, as they are called in America), labour market regulations (employment protection, minimum wage legislation, limits on the length of the working week etc. etc.) and other social democratic devices intended to inflate like airbags to protect us all from shocks from any possible direction. The whole edifice built up in Western countries to shelter us from the need to earn a living is now clearly unsustainable. We can no longer afford a regime which allowed, indeed encouraged us to live permanently beyond our means both as individuals and as a society.

Two aspects of the current crisis make this apparent. First, and most obviously, we are all more or less like Greece – our debts may be proportionately smaller, but they are still crippling. Our pensions regime may be less egregiously wasteful than Greece’s, but they are still more generous than we can afford. As for healthcare and care for the aged, they are a crippling burden and demographic pressures will make them impossible for any country to sustain at anything like present levels.

Of course, in principle, we can choose any level of welfare we want, provided we are willing to pay for it. In Southern Europe, the prosperous middle class are honestly dishonest about contributing  – in other words, they simply evade the tax, voting with their wallets against the regime. In respectable North European countries, people cannot evade tax, so they avoid it instead.

Now what is often forgotten is that, for economic purposes, tax avoidance is not restricted to complex schemes involving tax havens and obscure loopholes in the tax code. The simplest, most popular and most damaging tax avoidance scheme is simply to drop out of the labour force, pleading sickness, taking early retirement or straightforwardly going on the dole. Failing that, there are plenty of jobs for people with the right skills in sunny Australia. In most of the rich countries, more than one in three of the working-age population is already outside the labour force i.e. neither in employment nor currently looking for a job, a percentage which tends to rise at times like the present, where there are fewer and fewer jobs which can compete with the benefits on offer to those who don’t work. In particular, recessions magnify the discouraged worker phenomenon which results when high marginal taxes – sky-high when they take the form of means-tested benefit withdrawal, as they do for those caught in the poverty trap – meet decreasing demand for labour.

On unchanged policies, the number of workers left to carry the burden of the welfare state will decrease even further, just at the time when they are most needed. We might just about have been able to stretch matters for another decade or two before the system collapsed, if globalisation had not brought us suddenly into head-on competition with two billion Asian workers who may be less productive, but are willing to sell their labour for a fraction of our wages, without the promise of a month’s paid holiday, nor social security of any kind, nor limits on their working week, with minimal intervention from local health and safety officials (if there are any) and so little employment protection that their bosses enjoy more or less complete freedom to hire-and-fire at will.

Of course, nobody is suggesting that we should reduce our standards to those of the Third World. But the future is almost certainly going to involve a gradual raising of welfare standards in the emerging economies and a gradual reduction in ours, thereby preserving some sort of competitive equilibrium. By far the most efficient way to achieve this outcome is for Government to shrink its role drastically, leaving employers and workers to strike their own deals on pensions, healthcare, paid holidays, hours in the working week, and so on and so forth.

In other words, instead of holding a political auction to decide on the level of benefits people should get – and then finding they are unwilling to pay for it – we need to let individuals in the labour market decide how much they are willing to pay (in reduced wages) for each additional benefit – something which only happens to a small extent today.

Of course, as every politician knows, benefits are always popular and the beneficiaries are as unlikely to vote for limits on them as are turkeys to vote for Christmas. On the contrary, their votes are for sale – as long as any change brings more benefit than it adds to your tax bill, it is irrational to vote against, so the welfare state creates its own ever-growing electoral clientele.

Reversing this process will be painful because the expansion of state responsibility over so many aspects of our lives in recent decades has gone hand-in-hand with a diminution in personal responsibility – after all, responsibility is a zero-sum game. When people have got used to the idea that they are no longer held responsible for their health, their financial solvency, their housing, their own or their children’s education, they start to disown responsibility for everything – they look for someone else to carry the can even when the state is either unwilling or unable.

No wonder we see the same phenomenon even in areas where money is not directly involved. Thieves and murderers take to crime because the System (presumably, the Government) has failed them. Football hooligans run amok because they are provoked by the players (who must be punished accordingly). If I am overweight, it is because wicked TV advertisers tempted me with junk food (but if I am anorexic, it’s because they persuaded me to starve myself). And addiction is a very helpful excuse too. If I drink too much, or gamble, or take narcotics, or spend all day playing video games, it’s the addiction to blame – not me.  The history books need to be rewritten: Don Juan was actually a sex-addict and poor Genghis Khan was a helpless rape-and-pillage addict!

