Following WWII, the United States and subsequently, the rest of the world, entered into an economic growth phase of unprecedented dimensions. This was driven by a population spurt as post-war family formation quickly reached new heights despite the losses in the war. A principal feature of this economic growth was that it was driven by and dependent on consumer spending. Because of the resulting prosperity, salary levels and benefit commitments were made based on the belief that the rate of growth could be maintained.
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The weakness in this assumption of endless growth lay in the fact that the “baby boomer” generation adopted a mentality different from their parents who had lived through the great depression. They saw government and employer promised retirement and health benefits as mitigating the need for saving or for having children who would support them in their old age. Hence, consumption and self- satisfaction became not just acceptable, it was patriotic. Witness the current efforts by government to stimulate demand despite the fact that 2008 saw the retirement savings of so many baby boomers decimated, a situation that cries out for people to save, not spend more (which is in effect what is taking place proving that people are smarter than their government).
We, and most of the industrialized world, now face a situation where a disproportionate number of workers (the baby boomer generation) want to retire and collect benefits promised them, but never funded. They feel a sense of entitlement and are, therefore, very vocal and adamant in their demands. While one can sympathize with them, especially since much of their meager savings were decimated in 2008, the reality is that their expectation cannot and will not be met. They just did not leave enough children and enough savings behind to provide the economic resources to fund all the commitments made by government.
It is clear that many politicians do not accept this reality and those that do are at a political disadvantage in proposing remedies. The result is double talk and political grid-lock. This is why democracy is such a messy process. Standard & Poor’s failed to grasp this fundamental fact when they downgraded the credit rating of the United States from AAA to AA+. They failed to grasp that process is no indicator of outcome. They would have been better served to follow Winston Churchill’s advice that, “Americans can always be counted on to do the right thing…after they have exhausted all other possibilities.”
In a perfect world, we would face the problem head on and reset the commitments to the level that the system can fund. Under democracy, however, this is not what will happen. Yes, the economy can be tweaked to produce more revenue and the tax system can be changed to distribute more pain to more people, but this will not come close to closing the gap between promises made and promises to keep. The only long term solution for government is to inflate away the unfunded promises by debasing the currency. They will deny this vehemently, and many will actually believe it, but there is really no choice to make.
We are fated to undergo a painful process of compromise wherein there will be losers and winners. The new manifesto will be “From each according to his vulnerability, to each according to his clout.” Come to think of it, there’s nothing new in this manifesto, that’s really how democracy works!