- - Thursday, April 12, 2012

Some commentators will tell you that our debt crisis has been aggravated by the political rift between Republicans and Democrats. Those who say so will suggest that the only way out of our fiscal crisis is the bipartisan way.

Bipartisanship, however, is the wrong medicine for the country. It would exacerbate, not solve, our debt crisis. We need a much more radical solution: We need to reform away our welfare state.

Then, and only then, can we avoid future debt crises.

The budgets introduced by Republicans and Democrats in March contrasted dramatically as to how they view our current debt crisis. Instead, the Democrats stuck their head in the sand, apparently hoping that the debt would go away on its own. Republicans on the other hand took the first step toward addressing the actual problem: entitlement programs and the welfare state.

The best feature of the Republican budget is block-granting. It is a nifty policy instrument, offering just the right remedy for our long-term debt problems. Under block-granting, states can reform federally sponsored programs, find cost-saving measures and bring in free-market solutions.

Democrats are vehemently opposed to this model. A bipartisan compromise on the federal budget would in all likelihood put the block-grant model on the back burner.

That would be a mistake. We really cannot wait any longer for the right remedy for our debt crisis. Like a runaway train heading for the end of the track, we are rapidly approaching a point where the only remaining option is a massive, panic-driven austerity program. As evident in Europe, such a program would have disastrous consequences. It would slash and burn entitlements but not offer those who are affected any way out of their dependency on government. There would be no free-market reforms to offer private alternatives to government entitlements. And forget growth-stimulating tax cuts under austerity.

Worse still, the political achievement - a balanced budget - would only be temporary. Soon, there would be another deficit crisis.

This is the inevitable result of panic-driven austerity. But don’t take my word it. Look at Europe and its plethora of examples of troubled welfare states. Greece, the most notorious among them, has experienced panic-stricken spending cuts for years, yet they are still in crisis mode. This winter, they came within an inch of defaulting on their debt. Greek treasury bonds have effectively been reduced to junk bond status.

The reason? They have kept their welfare state in place. All that their austerity programs have done is shrink the size of the spending programs. Taxes have gone up, so the private sector is weaker than ever and offers no alternatives for those who depend on government.

Spain is another morbidly obese welfare state. Their government is doing chainsaw-style budget cuts, which according to a recent report in the EU Observer, means deep cuts in education and health care. University tuition fees are going up and the single-payer health care system is imposing higher fees for patients - despite the fact that the system is supposed to be tax-funded all the way.

Europe’s austerity programs downsize the welfare state to make it fit what taxpayers can afford today. But they keep the entitlement programs that cause the deficits in the first place.

A compromise between Democrats and Republicans would inevitably bring austerity to our shores. We do not want to sit around and find out what that means. We want to do everything we can to avoid panic-driven austerity. There is irrefutable evidence from Greece, Spain, Italy and Portugal today, from Germany a few years ago and from Sweden back in the 1990s: Austerity does not work. It comes with indiscriminate budget cuts, it offers no room for structural entitlement reforms, and it almost always means higher taxes.

When Congress created Medicare and Medicaid the general idea was that government would always be able to pay for the health care that enrollees are eligible for. No one thought for a moment that these programs would become key drivers behind a big fiscal crisis in America.

Yet that is exactly what has happened, and there is an obvious explanation. Data from the Bureau of Economic Analysis shows that since Medicaid and Medicare were created, the output cost of health care has grown roughly 1.5 times faster than tax revenues in constant dollars. This has nothing to do with greedy capitalists profiteering off health care. Medical technology and pharmaceutical products are increasingly complex. Research and development is increasingly costly.

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