For those who followed the neo-Marxist debates on state theory in the 1970s (or were forced to learn about them by one’s professors), one of the more interesting contributions came from James O’Connor’s book, The Fiscal Crisis of the State. In essence, O’Connor argued that the state must simultaneously execute two conflicting functions: an accumulation function (creating the conditions for capital accumulation or corporate profitability) and a legitimation function (responding to the demands of voters and mobilized groups). As elected officials meet the demands for social provision, they embrace higher levels of taxation, ultimately reaching a point where capital accumulation collapses. They can try to put off the day of reckoning (e.g., through incurring debt) but ultimately, the crisis would occur, perhaps as a result of an exogenous shock. Of course, some of what O’Connor argued could also be extracted from public choice arguments that were emerging at the same time (see Buchanan) and the work of Mancur Olson (see The Rise and Decline of Nations).
With this in mind, the press is increasingly full of pieces detailing the fiscal crisis of in Europe, which has come to a head as a result of the sovereign debt crisis. I find these pieces interesting, in part, because they may foreshadow what will be occurring in the US in the next few decades.
As Michael Weissenstein reports, “the welfare state—cherished by many Europeans as an alternative to what they see as dog-eat-dog American capitalism—is coming under its most serious threat in decades.”
Peggy Hollinger (Financial Times) reports that France is seriously contemplating an increase in the retirement age, “as it embarks on a contentious reform of its debt-laden pension system and brings public finances back into line.” The unions are (insert shocked expression here) strongly opposed to any cuts and are planning a national strike on Thursday.
There was an interesting “debate” at the New York Times on whether we are witnessing the twilight of the welfare state and whether the sovereign debt crisis holds any important lessons for the United States.
It is my take (corrections are welcome) that the extent of the crisis in Europe is a bit overstated. First, the coverage of the crisis seems to suffer at times from what logicians call the fallacy of false dilemma (dismantle the welfare state or suffer collapse). There is often a failure to acknowledge that there is much room for reform and viable models within Europe (e.g., , flexicurity in Denmark). Second, the European welfare states have been far more generous than the US welfare state. In France, for example, the debate focuses on whether to increase the retirement age from 60. And as one 92 year old Spanish pensioner said (in the Weissenstein piece above) “he was unlikely to live long enough to see the worst of the pension freeze, but had no doubts he would have to start relying on savings to maintain his lifestyle.” My guess is very few 92 year old retired civil servants in the US are starting to contemplate dipping into savings.
Yet, one must ask: to what extent is the current crisis in Europe a harbinger of what will occur in the United States (2030, or 2040)? We are incurring ever-greater debt (and I know this may not strike a chord with Sven, but it certainly does with me) and this is only the beginning given the problem of long-term unfunded liabilities. Our demographic profile, while not nearly as bad as Europe’s, is nonetheless going to place ever-greater stress on a smaller proportion of the population, mandating levels of taxation that will have negative implications for growth and social cohesion.
The end result may not take the form of crisis, but a painful state of sclerosis and a moribund economy. O’Connor may have gotten the basic story right, but in the end, Mancur Olson may have been far better in teasing out the implications.