It will be a long difficult painful process back to the default position of our Victorian ancestors, which was that our fate is (or should be) in our own hands. To get back to sanity will require political courage in the coming years, because the economic and social stress will test democracies to the absolute limit and we know from ‘Yes, Minister’ that in the politicians’ dictionary courageous is a synonym for foolhardy.

Image — The DAX Index board is pictured at Frankfurt’s stock exchange August 5, 2011. Picture was taken with a fisheye. REUTERS/Ralph Orlowski

Comments

Brilliant article.

Posted by I_R_Responsible | Report as abusive
 

I think it is right to look at this from a long-term perspective. Governments have overspent for decades because in order for politicians to get elected they have had to promise more and more to the electorate. To this extent, we are nearly all to blame. Government spending has, force majeur, been funded by huge increases in debt, much of which is purchased by banks and central banks. Many of those assets are now of doubtful value, and the banks are suffering because of it, as well as because of their own home-made mistakes. It is inevitable that much of this debt will have to be written off, to the detriment of the banks’ capital. On top of that, the “agency problem” means that huge amounts of money which would otherwise have formed part of the banks’ capital has, in recent years especially, been paid out in bonuses to management who have not proven to be responsible caretakers. This has weakened the banks considerably. We cannot afford the benefits, and we cannot afford the bonuses.

Posted by johnrwshort | Report as abusive
 

The situation certainly doesn’t look good

Posted by openmodels | Report as abusive
 

Interesting true!

Posted by Favian2011 | Report as abusive
 

Gee Laurence, thanks to you I now realize it’s all our fault. Thanks to your amazing insight I now know it’s all us lazy workers who’ve demanded too much of the fruit from our labors.

Here I was thinking that it was the fruit of our labor that gives guys like Warren Buffett the hundreds of billions he takes in profits from things like the mandatory car insurance we are forced to buy, under the threat of jail and fines, if we want to drive a car to get to work.

“Gen Re” is really not a cash cow that gets its profits from laws that require us to pay them a tribute to legally drive our car. Thanks to you, I now know that Warren Buffett deserves all those billions of our dollars. Gosh, was I ever misinformed.

Same thing with those execs that earn millions each year by working so hard in those factories making products for the Defense Industry. Those poor execs are the only ones in all those factories that have truly earned their money. The rest of those workers are lazy bums, all of them.

And all those current and former members of congress who, during the “Debt Crisis Negotiations” never mentioned cutting the benefits they receive after a short stint in office. Those guys are the only ones actually producing all the things we consume.

And it’s not even the fact that instead of protecting our markets, and jobs, and industry, our government and corporate leaders instead, in fairness to all the billions of people to China who’ve done so much to make this nation what it was, decided that we should compete with all those willing to work for pennies on the dollar over there.

Nope, we ask too much for what we do. It’s us, the lazy workers, who’ve ruined it for ourselves.

And you, you deserve much more in compensation than us workers who built your home, and car, and paved the streets you drive on, and keep your sewer working, and your water running, and your lights and A/C on.

You have sweated, and endured the aches and pain of hard physical labor, in order to help us understand that the work of generations was overvalued, and now we must be forced to compete with the masses in greatly over populated foreign nations so we know what our real value is.

Those Chinese know the real value of labor. They know that, and indeed the real value of their their life’s work too. It is starvation wages and destitution in our old age.

“It will be a long difficult painful process back to the default position of our Victorian ancestors, which was that our fate is (or should be) in our own hands. ”

Yes, we’ll get there, and we’ll get used to it too.

Sure we will. And you can be certain that no more Guillotines will be built too. The masses will never again rise up to cut away the cancer that is the elite class. We’ll nourish it this time, and protect it with our own lives. Thanks to you, we now know that without those, like Warren Buffett, who’ve rightfully earned their entitlements, we would all wither and die a cruel and hard death.

You are indeed brilliant. You just look out your window Laurence and you know that man filling the pothole in your street, the other mowing your lawn, and the guy working on the power pole to keep your electricity on, you know they are all over paid and lazy. It’s you that deserves the big bucks because only you are smart enough to know how worthless we truly are.

