"To Solve a Problem, First We Must Recognize There is a Problem"

Sydney M. Williams

Thought of the Day

“To Solve a Problem, First We Must Recognize There is a Problem”

May 24, 2010

The social welfare state, which came to epitomize Europe in the post War years, exemplified the positive aspects of life and was a pay-off to the people for years of war and dislocation. It was born at a unique moment – out of the residue of World War II in 1945.

Over the previous thirty-one years Europe had suffered two devastating wars, a rise of militarism in Germany and a global depression. Two generations of young men had been slaughtered; cities had been destroyed and industrial capacity had been drastically reduced. It is unsurprising, given these antecedents, that Europe could be lured, like Ulysses, to the siren call of the welfare state – where hours worked would be minimal, vacations generous, retirement early and personal pleasure would serve as the raison d’être, in a cradle-to-grave state-empowered life. That model, for five and a half decades served the people well. The explosion of births following the War provided the labor to pay for the benefits of the War-diminished generations born during the years 1890-1930.

The longer term weakness of this policy, however, is now widely apparent and is aggravated by declining births and an aging population. In 1950, about seven people were working for every person retired. Today the ratio is 3 to 1. Given current trends – living longer and lower birth rates – the ratio is projected to be 1.3 to 1 by 2050. The problem in Europe is made worse by providing bond holders a sense that default (of state-issued bonds) is not an option. Once the threat of bankruptcy enters the equation, interest rates adjust and a more realistic cost of money will be factored in.

Steven Erlanger, writing in Sunday’s New York Times, exposes the fallacies of the model and why the debt crisis in Greece is but a harbinger of things to come; it should serve as a wake-up call for Americans, as we embark on a trek toward greater government intrusion in business and an increase in entitlements.

What makes a solution to the problem in Europe so elusive is that those who are retired or about to retire make up an increasing percent of voters. Additionally, there is a symbiotic relationship between public unions and politicians. The former fund the latter, and the latter ensure passage of legislation that meets the demand of the former. The bills are paid by private workers. The increase in demonstrations and strikes are a visible manifestation of the Herculean task facing policy makers. The state finds itself between the Charybdis of reducing benefits today and the Scylla of postponing the solution by raising taxes.

While it is easy to dwell on the problems, at least the problems are being addressed and that will, in time, have positive consequences. Resolution is never possible until people acknowledge there is a problem. In Europe, that is beginning to happen, though the depth of the costs and the time it will take are not yet known.

The quick, reactionary answer of most policy makers is to continue entitlement programs (in the U.S., we have expanded social welfare spending through the health care bill) and pay for them by raising taxes on the wealthy. While tempting, such action is short sighted and only postpones the inevitable – reducing benefits and raising the retirement age. Germany has already raised the retirement age to 67, while in France only half the people work past the age of 50.

Once addressed, the problems of the welfare state will begin to diminish and will serve to embolden Europeans. Self reliance will increase, leading to a declining influence of public unions and an increase in productivity. In the United States, we are beginning to see the debt problems of New Jersey, largely a function of unrealistic union demands for health care and retirement, finally being addressed by Governor Christie. It isn’t pretty, but cuts in benefits and pay are needed, as the till is empty. New York, California and our Federal Government have yet to seriously address the problem, choosing instead to continue to kick the bucket down the road.

While Mr. Erlanger’s article is sobering – the chart he displays depicting the number of working-age people (20-64) per person of retirement age (64+) is especially revealing and scary – it is also apparent from his article that among those whom he interviewed and who view the problem with the greatest clarity are the youth. They have little question that current trends are unsustainable. He quotes a 25-year old Athenian economics graduate, as to the current crisis: “It could be a chance to overhaul the whole rancid system and create a state that actually works.”

Historically, the United States has always taken a harsher view toward welfare, relying more on individual initiative and personal responsibility, but we are not immune from the siren calls that tempted Europeans sixty years ago, and we seem to be heeding their call. Many of our states are facing tough choices, and the Federal government is actually expanding entitlements. We have the advantage of positive population growth, but people are living longer. Our tax system encourages consumption and discourages savings and investment. Recognition of the problem is the first step toward salvation. Europe may be on that road. It is unclear that we are. For us, a failure to learn from their example means we are doomed to the plight now encompassing Greece.