Author Archives: Sven R Larson

From Athens to Sacramento: Austerity Coming to America

As the Greek people have painfully experienced, you cannot “austere” yourself out of a budget crisis. It only makes the crisis worse: higher taxes destroy the tax base and spending cuts increase government’s net drain of resources out of the economy. The result is that fewer people work, more people qualify for welfare programs – and government spending ends up growing while tax revenues go down.

The only way to solve the budget crisis created by a welfare state is – surprise – to do away with the welfare state. This can be done; it takes hard work and dedication on behalf of us and our elected officials, but it can be done. So far, though, not a single welfare state in Europe, and not a single U.S. state, has been willing to step up to the plate and be the first to reform away the welfare state. Instead, Europe’s political leadership is going deeper and deeper into panic mode, relying as they are on budget cuts and tax increases to save their morbidly obese, fiscally unsustainable welfare states.

So far America has been saved from the austerity flu. But don’t bet your job on us being able to keep it that way. Some states are already resorting to policies reminiscent of austerity, and one of them has already entered the downward spiral that hurled Greece into full-fledged fiscal and political turmoil.

That state is California. The Golden State has wrestled with budget problems for many years, and Governor Brown was elected on promises to finally solve the problems. However, his strategy was the same old, same old: modest spending cuts and modest increases in some taxes. (He even accepted microscopic tax “cuts” by allowing a minor, temporary sales tax increase to expire.) Predictably, his strategy has not worked. As shown by an article in The Washington Post, The Golden State is now in even deeper budget trouble than it was before Jerry Brown got (back) into the gubernatorial mansion:

California’s budget deficit has swelled to a projected $16 billion — much larger than had been predicted just months ago — and will force severe cuts to schools and public safety if voters fail to approve tax increases in November, Gov. Jerry Brown said Saturday. The Democratic governor said the shortfall grew from $9.2 billion in January in part because tax collections have not come in as high as expected and the economy isn’t growing as fast as hoped for.

Part of the reason for this problem is of course that the governor and his staff joined the Democrats in the state legislature in an overly joyous forecast of how the Obama administration’s policies – including the nonsensical and totally wasteful stimulus bill – would put the economy back on a growth path. But part of the problem is also that the Democrats in California will try to save the welfare state at any and all cost. Thereby they allow themselves to completely ignore the very problem that caused the crisis in the first place: the welfare state.

But even worse is the fact that the solution they are applying – a very mild version of austerity – is now driving the state budget deeper into the deficit ditch.

In short: the medicine is killing the patient.

The austerity policies applied in California are supposed to increase tax revenues through higher taxes and cut government spending through – yes – spending cuts. But what austerity-minded politicians like Governor Brown do not understand is that the economy responds to austerity policies just like it responds to all kinds of economic policies. Tax increases discourage productive, private-sector economic activity; in combination with spending cuts, the tax hikes actually increase the government’s drainage of resources from the economy.

As a result, private-sector business activity is reduced or its growth rate is significantly reduced. Fewer people pay taxes and more people apply for the entitlements that the welfare state provides. Predictably, this is exactly what is happening in California. As shown by data provided by state controller John Chiang, tax revenues are lower while welfare-state spending is considerably higher this year than California’s politicians foresaw last year when they enacted the first round of Governor Brown’s austerity policies.

An analysis of the controller report for the period July 2011 to April 2012 shows a rise in two of the best short-term indicators of welfare-state spending:

  • Medical Assistance Programs spending has increased almost a quarter of a billion dollars more than even the Brown administration predicted it would under the recession; and
  • Social Services spending was hit hard by spending cuts and predicted to fall by $346 million; in reality, spending is almost $200 million above the budget target.

At the same time, tax revenues are coming in below target. During the period July 2011-April 2012 the state of California took in $73.5 billion in tax revenues. The forecast for the same period this year was $69.1 billion; the actual number is $65.6 billion. In other words, the state’s tax revenues are more than five percent below what the governor and his Democrat fellows in the state legislature needed in order to protect their welfare state from further cuts.

As is evident from these numbers and from the article in the Washington Post, the Sacramento statists have failed. The reason is not that they did not cut spending and raise taxes enough – the reason is that they combined spending cuts with tax increases. With this combination government takes more from the economy each year and gives less and less back. It is like government is trying to sell a new 2011 car at 2013 prices one year and a new 2010 car at 2014 prices the next year.

One of the most obvious reasons why austerity won’t work in California is that the state has a small and, relatively speaking, shrinking tax base. From the peak of the business cycle in 2007 to the 2011 California lost 1,028,000 private sector jobs. This was partly due to the national recession, partly due to California’s business-unfriendly policies. As of March 2012 The Golden State had fewer private sector jobs than it had in March of 2003, when the state was still suffering from the Millennium Recession.

During the same period, the state has increased its spending paid for with in-state tax revenues by 40 percent. In other words, the state is expecting each privately employed Californian to be able to pay $140 in 2012 for every $100 he paid in taxes in 2003. Yet his income has increased by far less: for every $100 a private-sector employee earned in 2003 he earns approximately $120 in 2012.

Where does the state government expect to get the remaining $20 from?

Looking again at California’s employment numbers, we find that there are fewer people working in Californa’s private sector in March of ’12 than even in March of 2000. Yet the state legislature has not downsized its government to 2000 levels. The state has 12 percent more employees now than it had in 2000; in fact, the state government had as many employees in March 2012 as it had in March of 2007.

It is unlikely that Governor Brown will realize what he is doing to his state in time to save it. To do so, he would have to abandon his policies of combining spending cuts with tax increases. Instead, he would have to:

  • Combine spending cuts with tax cuts;
  • Make the spending cuts structural so that they phase out, and eventually eliminate, entitlement programs; and
  • Cut taxes in such a way that people can take care of themselves instead of relying on government.

It is very unlikely that he will do this. More likely, Governor Brown will press on with his austerity policies: higher taxes and less spending. The result will be a continued erosion of the tax base. Not only will businesses refrain from expanding, but there will be close-downs and an escalating migration of productive citizens and businesses out of the state.

In 2009 California had a net migration loss to the other states of 87,000 people. The largest destinations for outbound Californians were states with notably lower taxes. Among the most attractive were no-income-tax states like Texas, Washington and Nevada. These numbers, which are the latest available, are likely to be significantly higher for more recent years.

California still has the chance to get out of the austerity spiral. But time is running out. If Governor Brown does not take the right steps and put his state on the right track, his austerity policies will put the entire nation’s economy in jeopardy. The consequences for all of us would be devastating.

Europe: From the Welfare State to the Totalitarian State?

Thanks to the voters who put Obama in the White House in 2008 and Democrats in charge of Congress in 2006 elections, the hard-line left has been able to determine the course of America over the past 3.5 years. In the 2010 election a majority of voters issued a restraining order on the runaway leftists who thought they were invincible after 2008. But so long as we have a radical in the White House and a Democrat Senate majority that gives the president a pass on every decisive power grab he wants, we are going to continue down the path that the hard-line left staked out in ’08.

That path goes straight into the murky backwoods of big-government Europe. We have already seen numerous examples of how the Obama administration is Europeanizing America: from anti-business environmental regulations to health “reform” to socialization of student loans to the continuous assault on state sovereignty. Everywhere they can they create another government incursion into the lives of private citizens.

Since the Obama administration and its allies in the Senate want to continue down the path of Europeanization, we need to look at what is going on in Europe and learn from their mistakes. We already know about the disastrous fiscal situation in welfare states like Greece, Spain and Portugal and what that will mean for America, should we continue to build a European welfare state here. What is less known is that the harsh austerity policies used in Europe to save the welfare states from inevitable collapse, are also having serious repercussions beyond the realm of economics.

As a result of a continuous downward spiral of unemployment, higher taxes and economic deprivation, Europeans are becoming increasingly desperate. Even politically. Support for extremist political parties is rising all across the European Union. in the harsh economic realities created by a crumbling welfare state and destructive austerity policies, authoritarian political movements are experiencing a new dawn.

Not surprisingly, Greece is the scene of one of the strongest surges in extremism. Nazis and Soviet-style Communists are rapidly gaining ground among voters and could make big gains in the upcoming parliamentary elections. In France, the leader of the National Front, Marine LePen, got 20 percent of the votes in the first round of the presidential election, placing her a close third among all voters. Her support among first-time voters surpassed that of any other candidate, which puts her party in a very favorable position for local and regional elections in the next few years.

In Hungary, one of the youngest members of the EU, the new government has brought back an old-style, dingy European form of nationalism that is openly threatening the country’s parliamentary democracy. The success of the Fidesz and Jobbik parties was built on deep dissatisfaction among Hungarians with the austerity policies forced upon them by the European Union.

Even Britain, often considered the pillar of classic European liberalism, freedom and democracy, is tilting toward the shadows. The British National Party, which gained significantly in opinion polls back in 2009, seems to have survived internal faction-fighting and is a frighteningly resilient player on the British political scene. Its fellow traveller on the authoritarian side of the political spectrum, the English Defense League, is a fast-growing, street-wise anti-immigration movement with an authoritarian touch and a disdain for the British parliamentary system.

In Sweden, the openly un-democratic National Democrats have seats in several city councils and are preparing for participation in the 2014 national parliamentary elections.

All these parties have one thing in common: they want to preserve the welfare state and they blame its decline on a combination of economic freedom, free trade and immigration. They are generally prepared to save the welfare state by sacrificing or severely restricting political freedoms and parliamentary democracy. They propose far-reaching government control over the economy – the differences between them are limited to how much of private property rights they want to take away. Other than that, they all stand for higher taxes, preserved or expanded welfare programs and harsh control of businesses. They also want to restrict free trade and more or less close national borders.

