No. 137

The Welfare State is not back – it never went away

STONE the crows! Franklin Delano Obama is about to romp home for a second term with people no better off than they were long before he was in office. Median family income, for example, peaked in 2007 and is now, inflation adjusted, back where it was in 1996. [i] Still, the national polls put the president in front, with an increasing lead.[ii] And in some election-deciding swing states his lead is almost unbelievable – CBS gives the president a 10 per cent edge in Ohio among people polled who say they will definitely vote. [iii]

To some extent this is largely due to the ineptitude of his opponent. It is hard to imagine a greater gaffe than Mitt Romney’s 49 per cent are parasites remark. But the president will win because the times suit his philosophy of government. [iv]

As Barack Obama said in the past:

The nation looked to government but the government looked away. Nine mocking years with the golden calf and three long years of the scourge! Nine crazy years at the ticker and three long years in the breadlines! Nine mad years of mirage and three long years of despair! And, my friends, powerful influences strive today to restore that kind of government with its doctrine that that government is best which is most indifferent to mankind. [v]

Quite a while back it was a different president, Franklin Delano Roosevelt, running for a third term in 1936. Back then the electorate was appalled by inequality and abhorred a market that they believed they had failed them.

Just like now. As President Roosevelt, sorry, Obama, put it the other day:

Top-down economics doesn’t work. We don’t need to double down on the same trickle-down policies that got us into this mess in the first place. This country doesn’t succeed when only the rich get richer. We succeed when the middle class gets bigger, when there are ladders of opportunity for all who strive to get into the middle class, when everybody who’s willing to work hard has a chance to get ahead and live up to their God-given potential. [vi]

So in the 1930s voters decided it was the State’s responsibility to protect them against predators, capitalists in general, but basically bankers, and to protect their health and provide for them in hard times.

And it is happening again.

President Obama made the case for the welfare state in his nomination speech:

Over and over, we’ve been told by our opponents that bigger tax cuts and fewer regulations are the only way — that since government can’t do everything, it should do almost nothing.  If you can’t afford health insurance, hope that you don’t get sick. If a company releases toxic pollution into the air your children breathe, well, that’s the price of progress. If you can’t afford to start a business or go to college, take my opponent’s advice and borrow money from your parents. You know what, that’s not who we are. That’s not what this country’s about. As Americans, we believe we are endowed by our Creator with certain, inalienable rights — rights that no man or government can take away. We insist on personal responsibility and we celebrate individual initiative. But we also believe in something called citizenship. Citizenship: a word at the very heart of our founding; a word at the very essence of our democracy; the idea that this country only works when we accept certain obligations to one another and to future generations.  [vii]

In the 1930s, of course, voters did not know there were limits to what welfare states could deliver. They do now – at least anybody who is even vaguely aware that the health and welfare costs of the baby boomers are going to cost a bomb knows. In the US health and welfare entitlements will account of 61 per cent of federal spending by 2030. [viii]

It’s the same here. Peter Costello first put the ever-increasing costs of the aged on the agenda in 2002, where it remains.[ix] By the middle of the century Australia will spend 15 per cent of GDP on heath and aged care, plus general welfare payments, compared to less than 4 per cent on education and defense.

But despite the failure of the welfare state in western Europe, reducing health and welfare spending is off the agenda here and in the US.

President Obama has a new name for unsustainable spending – “economic patriotism … rooted in the belief that growing our economy begins with a strong and thriving middle class”. [x] Certainly he talks about using money saved by abandoning the people of Afghanistan “to pay down our debt”.  But, with a trillion dollar federal deficit this year, the US has to reduce overall outlays. And that inevitably means welfare.

While soaking the rich is politically popular – there are simply not enough of them for it to accomplish anything. According to research for the Brookings Institute, increasing the top two income tax rates to 100 per cent would not reduce the publicly held debt to GDP ratio to 60 per cent. [xi]

But the voters aren’t interested. President Obama will win the election because he has donned the mantle of FDR. And there is no constituency for cutting welfare or increasing income taxes on the vats mass of wage earners here. Consider the grief the government is enduring in attempting to force single parents back to work. [xii]

Now, imagine what would happen if a government of any persuasion announced we had a choice to avoid going broke – across the board, income tax hikes, plus a rise in GST or a reduction in health services and tightened means testing for pensions and family payments.