Yes, we just needed to understand our place, and thanks to you, we now do.

You must need a vacation after working so hard at telling us how worthless we are. Tell your housekeeper to pack a bag for you, tell the airline worker to reserve a seat in First Class for you. It’s all on us. We owe you.

Posted by Bill-in-air | Report as abusive
 

A Template/framework excluding the process of technology transfer=the machines make everything but the emergent order transforming the world needs a new IT based form of transactionable currency so the ghetto/pareto effect can lift us all
laziness is innovative done correctly-most of the training and professions are synthetically insular and non-scalable.
Third world dentists and doctors should be put in place as well as a mechanism to convert the huge unnecessary square footage empty or under used into housing
networks of leisurely community proceedures removed from speculation and supported by performance not position
leading this process would motivate a holistic global culture
greenback II-welcome the era of the new Global Greenback party
save the debtors from continued frustration and painful culture wars disguising the underlying weakness of yesterdays pre-internet smart phone posse
and in return a performance driven requirement for everyone
sitting out done correctly is a laissez faire reality and when necessary information technology could trigger non-overheated(boom-bust) economies only available today and >>>>forward

Posted by brooksblanchard | Report as abusive
 

This article was obviously posited for a European audience.
The amount of times you mentioned “welfare” is juxtaposed only by the amount of times you mentioned “bankers”, “corporate welfare”, “politicians bought off by bankers and billionaire corporations”, yes that’s right, you mentioned these latter phrases zero times in this article to your intellectual peril.

Sure you talked about political courage, and trends of people not taking responsibility for their malaise. But what you did not discuss is just as noteworthy from an American’s point of view:
1. Bailout(why don’t you call THAT welfare sir) to bankers by the Bush Administration, supported by both parties.
2. GE making billions of profits and not paying a dollar of taxes to the US. (Again, is that not welfare as well? But I digress).
3. A social medicare drug bill not paid for, passed by both parties in America.
4. A phoney war in Iraq based on lies to the American people that cost us billions. (No mention of this in your scenario since you just blame the middle class and the “welfare state” for their “addictions”).
5. Enter Obama, another bailout to the bankers(make no mistake about it this money according to a Fed Reserve audit also made its way to European banks, funny that you did not call that WELFARE, why didn’t you just call for the European banks to fail with the same enthusiasm as you call on normal people to stop blaming things on their “addictions”, an irony not lost on me. Weren’t the banks addicted to “welfare” from the Federal Reserve by this point?
6. Increased spending in Afghanistan, and an extension of the war where billions more were spent to the military industrial complex, supported by BOTH political parties here in America.
7. Increased stimulus package, where millions of dollars left to be spent on infrastructure, not enough to get the economy rolling, but certainly a nice show, supported by Dems who controlled both Houses of Congress at the time. Did not work.
8. Federal Reserve with its inflationary QE 1 and 2 programs to prop up the Ponzi scheme, printing electronic money not worth the paper its not printed on. And attempting, dare I say a pseudo QE3. Are you kidding me? Anyone ever heard of hyper inflation. By the way, let me be clear with a prediction, America is headed not towards a double dip recession but a full blown depression. You have no idea how bad it will get in America, but let me be the first to inform you and your readers. You think London is burning now? That will be nothing compared to what is to occur shortly in the US. Not to mention if a natural disaster strikes in North America, earthquake New Madrid Fault or the Juan de Fuca fault near Seattle, Wa.

I could go on and on but I think you get my drift. In your world you try to create a European rift between welfare for poor needy people and you don’t mention not even once the corporate welfare that got the world into this mess. Sure you gloss it over with globalization, without calling a spade a spade and instead blame the situation on the middle class and poor people’s greed and selfishness when it was the banksters greed(derivatives, fraud[AIG v. BOA] and “kept” politicians’ greed that precipitated this madness. If your opinion wasn’t so ludicrous it would be actually be funny. I actually agree with 25 percent of your article, but I must say, shame on you sir because you have missed the true reason why Europe and America are falling into the abyss with the wind whistling in their ears: TOO BIG TO FAIL. Think about that for a second and write another more balanced article and I may actually laud your intellectual honesty and clarity. Until then all you do by blaming “welfare” is to indict more of the very corporatists that helped cause the problem for it is THEY that demanded the WELFARE that got America into the mess they are in. To imply anything less is completely disingenuous.

