Most people in America associate the Democratic Party with spending on welfare programs and the Republican Party with spending on warfare. Until reading Niall Ferguson’s brilliant The Ascent of Money, I never realized that welfare and warfare have gone hand in hand for over a century. The immortal German warmonger Otto von Bismarck was the first politician to introduce social insurance legislation in the 1880s. His reasoning was not strictly humanitarian. According to Bismarck, “A man who has a pension for his old age is much easier to deal with than a man without that prospect.” Bismarck was a shrewd politician who realized that when you provide people something for nothing, they will vote for you. When you go to war with France, a population sedated with entitlements is more easily malleable and controllable. David Lloyd George rolled out pensions and national insurance in Great Britain prior to World War I in order to win votes. Politicians began a century of addiction to welfare programs, as the poor voted for those that promised them the most. The world has now reached its limit of unfunded promises. The financial crisis in the last two years was caused by politicians throughout the world promising benefits to their citizens and paying for these benefits with borrowed money. Margaret Thatcher aptly summed up what has happened:

”The problem with socialism is that eventually you run out of other people’s money.”

The world has run out of other people’s money.

Britain expanded their social welfare state during and after World War I. With demobilization in 1918, they introduced unemployment insurance as a method to keep former soldiers from disrupting their country. Winston Churchill rolled out an ever growing array of social programs to keep the lower classes from revolting. The Japanese government, after World War II, initiated national insurance for sickness, injury, childbirth, disability, death, old age, and unemployment. Nations began to cover all citizens against everything that could possibly go wrong. Is it a coincidence that the largest expansions of the U.S. welfare state occurred in the 1930’s before a World War, in the mid 1960’s in the midst of the Vietnam War, in 2003 at the outset of the Iraq invasion, and in 2010 as we continue to fight wars in Iraq and Afghanistan? It was essential for politicians to buy off the populace before conducting undeclared wars in far off lands. Why? Who has benefitted from entitlement spending and endless warfare? Politicians and the Military Industrial Complex benefit. The way to get elected in the U.S. since the 1930s has been to promise voters benefits while ignoring the long-term costs. The defense industry and their lobbyists benefit by creating phantom enemies around the globe and stirring up the masses through fear and propaganda. The other beneficiary has been the banking syndicate and their owned printing press called the Federal Reserve. The welfare promises and constant warfare over the last century wouldn’t have been possible without the Federal Reserve and their ability to create constant inflation.

Guns & Butter

Politicians discovered that the populace will go along with their never ending military adventures if they were bought off with promises of generous pensions, free medical insurance, subsidized housing, unlimited drug benefits, farm subsidies, tax loopholes, and thousands of other voter boondoggle payoffs. The Federal Reserve printed the fiat currency, the military industrial complex created the enemies, young Americans fought and died in foreign countries in undeclared wars of choice, and corrupt politicians promised unlimited benefits to the masses in search of votes while rigging the tax system to benefit the rich and powerful. The creation of the Federal Reserve and the Federal Income Tax in 1913 unleashed politicians from the chains of fiscal responsibility. The “guns versus butter model” was turned upside down. Before the Federal Reserve was created the U.S. had to choose between two options when spending its finite resources. It could buy either guns (invest in defense/military) or butter (invest in production of goods), or a combination of both. Politicians handed out butter to the masses and M-16 rifles to our young men. All of the New Deal and Great Society social programs are dependent upon unlimited amounts of debt to be issued for all eternity or until the entire corrupt house of cards collapses.

The beauty of socialism and the welfare state is that when a country is young and vibrant, with a rapidly growing economy, the many pay for the benefits of the few. The baby boom that occurred throughout the modern world after World War II granted politicians the means to expand their welfare pledges. The more politicians promised, the more votes they received. It was a beautiful scheme, until reality struck.

Ferguson provides the reality check in The Ascent of Money:

“Yet there was a catch, a fatal flaw in the design of the post-warfare welfare state. What had started out as a system of national insurance had degenerated into a system of state handouts and confiscatory taxation which disastrously skewed economic incentives.”