What is emerging in Europe is nothing short of a totalitarian attempt at defending the inherently failing, and doomed, welfare state. If this movement becomes stronger, history from the 1920s Germany will eventually repeat itself. The German leaders during the Weimar republic did everything they could to preserve their welfare state in the face of enormous economic problems. Since the economy could not afford the welfare state, and since they were ideologically married to keeping it, the Weimar government tried its very best to shrink entitlements to make them fit the ever shrinking tax base. In a desperate measure to try and avoid the inevitable they started printing money en masse. The currency collapsed, economic and social chaos took over – and the road was paved for the NSDAP to march into Berlin.

With exception of the money-printing part, all the ingredients are there: a “higher” cause that motivates repealing political freedoms; a crisis to rally people around one leader; and a convenient group to blame. This group is not the Jews this time, but non-European muslims. It is a fact that Europe has received more muslim immigrants than the continent can handle, but this does not mean that they are the origin of the economic crisis. And it certainly does not mean it is legitimate for power-hungry, authoritarian-minded politicians to play the “blame game” on them.

The only ingredient missing is hyper-inflation. So long as countries like Greece stay within the European currency union they won’t be able to print money and destroy a currency in the name of saving the welfare state. However, there is a scenario where the EU can give up on Greece, and Greece give up on the EU. If the Greek government feels that their democracy cannot surviv another round of austerity, they may very well decide to leave the currency union, reintroduce their national currency and monetize their deficit. This would add the final ingredient and resurrect Weimar.

When one country has left the euro zone, pressure is going to mount for others to do the same. Spain and Portugal would be next, and the probability is high that they would take to the monetary printing presses to try and save their welfare states. It is not going to work, of course, but before they realize that they will also have stirred up the same ugly stew that brought Hitler to power in Germany.

A breakdown of Europe’s currency union was unthinkable two years ago. Today, more and more analysts are pointing to it as a credible alternative in the next couple of years. Likewise, the resurrection of authoritarianism in Europe has been unthinkable for a great long time, yet that is precisely what is happening.

With this in mind, and given the fact that America’s left is pushing hard to transform us into Europe 2 – how unthinkable is it that we might also experience a turn toward authoritarianism in the future? Just how far are American lefitsts willing to go to defend their welfare state project?

Freedom vs. The Welfare State

The average American college student is too young to even have been born when the Soviet Union was still around. An entire generation has grown up since the Cold War ended. They have put a big distance of time between us and the Soviet Union, the most formidable threat to freedom the world has ever seen.

In one way this is of course very good. Despite the problems Russia faces today, life is indeed better for hundreds of millions of people from Saxony in East Germany to Sakhalin in East Russia. But this also means that the younger generation can no longer witness with their own eyes what Communism means. They cannot share the very tangible experience I had in 1988 when I walked along the East Side of the Berlin Wall, realizing the profound nature of the evil that Communism represented.

You need not have hands-on experience with tyranny to understand that it is evil. It helps, of course, but a thorough education on it should suffice.

I am concerned, though, that we are slowly but steadily forgetting what the evil face of totalitarianism looks like. I worry that with time, we will lose our collective memory of oppression in the name of an ideology.

As we lose sight of the Evil Empire and its desire to eradicate the free world, we also lose our ability to recognize totalitarian character traits in our own policies, right here at home. Legislation that would never have been passed into law in the 1980s can now become the law of the land. Without the absolute evil of communism staring us in the face, we lose the ability to see the absolute good in freedom.

It is against this background that I believe we need to view the following change in how the IRS enforces tax compliance among American citizens. A report by Fox Business News reports about a new, bizarre law authorizing the IRS to revoke your travel rights:

 A new bill making its way through Congress could allow the federal government to prevent Americans who owe back taxes from leaving the country. The provision is part of Senate Bill 1813, which was introduced by Senator Barbara Boxer (D-CA) in November and passed by the Senate on March 14 “to reauthorize Federal-aid highway and highway safety construction programs, and for other purposes.” Those “other purposes” have come to include a little-known amendment recently introduced by Senate Majority Leader Harry Reid that would allow the State Department to revoke, deny or limit passports for anyone the Internal Revenue Service certifies as having “a seriously delinquent tax debt in an amount in excess of $50,000.”

In other words, this bill would allow the federal government to effectively put a Berlin Wall around the country and only allow people to leave who, according to the Internal Revenue Service, have paid their taxes in good order. If the individual taxpayer says he has paid his taxes, he does not have the right to contest the ruling by the IRS in court. When it comes to your travel rights, the IRS is the final arbiter of whether or not you owe any taxes.

First of all, this is a frightening perspective on the abuse of government powers given that both presidents Nixon and Obama have been accused of using the IRS to target political enemies. Since all it would take now for someone to be deprived of the right to travel abroad is an accusation from the IRS, the threshold for power abuse has been lowered to disturbing levels.

Secondly, beyond the immediate concerns for individual freedom there is the question of the purpose of this law. It is put in place, evidently, to guarantee tax compliance by high-income earners. The federal government sees this need, in turn, because Congress wants to preserve all its spending, all its entitlements – its welfare state, for short.

This means that Congress is willing to let the ideology of the welfare state supersede the inalienable right of American citizens to freely travel as they please.

It is important to point out that the federal government’s eagerness to defend the welfare state is not the result of the same profoundly evil intentions that drove the communist governments in the Soviet empire. I grew up during the Cold War, I visited both the Soviet Union and most of its Eastern European satellite states. I know it as well as you can know it without actually having lived under its boot. There is a world of difference between one single law to restrict the freedom of some Americans, and an all-out assault on individual freedom as in the Soviet Union.

That said, let us also notice the metaphorical meaning of the old Swedish saying: many small creeks add up to a mighty river. An individual piece of legislation such as this one, that places one type of restriction on individual freedom, does not make America a totalitarian country. But the cumulative effect of many small pieces of legislation can be very troubling, much sooner than we tend to believe.

A common denominator to all authoritarian legislation is that it puts the interests of government above the interests of the people. This piece of legislation is a case in point. Government, in the form of Congress, has an interest in preserving our entitlement programs and our welfare state. It is willing to do so even if it means that they have to make very deep incursions into our liberty.

It has been said that the difference between the welfare state and the totalitarian state is a matter of time. Europe has recently had experiences that reinforces this chilling warning. The more of these draconian, freedom-stifling pieces of legislation we pass, the closer we nudge ourselves to the edge of tyranny. When each piece of legislation is motivated by an allegedly good cause – in this case to raise more taxes for government spending – the slow slide into the dungeons of totalitarianism is even less visible to the naked eye.

This makes our slow, steady move in the wrong direction all the more serious. It is motivated by the pursuit of a “good cause”, namely the spending on entitlements that supposedly makes life easier for the poor. Consequently, government can motivate its virtual Berlin Wall with its self-purported benevolence. Thereby it looks like the price paid by those who lose their freedom is worth paying.

In reality, this type of legislation represents the moral decay of government. It also raises some serious questions as to what Congress would be willing to do tomorrow to defend its welfare state. Today it is the travel rights of American citizens; what are they willing to do tomorrow – in the name of the welfare state?

Taxed in the USA: Cost of Government Rising Across the Country

It’s that time of the year again. Tax time. What better time to be reminded that taxes are still going up in America? Sad to say, there is a trend of state and local tax hikes, from Rhode Island to California, from Kentucky to Washington state. The trend is so strong, in fact, that we might almost call it a silent epidemic.

Let’s take a tour around the country and see for ourselves. We begin in California where the Sacramento Bee recently relayed the following lament about tax evasion:

As Californians put the finishing touches on their income tax returns, tax collectors say the state’s $9.2 billion deficit would drop to zero if all taxpayers submitted what they owe. … In a new estimate, the Franchise Tax Board says that $10 billion in state income taxes go unpaid each year, often when workers receive payments under the table, businesses skirt reporting requirements or people take deductions for which they do not qualify. The state Board of Equalization says an additional $2.3 billion in sales and use taxes go unpaid.

 We should always pay the taxes we owe, and I acknowledge that tax evasion distorts competition between compliant and non-compliant businesses. However, at some point our politicians might want to stop vilifying those who pay less than they owe and consider the rational reasons behind a lot of the tax evasion.

But high taxes don’t just inspire tax evasion – they also lead to tax competition. High-tax jurisdictions lose jobs and investments to low-tax jurisdictions. Oregon has already felt the squeeze from tax competition,as it is losing residents and jobs to Washington state. However, as reported by the Portland-based Oregonian, this has not deterred big-government advocates in the Beaver State from campaigning for higher taxes:

 A union-backed group is deciding whether to move forward on proposed ballot measures that would raise taxes on corporations and the wealthy — and that would certainly re-ignite the bitter tax wars that split the state two years ago. The group, Our Oregon, this week received ballot titles on five tax measures that in many respects resemble the controversial tax package that Oregonians approved in January 2010 after an expensive campaign that gained national attention. Like the latest proposals, the earlier measures also raised taxes on wealthier individuals and on corporations.

 Oregon already has some of the most punitive taxes in the country. The Tax Foundation reports that the marginal income tax rate for a couple in Oregon is 9 percent from $15,500 in annual income. At $250,000 it rises to 10.8 percent and at $500,000 to 11 percent flat.

Not one of Oregon’s neighbors punishes its most productive citizens to that level. Predictably, the CNBC State Business Climate Study for 2011 reports that in overall state economic performance Oregon places 48th of all states.

According to the Bureau of Labor Statistics, Oregon lost 1.5 times as many private sector jobs as Washington state, its neighbor to the north. Washington has no state income tax.

Next stop on our Taxed-in-the-USA tour is New England. From NBC Connecticut:

Downloading music, movies, e-books and Apps could soon cost Connecticut residents more as lawmakers consider a tax on digital downloads. The bill, proposed by the General Assembly’s Finance, Review and Bonding Committee, would have consumers pay the 6.35% sales tax on any electronic transfer. Supporters say the bill would level the playing field for brick-and-mortar retailers in the state who are already required to charge Connecticut sales tax to consumers who purchase these products in their stores.

