Saving the Welfare State

I was invited to the “Festival Internazionale dell’ Economia” in Turin, to speak about inflation and debt. The grand topic of the conference is “Saving the welfare state” (“Salvare lo stato sociale”). So, I added some typically grumpy comments on that topic.

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This conference is devoted to the question, how to save the welfare state? This is the wrong question. The question is how to save our countries from the welfare state.

France’s debt is in the news. France’s government spends 57% of GDP. 57%. That means the average tax rate in France must be 57%. And for everyone who pays less, now or later, someone else must pay more. For much of Europe the number is only slightly less, around a half. The US is not far behind.

Europe’s crying economic problem is economic stagnation. Marginal tax rates well above a half are deep in the range of undeniable disincentives to work, save, innovate, start and grow businesses, invest in education, and so on. Add extreme business protection and over-regulation, pay people not to work, and you have all the ingredients of stagnation.

What to do? Tax even more? Cut benefits to needy people? Economics offers a way out: Focus on the incentives. In the United States people lose about $1 of benefits for each dollar they earn from 0 to $60,000, with many cliffs along the way. Many retirement and disability schemes make work essentially impossible. You don’t have to force people to work, you just have to let them keep some of the money. And grow, which needs mostly a big dose of get-out-of-the-way.

Beyond debt and growth, our societies are failing the most basic biological commandment, to reproduce. When the average woman has one child, the population falls by half every 30 years. A pay-as-you-go welfare state cannot survive that. And it is doubtful that our highly specialized economies can survive population decimation either.

In the old days, people had children in part to support them when they got old, sick, or unlucky. In a welfare state, other people’s children take care of you when you get old or sick or unlucky.

Margaret Thatcher said socialism ends when your run out of other people’s money. Here we are. The welfare state ends when you run out of other people’s children. Here we are.

For better or worse, the regulated welfare state substitutes a personal, individual relationship with the central government for the insurance once provided by family, markets, savings, community, church, charity, and local government. But incentives matter. Children are now just an expensive luxury consumption good. The welfare state is at least part of the plummeting fertility that undermines the welfare state.

Don’t save the welfare state. The welfare state is killing our prosperity. End, or at least deeply reform, the welfare state. Focus government efforts on the truly needy and unfortunate. Leave the average person to the glorious incentives, rewards, and protections of the competitive market.