America – More Of A Welfare State Than We Admit

America has become more of a welfare state than most of us would care to admit as Robert Samuelson details in a recent article.  The shock to many will come when it becomes obvious that the promises made by Government are so large that they simply cannot be kept.

Washington Post – Raised in an individualistic culture, Americans dislike the concept of the “welfare state” and do not use the term. But make no mistake, the United States has a welfare state, and its future is precarious. The true significance of General Motors’ bankruptcy lies more with this welfare state than with the battered condition of American capitalism.

Broadly speaking, the U.S. welfare system divides into two parts — the private, run by firms; and the public, provided by government. Both are besieged: private companies by competitive pressures; government by rising debt and taxes. GM exemplified the large corporation as private welfare state. In contracts with the United Auto Workers, GM promised high wages, lifetime employment, generous pensions and comprehensive health insurance. All this is ancient history: New workers get skimpier benefits.

What most Americans identify as government “welfare” are payments to single mothers, food stamps and (perhaps) Medicaid, the federal-state health insurance program for the poor.

But that’s not the half of it. Since 1960, government has changed radically. Then, 52 percent of federal spending went for defense, 26 percent for “payments for individuals” — the welfare state. By 2008, 61 percent consisted of “payments for individuals,” 21 percent for defense.

Social Security and Medicare — programs for the elderly — represented the biggest share: $1 trillion in 2008. Most Americans don’t consider these programs “welfare,” but they are. Benefits are paid mainly by present taxes; there’s little “saving” for future benefits; Congress can alter benefits whenever it wants. If that’s not welfare, what would be?

In theory, expanding public welfare could offset eroding private welfare. President Obama’s health-care proposal reflects that logic. The trouble is that the public sector also faces enormous cost pressures, driven by an aging population and rising health costs. The Congressional Budget Office projects the federal debt will double as a share of the economy (gross domestic product) to 82 percent of GDP by 2019.

Any sober examination of figures like these suggests that the system has promised more than it can realistically deliver. We are borrowing not to finance investment in the future but to pay for today’s welfare — present consumption. Sooner or later, the huge debt will weaken the economy. Nor would paying for all promised benefits with higher taxes be desirable. Big increases in either debt or taxes risk depressing economic growth, making it harder yet to pay promised benefits.

Politicians for the most part do not understand basic finance and they get elected based on who promises the most, regardless of the ability to pay. Do not expect things to change until America’s overextended credit line is cutoff.