The larger the welfare state becomes, the lower economic growth, higher inflation and lower productivity overcome the social benefits. As unions become stronger, the economic system becomes more dysfunctional and warped. The economy in a welfare state becomes bogged down in misallocation of resources, mal-investment, rules, regulations, and distorted pay structures. Incentives to increase profits are eliminated. Incentives to create new businesses and to boost efficiency are purged as bureaucracy gains increasing power. As the populations of the welfare states age, there are only a couple of alternatives for the politicians who never looked beyond the next election when passing legislation to hand out more entitlements. Politicians increase taxes on the productive to pay entitlements for the unproductive. The entitlement promises are so great in the United States that politicians couldn’t possibly raise taxes high enough to pay for them. This is where a willing Central Bank steps in and prints money and allows politicians the easy out of borrowing to pay the entitlement promises. This method works until it doesn’t. Ask Greece and Spain.

Turning Japanese

The welfare state really gained momentum after World War II with Japan and Great Britain leading the way. Ferguson describes the beliefs that overtook the developed world:

“From now on, the welfare state would cover people against all the vagaries of modern life. If they were born sick, the state would pay. If they could not afford education, the state would pay. If they could not find work, the state would pay. If they were too ill to work, the state would pay. When they retired, the state would pay. And when they finally died, the state would pay their dependents.”

With a post-war worldwide baby boom, the taxes easily paid for the benefits in the early years. The myopic politicians and bureaucrats failed to consider that life expectancy would increase from 62 years old in 1935 to 78 years old today, a 26% increase in 75 years. They also failed to anticipate that the Baby Boomers would have fewer children. The average family size has plunged from 3.5 in 1935 to 2.5 today, a 29% decline. After the implementation of Johnson’s Great Society programs in the late 1960s, the percentage of families with 2 or more children plummeted from 36.7% in 1970 to 23.7% in 2007.

As usual, any program conceived by politicians always has unintended consequences because they have not properly considered the potential scenarios. A properly run Ponzi scheme like Social Security, Medicare, and Medicaid requires that enough new money come into the system from new suckers to pay off the old suckers. With the old suckers living much longer than anticipated and not enough new suckers being born, politicians have resorted to doing absolutely nothing. Any politician who proposes any adjustment, restriction or cut in these programs is immediately ridiculed, spat upon and run out of office by the AARP and the entitled classes. The U.S. is about to experience what Great Britain and Japan have already experienced. The major difference is that Japan and Great Britain did not have to fund warfare along with welfare like the U.S. has been doing for half a century. This experiment of delusion will not end well.

Great Britain’s experiment in socialism came crashing down much sooner than Japan, as their population was much older. Their system degenerated into a system of state handouts, high taxation, no economic incentives, slow productivity, high inflation, and economic stagnation. Social transfers rose from 2.2% of GDP in 1930, to 10% in 1960, 13% in 1970 and 17% by 1980. Unions controlled the politicians and resisted all efforts to institute incentives based upon traditional capitalistic principles. Margaret Thatcher was able to slow the advancement of the welfare state for awhile, but was unable to put a stake through its heart. Great Britain continues its long-term decline with a GDP equal to Italy today. Japan, on the other hand, appeared to have figured it out, with the most dynamic welfare state economy in the world from 1970 until 1990. But, then the wheels came off. Demographics have a way of ruining the best laid plans of politicians.

As the life expectancy of the Japanese has risen to the highest in the world at 83 years old, the birth rate in the country plunged. There are more people dying than are being born every year in Japan. They are the oldest society on earth, with 21% of the population over the age of 65, versus 12.8% in the United States. Japan has been in a two decade long slump and has squandered their national wealth on wasteful stimulus programs while failing to address the impossibility of fulfilling their welfare state promises. Japan’s welfare budget is equal to three quarters of tax revenues. Its debt exceeds one quadrillion yen, or 170% of GDP. On its current path toward 240% of GDP, Japan is doomed. As recently as the early-1970s, social expenditures amounted to only about 6% of Japan’s national income. In 1992 that portion of the national budget was 18%, and it was expected that by 2025, 27% of national income would be spent on social welfare.

Niall Ferguson sums up the situation for most of the developed world:

“Longer life is good news for individuals, but it is bad news for the welfare state and the politicians who have to persuade voters to reform it. The even worse news is that, even as the world’s population is getting older, the world itself may be getting more dangerous.”

