Day By Day© by Chris Muir.

Tuesday, January 04, 2005

Here's hoping we don't follow Europe into social welfare economic death

David Brooks at the NY Times has a compelling article analyzing the imminent death spiral in which Europe's economy finds itself, and pointing out that the US has averted this horrible problem only by hewing to conservative, as opposed to liberal, economic policies:

Over the past 50 years, we've been having a big debate over two rival economic systems. Conservatives have tended to favor the American model, with smaller government and lower taxes, but less social support. Liberals have supported programs that lead to the European model, with bigger government, more generous support and less inequality. I wonder if that debate is about to change. In the next few decades both models are going to confront a big test: aging populations. The U.S. model is going to be challenged by this problem, but the European model is flat-out unsustainable. Populations in the U.S. and Europe are both aging, but Europe is aging faster. According to the O.E.C.D., the dependency ratio - defined as the number of people over 65 as a percentage of the number of people 20 to 64 years old - will rise to 37 percent from 22 percent in the United States by 2050. But it will go up to 52 percent from 26 percent in the European Union. In addition, European public pensions are more generous and retirees are more reliant on them. To sustain these programs, European government spending will have to rise. According to the European Commission, demographic trends will push public spending up by five to eight percentage points of G.D.P. in the E.U.'s 15 richest members. In Germany, public spending on pensions will rise from an already huge level, 10.3 percent of G.D.P., to 15.4 percent by 2040. And that's after recent benefit cuts. To pay for all of this, taxes will rise and public debt will increase. A Standard & Poor's survey predicts that France and Germany could see their public debt grow to more than 200 percent of G.D.P. by 2050. Europe may find itself locked into a vicious circle: an aging population means more public spending, which means higher taxes, which means lower growth, which means higher unemployment, which means more public spending, which means more taxes and even lower growth. *** Which brings us to the current moment. In Europe, everybody is aware of the problem, but the remedies are so bad that most countries avoid them. Meanwhile, we in the United States are embarking on our own debate over the future of Social Security. Many liberals are claiming that we don't need to fundamentally revamp our system because there is no crisis. To the extent that's true, it is because we have not been taking their advice for the past 50 years. We have stuck with a low-tax, high-growth economic model. This gives us the resources and the flexibility to deal with the problems caused by an aging population without having to face, at least for now, the horrific choices that confront our friends across the Atlantic.
What I find fascinating about this article, aside from its obvious common sense, is the fact that, in the same day's NY Times, you get a nonsensical article from Paul Krugman touting the wonders of the America's social security system. Krugman resists any change that would help tear us away from the manifestly defective European model. (Incidentally, I'm absolutely sure that I read somewhere, possibly at National Review Online, that Krugman only a few years ago was bemoaning the fact that Social Security is about to fail. Krugman, in his approach to the Bush administration, reminds me of Groucho's 1932 Horse Feathers song -- "Whatever it is, I'm against it.") And proving that the NYTimes consistently takes its tone from the loony Left, with both these Op-Eds running in its paper, the Times' own editorial comes down emphatically on Krugman's side. Indeed, I wouldn't be surprised if Krugman authored this gem, culled fromthe Times editorial: "Contrary to Mr. Bush's frequent assertion that Social Security is constantly imperiled by political meddling, it has in fact been preserved and improved by political intervention throughout its 70-year history, most significantly in 1983. The system could - and should - be strengthened again by a modest package of benefit cuts and tax increases phased in over decades." It's certainly in keeping with Krugman's Op-Ed. Let's just hope that wiser minds than the NY Times Editors make decisions about Social Security's future.