Greenspan Nails Welfare - Too Late

Alan Greenspan finally talks about how welfare is destroying our economy.

Why can't our economy get off the ground?  We at Scragged tend to blame Mr. Obama, his endless parade of regulations, the uncertainty and high costs of Obamacare, and of course the ever-present threat of more taxes.

Alan Greenspan, once lauded as the man who had defeated the business cycle back in the golden years of the '90s, has a simpler explanation: Welfare.

Sure Enough, Welfare Does Destroy Wealth!

The Wall Street Journal has the story, though they don't seem to have given it as much play as it deserves:

Mr. Greenspan's biggest revelation came one day about a year ago when he was playing with gross domestic savings numbers. What he found, to his surprise and initial skepticism, was that an increase in entitlements has closely corresponded to a decline in the country's savings. "We had this extraordinary increase in benefits, with each party trying to outbid the other," he says. "That practice has been eroding the country's flow of savings that's so critical in financing our capital investment." The decline in savings has been partly offset by borrowing from abroad, which brings us to our current foreign debt: "$5 trillion and counting," he says.

Mr. Greenspan is making the argument that conservatives have for a long time: that government spending drives away personal investment.  If government takes money away from you, you don't have it to do useful things with.

It's simple common sense that a dollar stolen from you in taxes is a dollar you can't buy something else with, but it seems to have escaped the grasp of almost all our current politicians and certainly of our news media.  What Mr. Greenspan is arguing is even stronger: taxes don't just cut into spending in general, they cut into the most essential engine of future growth, which is savings.

Savings, by definition, are the capital that drives investment.  It doesn't matter whether you personally are an entrepreneur or skilled investor, as long as you are saving.

If you save by investing in your own business, you are creating personal wealth and jobs, if only for yourself.

If you save by buying stocks, that money ultimately drives company growth, business investment, and of course jobs.

If you save by putting your money in the bank, then the banker loans that money to someone whose use of it will, again, create jobs.  Obviously that's the case for a business loan, but even home mortgages create jobs: somebody has to build the houses, and somewhere down the chain of home purchases, eventually you come to someone downsizing who is keeping the money to invest it in their own or someone else's business.  Either way: jobs.

If you save by putting cash in a mattress - no, that doesn't create jobs.  But if your cash is taken out of the economy, that counteracts inflation which is caused by too much money being created.  That makes everyone else richer and more able to spend and invest, so even that sort of savings is at least a little bit helpful.

When the government steals the money, there are a few jobs created in the bureaucracy.  Because the wealth is being destroyed rather than growing, however, you don't get any multiplier effect of new jobs leading to more jobs and wealth.  You just get a few permanent paper-pushers with generous retirement and medical benefits, that's all.

Mr. Greenspan doesn't get into the direct downside of welfare as a discouragement of work.  Not everyone would be content to live a life on the dole.  Clearly, however, quite a lot of people are, and the higher the welfare payment, the more people are satisfied to accept it.  The higher the taxes, the less beneficial a low-end job is; there have been calculations showing that a family on welfare has the spending power of one earning $60,000 when you consider that welfare benefits are tax-free income.

If you know that you can have a halfway tolerable life on welfare, why work?  What's more, if you are working but know that there's a reasonably comfortable safety net, why save for a rainy day?  There's always welfare.  And with Social Security, Medicare, and the rest, maybe there's no need even to save for retirement!

Of course, this is a foolish decision: today's young people will never see anything from Social Security, it will long since be all gone by the time they reach retirement age.  But Mr. Greenspan has demonstrated that people do make these kind of decisions, and that our economy suffers for it.

What's more, he's identified how we're making up the gap: by borrowing more and more from the Chinese.  So it's particularly relevant that the Chinese are increasingly reluctant to lend us any more; just last week, an official Chinese paper warned that "it is perhaps a good time for the befuddled world to start considering building a de-Americanized world."  Not much of a vote of confidence from our international bankers!

Better Late Than Never

Yes, Mr. Greenspan has rightly identified a chief cause of our woes - after he retired and gave up the power to do anything about it.  If, as chairman of the Fed, he'd sounded the alarm about welfare, it might have made an historic difference.  As it was, Bill Clinton and Newt Gingrich agreed on a major reform of welfare that cut the cost for many years.  How much more might have been done if Mr. Greenspan had added his voice and the power of his then-stellar reputation?

Instead, we get the career equivalent of a Friday-afternoon document drop: Enough for Greenspan to claim he told the truth, but not enough for anyone to notice or anything to happen as a result.

In other words, yet another Washington example of the buck never stopping anywhere.

Petrarch is a contributing editor for Scragged.  Read other articles by Petrarch or other articles on Economics.
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