A gem of modern human civilization, the European welfare system, is in peril. The situation is not necessarily bad in all the major European economies, but it has deteriorated in a sufficient number of European economies to cause serious consternation. Contagion from the financial crisis and the ensuing deep recession in the United States is one of the factors that has caused the economies, the tax revenues and the public finances of several European countries to deteriorate. Further, overinvestment in housing sectors, way beyond what effective demand for housing in these countries would justify, has led to a state where sudden decreases in housing construction has become necessary, with all the associated ramifications like decrease in employment levels in the construction industry, decrease in capital inflows, decrease in gross domestic product etc. The effect on public finances means that not only are short run austerity measures necessitated, but the sustainability of welfare systems in the long run can be in danger unless the public finance parameters are managed just right from now to say ten years from today.
And the significance of this phenomenon cannot be overstated. There are no controlled experiments in economics. Successful economic policies and successful economic programmes are role models that can be emulated after necessary modifications in different countries and in different time periods. Unsuccessful economic policies should be studied in order to gain an understanding of the relevant dynamics and to avoid mistakes in the future. When one considers the European welfare systems, they are systems that contribute immensely to human welfare in European countries and provide essential economic cushion during periods of economic distress, which have become more common in recent times. In the United States, not only is the long-run sustainability of the Social Security system in doubt due to the intransigence of right-wing political parties, but the kind of and the amount of support provided by the current Social Security and unemployment benefits system in the United States leaves much to be desired. For example, news stories about senior citizens facing tremendous difficulties during heat waves are not that uncommon. Similarly, news items about seniors struggling to pay for heating in winter have also made the news in the past. More recently, with the persistence of unemployment numbers that are very high by historical standards, the question of unemployment benefits has acquired great significance and the extension of unemployment benefits for people who have been out of jobs for long periods of time has become a question that the United States Congress has to contend with. And the poverty rate in the United States is around 15%, the highest it has been since the 1960s. This fact itself is a sign that the jobless group, the low-income group and other economically challenged groups do not have the necessary quality of economic safety nets and do not receive the necessary quantity of emergency asistance either in the United States. In contrast, the European welfare systems are reputed to provide much better coverage for the poor and economically challenged populations, in the short run and in the long run. And despite this difference in ethos and despite this difference in the actual level of benefits that welfare systems provide, the American public finance situation is not much better than in the economies in the European Union and when it comes to structural weaknesses, the future prospects of the American public finance situation are in bigger trouble than in Europe in many ways. Despite the fact that some European economies, like the PIGS ( Portugal, Ireland, Greece and Spain ) economies, have experienced spikes in debt-to-GDP ratios in recent times due to global economic weakness, the welfare system in Europe is still much better-managed than the American Social Security system and unemployment benefit system. For example, even when the economic climate is good, the American political establishment does not arrive at the mechanisms necessary to make the Social Security system solvent in the very long run. The European countries have a better record of paying for their welfare systems from current payroll taxes that are high enough to cover the required payments and to keep the systems solvent. The fact that European countries get into economic trouble and face fiscal difficulties in no way detracts from the truth that there is a fundamental difference in ethos between Europe and the United States in the area of welfare systems. European welfare systems provides models from which American policy framers can learn some useful lessons. And it is also something that can provide a useful standard for other countries, like developing countries, as they proceed from less sophisticated and less comprehensive economic safety nets to more sophisticated and more comprehensive economic safety nets. After all, the perils of letting the welfare systems remain vulnerable even during good economic times cannot be overstated. And the European economies follow better practices in this regard compared to the United States. While economic turbulence cannot be predicted accurately all the time, the solvency of welfare systems during normal economic times and the presence of careful planning to ensure long-term stability of welfare systems is a hallmark of a mature society. Careful planning for long-term stability can provide resilience against short-term economic volatility. But a lackadaisical and complacent attitude about Social Security and other aspects of the welfare system, as is seen in the United States, can only result in extreme distress for economically vulnerable groups during times of economic difficulty, and that too distress that can be avoided with careful long-term planning and a different social ethos. In the United States, there is a significant section of the political establishment that is hell-bent on eliminating the welfare system and replacing it with privately paid systems that are much more vulnerable to things like speculative trading. In countries with this kind of ethos, like the United States, there is a bigger chance that systems like Social Security may become insolvent due to economic crises and due to political hostility. The kind of welfare system that is aimed for in normal economic times and the kind of public finance that is provided for it in normal times is where Europe provides a useful role model.
