The Dark Side of the Welfare State

The Dark Side of the Welfare State
by Fergus Hodgson, June 7, 2011

There comes a point when elected leaders reach the end of their ability to tax, borrow, and inflate for funding. The United States is verging on that threshold.

However, rather than acknowledge the folly of and dispense with unsustainable entitlements, U.S. leaders are, for the most part, endeavoring to preserve them.

This leads to what Sven Larson, a research fellow with the Wyoming Liberty Group, has described as the "dark side" of the welfare state: prevailing or incrementally increased levels of taxation but an erosion of core government services. "You keep the shell or the façade of the welfare state, but what you actually provide inside of it becomes more and more hollow," he says. "It is as though Wal-Mart would give you a poorer product, but they would keep raising the prices.… That is what [the U.S.] government is turning to."

Larson and I spoke about how this pattern developed in Sweden, his country of origin, and what he anticipates for the United States as fiscal pressure continues to mount.

Click here to listen to that interview - 22 minutes.

He has documented the Swedish experience and its ramifications in his 2010 book, Remaking America: Welcome to the Dark Side of the Welfare State. The chief motivation was to provide a wake-up call to Americans, to avoid "the same disaster that Sweden is now rapidly becoming." He fears "the differences between America and the Europe [he] left will wither away."

Given the debate over reform of Medicaid and the approaching debt limit, the book is timelier now than when initially released.

His research suggests that once government constitutes about 40 percent of an economy, the disincentive for productivity erodes the tax base and unsustainable deficits are inevitable. The nation has gone beyond the Laffer curve maximum, so officials may raise tax rates, but this only provides short-term revenue as people adapt.

Swedes pushed marginal income tax rates to as high as 61 percent, along with a 25 percent value-added tax. Yet, their balance sheet remained unstable and, during the 1990s in particular, they cornered themselves into widespread cut-backs. So put aside the pristine, idealistic images of Sweden. Along with the world's highest taxes, Sweden now has the least accessible health care in the industrialized world, almost three times the American rate of assault, and the highest rate of sexual assault in Europe.

In fact, in 2006 there were 505 cases of arson on public schools ­ and that's in a nation with a smaller population than North Carolina. Larson presents this as a symbol of Sweden's social disintegration.

The kids are burning down their own schools.… They are growing up on the dark side of the welfare state, in a school system that treats them not as students but as irritating cost units.

Back in the United States, government spending eclipsed 41 percent in 2009 and remained at 40 percent in 2010. As deficits mount, desperation for more tax revenue, amid a stagnant economy, is growing evermore apparent. The latest healthcare reform alone had more than 20 new or increased taxes, despite President Obama's campaign promises to the contrary.

The states, many on track for default, are raiding rainy-day funds, delaying refunds, and relying heavily on debt-financed federal aid. The imminent crisis of unfunded pensions is only going to exacerbate the situation and divert taxes away from current services.

The United States already has the most progressive taxes in the OECD, so there is little room for further taxation of the wealthy. Additionally, so long as people can shift their feet and money elsewhere, higher rates would likely prove counterproductive beyond a few years.

While many federal departments could be done away with tomorrow without pain, sufficient political will remains to be seen. Nor does it appear to be there for opt-out or privatization plans, to allow for tax cuts and a transition away from entitlement programs. These, along with the military, make up the lion's share of the budget.

To be fair, Sen. Rand Paul (R-Ky.) has proposed solutions that would cut much of the fat, but he remains in the minority. Rep. Paul Ryan's (R-Wis.) budget proposal and Medicaid plan, although perhaps steps in the right direction, do not challenge the notion that the federal government is responsible for health care. Yet even the Ryan plan has drawn immense criticism, including from his own party.

This all suggests that the dark side of the welfare state ­ an ever-growing decline in the quality of government services accompanied by an ever-growing increase of burdensome taxation ­ is arriving on American shores.

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