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What happens when the money runs out?

If there are no deep structural reforms, in the long run this Western welfare business model will collapse. And there will be dire consequences

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When The Money Runs Out, by Stephen D. King
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Vincent Cooper
On 11 July 2013 15:15

Is today’s financial crisis the same as previous financial crises? Is it the same as the 1930s depression, for example?

Judging by the widespread “austerity versus stimulus” debate among politicians and economic pundits in the media, there would seem to be the belief that, yes, today’s financial problems are simply another version of the 1930s cyclical depression.

That’s why much of the debate is carried on in terms of austerity versus stimulus. Those were exactly the terms of the debate in the 1930s, between the New Deal stimulus Roosevelt and fiscal-tightening austerity J. Edgar Hoover.  

But what if the pundits are wrong? What if our financial problems today are radically different from what has happened before? What if, in fact, the financial problems in the West today are the result of a historic living beyond our means, of an extravagance that has finally bankrupted us?

That is the claim of a recent book: When the Money Runs Out: The End of Western Affluence, by Stephen D King.

Western governments, King claims, have made welfare promises that simply cannot be honoured:

“We have promised ourselves no end of riches, from pensions through to health care, and from education through to big stock-market gains. These promises can only be met, however, if our economies continue to expand at a rate we’ve become accustomed to.”

But, King argues, a return to such growth rates is not going to happen, certainly not in the short term and not without painful structural changes. Such structural changes will involve dismantling the traditional Western welfare state and a rediscovery of some sort of work ethic.

Why so? Basically, this book claims that Western, particularly European welfare states have based their economic hopes on the “economics of extrapolation.”

Past growth rates have been high, therefore future rates will be high. The money will keep rolling in. We can make promises to our people on health care, longer living, early retirement pensions, single-parent state support no matter how many children or how many non-supporting fathers, all based on never-ending high returns on growth.

But the welfare profligacy game is up. That part of our history is coming to an end. Western economies will not return to high growth rates and will not be able to pay for the welfare dependency culture they have created.  

According to King, there are several reasons for this. From the end of the Second World War, Western growth rates were impressive. After half a century of on-and-off conflict, peace in 1945 re-established cross-border business relationships that had been under the jackboot. World trade and international financial institutions grew. Credit facilities expanded. In Britain, per capita incomes tripled from the 1960s to 2003.

Such post war high growth rates gave politicians the illusion that economic progress was a permanent feature of life. They took progress for granted and made promises of ever-increasing welfare.

But much of that post war growth was based on one-off, unrepeatable events. As King says: “We can only have one reopening of world trade, one substantial increase in consumer credit, one fall in the Berlin Wall.”

The world economy and credit can expand only so far. Growth cannot go on forever, a truth that Japan was the first country to discover. The Japanese economy has been stagnant now for over twenty years and no amount of stimulus can bring it back to life.

For the West, the signs of failure are clear. For the first ten years of the new millennium, growth averaged just 1∙5 percent per annum, by far the weakest performance in any decade in the post war period. Such meagre rates were not what the politicians predicted. As King puts it: “Levels of economic activity in the major Western economies are between 7 and 15 percent lower than forecast before the onset of the financial crisis.”

With such low growth rates, the West will simply not be able to deliver on its welfare promises.

In desperation, the British government, for the first time in its history, has started printing money. But it’s hardly working. Quantitative Easing induces risk-averse behaviour among financial investors, with the main beneficiary being the government who can now borrow on the cheap.

And that is what is happening. The British government continues to borrow more and more to fund an unsustainable welfare state.

There have been some structural reforms to pensions, but all of the life-style choice welfare entitlements are still firmly in place. The welfare system is groaning under the weight of generations of families who have never known work. I would include certain immigrants, people who have never made a financial contribution who simply slot into the welfare system with subsidised housing, free schooling, health care and dole, all paid for by the working tax payer.

It cannot continue. According to King, if there are no deep structural reforms, in the long run this Western welfare business model will collapse. And there will be dire consequences. One of the key features of the book is its historical perspective. As King points out, history is full of examples of societies that, like ours, thought they would last forever. Of course they didn’t. When the money ran out, large-scale civil disturbances ensued. And interestingly, in every case of financial collapse throughout history, it was government expenditure in one form or another that brought about the final catastrophe.

When the Money Runs Out is a sobering read.

Vincent Cooper is a freelance writer

Read more on: when the money runs out, economics, the welfare state, and growth
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