As chartered accountant chief Yasser El-Ansary argues, Canberra will hit business and upper-income superannuation concessions to reduce the deficit because “the political pain far exceeds the revenue gain”, from increasing taxes and or reducing welfare for low and middle income earners. [xiii]

And so governments ignore reality because they can now – even though welfare budgets around the developed world are unsustainable.

And so Australia and the US are where they where in the 1970s and Europe is now – with government spending we cannot sustain and public assumptions about the role of government that are less erroneous than disastrous.

The welfare state isn’t back, it never went away.

ENDNOTES

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[i]  US Treasury, “US economy in charts,” February 2012, @  HYPERLINK “http://www.treasury.gov/resource-center/data-chart-center/Documents/20120229_EssentialEcon.PDF” www.treasury.gov/resource-center/data-chart-center/Documents/20120229_EssentialEcon.PDF recovered on September 29

[ii] Real Clear Politics, “Latest election polls,” September 28, @  HYPERLINK “http://www.realclearpolitics.com/epolls/latest_polls/elections/” http://www.realclearpolitics.com/epolls/latest_polls/elections/ recovered on September 29

[iii]  Brian Montopoli, “Poll: Obama opens substantial leads in key swing states,” CBS News, September 26 @  HYPERLINK “http://www.cbsnews.com/8301-250_162-57520341/poll-obama-opens-substantial-leads-in-key-swing-states/?pageNum=3&tag=contentMain;contentBody” http://www.cbsnews.com/8301-250_162-57520341/poll-obama-opens-substantial-leads-in-key-swing-states/?pageNum=3&tag=contentMain;contentBody recovered on September 29

[iv]  David Corn, “Secret Video: Romney tells millionaire voters what he really thinks of Obama voters, Mother Jones, September 17 @  HYPERLINK “http://www.motherjones.com/politics/2012/09/secret-video-romney-private-fundraiser” http://www.motherjones.com/politics/2012/09/secret-video-romney-private-fundraiser recovered on September 29

[v]  Franklin Deland Roosevelt, “Speech at Madison Square Garden,” October 31 1936, @  HYPERLINK “http://millercenter.org/president/speeches/detail/3307” http://millercenter.org/president/speeches/detail/3307 recovered on September 29

[vi]  Barack Obama, “Remarks by the president at (sic) campaign event in Virginia Beach, Virginia,” September 27 @  HYPERLINK “http://www.whitehouse.gov/the-press-office/2012/09/27/remarks-president-campaign-event-virginia-beach-va-0” http://www.whitehouse.gov/the-press-office/2012/09/27/remarks-president-campaign-event-virginia-beach-va-0 recovered on September 29

[vii]  Barack Obama, “Remarks by the President at the Democratic National Convention,” September 6 2012 @ HYPERLINK “http://www.whitehouse.gov/the-press-office/2012/09/07/remarks-president-democratic-national-convention”http://www.whitehouse.gov/the-press-office/2012/09/07/remarks-president-democratic-national-convention, recovered on September 29

[viii]  Bill Keller, “The entitled generation,” New York Times, July 29

The Treasury, “Intergenerational Report,” @  HYPERLINK “http://archive.treasury.gov.au/igr/” http://archive.treasury.gov.au/igr/ recovered on September 29

[ix] Australian Government, Australia to 2050: future challenges,” 2010 @  HYPERLINK “http://archive.treasury.gov.au/igr/igr2010/Overview/pdf/IGR_2010_Overview.pdf” http://archive.treasury.gov.au/igr/igr2010/Overview/pdf/IGR_2010_Overview.pdf recovered on September 29

Obama, Virginia Beach address, ibid

[x]  Congressional Budget Office, “The budget and economic outlook: fiscal years 2012 to 2022,” January 31 @  HYPERLINK “http://www.cbo.gov/publication/42905” http://www.cbo.gov/publication/42905 recovered on September 29

[xi]  Eric Toder et al, “Reducing the deficit by raising individual income tax rate,” Tax Policy Centre, 3 March 6 @  HYPERLINK “http://www.taxpolicycenter.org/publications/url.cfm?ID=412518” http://www.taxpolicycenter.org/publications/url.cfm?ID=412518 recovered on September 29

[xii] Alexandra Kirk, “Human rights committee: don’t force single parents onto dole,” ABC Radio, AM September 21 @  HYPERLINK “http://www.abc.net.au/am/content/2012/s3594912.htm” http://www.abc.net.au/am/content/2012/s3594912.htm recovered on September 29

[xiii]  Adam Creighton and David Uren, “Households ripe for tax hit,” The Australian, September 29

'2012