How debt will change the West.
The daily drama of the European sovereign debt crisis and the U.S. debt ceiling debacle has obscured what could be a momentous and fundamental shift in the role of Western government. Hamish McRae's piece yesterday dug at the root of the issue:
That brings us to the great issue: what will government be like 20, 30 or 50 years from now? A century ago, when the foundations of the European welfare state were being laid, government was still typically 10-15 per cent of GDP. Governments did defence, a few public services and some welfare and pensions. That grew, helped (if that is the right word) by two world wars, and by the expansion of public services from the 1950s onwards, a process that is still moving forward in the US with the Obama health reforms. Now public spending varies between 35 per cent and 55 per cent in most developed countries.The system worked well but did so under favourable circumstances: a growing workforce able to pay the taxes to support a relatively small retired population. Now, most European countries face a falling workforce and growing ranks of the elderly. In the extreme case of Italy there will in 30 years be only one worker for every pensioner. Something has to give.
Bill Jamieson also captures the issue:
More than ever in our history, government is caught between the two massive requirements: one of servicing the debt incurred by previous generations and administrations; and the other, of managing the growth of future debt: making provision for rising pension liabilities and the costs of an ageing population. The proportion of the population aged 65 and above is set to rise from around 17 per cent currently to about 26 per cent in 2061 - and with half the inward migration flows experienced in recent years.Little wonder that it will seem to a new generation of politicians that history has left them a role no greater than old age home operators and debt commissioners. The scope for the type of government and politics enjoyed for half a century will shrink drastically relative to these two obligations.
Unfortunately, the West, and particularly the United States, appears trapped in a vicious cycle. As citizens assume more of the financial responsibilities previously assumed by the state, their economies - sustained by personal consumption - will falter still more. Money previously spent on iPads and SUVs will be directed toward retirement savings and rising healthcare costs. It's a necessary corrective, but it will be a painful and potentially explosive one.
But the debt crisis is also a vital reminder that the most potent security threats to the West don't come from overseas, but from their own dysfunctional domestic politics. More wealth has been destroyed by irresponsible banks, lax regulators and short-sighted politicians (and their constituents) than by al-Qaeda or any combination of ramshackle dictatorships that we frequently obsess about.
(AP Photo)