Dangerous Liaison

The United States has hit the proverbial jackpot, with a rapidly aging population, a 6 trillion unfunded liability, an administration that has piled more unfunded healthcare obligations upon our future unborn generations, spineless politicians that refuse to address the crisis, and as icing on the cake 700 military basis spread throughout the world and an annual defense budget of 5 billion equaling the total spending of the next 11 countries combined. The number of Americans over 65 will surge by 35% over the next 10 years and then by an additional 30% in the following decade. Baby Boom demographics have caught up with politician promises. Therein lays the dilemma. Every day 10,000 Americans turn 50 years old. They will not vote for anyone who promises to cut their entitlements. It is the American way to ignore long term problems until the crisis arrives. Politicians could have proactively addressed the out of control entitlement issue ten years ago. They did not. Now it is too late. The crisis is upon us.

“The US government is on a “burning platform” of unsustainable policies and practices with fiscal deficits, chronic healthcare underfunding, immigration and overseas military commitments threatening a crisis if action is not taken soon.” – David M. Walker

The United States of America is the modern day Roman Empire. Any reasonably intelligent person with a calculator can figure out that this will end in economic collapse. And still, we do nothing. Not only do we do nothing, we push our foot down on the accelerator by spending trillion on wars of choice, commit trillion to new drug coverage for seniors, and national healthcare for all at an unknown cost. There is one law that cannot be skirted. An unsustainable trend will not be sustained.

America’s welfare state delusions have been built upon decades of indoctrination, misinformation and the ridiculous belief that heavily taxing the productive and redistributing it to the non-productive benefits society. A nation of 310 million people cannot be governed based on emotional sob stories, but this is the tactic used by liberals to enact ever more entitlements and safety nets without consideration of cost. Steven F. Hayward describes the liberal mindset:

“Liberalism’s irrepressible drive for an ever larger welfare state without limit arises from at least two premises upon which the left no longer reflects: the elevation of compassion to a political principle (albeit with other people’s money) and the erosion of meaningful constitutional limits on government on account of the imperatives of the idea of Progress.”

Liberals have used these tactics to jam through unemployment benefits now reaching 99 weeks. They used these tactics during the healthcare debate. Emotion based sob stories always overcome rational debate, discussions of cost, and overall impact on society. The problem with making decisions with long term fiscal implications based upon compassion only is that you will run out of money before you run out of compassion. Author William Voegeli points out that there is no end to the liberal compassion-fest:

“Because compassion is an emotional response rather than a moral principle, it defeats every attempt to make wise choices about which sufferers do and don’t deserve governmentally dispensed solace.”

The more programs that are created and expanded the larger the constituency for never ending the program. There is no example in the history of the country where a program has been deemed a failure and scrapped. Entitlement programs never die. The current lot of myopic, bought by special interests politicians do not have the guts to cut or even reduce the growth rate of entitlements. Thomas Sowell captures the essence of America today in this quote:

“The problem isn’t that Johnny can’t read. The problem isn’t even that Johnny can’t think. The problem is that Johnny doesn’t know what thinking is; he confuses it with feeling.”

Fallacies & Fear

The chart below paints a picture of impending disaster. There are no easy choices left. Massive tax increases, enormous benefits cuts, or some combination of the two will be required to avert a catastrophe. Greek like demonstrations, protests and strikes are in our future.

The mindset of close to 50% of the U.S. population is exactly the same as the socialists in Greece. In the latest edition of The Casey Report reporter Jayant Bhandari describes the mindset of the entitled class:

“While sitting in a coffee-shop in Athens, I struck a conversation with a very smart-looking, confident girl while we sipped our rather expensive Euro 4 coffee. She was proud of spending time lying on the beaches and buying expensive clothes. By not taking on too much, she was contributing to the world’s peace and happiness. She claimed to be doing a good deed by spending money, which kept the economy going through increased money circulation. Saving money, she said, was bad, something only a selfish person would resort to.

“Fewer working hours mean work for other people and hence less unemployment,” she said. While I was thinking that she was likely a spoiled child of rich parents, she added, with bright, clear eyes, that the rich should be heavily taxed. Realizing something was missing, I couldn’t help but ask if she was on public assistance. Without a blink, with supreme confidence and a complete absence of any guilt, she said, “Yes.”

The reason she didn’t lie is because she did not feel an iota of guilt for being on dole. Those memes have been systematically annihilated. This is a life in complete contradiction to the natural principles. Not only does the educational system teach falsehoods, the machinations of the system are such that there are seemingly no consequences to misguided living.”

