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Rome, America, and the Collapse of the Welfare State

Posted: June 8, 2011 at 7:06 am   /   by

Every so often, mankind learns a major lesson in governance:

  • The Romans learned the perils of imperial overreach.
  • The feudal system got a major upgrade with the Magna Carta.
  • Mankind continues to enjoy the benefits of the revolution in governance produced by the 18th century classical liberal enlightenment.

And there were others. I am going to go out on a limb here and predict now that humankind is about to go through another such sea change: The Collapse of the Welfare State.

All the signs are there, from Greece to Portugal to Ireland to the U.S. It's all coming unraveled, and I believe that is because the welfare state cannot work. Not that it isn't working or "isn't being done right," but because it is literally not possible for it to work. Fully socialist states have already proven to be failures. And now we are seeing that welfare-state capitalism, while more stable than socialism, also becomes unsustainable eventually.

The internal contradictions are simply too great. Those contradictions are many and their natures are multifarious, but it can all be simplified to this:

As the dependent population increases, the strain on the ever-shrinking productive population increases. Eventually, the strain becomes too great and the system collapses.

In other words, too many takers and not enough makers. I'm not even saying that as a value judgment, just a fact. It doesn't work because it cannot work. Indeed, the debt load of major welfare states shows that it stopped working a long time ago. I'll repeat:

As the dependent population increases, the strain on the ever-shrinking productive population increases. Eventually, the strain becomes too great and the system collapses.

As soon as you start borrowing to feed the welfare state, you've already crossed that line. The debt is a clear indication that the productive population is not able to support the dependent population anymore. The welfare state begins not only surviving on borrowed money, but on borrowed time.

Critics will argue that the productive population needs to be taxed at higher rates, but the Laffer Curve is an inescapable economic reality. We may disagree on where the sweet spot is on the curve. It may not even be possible to know exactly where it is. But we do know what happens at either end. Tax rates of 0% produce no revenue. Tax rates of 100% also produce no revenue. As you increase rates past that sweet spot (wherever it is) and move towards 100%, revenue falls. A welfare state that is ever-growing requires ever-greater amounts of revenue. But this revenue cannot be produced by taxation at ever-greater rates because eventually revenue will fall off.

Unless the size of the welfare apparatus is small and strictly limited to a safety net for those in serious need, its growth is inevitable. This makes borrowing inevitable, and since borrowing cannot continue indefinitely, it makes collapse inevitable.

I believe humankind is about to learn this lesson. Like all sea-changes, their nature and impact becomes much clearer in the fullness of time and history, and we may be deprived of a single, punctuating event that puts it all into focus in our lifetimes. Nonetheless, I believe that our time is that time—the time when the welfare state, writ large, collapses and lessons begin to be learned. And I fear the lessons will be hard indeed.

America's role in this process—and our suffering—will very likely be great indeed. We are the world's largest commercial empire, and until recently, it seemed like there was no stopping us. Rome was once the world's largest territorial empire, and they seemed similarly unstoppable. But imperial overreach and a host of problems back home eventually brought about their collapse. The chilling reality now is that welfare-state overreach may be what future generations cite as the factor that brought about ours.