The Tax Foundation’s latest business tax climate study places Connecticut 40th among the 50 states, with property taxes ranking worst in the country. Tax Freedom Day is May 2, latest in the nation. In the 2009 American Community Survey Connecticut ranked in the top third for population loss.  

Some of the U-Hauls leaving Connecticut are headed for Rhode Island. This is a bit surprising, given the fact that The Ocean State’s tax burden ranks just a couple of spots below The Constitution State. However, while the business tax climate is even worse in Rhode Island than in Connecticut, property taxes are marginally less oppressive.  

If you have spent the winter in Fairbanks, Alaska, spending the next winter in Anchorage may not be much better, but it is better…

It remains to be seen, though, how long Rhode Island can keep its edge over Connecticut. That edge is as tiny as the state, and Governor Chafee is pursuing his own package of higher taxes.

In Wyoming there is a campaign under way to raise both the state and county sales taxes. In 2010 yours truly was instrumental in successfully educating the public on the detriments of a proposed ten-cent gasoline tax increase. As a direct consequence of the death of that proposal, state and local legislators are now hard at work to jack up the sales tax. According to economic model simulations by the Wyoming Liberty Group, the tax hikes would cost 6,000 private sector jobs per year.

Over now to Austin, Texas and a recent report from the KXAN news station:

One of the issues City Council could decide Thursday is whether or not to ban plastic bags in the city. …  If this ordinance passes it would mean starting in January 2013, shoppers will be charged 10 cents per bag or $1 per transaction if they need a bag from the store. That would last a year to allow for a smooth transition to a complete ban, one that activists say needs to happen.

More than likely, the city is going to get so addicted to the revenue from this tax that they will extend the “smooth transition” phase indefinitely.

Now on to Washington, DC where, according to the Washington Examiner, the city wants more money from the city’s food trucks:

The D.C. Council’s Committee on Finance and Revenue unanimously passed a bill Thursday that will force food trucks to charge the same 10 percent sales taxes paid by brick-and-mortar restaurants. The measure is expected to pass the full council and will take effect Oct. 1. … Food truck vendors currently pay a flat $1,500 annual fee ($375 per quarter) — the same fee that street vendors near tourist spots have been paying for more than a decade. But many restaurants owners argue this is no longer a fair deal, due to the surge in street food popularity. … As the bill stands, each licensed food truck operator who collects more than $375 in sales taxes on a quarterly basis will continue paying that sales tax to the city.

If the District of Columbia were just out to level the playing field they would adjust the taxes downward for brick-and-mortar food vendors. This is a new revenue source to them.

Across the border from DC is Maryland, where Governor O’Malley is trying to draw even more blood from his state’s taxpayers. It does not seem to be working very well, though:

One of every five Marylanders would pay an average $274 in extra taxes each year under Gov. Martin O’Malley’s income tax plan, higher than the governor had estimated, according to a new report from state budget analysts. In Montgomery County, where roughly 32 percent of taxpayers would be hit by higher levies, the average annual tax increase would reach $334 for 123,537 taxpayers, the state’s independent Department of Legislative Services reported.

The tax hikes won’t generate as much revenue for the state as he was trying to claim: only $130 million, not $182 million as the governor suggested.

Maryland is an excellent example of what drives government’s insatiable thirst for more tax revenues. In September 2007 the state government had 106,800 employees; in September 2011 its payroll had expanded to 112,500, with the bulk of the increase taking place since 2008 – i.e., during the recession. In the meantime, Maryland has lost 102,400 tax-paying private-sector jobs.

The state government in Maryland has increased its spending by 6.2 percent per year since 2005. In the past three years alone, when both the economy of Maryland and of the country as a whole has been in a recession, the state government in Annapolis has grown its spending by a total of 14.4 percent.

The the tax-hike stampede continues to, e.g., Arkansas, Illinois, Kentucky, Washington state and West Virginia.

Of course, U.S. Congress does not want to be left behind when their statist buddies around the country throw tax-hike parties. They have managed to come up with a way to tax businesses for not doing the impossible:

When the companies that supply motor fuel close the books on 2011, they will pay about $6.8 million in penalties to the Treasury because they failed to mix a special type of biofuel into their gasoline and diesel as required by law. But there was none to be had. Outside a handful of laboratories and workshops, the ingredient, cellulosic biofuel, does not exist. … Refiners were required to blend 6.6 million gallons into gasoline and diesel in 2011 and face a quota of 8.65 million gallons this year. “It belies logic,” Charles T. Drevna, the president of the National Petrochemicals and Refiners Association, said of the 2011 quota. And raising the quota for 2012 when there is no production makes even less sense, he said.

This brilliant move by Congress has opened a whole new can of tax worms. We can now look forward to endless tax policy innovations. Some ideas for Congress to consider:

  • A tax on pedestrians who fail to use all three legs while walking;
  • A fine for the blind who fail to pass the test for a driver’s license;
  • A tax on McDonald’s for serving food in their restaurants;

 This could of course also work the other way, in the form of impossible-to-do tax credits:

  •  A $10,000 tax credit to each Member of Congress who can prove an IQ above 85.

We better stop our Taxed-in-the-USA tour here. But taxes won’t stop going up, at least not yet. To put an end to higher taxes we need to fundamentally change the role government plays in our lives. We need to refocus it on its essential functions: protection of life, liberty and property. Then, and only then, will there be no more tax hikes.

The Swedish Disaster – America’s Future?

If Obama gets re-elected, and if the Democrats gain any more power in Congress than they already have, it is almost certain that America will quickly turn into a full-fledged European welfare state.

Obama’s America is not the America you grew up in. It is not the America you want your children to grow up in.

I know, because I actually grew up in Obama’s America. It’s called Sweden.

For decades, the American left has touted Sweden as a role model for America: its income security system, its universal, tax-paid child care, and of course its government-run, single-payer health care system. From college professors to politicians, liberals have done everything in their power to convince America that they should entrust their and their children’s future to a Swedish-style social democratic welfare state.

God help America if they succeed.

Before I share the true story about Sweden, let me explain how close we are to fulfilling this wet Swedish dream of the left. The federal government only needs to add three more features to the already large American welfare state: single-payer health care, universal child care and general income security.

As I explained in my column last week, the road to a single-payer system is already paved. Proposals for federal, universal child care have been floating around in liberal circles for many years. Thankfully the idea has not yet gotten serious traction here in America, but don’t hold your breath on that. As recently as in 2008 Hillary Clinton made it one of her major issues.

The second biggest trophy for welfare statists, after single-payer health care, is a general income security system. It means, plain and simple, that government taxes us to hand out income replacement checks when we are home from work for a variety of reasons, such as caring for a sick child.

Sweden’s general income security programs are very elaborate. Predictably, they have also eroded workforce participation and raised government dependency to alarming levels.

In 2009 Congresswoman Lynn Woolsey (D-CA) introduced a bill to create a general income security program. It was called the FIRST Act, “Family Income to Respond to Significant Transitions”, and gained two dozen sponsors. Thankfully, it never made it out of committee.

That does not mean it won’t come back. Keep in mind how relentless the liberals were in getting a government-expanding health reform done. Behold Obamacare. The idea of a general income security program has strong support by the influential Center for American Progress, whose senior economist Heather Boushey has testified before Congress in ardent support of the act.

One of the most serious problems with the welfare state is that it is socially and economically deceitful. It comes front-loaded with benefits – you get your entitlements from day one – but the true cost does not appear until much later. And when the cost comes, it hits others than those who cashed in on the benefits.

Let me use my own background to illustrate. My grandparents were born in the 1910s into a country that had no welfare state whatsoever. They got married and had children in the late ‘30s and ‘40s, still without a welfare state to take care of them. They lived by the old-fashioned work ethics that has underpinned Western Civilization for centuries: work hard, be virtuous and charitable, and take care of your family. They were poor, but they were still able to feed, clothe, house and educate their children. And they were proud of it.

My mother once said of her upbringing: “We never had time to complain about how poor we were. We were too busy doing our homework.”

As my parents grew up during the ‘50s, the Swedish welfare state started growing. The socialists who ruled Sweden uninterruptedly for 44 years expanded government in all thinkable and unthinkable directions. There was universal child care, and all kids were supposed to be in it. There was socialized health care. Public housing was expanded to such a degree that only families with very high incomes could afford a house.

Private landlords were reduced to a curiosity.

Even when you rented from public housing you got a tax-paid subsidy check toward your lease. You got an annual child benefits check (as opposed to the American tax credit version).

And then of course there was general income security.

In Sweden, the general income security was set up to pay the paycheck for pregnant women, for women who had just had a baby, for women who wanted to stay home with their baby, for anyone who wanted to stay home and take care of a sick child or a relative in need of assistance.

In 20 years’ time, from 1960 to 1980, the size of government as share of GDP went from 18 percent to 40 percent. For my parents’ generation, it looked like Sweden had found The Ultimate Solution to all social and economic problems. They voted passionately to keep the welfare state in place, even when systemic problems began showing up in the early ‘80s.

To pay for its enormous spending, government needed tax revenues. Lots and lots of tax revenues. Local income taxes doubled from 1960 to 1980. The top bracket of the national income tax reached 80 percent and in some absurd cases even topped 100 percent! The value added tax (a complicated European replacement for the sales tax) climbed to 25 percent.

To pay for the general income security system the Swedish government raised the payroll tax year after year. It is now twice as high as the American payroll tax.

Inevitably, this max-tax policy started affecting the free part of the economy. Economic growth slowed to a crawl, private consumption virtually stagnated, and after the recession in the early ‘90s Sweden never recovered from its huge private-sector job loss. Today Sweden has as many private-sector jobs as the country had 20 years ago.

This stagnation in the private sector also shows itself in sharp increases in the actual tax burden. For every $100 a taxpayer paid in taxes in 1990, he paid $143 in 2000.

