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Is the Welfare State a Ponzi Scheme?

A Commentary by Howard Rich

Thursday, June 24, 2010

Ponzi schemes rely on people falling for promises that are literally too good to be true – but the outcomes are never really in doubt for the perpetrators of these scams, are they?

First they are playing with money that does not belong to them – which means they cannot lose.  Also, when the scams finally unravel, the perpetrators have invariably moved on to their next group of unsuspecting victims –where the fleecing begins anew.

Sound familiar?  It should.  This is the modus operandi of governments all over the world in our current era of Keynesian excess – an era in which new taxes, fees and fines must be continually created and levied in order to pay for promises made in previous years.  Of course these government promises are never actually “paid for,” the IOUs just keep mounting as the burden of repayment is extended further down the line to future generations of taxpayers.

Crisis compels the scammers to grow even bolder in their efforts to fleece the taxpayers.  In fact, these “too good to be true” scams have only grown more expensive in response to the recent economic downturn.

Take the ongoing financial crisis in Greece, which has prompted a $144 billion bailout from the European Union and International Monetary Fund.This EU/IMF bailout – part of a larger $1 trillion “rescue” plan for the Euro – is nothing but a massive Ponzi scheme, as the leaders of fiscally reckless nations are basically saddling their debt onto the shoulders of their more responsible neighbors.

Not surprisingly, the root cause of the crisis that is threatening to bring down the global economy lies in the unsustainable expansion of the welfare state – which should be a lesson for American politicians of both parties.

First, let’s look at what’s happening in Greece.

“Greek governments have spent years buying social peace and votes with public spending, generous pensions, tax breaks, EU money and jobs for life, directed to an array of rent-seeking interest groups,”The Economist noted last month.  “This sort of social contract, lubricated by endemic corruption and lax law-enforcement, has evolved to suit a country emerging from a vile civil war and years of dictatorship in which consensus was painfully absent.”

Also, let’s not forget that Greece sought for years to hide its growing debt problem from the rest of the world, paying hundreds of millions of Euros to various financial institutions in an effort to conceal the extent of its profligate borrowing.

Greece is now implementing several so-called “austerity” measures as a pre-condition of receiving the rest of Europe’s bailout benevolence.  But what sounds “austere” to the Greeks is still quite excessive when compared to the government largesse being doled out elsewhere on the continent.  In fact, at its heart Greek “austerity” amounts to little more than tinkering around the edges of the nation’s overextended entitlement culture, and in typical Ponzi fashion this political path of least resistance includes several new tax hikes that will only exacerbate the fundamental problem.

Meanwhile, even more frightening is the likelihood that the financial woes in Greece presage a broader European solvency crisis – one that will spread to other nations that are similarly drowning in the red ink of unsustainable government welfare.  Spain, for example, is on the verge of having to tap into hundreds of billions of Euros tied to the EU/IMF bailout, and even that may not be enough to stabilize its teetering economy.

Spain’s welfare state includes a socialist labor system that makes it nearly impossible to fire workers for any reason.  And like Greece, its habit of dispensing unsustainable taxpayer-funded largesse has been propped up for years by government denials and deception.  Most recently, Spanish Prime Minister José Luis Rodríguez Zapatero chose to deal with the brewing fiscal crisis by ignoring it and delaying long-overdue reforms in an effort to maintain his political positioning.

It’s the Ponzi mentality all over again.

Eventually, though, the scammers will run out of people to scam – and Spain could very well represent the last great heist.  Spain represents 10% of the euro zone banking system and 16% of all net euro-zone loans, meaning that its collapse could very well bring the entire global house of cards tumbling down.

Such an outcome would clearly have disastrous effects on the American economy, which makes the aggressive expansion of the welfare state here in the United States all the more unexplainable. Greece and Spain (as well as Portugal and Ireland) are clearly cautionary tales – not examples for America follow.

Howard Rich is chairman of Americans for Limited Government.

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Views expressed in this column are those of the author, not those of Rasmussen Reports.        

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