Economists define a nation to be a welfare state when 20% or more of its gross domestic product (GDP) is spent by the state on welfare and education. The United States has never hit that level, but welfare and education "investment" spending under President Barack Obama rose to 19.4% of GDP in 2012. Implementing Obamacare will convert America into a welfare state for the first time in our history.
The concept of the welfare state that ensures cradle to grave well-being for its population is uniquely a European creation. It originated in Bismarck's Germany in the late 19th century and took root in Britain and the Scandinavian countries during the Great Depression. The treaty establishing the European Economic Community in 1958 set standardized social objectives across the continent for "promotion of employment, improved living and working conditions... proper social protection, dialogue between management and labor, the development of human resources with a view to lasting high employment and the combating of exclusion." The 1993 Maastricht Treaty expanding the European Union (EU) and adopting the euro currency legally required European states to provide high living standards and good working conditions. Historian Tony Judt famously stated that the European social model "binds Europe together" in contrast to the "American way of life," which sociologist and former communist Will Herberg defined in 1955 as so individualistic that "it stresses incessant activity on his part, for he is never to rest but is always to be striving to 'get ahead.'"
The objective of the welfare state is "limiting the reliance of family and market" through equality of opportunity and an equitable distribution of wealth to achieve contentment for the group. This involves financial redistribution transfers through progressive state tax rates to provide an array of services and make direct benefit payments to individuals. Hillary Clinton argues in It Takes a Village that communities are superior to parents at raising children and economist Peter Lindert argues in Growing Public that state "investments" contribute to economic growth and do not reduce productivity.
But according to a study by the Brussels-based Bruegel think-tank: "Much of Europe suffers from a mutually reinforcing interaction between limited productivity gains, protracted deleveraging, weak banking sectors and distorted relative prices... This combination contributes to an overall weakening of economic growth and threatens to turn into self-perpetuating stagnation." The report acknowledged that 30 years ago the economic output of the countries that formed the EU had 15% higher output than the U.S., but by 2017 the output of the EU will be 17% less than the U.S. The International Monetary Fund warned on April 18th that the EU's "structural unemployment" rate -- that is the unemployment that won't go away even if the crisis ends and the economy returns to normal -- is expected average a staggering 10.1%, up from 7.4% before the European financial crisis began in 2009.
This grim economic outlook threatens to put substantial financial stress on the solvency of the Dutch and the Germans, whose Aaa credit ratings have backstopped the multiple EU borrowings that rescued Portugal, Ireland, Italy, Greece, and Spain (PIIGS) from bankruptcy. But on July 23rd, Moody's Investor Services put the Dutch and German premier credit ratings on negative credit watch, in anticipation of a possible credit downgrade. Moody's on September 3rd put more financial stress on the Dutch and Germans by also changing the credit outlook to negative for EU debt they guaranteed.
King Willem-Alexander's words are highly symbolic, since European elites on the center-right and the center-left have resisted challenging the welfare state as the social contract between Europe's rulers and those ruled. Europeans enjoyed decades of lush welfare benefits without paying the full costs. European economies burdened by high taxes and government interference were able to mask their dismal trade and industry performance through massive amounts of borrowing. But if the Dutch and Germans pull their guarantees, most of European welfare states will collapse like houses of cards.
All of this should serve as a ringing endorsement for nations around the world to imitate the "American way of life." But just at the moment of triumph for America's market and family friendly economic model, the Obama Administration and a small cadre of ideologues want the United States bound together with the collapsing European welfare states.
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