Again, under the world’s highest taxes the private sector has stagnated. Tax revenues have stagnated as well – but demand for services and entitlements from the welfare state have skyrocketed. This is the work of a combination of reckless generosity from the welfare state and rising poverty due to a poorly performing economy.

In response, Sweden’s lawmakers have instituted perpetual austerity programs. They cut services, reduce entitlements and try to change eligibility rules to lock more and more people out of the welfare state. But they don’t cut taxes to compensate; if they did, they would admit that the welfare state is no longer working.

The price for this perpetual austerity policy is high. Health care services have been cut to bare bones, with, literally, deadly consequences. Patients die of curable conditions at rates that would cause a revolution in America.

When my grandfather got heart problems in the 1990s, after a long life of hard work and putting his faith in the welfare state to be there for him when he needed it, he was admitted to a government-run hospital, courtesy of the Swedish single-payer system. His experience was so terrible that he begged my grandmother: “If I get ill again, please do not send for an ambulance. I’d rather die at home than go back there.”

He passed away peacefully at home. My grandmother, on the other hand, ended up in the harsh, budget-starved hands of a government-paid elderly “care” home. After a traumatic period of neglect, malnourishment and carelessness she died alone, humiliated and abandoned by a welfare state she had put her faith and money into all her life.

Her experience is shared by vast numbers of Sweden’s elderly today. Despite the world’s highest taxes the Swedish welfare state still cannot care for the most vulnerable. Elderly care homes are cutting costs to the point where they impose severe rationing of food, coffee and personal hygiene for their residents/patients.

The rest of the welfare state is in equally bad shape. The general income security system orders cancer patients back to work in the name of cost cutting. What was once created as a compassionate government institution to allow people to get well without the pressure of having to rush back to work, is now a bureaucracy with one single goal: to cut its costs and terminate entitlement payments to individuals as quickly as possible.

All this is systemic and inherent to the welfare state. It brings this destructive ausiterity upon itself. Its confiscatory taxes crush the private sector. Adding insult to injury, the welfare state itself de-incentivizes work: when government promises people all sorts of perks to people, one big reason to work hard is gone.

My parents grew up to enjoy all the perks the welfare state provided for them; my generation, born in the ‘60s, pays the price in the form of low income, perpetually high unemployment, low and stagnant standard of living and a grim outlook on the future.

I left Sweden in the late ‘90s. I have never looked back. The last thing I want is for America to become another Sweden.

There is still time for America to turn the tide on the welfare state. But not much. Only a strongly conservative Congress and a freedom-minded president can safeguard us against being transformed into another Sweden.

Health Reform after Obamacare: Return of the Single Payer

The Supreme Court’s hearing of the lawsuit against Obamacare was one of the toughest moments for our current president. It coincided with the House of Representatives voting down his budget 414-0, numbers that look more like the Giants beating the Patriots than Congress voting on a presidential budget bill.

Many commentators have declared the imminent death of Obamacare when the Court in all likelihood strikes down the individual mandate as unconstitutional. That may very well be the Court’s ruling, but to assume that this will also be the end of health care statism in America is more than premature. It is irresponsible.

Socialized medicine was declared dead in America after Bill Clinton’s Health Security Act went down in flames in 1993. But it did not even take 16 years before a Democrat president once again introduced an all-out health reform bill. Between these two legislative behemoths were numerous smaller proposals for advancing government in health care. After the Health Security Act was defeated, Clinton and – shame on them – the Republican-led Congress in 1997 created the SCHIP program. This “Medicaid for Kids” has been expanding relentlessly since then and is today within reach of socializing health insurance for children. Children are relatively cheap to insure and their removal from the private insurance market has contributed to higher premiums for adults. With higher insurance premiums, fewer people can afford health insurance; with more people without coverage, liberal theory says that the support for government-run health care will increase.

Another form of proposed advancement of government in medicine has been the opening of the federal employee health insurance program to all Americans. Two Democrat presidential candidates, Bill Bradley in 2000 and John Kerry in 2004, were big champions of this idea. The idea is to create a “public option” that slowly but relentlessly will outcompete private insurance. The original version of Obamacare came with a modified version of the Bradley-Kerry idea. (The public option is still in Obamacare, just dormant for now.)

In other words: health care statists have never given up. They have just shifted tactics. When Obama won decisively in 2008 and Democrats took control over Congress they felt their time had come again. A defeat in the Supreme Court may mean defeat for Obama in November, but regardless of how the election goes, health care statists will not give up.

The battle for health care freedom is not over. Far from it.

The question is: what’s next? Some conservative commentators, including Rush Limbaugh, have suggested that the single-payer model will resurface. Having researched and written about health reform for a good decade now, I am inclined to agree: all experience shows that single-payer health care is the only goal that will satisfy a health care statist.

A comparison between Obamacare and the Clinton plan reinforces the impression that single-payer is next on the liberal health policy agenda. The two reform plans have several key policy goals in common:

  1. Expand government in health care;
  2. Change the way health care is paid for and the way it is distributed; and
  3. Introduce new criteria for who shall get health care and who should not.

They also share important policy methods for achieving these goals:

  • Mandatory individual health insurance coverage;
  • Separation of premiums from health risk, i.e., community rating;
  • Introduction of federal coverage mandates; and
  • Guaranteed issuance of insurance plans.

The only major difference is that the Clinton plan was an open single-payer model, while Obamacare relies on the individual purchase mandate. (In the Clinton plan, employers were mandated to provide insurance – a small but crucial difference.) The single-payer feature was a major reason why the Health Security Act died in Congress.

Obama’s health reform team learned from Clinton’s mistake and omitted the single-payer element. This was, of course, deliberate. It is in the president’s desk drawer, and will be pulled out in the event he is re-elected. He could use the single-payer model to scoop up the pieces left over after the Supreme Court fires its judicial artillery at his Affordable Care Act.

Contrary to the individual purchase mandate, a single-payer financing model for health care is shielded from judicial challenges. Declaring a single-payer health care system unconstitutional because it is funded through taxation would be like declaring public education or Social Security unconstitutional because they are funded through taxation.

Although I personally do not believe that the government has the right to tax us and spend the money on entitlements like public education or Social Security, the Supreme Court has the last say on that. It would be earth-shattering if the Court was ever faced with a challenge to a single-payer health care system and declared that government cannot tax us and spend the money on entitlements.

The health care statists know this. They also knew that they could not get Obamacare passed as a single-payer plan. Therefore, a defeat of the individual mandate offers them a perfect opportunity to revive single-payer, either after the November election or later. Therefore, it is very important that friends of health care freedom are prepared to meet the challenge from health care statists.

By definition, single-payer health has only one source of health care payments. The Clinton plan relied on a 7.9 percent payroll tax to pay for our health care. This funding mechanism came with a plan to keep the tax rate steady – effectively a guarantee that the health care income tax would never go up. This is of course a ludicrous promise to make: a quick historic review of the growth in health care costs and the growth in compensation of employees reveals that health care outpaces the proposed tax base at every corner.

Suppose, for the sake of analysis, that the Clinton plan had become the law of the land in 1987 (the earliest year with available, consistent data). In order to generate sufficient revenues to pay for our health care from that year until 2010, the federal government would have had to raise the tax almost every year. By 2010 the tax would no longer be 7.9 percent but 12.4 percent.

This is, of course, assuming that government would not ration health care. If it chose to maintain the payroll tax at its original level, it would have had to slash away a large portion of the health care produced in America every year:

  • In 2010 the output value of all health care in America was $1,619 billion;
  • If the only funding source would be a 7.9-percent payroll tax, there would only have been $1,026 billion available in 2010;
  • The American people would have had to forfeit $593 billion worth of health care in 2010 alone.

Who would have been deprived of health care? Who would have made the decisions on who should get, and not get, health care?

Health care statists avoid the rationing problem like the plague. If they revive single-payer again, they should face these questions every time they take their socialized-medicine idea to the public arena.

The GOP Budget: Hope for a Fiscally Conservative Future

The federal government has few constitutional powers and responsibilities. One of those responsibilities that made the Founding Father’s very short list is that Congress shall pass a budget every year. Given how much time our elected officials spend on Capitol Hill, you would think that this responsibility would not be overwhelming.

Apparently, it is. As Conservative Daily News reported last week, it has been over a thousand days since the U.S. Senate passed a budget, and it looks like they will derelict on their constitutional duty this year again.

By refusing to live up to its constitutional responsibility, the Senate leadership has effectively handed the budgeting authority over from the legislative branch to the executive branch. Given that the federal government controls more than one fifth of our economy (including cash entitlement programs like Social Security) this is a serious matter. It is an unconstitutional transfer of power from one branch of government to the other in direct violation of the checks-and-balances principle.

The Senate’s budgetary AWOL strategy is aggravated by the fact that the federal government effectively controls the budgets of almost every state, and indirectly a big part our local government budgets. The fiscal powers thus concentrated (but not vested) in the hands of the president thereby extend to another 15 percent of the economy.

One of the consequences of this breakdown of checks and balances in the budget process is that the executive branch effectively can spend as much as it wants on credit. Congress has not yet punted on its right to tax the American people, and the balance between the Republican-led House and the Democrat-controlled Senate has prevented taxes from going up. But since the White House now de facto has full control over the budget they can choose to spend as much as they want. All they have to do is borrow what they don’t get from taxes.

In short: by refusing to let the Senate pass a budget, the senatorial leadership actively contributes to the nation’s already very serious debt problems.

But there is hope. In the midst of the complete irresponsibility exhibited by Senate Democrats and the apparent desire by President Obama to spend as much as he can get his hands on, House Republicans have actually produced a pretty decent budget for the 2013 fiscal year.

In fact, the new GOP budget is probably the most compelling fiscal-policy documents produced by Republicans in Congress since the 1990s welfare reform. Its main architect, Representative Paul Ryan (R-WI), deserves credit and respect for a bill that actually tackles the very driving forces of excessive government spending.