Posted by Independent007 | Report as abusive
 

Interesting theory Laurence, but the root of the problem of all the current economic woes is the interest on any loan. Until banks start issuing the interest as well as the principal, the system is mathematically doomed to failure. A system of loans that requires even one penny more to be repaid than is lent in the first place is not sustainable. Our system requires much more to be repaid that is lent, and like the snake eating it’s tail, it will consume itself and die. That is what is happening right now to the US and all other countries to one extent or another. Well, except Iceland. That group woke up saw things the way they really are. Everyone else would be wise to follow suit.

Posted by itstheinterest | Report as abusive
 

US medical costs are 2.7T$ per year. Other countries provide as much or greater health at half the cost, using a single payer system. That would free up 1.35T$ per year, every year.
(And don’t believe that we pay twice as much because of research by Pharma. That number is only $15B/year, according to the National Academy of Sciences.)

The US spends about 1T$ per year on military and security per year. Reduce that amount to the world per capita average, and that would free up another 0.9T$.

Reinstate the Bush tax cuts given to the wealthy. That would give an additional 0.1T$ per year.

I think we can easily find enough money here to quickly retire our 14T$ national debt, keep the Social Security benefits (which our taxes directly pay), and also have universal health care.

There are additional useless programs to be cut, such as the War on Drugs.

The additional available funds could be used to re-build our country and re-educate our people for the new global world (like it or not) that we live in.

I agree that “We are living through the death throes of an ideal, a dream which has turned into a nightmare”; but the ideal has been free-rolling, uncontrolled, high-level capitalist greed. Obviously we can’t go much further with this. The wealthy have as much of their stuff as they will probably ever be able to get. Inequality has reached its limits.

Posted by xcanada2 | Report as abusive
 

Great articles inspire great comments. But, regardless of the individual circumstances, people have been led to expect three times more from the pot than they put in! To do so simply means they are getting other peoples money. As Thatcher so aptly put it, pretty soon you run out of other peoples money!

Politicians have long recognized this system as a great Ponzi scheme but intended to ride it until they could personally bail out, thereby, doing none of the heavy lifting of changing it. As for those most severely affected, it may make them feel better to identify some of the players in this tragedy but the end is the same, and the train has left the station!

Posted by PhillupSpace | Report as abusive
 

Why is it that the europeans And the Americans feels that they have the god-given right to live beyond their means? The asians are now living the period of the Victorian eras. We (asians) sell our souls to survive. We accept low wages so that have a chance to earn a living. But eventhough our wages are low, we save for the next generation. This is nature. this is survival instinct of any species, in this case the asian sub species. The next generation must survive. But the Western sub species mortgage their houses to splurge on luxuries, not caring for the next generations. Their government is only interested in ruling the masses. Hence the keen fight between the varous political parties. Why? Its the money. Who are the people behind these parties? The rich. So the rich, who are actually unelected, is ruling the so called democratic countries. Unsustainable welfares are promised in order to obtain votes so that when power is in the rich’s hand, they quickly plunder. They will leave the forthcoming ruin for the rest of the foolish citizens to enjoy, while they will live in luxuries for generations to come. Remember whwt I wrote ealier about survival and nature. Some decades ago, the western countries were colonist. They take over nations which were less progressive and plundered their wealth. That was were the then government were able to provide much of the welfares to their people. But all living things will choose to live alife of least discomfort. They become addictive. So the western society has become addicted to easing living, and living beyond their means. The Asian society has to accept pittance as wages, so the west can buy cheaply. So why do you(those who think Lawrence is wrong) think that you and the west deserve to live a life of luxury, while the east has to live a life of misery. By the way those smart investors conjure dreams for you so that they can milk you and all the lazy people. They invest in politicians, get it.

Posted by syching | Report as abusive
 

“The asians are now living the period of the Victorian eras. We (asians) sell our souls to survive. We accept low wages so that have a chance to earn a living. But eventhough our wages are low, we save for the next generation.” syching

syching, selling your soul to survive is not something americans will do without a revolution first. We, as a nation, are getting pretty fed up with a corporate run government, and we’re getting fed up with being forced to compete with foreign, communist government supplied labor too.

If you want to help, quit selling your soul.

Posted by Ozarker | Report as abusive
 
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