Tuesday, July 5, 2011

About the welfare state

This comment provoked the thought that modern welfare states are systems for replacing private saving with public debt. With large health costs and retirement income guaranteed, much of the incentive for private saving is undermined. Meanwhile, the political incentive to pay for present goodies to hand out to voters by pushing the cost into a future that the office-holder may well not have to deal with encourages high levels of public debt.

Given rising per capita incomes, people should be increasingly able to manage their own health and retirement costs, yet the clear tendency has been for this process of replacing private saving with public debt to accelerate.

There are exceptions in various directions. For example, the Singaporean system of compulsory saving, the Australian system of compulsory superannuation, the Japanese combination of high private saving and mountainous public debt. Nevertheless, in adopting an inappropriate common currency--the euro--the eurozone EU may have revealed this basic contradiction in the post-1960 welfare state by cutting off a major mechanism for dealing with the consequences of replacing private saving with public debt, currency devaluation (both against other currencies, making one's products cheaper and imports more expensive, and future value, reducing the value of debts denominated in one's own currency). Add in collapsing fertility rates (and so lack of future taxpayers to pay these mounting debts) and one can see that the post-1960 massive income-transfer welfare state is not likely to be a long-lasting historical form.

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