The End Of The Welfare State – Coming Someday

Megan McArdle has a short, good piece up about the impending crisis of state and municipal finance occasioned by their pension profligacy. The discussion of the problem doesn’t contain any new information about the inevitable train wreck but her thoughts on the reality the developing situation represents is useful.

This problem has been building for a long time.  That’s the problem with retiree benefits–they can accumulate for quite a while before you notice that, oops, they’re budget killers.  Unfortunately for us, as with Medicare and Social Security, now is when these problems have gotten too big to ignore.  We have a triple-whammy of rising health care costs, a demographic bulge, and the historical legacy of a major expansion of government.  In the early years, as government expanded, generous pensions and retiree benefits were easily expandable; the previous generations of workers were relatively small, while the large new class was relatively young.  Now those generations of workers are piling up in the retirement system, and the current group of workers is not big enough to absorb the cost out of their paychecks.

This mirrors a debate happening in Europe, and I think it is the end game of the arguments about the welfare state.  The vision has hit its practical (and demographic) limits.  The convulsions will continue for some time, as we try to settle what, and how much, the state will pay for.  But in the end we’ll probably emerge with something roughly stable, and the sweeping, century-long conflicts will no longer be about growing or shrinking the safety net.

What will replace those debates?  No idea.  But as the state hits its fiscal limits, I predict that debating what more it should spend money on will come to seem a lot like arguing over how many angels can dance on the head of a pin.

I think that she’s fundamentally right. Maybe it is predictable that the end will come not so much as a result of political triumphs or failures as from simply exhausting financial resources but looking at the deal that was just cut on extending the Bush tax cuts, it’s doesn’t appear as if the political class recognizes that reality.

At a cost of $900 billion over a couple of years, it would seem that the political knee jerk reaction of passing out benefits is alive and well. Neither the Republicans nor the Democrats uttered any words about deficit reduction and the need to move towards more fiscal responsibility as this “deal” was hammered out. A month ago the talk was of nothing but moving towards a more stable and supportable financial framework. Today the fiscal conservatives, if any really exist, were in hiding.

I know the arguments in favor – you don’t raise taxes in a recession and we need more stimulus and blah, blah, blah. Sorry, when everything starts coming up false roses there won’t be any incentive to bite even the smallest bullet, not to mention the fact that when this “deal” expires the next election will be staring all of our Washington heroes in the face. Wanna bet they run on austerity as opposed to passing out more goodies?

McArdle is right, this is going to end sooner rather than later. Unfortunately, the change will be occasioned by a major calamity. We just don’t do crisis planning well.

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