The difference between the way the United States approaches the question of welfare systems and the way Europe approaches the question of welfare systems is one crucial aspect of the modern civilizational differences between the two. That two modern civilizations with comparable per capita incomes and with comparable standards of living have such different emphases on economic welfare is a noteworthy phenomenon. The stability of human civilization itself may rest on which kind of ethos dominates in the politics of nations.
by C. Jayant Praharaj
And the significance of this phenomenon cannot be overstated. There are no controlled experiments in economics. Successful economic policies and successful economic programmes are role models that can be emulated after necessary modifications in different countries and in different time periods. Unsuccessful economic policies should be studied in order to gain an understanding of the relevant dynamics and to avoid mistakes in the future. When one considers the European welfare systems, they are systems that contribute immensely to human welfare in European countries and provide essential economic cushion during periods of economic distress, which have become more common in recent times. In the United States, not only is the long-run sustainability of the Social Security system in doubt due to the intransigence of right-wing political parties, but the kind of and the amount of support provided by the current Social Security and unemployment benefits system in the United States leaves much to be desired. For example, news stories about senior citizens facing tremendous difficulties during heat waves are not that uncommon. Similarly, news items about seniors struggling to pay for heating in winter have also made the news in the past. More recently, with the persistence of unemployment numbers that are very high by historical standards, the question of unemployment benefits has acquired great significance and the extension of unemployment benefits for people who have been out of jobs for long periods of time has become a question that the United States Congress has to contend with. And the poverty rate in the United States is around 15%, the highest it has been since the 1960s. This fact itself is a sign that the jobless group, the low-income group and other economically challenged groups do not have the necessary quality of economic safety nets and do not receive the necessary quantity of emergency asistance either in the United States. In contrast, the European welfare systems are reputed to provide much better coverage for the poor and economically challenged populations, in the short run and in the long run. And despite this difference in ethos and despite this difference in the actual level of benefits that welfare systems provide, the American public finance situation is not much better than in the economies in the European Union and when it comes to structural weaknesses, the future prospects of the American public finance situation are in bigger trouble than in Europe in many ways. Despite the fact that some European economies, like the PIGS ( Portugal, Ireland, Greece and Spain ) economies, have experienced spikes in debt-to-GDP ratios in recent times due to global economic weakness, the welfare system in Europe is still much better-managed than the American Social Security system and unemployment benefit system. For example, even when the economic climate is good, the American political establishment does not arrive at the mechanisms necessary to make the Social Security system solvent in the very long run. The European countries have a better record of paying for their welfare systems from current payroll taxes that are high enough to cover the required payments and to keep the systems solvent. The fact that European countries get into economic trouble and face fiscal difficulties in no way detracts from the truth that there is a fundamental difference in ethos between Europe and the United States in the area of welfare systems. European welfare systems provides models from which American policy framers can learn some useful lessons. And it is also something that can provide a useful standard for other countries, like developing countries, as they proceed from less sophisticated and less comprehensive economic safety nets to more sophisticated and more comprehensive economic safety nets. After all, the perils of letting the welfare systems remain vulnerable even during good economic times cannot be overstated. And the European economies follow better practices in this regard compared to the United States. While economic turbulence cannot be predicted accurately all the time, the solvency of welfare systems during normal economic times and the presence of careful planning to ensure long-term stability of welfare systems is a hallmark of a mature society. Careful planning for long-term stability can provide resilience against short-term economic volatility. But a lackadaisical and complacent attitude about Social Security and other aspects of the welfare system, as is seen in the United States, can only result in extreme distress for economically vulnerable groups during times of economic difficulty, and that too distress that can be avoided with careful long-term planning and a different social ethos. In the United States, there is a significant section of the political establishment that is hell-bent on eliminating the welfare system and replacing it with privately paid systems that are much more vulnerable to things like speculative trading. In countries with this kind of ethos, like the United States, there is a bigger chance that systems like Social Security may become insolvent due to economic crises and due to political hostility. The kind of welfare system that is aimed for in normal economic times and the kind of public finance that is provided for it in normal times is where Europe provides a useful role model.
The difference between the way the United States approaches the question of welfare systems and the way Europe approaches the question of welfare systems is one crucial aspect of the modern civilizational differences between the two. That two modern civilizations with comparable per capita incomes and with comparable standards of living have such different emphases on economic welfare is a noteworthy phenomenon. The stability of human civilization itself may rest on which kind of ethos dominates in the politics of nations.
by C. Jayant Praharaj