What really gives us hope for the future is the fact that Senator Rand Paul (R-KY) has a budget bill that suggests reforms that in many ways mimic what is in the House budget bill. If both chambers of Congress actually get a fiscally conservative majority after the election in November, things could take a turn for the better very soon in 2013.

One of the most important features of the GOP House budget is that it draws an ideological line in the sand. It wants to break away from the Obama administration’s ambitions to continue America’s march into a European-style welfare state and instead restore the American tradition of limited government.

Conservative cynics will say that Paul Ryan’s efforts are too little, too slow. That is a valid point. However, the main hurdle in the way of returning to limited government is the welfare state. The welfare state is the key cost problem of the federal government. It took liberals decades to build it, and it won’t go away overnight. The GOP budget takes two first steps, though.

The first is, again, a recognition that there are two distinctly different ambitions for the role of government in America:

The first responsibility of the federal government is the safety and security of all Americans. … This overarching governmental responsibility – securing the inherent rights of all Americans to life, liberty and the pursuit of happiness – is the principle and the purpose that informs this entire federal budget.

The budget then outlines the difference between a redistributive, Scandinavian-style welfare state and a no-fault government safety net. In the Scandinavian model, government takes from one group of citizens and gives to another on a permanent basis, regardless of whether the entitlement recipients can provide for themselves or not.

A no-fault model, by contrast, limits government to providing a safety net for the poor and needy. Two rules determine when benefits kick in:

  • It is established that it is fault of your own that you are suffering financial hardship, and
  • All private options for support and help have been exhausted.

One particularly important point in the GOP budget is expressed on page 37:

[Some] aspects of the [current] safety net impose barriers of their own. For instance, the elimination of certain benefits as income rises has the effect of imposing a tax that discourages some low-income Americans from seeking lives of independence and self-sufficiency. … In particular, it is essential to prevent benefits structures from becoming barriers to upward mobility.

This is precisely what the redistributive, Scandinavian-style welfare state does: it traps the poor in poverty and turns them into perennial welfare consumers.

What makes the GOP budget so compelling is that it also makes an honest effort to turn this good analysis into actionable policy. It echoes some ideas from 1990s welfare reform by emphasizing job training as a way out of life long welfare dependency (p. 41):

If government is to require able-bodied recipients of aid to find work, as it should, then it must also help them return to productive working lives. To that end, federal education and job-training programs need to be modernized to keep the workforce competitive in a 21st century, global economy. Government must do a better job of targeting resources to make sure that America’s workforce can successfully pursue new opportunities and adopt new skills, if necessary.

It also wants to introduce block grants for federally sponsored, state-run welfare programs. There is also a spelled-out ambition to reform Medicare and to keep federal spending within 20 percent of GDP.

Taken together, these proposed policy reforms obviously will not eliminate big government in a hurry. But, again, if you are driving toward the edge of a cliff, it is better to at least stop and turn the car around than to continue straight ahead.

Our current policies are taking us straight into the dungeon that has swallowed Greece, Spain and other European fiscal disasters. The GOP budget shows that we are within reach of evading that dungeon. A fiscally conservative majority in Congress working with a president willing to listen to them could actually get some true spending reform done.

And make sure that America’s future once again is brighter than her past.

California: From Golden State to Welfare State

While we are witnessing the unfolding fiscal disaster that the welfare state has brought upon Europe, we have our own version of this crisis in progress in the United States. The gaping hole in the federal budget is the best known element of the American version of the welfare state crisis, but the situation is almost as bad in many states.

The most notorious among the troubled states is California. Its budget problems go back many years and include such absurd practices as “paying” bills, and even tax refunds, with IOUs. But even though it is a serious enough matter when a state government cannot pay its bills, the worst part of the California mess is that no one seems to dare speak out about what is truly behind the Golden State’s chronic fiscal trouble.

The welfare state.

California’s budget mess is as simple as anything can be. The state government has made spending promises – handed out entitlements – which it is now notoriously unable to keep up with. From health care to welfare; from public union benefits to education; the lawmakers in Sacramento have piled on promises up and above what taxpayers can keep up with.

Over the past 25 years the California state government has increased its total spending (including General, Federal and Other Funds) by 6.8 percent per year, on average. During that same time the state GDP grew by 5.5 percent per year (both numbers adjusted for inflation).

Let us stop and ponder for a moment what these bone-dry numbers actually mean. GDP is the source of all tax revenues a government can get their hands on. It is the sum total of all our incomes and therefore the base for income taxes, sales taxes, user taxes, gasoline taxes, payroll taxes… Even property taxes are paid out of current income. Since your current income is part of GDP, this means that property taxes are paid out of GDP as well.

You don’t have to have a Ph.D. in economics to figure out that when the ultimate tax base, GDP, grows at 5.5 percent per year, and total government spending grows at 6.8 percent per year, government will run eventually run out of taxpayers’ money. This is precisely what the state lawmakers in California have allowed to happen. For some time, they have put off going to taxpayers for more money by asking instead that Uncle Sam sends more cash to Sacramento. But now that the federal government is in deep fiscal trouble and can be expected to turn off the cash faucet, California’s budget problems are about to go from bad to worse.

Predictably, the legislators in Sacramento are now in budget panic mode, scrambling to rein in a budget they have allowed to run amok for more than two decades.

Half of all state spending in California goes to three items in the budget: Medicaid (or MediCal), cash assistance (or “welfare”) and public education. Since 1985 two of these items have, on average, grown faster than the state GDP: Medicaid has increased at 10.7 percent per year and public education has gone up at 6.5 percent per year.

Each time legislators in Sacramento passed a budget that expanded welfare-state spending faster than the state’s economy was growing, they knowingly contributed to the fiscal problems that are now haunting taxpayers in California. The compounded effect of this decades-long streak of spendoholism is now coming back to haunt them. This year’s legislative battle to piece together a budget for The Golden State is tougher than it has been in many years. For the first time since California’s classis Proposition 13 tax reform, the state’s elected officials are facing resistance to higher taxes. They now have to learn how to restrain spending.

The problem with that is, of course, that 25+ years of lavish government spending has allowed the people of California to take effort-free entitlements for granted. The welfare state has created a large tenderfoot population who cries foul at the sight of even the smallest aberration in state spending.

Some of the tenderfeet do not think twice about using children in their protests:

Students at Elk Grove Elementary School joined kids from San Francisco to Los Angeles to blow bubbles Thursday in protest of state budget cuts to education. The “This Budget Blows” protest, organized by the parent organization Educate Our State, coincided with the March 15 deadline for school districts to issue preliminary layoff notices to educators. Nine empty chairs at Elk Grove Elementary represented the nine teachers at that school that were given pink slips.

To the defense of Governor Brown, he has been tough on the budget from the day he got (back) into the Governor’s mansion in 2010. He has actually been able to put brakes on the General Fund:

Largely through spending cuts, Brown and the Legislature have reduced the state’s structural deficit by roughly two thirds, to an estimated $9.2 billion at the start of the year. General fund spending as a percentage of the state’s economy, according to the governor, has dropped to levels last seen in the 1972-73 fiscal year. More than 15,000 positions have been eliminated from state government.

It is important to keep in mind, though, that these spending “cuts” for the most part consist of deferred increases in spending. They put a lid on expansions of government spending programs – but they do not do anything about the underlying problem.

The welfare state.

Each entitlement program that the government spends money on, comes with a formula that defines:

  • Who is eligible;
  • How much money (such as cash assistance) or in-kind services (health care or education) each eligible person should get; and
  • Under what conditions a person is no longer eligible.

When people become eligible they adjust their lives to that eligibility. A cash assistance recipient, or someone who is eligible for food stamps, expects to get a certain amount of money each month from government. A family who is entitled to public education for their children (i.e., all of us who have school-age kids) will expect government to continue to deliver that service as promised.

Being dependent on a tax-paid, work-free entitlement is comfortable. The longer people are dependent, the more comfortable they get with consuming the entitlement. Every prospect of a cut becomes an imminent threat to that comfort. When government starts cutting entitlement spending, the first reaction among entitlement consumers is to demand that government continues to deliver as promised.

This is particularly obvious when it comes to public education. Taxpayers who consume public education for their children still pay the same taxes as they did before the budget cuts went into effect. After the cuts, government delivers a reduced-quality product for the same price.

As much as it is wrong that people demand to be allowed to continue to consume entitlements, there is a point in the protests against panic-driven budget cuts. If government makes a promise, the right thing to do is to keep that promise.

The legislative error is not in the budget cuts, but in the very existence of the welfare state and its entitlements. These entitlements have given California chronic fiscal bronchitis – perpetual budget problems – against which the state legislators are prescribing marginal, annual budget cuts. But that medicine won’t work: it does not treat the underlying problem, namely the very existence of the welfare state. On the contrary, the budget cuts that are planned and have gone into effect in California are in fact designed to save the welfare state. After 25 years of growing entitlement spending faster than the state’s tax base, the lawmakers in Sacramento have teamed up with the governor to try to rein in the welfare state and make it fit what taxpayers can be expected to keep up with.

This is a losing strategy. The cost of an entitlement program is, again, defined by eligibility rules that are independent of what taxpayers are able to pay. Nowhere in Medicaid does it say that people can enroll and get services provided that taxpayers can afford to pay for them. Naturally so: the very definition of the welfare state is to give people what ideologues and politicians say that people have the right to, period.

California’s decline from the Golden State to the Entitlement State was a long, slow process. Ideologically charged politicians are fighting a panic-driven battle against the very behemoth that caused the state’s decline in the first place. They are going to lose that battle. California is heading for a Greek situation.

Unless, of course, Californians wake up and realize that the only solution is to eliminate the welfare state. If they do, the Entitlement State can once again become the Golden State.

