Why Welfare States Hemorrhage

Tibor R. Machan

One central reason welfare states--or call them social democracies or whatever runaway mob rule most developed and developing countries are subject to these days (for the last thing they are is capitalist)--go broke is a basic flaw of the system, not the particular fault of politicians or bureaucrats or the devil.

Nearly all democracies now are unlimited, illiberal, and unrestrained by firm constitutional principles that prohibit spending more than what the treasury can bear. So the politicians are impelled by democratic forces to dole out support for their constituents without any regard for budgetary constraints. No budgets can be enforced since the very lawmakers and bureaucrats who would do the enforcement are themselves impelled by the democratic process to drain the treasury beyond rhyme or reason. Also, people just cannot be taxed endlessly--in time they just give up seeking to prosper.

Just imagine a family of five, with each using a copy of a credit card but none imposing self-discipline, so that whenever one of them wants to make a purchase, it’ll be done. Together the purchases reach way beyond the family’s financial resources, so, no surprise, the card will be maxed out in no time. Of course, credit card companies impose limits on card-holders but most families can obtain a half a dozen or more credit cards, so maxing out one doesn’t serve to discipline them, either individually or collectively.

Now add to this analogy the fact that when it comes to national treasuries, these are generally subject to carrying enormous debts and deficits. And those who are in time responsible for covering these are not yet alive or are very young, so they aren’t even in a position to express their protest about being saddled with these obligations they did not assume either individually or collectively. They are trapped into shouldering obligations very likely way beyond their capacity to cover. (There, by the way, goes “no taxation without representation”!) This is all exacerbated by the tragedy of the commons, since everyone also believes in getting as much out of the common treasury as possible with no thought about replenishing it. After all, what is in the treasury is all ours, a public resource, just as the resources around us in the wilds or the air mass belong to all of us, so that no private property rights serve to put borders around what people have available to use. Furthermore, public choice theory shows that politicians and bureaucrats work mainly to advance their own limitless agendas, having no clue at all what is in the public interest. So the pressures on the treasury are enormous.

There is a school of economic thought that aims to remedy matters, called constitutional economics--lead by George Mason University Nobel Laureate economist, James Buchanan--with the public policy objective to putting constitutional limits on spending. Some states of the union make an attempt at this but usually without much success, again because the democratic process tends to override all attempts at restraint. If politicians can ensure their own elections and reelections by promising to raid the treasury “for the benefit of voters”--never mind that altogether this is not really feasible but only a deceptive promise--they will do whatever they can to accomplish this goal. Those on their staffs or whom they appoint are not likely to stand in their way since they will be fired in a jiffy if they try.

It comes out to be a proverbial Hobbesian war of all (groups) against all. Labor, business, education, science, the arts, farming, you name it, and everyone is asking to gain support from the treasury and the politicians proudly assume it to be their duty to accommodate the requests however impossible this is.

The late Mancur Olson, a brilliant student of the welfare state, argued (in his book The Logic of Collective Action [U. of Michigan Press, 1965]) that this process is literally unstoppable and only a major meltdown can put a halt to it, followed by, perhaps, some revolutionary changes in the system. But so long as the democratic process continues (me thinks), everything will just repeat itself (even though now the meltdown may well be on its way globally).

I know of no solution to all this other than to insist that the very problem be communicated to the citizenry, relentlessly, repeatedly, and vigilantly, so that despite everyone's tendency to get on the dole, wisdom and prudence would in time prevail.

All of this needs to begin at home, but sadly macro-economists--including our current president--are telling everyone to spend, spend, and spend some more, for therein, miraculously, lies our salvation. Yet, contrary to this nonsense, in the end the best cliche to follow is that one just cannot get blood out of a turnip.