Obama Has Nearly Achieved His European Welfare State, But we cannot pay for it

The debt-ceiling brouhaha diverts attention from the most fundamental economic issue we face: Do we want a European-style welfare state? If we do, how in the world are we going to pay for it?

Presidential candidate Barack Obama called for "hope and change," but he was deliberately vague on the "fundamental change" part. In speeches as president both at home and abroad, he appeared to reject American exceptionalism and intimated we have much to learn from Europe, especially its cradle-to-grave welfare state.

Obama's juggernaut passage of universal health care, despite severe budget and employment problems and the loss of his Senate super majority, bears witness to his determination to transform the United States into something more closely resembling Europe. Although many regard his term in office as a failure, he has nearly achieved his long-term objective. He has completed the foundation of the Europeanization of the American economy.

The European welfare state requires huge levels of public spending and taxation. Public spending in France, Italy and Sweden is more than 50% of GDP. Frugal Germany provides the lower bound at a "modest" 48%. Some of this public spending goes to the unfortunate, but the bulk goes to the middle class for retirement and health benefits.

What Americans may not understand, because of their limited textbook exposure to their own history and that of Europe, is that this topic of European economic models may have changed little since the late 1700's.

As a matter of fact, in 1775, Edmund Burke spoke before the British Parliament on "Conciliation with the Colonies" and traced the amazing and marvelous economic development in the colonies which then surpassed that of Europe. In that speech, he attributed the American colonists' productivity and wealth production to "the spirit of liberty" which existed there, owing nothing to British planning or interference.

And, that was prior to the Declaration of Independence and Constitution, which further protected liberty and freedom of individual enterprise from government intervention.

Jefferson alludes to the Old World (European) taxation effect in one of the following statements:

"To preserve [the] independence [of the people,] we must not let our rulers load us with perpetual debt. We must make our election between economy and liberty, or profusion and servitude. If we run into such debts as that we must be taxed in our meat and in our drink, in our necessaries and our comforts, in our labors and our amusements, for our callings and our creeds, as the people of England are, our people, like them, must come to labor sixteen hours in the twenty-four, give the earnings of fifteen of these to the government for their debts and daily expenses, and the sixteenth being insufficient to afford us bread, we must live, as they now do, on oatmeal and potatoes, have no time to think, no means of calling the mismanagers to account, but be glad to obtain subsistence by hiring ourselves to rivet their chains on the necks of our fellow-sufferers." --Thomas Jefferson to Samuel Kercheval, 1816. ME 15:39

"I deem [this one of] the essential principles of our government and consequently [one] which ought to shape its administration:... The honest payment of our debts and sacred preservation of the public faith." --Thomas Jefferson: 1st Inaugural, 1801. ME 3:322

"I sincerely believe... that the principle of spending money to be paid by posterity under the name of funding is but swindling futurity on a large scale." --Thomas Jefferson to John Taylor, 1816. ME 15:23

"[With the decline of society] begins, indeed, the bellum omnium in omnia [war of all against all], which some philosophers observing to be so general in this world, have mistaken it for the natural, instead of the abusive state of man. And the fore horse of this frightful team is public debt. Taxation follows that, and in its train wretchedness and oppression." --Thomas Jefferson to Samuel Kercheval, 1816. ME 15:40

It is not just the welfare state. Obama, and Clinton before him, are rapidly moving America into alignment with International values and UN Programmes. Obama has now adopted Water nationalization programs of the European Union and is implementing them through the Army Corps and EPA. These same programs are currently also being implemented under the California Water Plan Update.

The water strategy follows the 4 Dublin Principles, which assume that “Water is a public good and has a social and economic value in all its competing uses.” In true communitarian spirit, it presumes that “stakeholders” should be the determinant for allocation. (In the western US, it is clearly vested private property.)

The fifty percent or more share of state spending in Europe is financed by conventional income and profits taxes, VAT taxes (ranging from 15% to 20%), and payroll taxes approximately twice U.S. social security rates. High payroll taxes have been an integral part of the European experience for a long time. In the U.S. payroll taxes were introduced in 1935 and remain low by European standards.

In other words, we have created a European-style welfare state without the means of financing it. Therein lies the rub. This hard fact is seen in the trillions of dollars of unfunded liabilities of Social Security and Medicare, which we conveniently ignore in budget debates. With our current tax system, we simply cannot pay what our citizens have been promised.

Consider the magnitude of our funding shortfall: On the eve of Obama's inauguration, federal, state and local revenue equaled 32.5% of GDP. With the extended economic slump starting in 2007, total government revenue fell to 29%. During our last year of prosperity, 2006, it equaled 35%.

If a European-style welfare state requires 50% of GDP, we are currently 20 percentage points short. Applied to current GDP, we are $3 trillion short! We must ask: Where is the $3 trillion to come from?

Obama has repeatedly employed class-warfare rhetoric to claim that we can afford everything if the rich pay their "fair share." Such posturing reflects stupidity or mendacity, more likely the latter. If we taxed away half the income of those earning $250,000 and above, we would raise at the very most $700 billion of the $3 trillion shortfall. Treasury coffers would receive much less as the "rich" adjust their economic behavior. Forcing the rich to "pay their fare share" would make no difference whatsoever.

At least today's Europeans know that they must pay for their welfare state, i.e., pay the taxes to fund it.

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