The Crisis of the Old Order

The Crisis of the Old Order

By Robert Samuelson - July 25, 2011

WASHINGTON -- We are now witnessing "the crisis of the old order." The phrase, coined by the late historian Arthur Schlesinger Jr. to describe the failure of unfettered capitalism in the late 1920s, also applies to the present, despite different circumstances. Everywhere, advanced nations face similar problems: overcommitted welfare states, aging populations, flagging economic expansion. These conditions define the global crisis and explain why it's struck the United States, Europe and Japan simultaneously. We need to move beyond daily headlines to understand this larger predicament.

The old order, constructed by most democracies after World War II, rested on three pillars. One was the welfare state. Government would protect the unemployed, aged, disabled and poor. Capitalism would be tamed. A second was faith in economic growth; this would raise everyone's living standards while permitting income redistribution. Growth was ordained, because economists had learned enough from the 1930s to cure periodic recessions. Finally, global trade and finance served countries' mutual interests.

All three pillars are wobbling. To be sure, the financial crisis worsened matters, and each country's situation is different. America's welfare state is less generous than Germany's. Greece's crisis began because it had vastly underreported its budget deficit; Ireland's stemmed from a burst housing bubble that led to a costly bank bailout. But these differences obscure large similarities.

Start with the welfare state. A blessing to many, it's also a common burden. Its expansion was huge. In 1950, government spending as a share of a nation's economy (gross domestic product) was 28 percent in France, 30 percent in Germany and 21 percent in the United States. By 1999, figures were 52 percent of GDP in France, 48 percent in Germany and 30 percent in the United States, according to the late economics historian Angus Maddison. Aging societies would boost future costs for social security and health care. From 2008 to 2050, the 65- plus population is projected to rise 40 percent in Germany, 77 percent in France and 121 percent in the United States.

Given this outlook, even countries without immediate crises are embracing austerity measures. All face a ruinous choice: The higher taxes or deficits needed to finance more welfare spending might further damage the economy, but cutting benefits stirs popular backlash. Still, benefits are now vulnerable. Ireland cut benefits for the unemployed by about 10 percent, reduced child payments by 16 percent and, beginning in 2014, will gradually raise the retirement age from 65 to 68.

On paper, faster economic growth could rescue governments from this trap. Unfortunately, this seems a mirage. Indeed, the old order's second prop -- faith in routine economic expansion -- is suspect. Economists exaggerated their understanding and control. They seem to have exhausted conventional policy approaches. Central banks such as the Federal Reserve have held interest rates low. Budget deficits are high.

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Copyright 2011, Washington Post Writers Group

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