Saturday, August 20, 2011

The downfall of the welfare state

Who does not want to get a free lunch? Most people likes the idea. Every society is building its strength on a moral ground. The modern Welfare State has been created on the myth that someone else is paying for the good gifts that the political class offers the masses. The guiding principles of the Welfare State were first explained by Ferdinand Lassalle (1825-1864), both a friend and rival of Marx. Lassalle ridiculed the socialist economic doctrines and in his eyes the state was God and Santa Claus at the same time. The state had inexhaustible funds at its disposal, which could freely be used to make all citizens prosperous and happy. The state should nationalize big business, underwrite projects for the realization of which private capital was not available, redistribute national income, and provide for everyone security from the cradle to the grave. The socialist's and the progressive's proposition is that the "rich" can be endlessly plundered on their wealth, the next generation is able to pay for the previous generations benefits, and other countries can be endlessly soaked to pay for the "free" entitlements. But when the political class believe they unpunished can plunder others on their wealth they are fatally mistaken.

In reality the money supply from other nations is about to evaporate and the rich wealth is not an inexhaustible resource. There is not enough money to take away from the rich to raise the standard of living anywhere in the world. Even if all taxable income of those earning more than $250,000 were confiscated, the additional income to any government would not cover all the good gifts promised by the political class. The Greeks who has been rescued twice by their Euro Zone partners have not changed their attitude. And Europe has not got it yet, that this approach is leading to a long and painful road to the downfall of the welfare state?

Germans and Frenchmen are though worrying that the PIIGS (Portugal, Ireland, Italy, Greece and Spain) are in such trouble that entire Euro Zone structure could come to a dismantling. When ordinary Germans learned that Greeks retired well before they themselves, they began to ask why they should continue to work so that others could rest on the beach, drink, and joke about the others who pay for them.

The European socialist economics doctrine (Keynesians) is about to crash like a house of cards. We are now facing the downfall of the welfare state and not the collapse of capitalism. Only nations based on a solid economic capital base founded on savings provides survivability. A society based on borrowing for consumption will consume itself and decline. When finally the costs of government exceed the gross domestic product the state can only survive by depleting their community wealth. This will result in the decline of the quality of civic life.

The nanny welfare state in front of others, Sweden, has been in terminal decline since the 1980s. The socialist “cradle-to-grave” welfare state did not work and there is little opposition to the slow dismantling of the benefits by the leading political party's. The working class does not anymore sympathies with the left for the solution of their problems.

Only one country in Europe, Switzerland, has managed to keep its welfare system under control. When the checks and balance is made by the people its less likely that unfunded and costly welfare reforms will survive a referendum (popular vote) by the people. This has been proven by several empirical results, like by Pommerehne (1978, 1990) and Matsusaka (1995). Government expenditure is lower in a representative direct democracy (republic) than in a pure representative democracy. The existence of citizens initiative leads to a particularly large reduction in the state and local public spending. Public services are produced more efficiently in representative direct democracies than in pure representative democracies. Swiss municipalities with private suppliers had the lowest cost. Those costs are at between 20 - 30 precent higher in representative than direct democracies. Most notable is that the willingness to finance the public sector is higher with referenda than in pure representative democracies. Most important public debt is lower when the citizens can vote on the issuance of public debt in referendums. Swiss cantons with direct democracy had a significantly (5 - 15 percent) better economic performance than purely representative systems. According to the European Commission’s 2009 European Innovation Scoreboard, Switzerland is by far Europe’s most innovative economy.

Switzerland has the highest European rating in the Index of Economic Freedom 2010. The nominal per capita GDP is one of the highest in the world and higher than those of the larger Western and Central European economies and Japan. Switzerland has the highest average wealth per adult at $372,692, defined by the value of financial and non-financial (such as real estate) assets. In 2005 the median household income in Switzerland was an estimated 95,000 CHF, the equivalent of roughly $100,000 (as of December 2010) in nominal terms. The Swiss model with popular vote as checks and balance has lead to lower welfare expenditure and less tax revenue per capita. Even though the Swiss welfare state has not yet broken down, and no severe cutbacks has been made in public welfare expenditures.

A comparison between Sweden and Switzerland clearly shows that the Swiss model from 1970 produced a greater wealth than the Swedish Income socialized model. Sweden must make a growth rate of eight percent per year for five years to catch up with Switzerland. How can it be that Switzerland with fewer natural resources managed better than Sweden? A Swedes average wighted yearly salary is €56.053 and a Swiss €82.725. The Swede pay income tax with 28.89–59.09 per cent and an additional 31.42 per cent in payroll tax, while the Swiss pay federal income tax with 0–13.2 per cent. The total rate does not usually exceed 40% and in most cases, the maximum tax rate is much lower than this. For example, in the Canton of Schwyz, the top rate, inclusive of federal, cantonal/communal tax is approximately 22 per cent. The cop orate taxes are that low the cantonal tax system has come under attack from the European Commission, which is attempting to make Switzerland change aspects of its corporate tax regime designed to attract holding companies to the jurisdiction. The European Commission does not like competition from Switzerland and that cantonal governments has the freedom to set their own tax rates to attract new companies and wealthy expats. Obwalden and Appenzell-Ausserrhoden, both charge 12.7 per cent.

