The disintegration of the welfare state
TheGlobeandMail.com – ROB – ‘Italy’s public finances are a time bomb waiting to explode’
Published on Monday, July 11, 2010. Neil Reynolds
Democracies produced Nazi Germany and Fascist Italy, fulfilling the expectation of Socrates and Machiavelli that democracies end in tyranny. Now democracies are fulfilling the complementary expectation of Nobel laureate economist Milton Friedman that democracies end in bankruptcy. Put a democracy in charge of the Sahara, Mr. Friedman once said, and sand itself will become scarce. Democracies are indeed profligate trustees – or have been for the past 30 or 40 years. Mr. Friedman’s primary fret, though, was the tendency of democracy to centralize political and economic power in the same hands. Most critiques of democracy reflect this elemental distrust. “Democracy is two wolves and a lamb,” Benjamin Franklin reputedly said, “voting on what to have for lunch.”
Democratic self-deprecation isn’t quite as funny as it once was. Mobs have already taken to the venerable, iconic streets of European states, notably among them Greece, birthplace of Athenian democracy. It’s apparently easier to give wealth away than it is to take it back. Democracy assembled the welfare state peaceably enough. Can democracy dismantle it as peaceably? No, it can’t. The mobs are not finished.
In a disturbing analysis titled Democracy, Debt and Disorder, prophetically published early in 2008, two Italian economists assert that Italian governments have accumulated so much debt that it’s essentially impossible to avert the disintegration of the country’s social contract. Giuseppe Eusepi and Luisa Giuriato, of Sapienza University in Rome, do not specify violent insurrection as a consequence. They do specify an end to Italy’s welfare state – and to the “disorder” that will arise when government divides the spoils.
Profs. Eusepi and Giuriato studied Italy’s history of public debt across 150 years – since the country became a unified state in 1861. They found that successive governments commonly resorted to significant debt but that they never came close to the country’s current dependency on debt, year after year, to fund current expenditures.
In 1861, for example, Italy’s public debt stood at 35.8 per cent of GDP. At the end of the Second World War, it stood at 40 per cent. In 1970, it was at 50 per cent. Italy’s debt now stands at 120 per cent of GDP, equivalent to Greece’s debt. The country must soon choose between its welfare commitments and its interest payments. The two professors say it can’t afford both.
At the end of the First World War, Italy’s debt hit 160 per cent of GDP – an extraordinary indebtedness. Ironically, it was the Fascists, who seized power in 1922, who dealt with it. Profs. Eusepi and Giuriato credit the country’s first Fascist finance minister for cutting government expenditures in half in six years and for reducing public debt to 50 per cent of GDP. “The idea of [extreme] deficit and debt accumulation,” they say, “was simply culturally unacceptable at the time.”
This is an intriguing observation, suggesting that the accumulation of debt in affluent democracies reflects a cultural adaptation – in which public debt funds la dolce vita – as much as it reflects political ideology or novel economic theory. Beginning in the late 1960s and early 1970s, governments abandoned the old virtues. Profs. Eusepi and Giuriato describe the fiscal excesses that followed as “a public indebtedness saturnalia.”
Nevertheless, the professors blame Keynesian theory, too: “The adoption of Keynesian analysis provided politicians with a rationale for borrowing money to buy votes.” In 1961, public spending took 27.6 per cent of GDP. In 1971, it took 34.8 per cent and, in 1994, 121.1 per cent. The irony, the economists say, is that Italians could have afforded all of the largesse that flowed to them from the state – if only they had paid for them.
In fact, though, much of Italy’s debt purchased benefits that weren’t necessary. It paid for early retirement of public-sector workers, for example, and provided these pensioners with incomes much higher than private-sector workers. Now, with revenues falling and costs rising, Italy can avert insolvency only by adopting a constitutional prohibition of deficits, the economists say. This stringent assignment is Mission: Impossible.
Incidentally, Capital Economics – the international consultancy company – said in a research note last week that Italy will find it hard to avert bankruptcy. “Italy’s public finances are a time bomb waiting to explode,” the company said. “We believe that it might take a decade or more of falling wages for Italy to restore its full competitiveness.”
Democracies have made people more dependent on the state than any humanitarian necessity required. For Italy, and for other democracies, the worst is surely yet to come. Already, hundreds of thousands of middle-class people have thronged the streets of Paris and Rome, of Milan and Sarajevo, of Reykjavik and Bucharest (where demonstrators stormed the presidential palace, an insurgent act that evokes the spectre of revolution). The World Socialists’ website proclaims an age of rage ahead – and chillingly quotes British historian Simon Schama: “You can smell the sulphur in the air.”
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