Dawdling Into The Abyss

The estimable Robert Samuelson wrote in The Washington Post last month:

What we’re seeing in Greece is the death spiral of the welfare state. This isn’t Greece’s problem alone, and that’s why its crisis has rattled global stock markets and threatens economic recovery. Virtually every advanced nation, including the United States, faces the same prospect. Aging populations have been promised huge health and retirement benefits, which countries haven’t fully covered with taxes. The reckoning has arrived in Greece, but it awaits most wealthy societies.

The welfare state’s death spiral is this: Almost anything governments might do with their budgets threatens to make matters worse by slowing the economy or triggering a recession. By allowing deficits to balloon, they risk a financial crisis as investors one day — no one knows when — doubt governments’ ability to service their debts and, as with Greece, refuse to lend except at exorbitant rates. Cutting welfare benefits or raising taxes all would, at least temporarily, weaken the economy. Perversely, that would make paying the remaining benefits harder.

If only a few countries faced these problems, the solution would be easy. Unlucky countries would trim budgets and resume growth by exporting to healthier nations. But developed countries represent about half the world economy; most have overcommitted welfare states. They might defuse the dangers by gradually trimming future benefits in a way that reassured financial markets. In practice, they haven’t done that; indeed, President Obama’s health program expands benefits. What happens if all these countries are thrust into Greece’s situation? One answer — another worldwide economic collapse — explains why dawdling is so risky.

This entry was posted in Society, Sovereign Debt. Bookmark the permalink. Both comments and trackbacks are currently closed.

One Comment

  1. Chris Burns
    Posted June 17, 2010 at 11:34 am | Permalink

    I believe Samuelson’s analysis is severely lacking. First, his statement “Virtually every advanced nation, including the United States, faces the same prospect” is simply untrue, even if we are generous and assume he only means that they all perpetually run large deficits and are accumulating debt. The nordic countries have very developed welfare states, and I havent’ heard much about any trouble over there. Additionally, interest rates for sovereign debt for the UK, US, and Japan are very very low, indicating that we are not at all in the same boat, and the market agrees (whatever that’s worth).

    There is considerable evidence that this is really a euro problem. I think that Paul Krugman has the much more critical analysis of the situation: http://www.nytimes.com/2010/05/14/opinion/14krugman.html?partner=rssnyt&emc=rss

    So, why is Samuelson’s analysis so coarse, imprecise, and basically wrong? It sounds to me like he’s looking for an excuse to hit “the welfare state” over the head with a club. He is ideologically disposed to grasp at straws which might, with a quick brush of superficial reasoning, appear to discredit welfare societies. In short, Samuelson is an ideological hack.

    Samuelson is the man who wrote the following about health care (i.e. social insurance):

    If the administration has $1 trillion or so of spending cuts and tax increases over a decade, all these monies should first cover existing deficits — not finance new spending. Obama’s behavior resembles a highly indebted family’s taking an expensive round-the-world trip because it claims to have found ways to pay for it. It’s self-indulgent and reckless.

    He’s saying that basic health care is analogous to a luxury round-the-world trip, something “indulgent”. Here’s something that’s actually self-indulgent: trying to shave a few bucks off the unemployment benefits of the people who’ve been laid off during an economic recession caused by the financial services industry, while simultaneously defending the tax loophole which allows hedge fund managers to pay a long-term cap gains tax on their non-investment income. These are the so-called “responsible” centrists, not unlike Samuelson, who claim to care about this country’s finances.

  • The Kelly Letter
    A Complete Investment Management System
    The Kelly Letter  every Sunday morning by email.
    Like no other. Many subscribers say this is the best read of their week, astonishing in its ability to distill seven days of noise into one succinct overview of the very few items that might matter. Start your Sundays right!
    A one-page Quick Start Guide
    with page number references to full information in The 3% Signal. You'll receive access to this right away so you can begin transforming your portfolio into a performance machine immediately.
    The 3Sig Calculator.
    A thing of beauty! You'll use it to generate your own personal signals every quarter including exact share amounts to buy and sell based on your account balances. It emails you the results to make later quarters easy by keeping last quarter's numbers at your fingertips. Some subscribers say this tool alone justifies their subscription price.
    The subscriber-only section of this website
    where likeminded investors are commenting on notes and discussing in forums. Jason joins these interactions every day. They're a treasure trove of investing tips and wisdom.
    The archive of Kelly Letter notes.
    It’s a research center, searchable and smartly tagged to make gathering time-stamped material on covered subjects easy.
    The subscriber podcast.
    Jason reads every letter word-for-word. This feature was requested by subscribers who prefer audio learning. They listen on their Monday morning commute, during a workout, or while reading along at their computer.



    $200/year
    Save 17%



    $20/month
    Pay as you go
    Or sign up to receive free email and learn more about the system.
Bestselling Financial Author