Federal Funds: Uncle Sam’s Gravy Train to the States

In his 1981 inaugural address, President Reagan reminded us of the separation of powers embedded in the U.S. Constitution. This separation goes in two directions: laterally by separating legislative, executive, and judicial branches, and vertically by separating federal, state, and local governments.

A lot of attention has rightly been focused on the blurring of the demarcation lines between lateral powers. Today it is difficult to distinguish executive powers from legislative powers. This is especially true when it comes to the notorious Affordable Care Act where the Secretary of Health and Human Services is granted very far-reaching powers to shape the health care system.

Less attention is focused on the blurring of the vertical separation of government powers. This is unfortunate. Our Founding Fathers were very wise in designing the constitution in such a way that – as Reagan again reminded us – the sovereign states created the federal government. While the states are still formally sovereign, their actual status has changed dramatically in only a few short decades.

The force at work eroding state sovereignty goes under the rather inconspicuous name of “Federal Aid to States” (FAS). It is an umbrella for a long list of federal spending programs where the U.S. government and the states jointly pay the bill. Medicaid is largest, and perhaps the best known, of the FAS programs. Another hotly debated program is No Child Left Behind.

About 80 percent of the FAS spending goes to programs that easily fall in the welfare state category. Medicaid is obviously a welfare-state program, and it is joined by numerous others. Some examples:

  • Temporary Assistance to Needy Families (TANF);
  • Food Stamps/Supplementary Nutritional Assistance Program;
  • Women, Infants and Children (WIC) welfare checks;
  • Low Income Home Energy Assistance Program (LIHEAP);
  • Child Care and Development;
  • Fair Housing and Equal Opportunity;
  • HUD Public Housing Programs

FAS is a multi-billion dollar operation. The welfare-state part, which again is about 80 percent of FAS, exceeded $500 billion in 2011. Add to that approximately $250 billion in state MoE funds, and we have a welfare state that spends three quarters of a trillion dollars every year.

This is before we add Social Security and Medicare, the federal-only welfare state programs.

The welfare state hidden under the FAS umbrella is bigger than our annual defense budget. And it is growing fast: the average growth rate for entitlement programs under FAS has been 6.5 percent over the past ten years.

This obviously causes a number of problems, the most important of which is the steady erosion of state sovereignty. As an indicator of what this means for the future, the ARRA Stimulus Bill added so much more federal dollars in state pockets that 13 states now get more than 40 percent of their total revenues from the federal government.

In 2008 only three states depended that heavily on Uncle Sam.

The ARRA funds are set to expire in 2011-12, but that does not mean that state dependency on FAS money will fall. In February 2011 the National Governors Association practically begged the federal government not to turn off the stimulus faucet. The nation’s governors talked about serious budget problems in their states if Congress did not let the extra cash keep coming.

Federal aid to states is not a new phenomenon. It has been around for at least a century, though on a very small scale initially. In 1929 FAS accounted for 2 percent of state expenditures. It spiked in the early 1930s, increasing to 12 percent, where it remained until the early 1960s. After Medicaid was introduced in 1965 states have gradually grown more and more dependent on the federal government.

Notably, the only period when states actually saw a little bit of relief in their dependency on federal dollars was in the Reagan years. The dependency rate dropped from 33 percent of total state spending to 25 percent. That rate is back up again: it was 34.1 percent in 2010, not counting state MoE spending.

Some states are worse off than others. The preliminary estimate of state spending for 2011 by the National Association of State Budget Officers shows that South Carolina gets 50 percent of all its revenues from the federal government.

This raises an urgent question. Who is actually to be held accountable for state spending in South Carolina? Is it the legislators who are legislatively responsible for the state budget? Or is it U.S. Congress, who has created and decided to fund the FAS programs?

Put bluntly: is the South Carolina state government an independent jurisdiction, or a federal spending agency?

The consequences of eroded state fiscal independence go beyond simply controlling the budget. With FAS programs come a truck load of regulations. Among the most notorious these days are the regulatory incursions into children’s school lunches, even those brought in from home. But other regulations can be just as harmful, such as the coverage mandates that come with Medicaid funds. States have to dole out more and more money for health insurance to low-income families, regardless of whether or not the state can afford it.

Welfare programs are also tightly regulated as a result of federal funding. Uncle Sam de facto controls everything from what people can buy for their food stamps to city-level zoning and housing (partly under the new Unified Development Code). All of this brings new costs to states and local governments, but every new federal dollar also nibbles away at state and local independence.

The importance of being governor, state legislator, mayor or city council member is withering away. Instead of being the representatives of the will of local and state voters, these elected officials are becoming administrators of a federally sponsored, one-size-fits-all welfare state.

Furthermore, with each new program and each new dollar that Congress puts on the gravy train to the states, the welfare state gets more and more solidified. More people become dependent on it, and with more enrollees in federally sponsored programs, the more difficult it is to roll back those programs.

The worst part, at least for our state and locally elected officials, is that Uncle Sam is borrowing four dimes of every dollar he spends. Soon enough Congress will have to slam the spending brakes. When that happens, there will be noticeable cuts in FAS programs. That will force states to execute the cuts, even though they are not the ones who are ultimately pulling the trigger on the cuts. State lawmakers and governors will pay the political price.

There is a better way forward. It involves rolling back the welfare state, gradually phasing out entitlements and returning responsibility for welfare to the private sector. It can be done, but time is running out.

Are You Willing to Pay the Moral Price for the Welfare State?

Proponents of big government tell us that the welfare state is a superior model to our (mostly) free-market capitalist system. Its pundits say that while capitalism is an evil machine that draws blood from a stone, the welfare state puts people first.

The Affordable Care Act – Obamacare – was sold in good part on its purported moral virtues, but the same moral arguments are used to sell practically every entitlement program in the welfare state.

There is only one problem. The welfare state is not morally superior to free-market capitalism. The welfare state may look good on paper, but its practice is often the exact opposite. Its moral price tag is at least as steep as its economic costs.

Let us look at three examples of where this ethical cost comes from.

The first example has to do with the relentless pursuit of revenue for the welfare state. We all know that taxes slow down productive private economic activity. To some degree, businesses and families accommodate to taxes and try to minimize the burden as far as possible. But there comes a point where the end result of taxation is so much less economic activity that government gets a lot less tax revenues than it planned for. To compensate, our legislators look for new revenue sources.

When they have maxed out taxes on morally acceptable activities – such as earning income, owning property and buying clothes for our kids – they turn to taxes on immoral or destructive behavior.

Sometimes referred to as “sin taxes”, these taxes these are taxes on addictive products such as tobacco, alcohol, gambling and in some cases even legalized marijuana.

The meaning of a tax on an addictive product such as tobacco is not to discourage smoking, but to create a permanent revenue stream for government. Case in point: in the spring of 2011 state lawmakers in Louisiana proposed to raise the state’s tobacco tax by 120 percent – to get more revenue for general government spending.

An addiction tax exemplifies how government steps over a critical demarcation line to pay for the welfare state. A single mother receives housing subsidies from the city thanks to the fact that her neighbor continues to smoke.

In fact, these taxes are so common today that we have become blind to the immorality of the whole practice. Politicians can propose addiction taxes as a permanent revenue source without even a moment’s pause to consider what they just said. In Maryland, state legislators want to raise the alcohol tax to pay for new schools and care for the developmentally disabled. In Maine, the 2010 Democrat gubernatorial candidate proposed an increase in the state’s alcohol tax to pay for an expansion of state college education.

How dare you stop drinking and deny your own son a college degree?

Perhaps the standard bearer of addiction tax immorality was a proposal in 2006 from the American Association of Family Physicians (AAFP). In order to pay for an expansion of SCHIP, “Medicaid for kids”, the AAFP proposed an increase in the federal tobacco tax.

In other words, the expansion of government has become such a high priority that even a group of physicians take it for granted that bigger government is more important than the health of individual citizens. (The idea that the private insurance market could to a better job without exploiting people’s tobacco addiction was apparently alien to these doctors.)

The moral price of big government also stretches into government spending. When government has hit a revenue ceiling and cannot raise taxes or borrow anymore, it starts cutting spending. The cuts are not made to shrink government – that takes careful reforms and long-term commitment – but to save the spending programs. (When Congress cut Social Security costs by raising the retirement age it is to make sure they do not have to terminate the program.)

The bigger government gets, the more absurd cuts it makes. Big government is involved in everyhthing under the sun. This means, e.g., recreational activities. The idea is that government should care for all our needs, including playing golf.

The more recreational activities our cities get involved in, the more absurd priorities they make. Last fall, e.g., the city of Topeka, Kansas had to cut spending to balance its budget. The city council happily doled out $796,000 on golfing activities half-a-million on “athletics programs” and $267,000 on a tourist attraction called “Old Town.”

Where did it cut its spending? On the prosecution of domestic violence cases. This saved the city $350,000 per year.

It was more important that the city tried to satisfy the recreational needs of its residents than to send thugs who beat their wives to prison.

But we are not done yet. There is one more step on the immorality ladder. This one has to do with socialized health care, the “crown jewel” of the welfare state.

Under the guise that government is going to give everyone access to all the health care they will ever need, government has seized control over health care in almost all industrialized countries. The result has been rationing, long waiting lists and scores of patients dying of perfectly curable conditions because they cannot get health care in time.

But even this steep moral price is not enough. As a perfect illustration of how the welfare state creates a kind of moral numbness among us, two so called “medical ethicists” recently proposed that infanticide should be made legal so that government can keep its health care costs down.

Yes, that’s right. In the Journal of Medical Ethics professors Alberto Giubilini and Francesca Minerva argue that mothers should have the right to kill their newborn babies if the babies are born with “abnormalities” that otherwise would have permitted an abortion. Their key example is that only 64 percent of all Down’s Syndrome cases are detected during pregnancy. It is a burden, they say, on the family “and on society as a whole, when the state economically provides for their care.”