Switzerland has a very weak central government and small public sector (government). The referendum institute provides a good protection for minorities and local opinions. Sweden in contrary has since 1521 (when King Gustav Vasa ceased power) had an extremely strong central government and over time a larger public sector (government) than any other country in the entire world. This has hardly given Sweden an advantage in building a wealthy society with wealthy citizen's.

When the socialist leader Olof Palme was appointed in 1969 as prime minister, he needed more money to fund a flood of new entitlement reforms. He explained that the parliament in payroll taxes has found "a new tax source." Labour costs increased at a record pace in the early seventies. Wages increased 59 percent between 1973 and 1976. During the same period the socialist majority in parliament increased payroll taxes by 109 percent! Labor costs exploded by more than 80 percent in three years. The companies had no way to compensate for raising prices, because export prices were determined by world markets, and the Swedish companies were barely the price leader. The result was that corporate profits was wiped out and job's evaporated.

When the Swedish Social Democrat Party launched their radical ideas of equality, social justice and redistribution of wealth the opposition criticized and warned for the economic consequences of the abolition of any economic incentives. But the opposition never took up the criticism of the idea. During the first decades of industrialization a large part of the proceeds from the new Swedish industrial society remained with the owners. This kept up growth, as riches were reinvested. Those who subsequently criticized the unequal distribution of income during the decades around the turn of the century never discuss this aspect. The idea of ​​equality has become not only a reaction against unwarranted disparities in income, or "injustice," but it has evolved into a general intolerance of difference at all. Much of the so-called serious Swedish journalism is to detect differences between groups and criticize them as manifestations of "inequality."

Sweden did increasingly during the 1970s and 1980s focus on socialist entitlement arrangements. It is known as social insurance and guarantees income from unemployment and sickness and old age have largely been organized as state-controlled collective system, with a very weak link between taxes paid (fees) and insurance outcomes.

Sweden has since 1970, a single legislative chamber. All questions are decided by a simple majority: 51 percent win over 49 percent. The protection of minorities in the constitution is extremely weak. Property rights are protected, but so vaguely that a majority parliament vote may freely dispose of private property.

Switzerland has a uniquely decentralized democratic system that provides a long-term stability and political reliability that makes entreprenours dare to invest. In Switzerland a decision is not made like in Sweden at a congress and becoming law a few weeks later. Each member of the Swiss Government are elected separately by the Parliament. The parliament can not by censure compel a government member or the force the government to resign. The government, on the other hand, can not dissolve parliament and call for elections.

Above all, the Swiss referendum, provide "checks and balances" that prevent minorities from pushing through decisions that are against the popular opinion. The people can speak in the post of parliamentary decision by the decision-making referendums. At the federal level referendums are mandatory for constitutional amendments. Federal laws and decisions in general and international agreements are not in force until further notice and are subject to optional referendum. Unlike Sweden, Switzerland has implemented very few damaging and costly reforms since the early 1970s. This veto right by popular vote helps to make the country more stable and predictable compared to Sweden.

If Europe and North America shall avoid a slow and painful downfall its time to improve the political system and introduce checks and balance by the people. The only people who do not like more power to the people is the politician class. Anyhow, the demand for direct democracy is growing, not only at the level of the national level, but also at the transnational European level. Lively debates are going on in many countries about an European-wide referendum on the new Reform Treaty, and in these debates popular participation is frequently contested by the politician class with the same arguments the defenders of purely representative democracy always have used. If any of those arguments were true, the stable direct democracy which has been alive in Switzerland for more than 100 years could not exist, because a referendum democracy should be self-destructive; and come to a rapid and catastrophic end on the reefs of cognitive incapacity.

US Senator Mike Gravel and the National Initiative want empower the citizens to check and balance representatives, at a national level. This will give the people a "Plan B" whenever representatives don't represent the people. The Founding Fathers would agree! George Washington said "The basis of our political systems is the right of the people to make and to alter their constitutions of government." America's leading Constitutional expert agrees. Akil Reed Amar says in Popular Sovereignty and Constitutional Amendment "We the People of the United States have a legal right to alter our government – to amend our Constitution – via a majoritarian and populist mechanism akin to a national referendum, even though that mechanism is not explicitly specified in Article V."

I would like to see a lot of people raising this issue and debating it frequently. There is still time to save a great country from a destruction by a runaway congress.

Ben Hedenberg

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