After the Welfare State Politicians Stole Your Future … You Can Get It Back Tom G. Palmer CIS Occasional Paper 132 2013 After the Welfare State Politicians Stole Your Future … You Can Get It Back Tom G. Palmer First published by Students for Liberty & Atlas Network / Jameson Books, Inc. Essays reprinted with the permission of the authors Edited by Tom G. Palmer The editor gratefully acknowledges the assistance in preparing this book, not only of the authors and copyright holders but also of the members of Students For Liberty, most especially Clark Ruper, Ankur Chawla, Jennifer Jones, Morgan Wang, Jose Nino, and Matt Needham, who deserve a great deal of credit for bringing the book to publication. Moreover, he acknowledges the assistance in writing the essay ‘Poverty, Morality, and Liberty’ provided by Diogo Costa, whose insights helped to shape the thesis, and by Lech Wilkiewicz, who helped to track down a number of obscure items. Finally, he thanks Emmanuel Martin, Brad Lips, and Michael Bors for reading the manuscript with care and catching errors, and Dara Ekanger for her expert work as a professional copy editor. Published in April 2013 by The Centre for Independent Studies Ltd PO Box 92, St Leonards, NSW 1590 Email: [email protected] Website: www.cis.org.au The views expressed in this report are those of the author and do not necessarily reflect any views held by the publisher or copyright owner. These are published as a contribution to public debate. Copyright © 2012 by Tom G. Palmer, Atlas Economic Research Foundation, and Students For Liberty National Library of Australia Cataloguing-in-Publication entry Tom Gordon Palmer After the Welfare State: Politicians Stole Your Future … You Can Get It Back / Tom Gordon Palmer. ISBN: 9781922184092 (pbk.) CIS occasional paper ; 132. Other Authors/Contributors: Centre for Independent Studies (Australia) Contents Foreword ........................................................................... i Introduction ..................................................................... 1 By Tom G. Palmer Section I: Mutual Plunder and Unsustainable Promises The Tragedy of the Welfare State ....................................... 5 By Tom G. Palmer How the Welfare State Sank the Italian Dream ................ 15 By Piercamillo Falasca Greece as a Precautionary Tale of the Welfare State .......... 21 By Aristides Hatzis Section II: The History of the Welfare State and What It Displaced Dismarck’s Legacy ........................................................... 33 By Tom G. Palmer The Evolution of Mutual Aid .......................................... 55 By David Green Mutual Aid for Social Welfare: The Case of American Fraternal Societies ....................................................... 67 By David Beito Section III: The Welfare State, the Financial Crisis, and the Debt Crisis The Welfare State as a Pyramid Scheme ........................... 91 By Michael Tanner How the Right to “Affordable Housing” Created the Bubble that Crashed the World Economy ................... 97 By Johan Norberg Section IV: Poverty and the Welfare State Poverty, Morality, and Liberty ....................................... 109 By Tom G. Palmer A Little Further Reading for Fun and Understanding (and Better School Papers) ........................................ 137 Endnotes ...................................................................... 143 Index ........................................................................... 177 Foreword Peter Saunders and Andrew Baker After the Welfare State is a collection of short essays brought together by Tom Palmer of the Atlas Network and published in the United States in 2012. Believing that the book has a vital message for Australians, as well as for Americans and Europeans, The Centre for Independent Studies is reprinting the collection to coincide with Dr Palmer’s visit to Australia in April 2013. The book revolves around two core arguments. First, welfare states across the Western world have gone bust. They were set up as unsustainable Ponzi schemes from the late nineteenth century onwards; for more than a hundred years since, successive generations have been making a bad situation worse, jacking up state spending on themselves while leaving their children to pick up the growing mountain of bills. But now the buck has finally stopped. After the Welfare State traces the origins of the 2008 global financial crisis to the US federal government’s determination to subsidise low income groups who could not afford to buy their homes (see the chapter by Johann Norberg). But there is a more general problem too, for this specific crisis with its origins in the toxic loans taken on by the US financial sector is underpinned by the build-up of huge government debts across the Western world consequent upon generations of irresponsible welfare spending. It is Palmer’s contention that in Western Europe and North America, this century-long public sector orgy of immediate gratification and deferred payments has reached a crisis point. He estimates that across the 27 EU countries (where the crisis is at its worst), the gap between projected government spending and projected tax receipts up to 2050 has reached €53 trillion. Even excluding unfunded government pension i liabilities, the average EU public sector debt now amounts to 285% of GDP, with the welfare state accounting for most of this debt. Deficits and debts on this scale cannot possibly be sustained for long, for as Michael Tanner explains in his essay, no conceivable amount of future taxation can possibly hope to cover the costs of the welfare state debt mountain. The only solution is to slash the bloated welfare state (especially transfer payments, which have ballooned in most countries) and introduce a hefty dose of inflation to devalue the debts. Faced with so many chickens finally coming home to roost, Western governments are belatedly having to come clean with their electorates. It is not a comfortable situation for politicians, who for years have bribed voters with promises of ever-more generous handouts and passed on the bills to their successors. But now the music has stopped and they find themselves holding the parcel. As Palmer says, promises made in the past ‘cannot be fulfilled and will not be fulfilled’ (p. 12). So it is that across Europe, public sector pension schemes are being overhauled, state health care systems are being refashioned, and over-extended and over-generous transfer payments are gradually being reined in. Gradually, painfully and reluctantly, the unrealistic public expectations fuelled by decades of reckless spending are being confronted and massaged down. In some countries—notably Greece—this has sparked serious civil unrest. In many others, it is creating widespread hardship and disillusionment (Part I of the book includes essays on the Greek and Italian experiences). The second core argument of the book is less gloomy, for Palmer believes this doesn’t all have to end in tears. In the current crisis, he sees opportunity. He reminds us that the modern welfare state displaced earlier, small-scale systems of mutual aid that were more humane, accountable, sustainable and effective than the top-down bureaucratic state systems the world has grown accustomed to. He believes it may ii be possible to draw on this legacy to re-establish similar arrangements. Hence the sub-title of the book: Politicians Stole Your Future ... You Can Get It Back. In Section II, Palmer includes extracts from important work by David Green and David Beito analysing how friendly societies and other mutual aid associations provided sickness and unemployment cover for millions of workers and their dependents in the nineteenth century in Britain and the United States. Although he doesn’t say so, it was the same story here in Australia. In their 1984 book, Mutual Aid or Welfare State: Australia’s Friendly Societies, David Green and Lawrence Cromwell show how friendly societies had grown since the late nineteenth century to serve almost half the population by the inter-War years. These societies covered doctors’ and pharmacy bills, loss of income through sickness or unemployment, and widows’ benefits. They were eventually undermined by medical professionals, who hated the competitive environment in which they were forced to operate. First, the doctors’ top professional association imposed ‘model lodge agreements’ with set fees and conditions to stop members from competing for friendly society contracts; in 1950, it outlawed contract practice altogether. Three years later, the Commonwealth government passed the National Health Act, which established government subsidies for insurers and paved the way for Medicare quarter of a century later. Michael Tanner argues that as the top-down, bureaucratic welfare state crumbles, we could return to a more voluntary, bottom-up system of mutual aid, supplemented by self-help (private insurance and saving) for those who can afford it, and charitable donations for those who fall on hard times. Given that almost half of all Australian households could afford membership of voluntary schemes a hundred years ago, it is not implausible to suggest that many more of us could make the necessary contributions now. As Palmer notes in the final essay in this volume, real incomes are iii around 12 times higher today than they were at the start of the Industrial Revolution, so we are financially much better placed than earlier generations to look after ourselves. What form this mutualism might take,