Crisis Undermines Government Fundamentalism

Ever since the financial and economic crises began in 2008, critics have rushed to announce the demise of democratic capitalism. Globalization, “market fundamentalism,” U.S. world leadership -- all were supposedly following communism onto history’s ash heap.

Columbia University economist Joseph Stiglitz even compared the disaster with the fall of the Berlin Wall in 1989. But the obituarists of free-market capitalism have been too hasty. The Great Recession has sounded the death knell not of Anglo-American free-market capitalism but of social democracy and the expansive welfare state.

Yes, the European turmoil of 2010 -- the Greek bond emergency, the strain on the euro and the European Union, the rumors of Spanish and Portuguese debt blowups -- finds its proximate cause in the global economic slump, which has strained government budgets everywhere. But its source is the vast expansion of Europe’s welfare states.

What has pushed Greece to the precipice, for instance, is a regime of government benefits and union perks that the country doesn’t produce enough to afford.

Greece has one of the most generous pension systems in Europe -- it spends 12 percent of its gross domestic product on pensions -- even though the number of able-bodied working-age Greek taxpayers to fund them is fast dwindling. The nation’s 65-and-older population could rise to 25 percent by 2030, up from 18 percent today, experts project.

To maintain even its current welfare state, Greece has imposed high taxes, which discourage work and entrepreneurialism. It has also gorged on debt: Last year, it ran a nearly 14 percent budget deficit, and its debt has hit 115 percent of GDP.

Without far higher productivity and growth rates, this is unsustainable, whatever Athenian rioters believe. The current downturn only hastened the reckoning, as global investors began doubting Greece’s ability to service its sovereign debt, necessitating the massive European Union-led bailout to keep the country solvent (along with the French and German banks that had lended it billions of euros).

Long-term economic stability will require a considerable downsizing of Greek government commitments. And Greece’s problem is only a slightly exaggerated version of Europe’s as a whole.

The social-democratic terminus makes it all the more disturbing to see the Obama administration and Democrats in Congress using the crisis as an excuse to try to remake the United States into a Europe-style social democracy. The bailouts of Wall Street firms (begun under President Bush), the $800 billion neo-Keynesian government stimulus, Obamacare, the partial takeover of the automotive industry, efforts to increase regulations of the airwaves, higher taxes, proposed new environmental mandates -- all of it is pushing in the same statist direction.

During the first months of 2010, paychecks from private firms made up the smallest share of personal income recorded in U.S. history, while government benefits reached an all-time high. Federal spending last year exceeded 24 percent of GDP, the highest peacetime percentage ever for the U.S.

Once new Obama entitlements kick in, that percentage could reach 40 percent of GDP by 2050. Debt, according to some projections, could reach a Europe-like 90 percent by 2020.

To afford all this spending, the private sector will eventually have to pay a lot more to the government. This would reject what has worked in the U.S. in favor of what has proven inimical to progress.

The American people, having enthusiastically put President Obama in the White House a year and a half ago, are understanding these problems and changing their minds. Obama’s approval rating has dropped steadily since he took office and now dips below 50 percent in many polls.

Republicans are likely to trounce Democrats in November’s congressional races. With breathtaking speed, the Tea Party movement has forged a politically significant force for limiting government.

The social democratization of American capitalism may thus hit a political wall -- but reversing the recent growth of American government will nevertheless require herculean efforts.

This piece originally appeared in Washington Examiner

This piece originally appeared in Washington Examiner