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Tuesday, May 11, 2010

On "The Welfare State's Death Spiral"

Samuelson's piece Has the internet abuzz. Some say the media is waking up to the issue of the welfare state. In fact, Samuelson has written about this issue for some time. Maybe the blogosphere has just started to read him.
Anyway, the thesis is simple: governments have lived way beyond their means by making promises and, with an aging population, the problem is reaching a head. Samuelson's contribution in this piece, I believe, is to show that there is no easy way out of the mess - austerity programs at this point will only exacerbate the problem.

It is interesting from the perspective that the U.S. just went through a similar situation with a massive bailout; and although it got off to a rocky start,it eventually, in the view of financial markets, succeeded. A similar outcome was the hope yesterday as communicated by the strong market rebound. Today the market is having second thoughts. It is coming to understand what some observers were saying - the bailout is only postponing the problem. It is not a solution.

The problem is tied up with the incentives in the political arena and the type of goods that government provides. Politicians get elected by spending other people's money, and there are a lot of non-rich people who want what the wealthy have. They want nice retirements, community centers with elaborate physical fitness centers, libraries stocked with the latest DVDs, bus systems and world-class transportation systems, and, yes, medical care. Politicians willingly provide all of this, and much more, but are afraid to ask the people to pay for it. The easy thing to do is to borrow because the general population has no idea how this works.

Economists have shown that people who use credit cards cannot recite the prices of what they bought as well as those who pay cash. The same thing is going on here. People have no idea what the welfare state costs.

For the DIY investor, it is worth doing a check on comfort level. If volatility is troublesome, think about reducing it by raising some cash with the understanding that upside may be sacrificed.

1 comment:

  1. The gradual unwinding of the welfare is going to be painful, but necessary, both here and abroad if we want to have economic growth. Governments have about hit the upper limit of what they can spend and borrow without adversely impacting the producers, those geese that lay the golden eggs.