So first the government seizes control over all health care, then it promises to provide for all our health care needs. When the burden of the welfare state stifles private economic activity and thus forces government to make spending cuts, we should, according to these two “ethicists”, make it legal to kill babies for cost containment purposes.

Infanticide is thankfully illegal, but that is not the point. What is truly scary here is that two supposedly enlightened academics can make a serious moral case, in an established academic journal, for killing babies in the name of the welfare state. This moral numbness has the same origin as another type of moral numbness in another big-government era. In the 1930s so called “racial hygienicists” proposed infanticide for reasons of “racial purity.” Today so called “medical ethicists” propose killing babies that don’t fit the government’s health care budget.

Fiscal eugenics, if you will.

The welfare state is creeping into our lives from all angles, and has been doing so for quite some time already. It is being sold to us as a morally superior social organization, yet in its practice the welfare state is the precise opposite. It is harsh, stingy and sometimes outright authoritarian. It erodes both our economy and the moral foundations of our society.

It has been said that the difference between the welfare state and the totalitarian state is a matter of time. We should take those words seriously.

What Can Bill Clinton Teach Republicans about Winning in 2012?

In 1992, Bill Clinton made the phrase “It’s the economy, stupid!” a theme for his successful presidential campaign. Clinton focused on the one issue that the large majority of Americans agreed was the most important. Strategically, he made the right call: the economy had been in a recession for more than two years. People were craving for a recovery.

Clinton’s major achievement was to bridge the gap between himself and moderates who otherwise would disagree with him on social issues. Today, 20 years later, we are in a similar situation. We have had a bad economy for more than two years. People are once again craving for a recovery. The incumbent president has not managed to put the economy back on track, although Obama’s record is far worse than that of George Bush Sr. in ’92.

To win both Congress and the White House, all Republicans need to do is tell the story of how Obama’s policies have driven the economy into a thick muddy layer of big government and onerous regulations.

Despite this dream position, Republicans are showing disturbing signs of shooting themselves in the foot, nationally as well as at the state level. At a time when our state lawmakers need to spend every precious moment of legislative time and all their political capital on improving the economy, some Republicans are diverting focus to social issues.

There is nothing wrong per se with advancing pro-life legislation or protecting the family as the founding unit of a stable, free and prosperous society. But you have to pick your battles. At a time when the economy is sinking deeper and deeper into the quagmire of a European social-democratic welfare state, there are more urgent battlefronts to attend to. If the statists have it their way and America becomes a full-fledged welfare state, our traditional American social values will go the same way as our economic freedom. The controversy over forcing Catholic employers to pay for abortion is a case in point.

As an example of the consequences of diverting focus from the economy, consider the new Republican majority in the Virginia state legislature. Recently the Washington Examiner reported:

Virginia took another step Monday toward restricting abortions by defining life as something that starts at conception and giving fetuses the same rights as any citizen during a marathon legislative session in which Republicans pushed their most controversial measures. The House of Delegates gave preliminary approval to the so-called “personhood” bill a day before the General Assembly deadline to send legislation to the other chamber … During more than eight hours of debate, House Republicans advanced a litany of conservative initiatives ahead of Tuesday’s deadline, including bills that would allow the death penalty for accomplices in murder cases and create a voucherlike program that would give tax breaks to companies that pay for low-income students to attend private schools.

The “personhood” bill has since been declared politically dead. But the point about legislative priorities remains. Virginia has enough economic problems to keep the legislature busy. In 2009 the Tax Foundation ranked Virginia’s overall tax climate 33rd best in the nation, a notable deterioration from 2007 when Virginia ranked 22nd. As for business taxes, Virginia is also on a downbound train: its ranking for 2012 is 26th, down from 23rd a year ago.

On the jobs front, Bureau of Labor Statistics data show that Virginia lost 123,500 private sector jobs from 2008 to 2011 (September to September). During the same time, the state government in Virginia added 4,600 people to its payrolls.

Instead of attending to these economic alarm bells, Republicans in the Virginia state legislature spend their time pushing a social agenda that emboldens Democrats to reach out to swing voters at a time when their credentials with independents should be at their weakest.

To make matters worse, these unwise political priorities are now spilling over into the state’s pending U.S. Senate race. The two likely candidates for Virginia’s open seat (one of nine nationally) are Republican George Allen and Democrat Tim Kaine. So far, Allen has successfully exploited Kaine’s close ties to Obama and used the president’s economic-policy failure against the Democrat. But this advantage is now in jeopardy, as Tim Kaine is beginning to use the Virginia Republican conservative agenda against Allen. The Washington Examiner again:

The former Virginia governor and Democratic National Committee chairman is now trying to tie Republican George Allen to the divisive social agenda surging through the state’s Republican-run General Assembly in hopes of undercutting Allen’s support among independent voters. Virginia Republicans eager to flex their new majority status in Richmond are pushing a number of controversial measures on abortion, gay rights, guns and other initiatives shunned for decades under Democratic control. But every bill conservatives advance gives Kaine ammunition to use against Allen.

If Republicans can stay focused on the economy and Obama’s big-government agenda, they will mop the floor of the U.S. Capitol and the White House with their Democrat opponents. They will also make it easier for themselves to advance traditional American social values in the future.

Consider, again, the Bill Clinton example. In 1996 he had presided over an improving economy for four years and was able to win enough independent voters to get re-elected. He then turned his attention to some social issues he held dear, such as the creation of the SCHIP program (“Medicaid for kids”). By the same token, a Republican president and Congressional majority who can restore the American economy over the next four years will win a lot of credibility among independent and moderate voters. That will help them advance a social agenda that is pro-life, pro-religious freedom and pro family.

Furthermore, the path to a restored economy includes securing some of our traditional social values. Our economy will only improve if we roll back the welfare state, the conveyor belt of invasive government and radical social policies. Two examples:

  • Obama’s expansion of abortion-funding is tied to his Affordable Care Act – the defeat of ACA will, at least to some degree, restore the respect for life in America;
  • The campaign to legalize gay marriage is partly driven by the desire to give gay couples the same marital benefits as traditional couples get – by getting government out of the entitlement business, the gay marriage issue loses one of its main driving forces.

To paraphrase Bill Clinton: “It’s the welfare state, stupid!”

From School Lunches to Health Care: The Welfare State Is Coming to America

USDA school lunch programLast week a little girl in North Carolina was told by a tax-paid school bureaucrat that the lunch that her mother had packed for her was not good enough. The incident pointed Big Brother’s finger at the tens of millions of mothers in America whose entire lives revolve around their kids’ best. Understandably, many Americans questioned what business it is of the government to tell our children what to eat.

It would be bad enough if this was an isolated case of tax-paid do-goodery gone wrong. But this incident was much more than that. It was an example of the systematic transformation of America, from a generally free society to a Scandinavian-style social democracy. The school bureaucrat’s prying into a four-year-old’s sack lunch offered Americans foretaste of what life will look like once we are subjected to the full force of that welfare state.

There are three important angles to this incident that tie it to our future under European collectivism: economic redistribution, social engineering and socialized health care. The mother-packed school lunch in North Carolina is related to economic redistribution via something called Federal Aid to States (FAS). This is a program – or, to be precise, a package of programs – that send federal funds to states for a variety of purposes. Among them is a program to subsidize school lunches. Another pays for milk in school cafeterias and a third program helps school districts serve our kids fruit and vegetables.

These three programs come with strings attached. The bureaucrats at the United States Department of Agriculture impose restrictions and mandates on how schools can serve their lunches – and how also what nutritional value all school lunches must have. As the incident in North Carolina shows, these regulations now allow the federal government to open school lunch bags that kids brought from home and pass judgment on whether or not the kids’ parents followed federal regulations when they packed the lunches.

In other words: because Congress has created programs to make school lunch more accessible to kids from poor families, the federal government can now tell you what kind of food you can send with your kid to school each morning.

The second big-government angle to this school lunch incident has to do with social engineering. The welfare state is a project where government redesigns our entire society, including but not limited to our economy, in accordance with socialist theories and ideological preferences. At the heart of the welfare state is the idea that politicians, bureaucrats and select “experts” from academia know better than you and me what you and I want and need. This central planning of our lives spans from the macro level, where government punishes hard work and rewards sloth and indolence through income redistribution, to the micro level where individual citizens are told how they can and cannot live their lives.

As an extension of this master social planning, government takes upon itself to interfere with practically every aspect of our lives. In Denmark, e.g., there is a law that says that you as an employee must take a vacation every year. If you don’t, you are punished with a fine. (In my case that would have amounted to a loss of $3,000 taken out of my income.) In the bad old days, Communist East Germany mandated preschool for all children because it was “good” for the children’s upbringing.

In America, the same do-good social engineering philosophy now de facto dictates what parents can and cannot feed their children. So far, the dictate is limited to what is in the children’s school lunch bags. But how inconceivable is it that, in the name of creating a better society, the next step would be home inspections? How far are we now from extending this social engineering to a situation where parents are asked to sign a Fourth Amendment waiver and allow federal agents to do unannounced nutritional inspections of their dinner plates?

The third angle to the school lunch inspections is related to the Affordable Care Act, a.k.a., Obamacare. When our beloved government wants to tell our kids what to eat and what not to eat, the purpose is partly to replace parents as the final arbiter of good, nutritional food. Partly, though, the purpose is to enforce eating habits that keep kids from getting obese.

No one wants their kids to become obese. But if the federal government’s sole purpose was to help children avoid obesity, then all it would have to do would be to launch some dorky campaign with paternalistic TV commercials about how to eat well. It would not have to invade our children’s school lunch bags.

The purpose behind fighting child obesity is much more sinister than to help kids stay healthy. To see it, we have to take a step back and look at the Affordable Care Act one more time. One major feature of the ACA is to put so many mandates on private insurance plans (abortion pills and contraception being just a couple of them) that it becomes increasingly difficult for employers to afford private health benefits for their employees.