The same attitude about saving versus spending took root in the United States in the early 1980s. Citizens became consumers. The only way for a country to achieve long-term growth is for its citizens to save more than they earn. These savings can then be invested within the country to insure that prosperity would continue for future generations. A country of only consumers will eventually collapse under the weight of debt and lack of investment.

Two generations of Americans have been brought up to believe they are owed a pension, owed tax subsidized housing, owed free healthcare and owed the right to happiness provided by Big Brother. The conviction that government can coddle and provide for all the underachievers, disadvantaged and un-ambitious in society has taken root like a weed. This belief is a fallacy.

The other fallacy that has been bought hook line and sinker by the American public is that American style democracy can be spread around the globe through force by utilizing the most powerful military in the history of mankind. In 2000 the U.S. expenditure on Defense was under 0 billion. The Obama 2011 budget proposes military spending of 5 billion. That level is 8 times the next highest country. The country that we are supposed to fear as the biggest threat to world peace, Iran, spends billion per year on their military. This is 1.1% of the annual U.S. spending level. The “War on Terrorism” has cost over trillion since 2001. Do you feel safer than you did on September 10, 2001? The neo-conservatives like Dick Cheney, Donald Rumsfeld, Paul Wolfowitz, and Josh Bolton have used fear tactics to scare the American public into never ending war in the Middle East, Big Brother like “security” measures like passage of the Patriot Act, and visions of mushroom clouds if we don’t attack our perceived enemies before they attack us. The citizens of the U.S. have not heeded the wisdom of our founders:

“War should only be declared by the authority of the people, whose toils and treasures are to support its burdens, instead of the government which is to reap its fruits.” – James Madison

The country has been in constant military conflict across the globe since the 1940s and Congress has never carried out their Constitutional duty to declare war. The military industrial complex and the politicians they control have subverted the U.S. Constitution in order to enrich themselves at the expense of the citizens. The United States of America in 2010 is Greece, but with the biggest baddest military machine ever conceived as our backstop. The only difference between our socialist state and those that are tottering towards collapse is that we are also burdened with policing the world. This guarantees that our empire will not collapse with a whimper, but with a big bang.

The U.S. welfare-warfare state is not the result of any one political party’s agenda. The Republican Party and the Democratic Party have cooperated to achieve this result. Republicans passed the largest entitlement expansion since LBJ in 2003. Democrats have just proposed the largest military budget in the history of mankind. It isn’t easy to run the National Debt from $5.7 trillion in 2000 to $13.1 trillion today. It takes cooperation and mutual ineptitude on the part of both parties to achieve such a spectacular result. $30 billion unfunded unemployment extensions are attached to bills to pay for the war in Afghanistan. If you vote against the bill, you are not supporting our troops and you want to kick people out into the street. The two sides pretend to offer alternatives to the American people, but their agendas coincide:

“Mystical references to society and its programs to help may warm the hearts of the gullible but what it really means is putting more power in the hands of bureaucrats.” – Thomas Sowell

The hard truth is that every human life ends in a tragedy. There is no amount of money that can be spent by government bureaucrats to alter this fact. Baby Boomers can keep running on their treadmills, popping vitamins, and trying to stay a step ahead of the grim reaper, but the grave beckons. The real tragedy is that because of the fiscal irresponsibility of politicians and the Boomer generation, future generations of Americans will for the first time in U.S. history have a lower standard of living than their parents. The wealth of the nation has been frittered away by statists and war mongers. The current fiscal path of the country is unsustainable. The immediate actions required to avoid a catastrophic collapse are:

At least a 50% reduction in annual military spending. A drastic scaling back of Social Security, Medicare, and Medicaid benefits based on age, means testing and instituting real market competition. Scrapping the entire income tax system and replacing it with a VAT or flat tax. Eliminating useless government agencies like the Department of Energy and Department of Education because they are complete and utter failures. An across the board 25% reduction in every government program. The elimination of the Federal Reserve and the linking of the U.S. dollar to a basket of commodities including gold, silver, oil, and agricultural products, in order to restrict corrupt politicians from spending money we don’t have.

These six steps are the talk of a crazy man. There is no chance of any being implemented today. We all know that the American way is to ignore imminent problems until they morph into a crisis. Unless we act now, this may be our last crisis. The choice is ours.