Since Bismarck introduced social insurance in 1881 social welfare states have proliferated. While Americans pride themselves on self-reliance, our social security system is Bismarck’s creation, incarnated fifty years later during the New Deal. Expanding its parameters, we have created recipient constituencies, extended unemployment, health care, food stamps. We have extended welfare programs to banks, insurance companies, industrial and automotive companies. Our tax code is permeated with incentives to buy houses, cars, environmentally sound products, dividends, etc.
This week, Europe and America have a chance to look into the abyss and envision an end to the social welfare state. The financial upheaval in Greece dramatically exposes the fallacy of the social welfare state and the Keynesian economics from which it sprung.
The Roots of the Financial Crisis
Modern economic interventionist governments created a false sense of security. How did we get here? The New Deal and its progeny are not inherently evil, as those on the right would like us to believe. Roosevelt, Johnson, Kennedy and Obama faced harsh economic realities and acted from only the best impulses to ameliorate real hardships in the citizenry. However, cheap money and a tangle of unaffordable social programs send false signals. The tangle encourages people to take foolish risks. And it falsely promises that Big Government can be an economic and social savior.
The Emperor Has No Clothes
The Great Financial Crisis should bring home the fact the government cannot protect us. When the crisis hit we learned a number of disturbing facts:
- Banks and buyers committed rampant mortgage fraud.
- Banks operating under the nose of the FDIC were insolvent.
- The SEC endorsed rating agencies, which in turn manufactured unwarranted AAA ratings.
- The Executive branch ignored FBI warnings about an “epidemic” of mortgage fraud.
- Cheap money flowed from the Federal Reserve and inflated asset bubbles in house prices, commercial real estate, and stock prices.
- The SEC, the Federal Reserve and other agencies permitted excessive leverage. This ultimately destroyed Lehman, Bear Stearns, AIG and others.
Despite the frantic attempts of the current Administration to pass financial reform legislation, the Bush and Obama administrations had more than enough legislative and regulatory power to reign in bad behavior in all the financial markets. But neither Administration did it.
A Gullible Public
Animals in captivity lose their self protective instincts. A gullible public lulled into a false sense of security also loses common sense and financial self-protective instincts. As the crisis grew, Americans were told that social security will enable them to retire, unemployment will bridge any short jobless periods, houses prices will always rise, and stocks are good to buy. With only a little hindsight, we can see how prudent behavior lost out.
The White House and the financial press and broadcast media constantly promoted stock and home purchases. Why are we surprised that the US has one of the lowest savings rates in the Western World?
Greece and the End of the Welfare State
Greece is the wakeup call that we can no longer afford the modern welfare state. There are too many Greek citizens entitled to government benefits and not enough income producers and taxpayers. Simply put, the Greek government, just like the United States government, has insufficient funds to pay for the social welfare state. Our danger is that unlike Greece, the US has the money-printing press. The world still views us as a relative safe haven. But what we are really doing is “extending and pretending” before our American day of financial reckoning.
A Return to Self Reliance
What each of us must do now is to realize that government promises and support are illusory and ultimately fragile. We need a return to self reliance. We must be responsible for our own retirements, perform due diligence before investing, save more, spend less and pay down our debts. Better voluntary austerity then forced austerity with police on horses in full riot gear.
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