As more and more employers have to dump private insurance, the idea is that people will demand a government replacement plan. Lurking in the back of the ACA is the public option, which will spring to life once enough people have lost their private insurance. (This can very well happen even if the Supreme Court declares the individual mandate unconstitutional.) Once it is activated, the public option will enroll more and more Americans until it effectively wipes private options off the table.

Socialized health care through the back door.

Back now to the school lunch in North Carolina. The idea with force-feeding kids what government has deemed is nutritional and healthy food is, again, to fight obesity. The reason for fighting obesity, in turn, is that it leads to costly medical conditions. So long as we all have private insurance, these costs are no matter for the federal government. Only when the federal government takes over our health insurance through a public option will the costs of obesity-related diseases become a matter for Congress and the president.

In fact, cost containment is the main feature of government-run health care. Any student of socialized health care in Europe knows that it is marred in cost problems. In theory, everyone has the right to health insurance at no cost, but in practice access to health care is so rationed that people suffer tremendously while waiting for it. Patients die of curable conditions at stunningly high rates because they cannot see a doctor or, once in the hospital, there are too few doctors to give them the right diagnosis or treatment.

The architects of the ACA know this. They know that that once their law has socialized health insurance in America, the federal government will be faced with the same cost problems that plague government-run health care in Europe. As a measure to stem an obesity-related cost tide tomorrow, they invade children’s school lunches today.

There is no doubt that too many Americans have a problem with obesity, and there is also no doubt that obesity leads to a slew of medical conditions. But the way to fight obesity is to let the persons who become obese through irresponsible behavior bear the bulk of the cost for their decisions. Private employers who care about the health and well-being of their employees provide them with wellness programs. They do this sometimes because they genuinely care, sometimes because it is a cheap and effective way to keep the cost of health insurance down.

By the same token, parents who let their children become obese by feeding them irresponsibly should bear the financial cost of the extra health care that their children will require. This can, again, be done if private insurance companies are allowed to operate on the terms of free markets. Just like a smoker should have to pay a higher health insurance premium than a non-smoker, private insurance companies should be allowed to charge higher premiums of a family that eats themselves obese than of a family that eats responsibly and attends to their own health.

But instead of allowing us private citizens to make independent decisions and pay the consequences, the big-government honchos who currently run the federal government prefer to expand government control over our lives into new areas. The latest addition to that list of government-controlled areas is our children’s school lunch bags. It came about as a result of other expansions – economic redistribution, social engineering and socialized health care – and will probably not be the last of its kind.

Unless, of course, the American people decides that it is time to elect a president and a Congress that is more friendly to individual freedom and responsibility and less interested in building a Scandinavian welfare state. It remains to be seen whether or not that will happen.

Will Congress See the Greek Writing on the Wall?

Following the news from Europe is educational. Europe is ahead of America on the downward slope into an abyss of government debt and an unsustainable welfare state. There are plenty of good examples over there of what big government debt and big government spending can do to a country, but the most notorious one is Greece –  a country whose government is desperately trying to stay avoid outright default.

Greece ended up in its current mess because its elected officials refused to take action in time. Now they are in fiscal panic mode, adopting one austerity package after another.

The most frightening part of this sad Greek drama is that our own legislators in Congress have been acting exactly the same way for a long time. They have been in the same state of denial as their Greek colleagues, which opens some rather unpleasant perspectives for the future: panic-driven austerity.

It is unlikely that Americans will respond to such measures the way the Greek people have. There, people have responded to the latest austerity bills by vandalizing buildings, setting fire to cars and staging massive unrest in the streets. But this does not mean that we should welcome harsh austerity as a response to our federal deficit. An orderly retreat of government spending is infinitely more preferable.

The problem is that it is hard to convince our Congress – not to mention the president – that we actually must reduce government. They seem to believe that America is somehow isolated from the world where the laws of economics apply. One way to shake them out of this state of denial is to examine the causes of the Greek crisis and point to American parallels.

To begin with, it is important to dispel the myth, proposed by far-left groups especially in Europe, that “the financial system” is to blame for the fiscal crisis in Greece. One need not take any deeper look at macroeconomic data to see how wrong this is. The true cause of the problems in Greece is, plain and simple, a government that has been overspending and overburdening the private sector for a very long time.

An important step on the way to showing the role of government in the Greek crisis is to examine the role of a big, strong currency. Just like the United States has its dollar, Greece has the European common currency – the euro. The theory behind a big currency is that it somehow reduces the risk taken by those who lend money to a government under that currency. This lower risk is reflected in lower interest rates – and thus lower borrowing costs for that government. But this did work for Greece. As explained by, e.g., the insightful Across the Pond blog out of Indiana University,

Once Greece joined the Eurozone, its interest rates dramatically fell compared those of Germany.  As a result, it was then much easier for the Greek government to borrow money internationally.

In other words, under the euro the Greek government suddenly had borrowing privileges that resembled those of the U.S. government under the dollar. This led to a surge in borrowing for projects that eerily resemble what the Obama administration wanted to pay for with the ARRA Stimulus Bill: large-scale investments, especially in infrastructure.

But the low cost of borrowing for the Greek government not only allowed an infrastructure boom – just as with the U.S. government, it also allowed Greece to borrow for regular government spending at very low cost. With the currency union, the country-specific risks that lenders faced when all European nations had their own currency were wiped out at the “storefront”. Prior to the currency union there were two ways for lenders to set a price on the risks associated with lending to national governments: the interest rate on the national treasury bonds, and the exchange rate of the nation’s currency. With the euro the latter price mechanisms vanished. The former mechanism, namely the interest rate, practically also went away, as the European Central Bank became the lender of last resort within the euro system. (The ECB formally is banned from serving in that capacity, but has, predictably, taken that role anyway since it otherwise would not be able to defend its currency in a crisis.)

As a result, the Greek government saw the price of deficit spending drop dramatically. This explains their zest for fiscal recklessness, as evident in Eurostat macroeconomic data: from 2005 to 2009 – four short years – government spending in Greece, measured as share of the country’s GDP, increased by almost one fifth: from 44 percent of GDP to 53.2 percent.

In two years alone, 2006 and 2007, government consumption (not counting retirement benefits and welfare) increased by more than ten percent, adjusted for inflation.

While government in the U.S. is not yet at these exorbitant levels, it has been growing steadily over the past decade. Taken together, the federal government and the states are closing in on 40 percent of GDP. And let’s keep in mind that more than one third of state spending is funded by the federal government.

Furthermore, in Greece just as in America, the spending sins of recent years are merely the tip of the iceberg. Government spending has averaged 45 percent of the Greek economy for at least the past 15 years. In the meantime, the private sector has exhibited a very volatile behavior: private corporate investment in Greece has undergone violent swings over the past decade, since Greece joined the euro zone. After some remarkable increases early in the past decade, investments took a deep plunge in 2008. By 2010 corporate investments in Greece were back at where they were in 1997, adjusted for inflation.

This investment volatility has in good part been driven by the fact that the euro eliminated the currency part of the risk pricing mechanisms mentioned earlier. In part, they have also been driven by the government’s lavish spending: much like the failed ARRA Stimulus Bill here in America, Greece’s government-spending-gone-wild failed to generate a reliable trajectory of private sector growth. Once the government runs out of other people’s money, economic activity collapses. (And it may be worth noticing that corporate investment in the American economy is currently at almost depression levels.)

When GDP growth slows to a crawl or even reverses – i.e., when the economy begins to shrink – so do tax revenues. Taxes are always paid out of current income (technically, this is true even if you take money out of your savings account to pay them) which has caused some major problems for the Greek government, on top of its exorbitant borrowing.

Again, excessive government is nothing new to the past few years in Greece. Going back to 1965, and counting taxes as a percentage of GDP, we witness a disturbing track record of ever growing government:

  • In 1965 Greece had lower taxes than even the United States: 17.8 percent of GDP vs. 24.7 percent here;
  • By 1985 Greece had caught up with America: taxes were, respectively, 25.5 and. 25.8 percent of GDP;
  • In 2005 government in Greece were claiming 31.4 percent of the nation’s GDP in taxes (27.5 in the U.S.).

The sharp-eyed reader will notice that the taxes in Greece, as share of GDP, are much lower in 2005 than government spending as share of the same GDP. There are three reasons for this. First, the tax-to-GDP ratio is reported in current prices, not constant prices as is the case with government spending. This usually does not create significant disparities, but in a country like Greece, which has a documented track record of high inflation and currency devaluations, the difference between inflation-adjusted and current-price GDP data makes a big difference: it under-estimates the burden of taxes by simply inflating away that burden.

Secondly, Greece has a long history of deficit spending. While never reaching dimensions that could explain the entire gap between the tax and spending ratios reported here, it does account for up to one third of it in isolated years. Third: a good part of the funding of entitlements in Greece has been counted as “fees” instead of taxes. Due to finicky accounting methods used historically, this has allowed some governments in Europe to “cook the books” when it comes to government accounting. Fees have slipped under the radar of national accounting, resulting in an under-estimation of the nation’s tax burden.

With all this in mind, the conclusion stands: the Greek mess is entirely the work of excessive government and an over-the-top spending welfare state.

As such, Greece stands as a warning sign to all of us, even here in America. There is no way we can imagine today that we would end up in the Greek hole, with a government literally running out of credit – and cash. But then again, let us not forget that only four years ago we would never have imagined that we would have a Congress that would violate its constitutional obligation and not pass a budget.

Or a president that would happily sign on to borrowing 41 cents of every dollar the federal government spends. Year in and year out.

Just like Greece, if we continue to do nothing, we will reach a point where we have no other option than panic-driven austerity measures. We are a couple of years away from that point, and we can still start an orderly retreat from the welfare state. As I explain in my new book, Ending the Welfare State, we can indeed make that retreat.

But we need to act now. Time is running out fast.