The Half-Life of the Welfare State

Originally Published in Flourishing August/September 2011

Social Security is projected to exhaust its trust fund in 2036. Medicare will be out of cash in 2024. Technically speaking.

In reality, both systems are already in the red, because there are no actual assets in those trust funds; only government IOU’s. As Social Security and Medicare begin to pay out more than they take in from payroll taxes, they’ll scarf up virtually the entire federal budget and guarantee a steady increase in our already dangerous national debt. Add to that the current low interest rate environment (0-2%), and ask yourself what happens when we’re paying a more normalized 5% rate on upwards of $17 trillion.  Why else do you think the Federal Reserve is determined to keep rates so low?

Everyone already senses this, of course, but most people don’t yet understand that the current budget crisis heralds the beginning of the end of the Era of Entitlements.  Though Social Security has been around since 1935, the growth of cradle-to-grave entitlements accelerated in the 1960’s and ’70’s, when we decided that we  could subsidize everything for everybody. From education, to housing, to medical care, to food stamps, to the arts and entertainment, to retirement; a consensus of Americans decided that a policy of “from each according to his ability, to each according to his need” would be a fine thing. The wealthiest among us would somehow pay for it all.  Or most of it, anyway.  But it was an illusion. The 2009 Patient Protection and Affordable Care Act  (PPACA) was the last gasp grasp of that philosophy, and because the American people—having finally realized who would really pay—overwhelmingly opposed PPACA, it had to bullied through Congress in the dark of night.  That Act, following hard upon the government-led bums’ rush into housing (1995-2006), and the subsequent $trillions wasted on bailouts and stimulus packages have pulled back the curtain.

So, we’re now intimately acquainted with the life cycle of the entitlement hoax. Benefits, bailouts, and tax breaks are passed by the Congress and millions rush to claim them.  Marginal taxes rates can never be raised fast enough to keep up with an unending stream of entitlement promises without triggering a recession, so Congress makes up the difference with massive deficit spending and an ever-increasing debt burden—and we get a recession, anyway.  The Federal Reserve sops up the government’s debt with an increasing supply of inflationary electronic dollars—until we reach the point where we are now.  Over a (pork) barrel.

The task of our generation, and perhaps the next, is to preside over the dismantling of the voracious entitlement monster we’ve created.  We can now see that it was the unprecedented wealth created by the entrepreneurs, savers, and investors of our parents’ generation that made the welfare state seem plausible. In particular, the post-World War II boom in Americaand Europesupported the fantasy that we were rich enough to afford such an immoderate system of cradle-to-grave entitlements.  But, despite the incredible wealth creation of the past sixty years, the Age of Entitlement is now kaput.  We are living in the Age of Recompense.  Without explanation—since none should be needed—let me just assert that that’s a good thing.  It means that working, saving, and personal responsibility will soon be in vogue, and not just for those formerly willing, but for everyone.  Well, I guess that is the explanation, isn’t it?

The science of Physics tells us that a radioactive isotope decays perfectly according to first order kinetics.  For example, the half life of the Carbon 14 isotope is 57.3 centuries, which means that in 5,730 years, one half of any given quantity of Carbon 14 will have decayed into its surroundings.  By its nature, Carbon 14 is physically unsustainable.

As an extreme, and, therefore, educationally valuable case, consider the PIIGS (Portugal, Italy, Ireland, Greeceand Spain).  Over the last forty years, they were all built on the self-same ideal of cradle-to-grave entitlement; and here they are, begging the world for bailouts.  The entitlement philosophy is economically unsustainable, because compound interest, being mathematically akin to radioactive decay, guarantees that sooner or later entitlements will consume all of a country’s capital, and then destroy its credit, too.  With the demonstration and dissemination of that knowledge provided by the sad spectacle of the PIIGS, the remaining half-life of our own welfare state will not be measured in centuries, perhaps not even in decades.  mh

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Of Pawns & Kings

First published in Flourishing May 2011.

Louis XIV was King of France for seventy-two years, and though he was not the worst of Kings, he did lead France to the brink of bankruptcy through his lavish and self-congratulatory spending. Mark Twain famously said that history doesn’t repeat itself, but it rhymes.  Indeed.

We Americans are about to begin a national discussion of that vast, unfunded taxpayers’ liability known as Social Security.  (The discussion is bound to include all entitlements, but for the sake of simplicity, I’m focusing on Social Security.) For that discussion, we can thank President Obama’s National Commission on Fiscal Responsibility and Reform1.  Even the Social Security Administration confirms that sooner is better than later. (See inset p.2)

For the better part of seventy-five years, most people have believed that their Social Security contributions were being set aside for their retirement.  Not for one second did my father believe that his pension checks came from his children’s pockets. But in fact, they did.  The money he had deposited into Social Security had been spent for programs and projects designed to assure an abundance of goodies to a mixed assortment of voting blocks. That process continues unabated and enhanced today.  And, in that process and others of equal deception, we have become a collection of political pawns, bribed and manipulated with our own money.  

Unlike in my father’s time, virtually everyone knows today that there is no Social Security “lockbox”.  There is, instead, an unfunded liability awaiting the American taxpayer of this and succeeding generations in excess of $7.7 trillion2.  That’s just for Social Security, which is itself dwarfed by the unfunded liabilities of Medicare, etc.  I know what Dad would say about that: “Holy smoke!”  But, he was a better man than I am.

I don’t need to tell the readers of this newsletter that one of the most important motivations for private saving and investment is the need to provide for—you’ll forgive the anachronism—old age.  As in my father’s case, one “unintended consequence” of Social Security has been to create the illusion of saving and to reduce the apparent need for disciplined investment in IRA’s, 401(k)’s, and other retirement savings opportunities. Not surprisingly, the rate of saving in the United States has declined precipitously over the past seventy-five years.

The Social Security system has not only served to undercut the motivation to provide for old age and retirement by means of private saving and investment, there is a second “unintended consequence”.  It has also impaired the average American family’s ability to actually do so.  OASDI withholding (7.65% of wages and salaries) is nearly double what the average family spends on gasoline3; and I’m not counting employers’ contributions to Social Security.  Each of these two “unintended consequences” were entirely predictable—and were predicted by free-market economists4—but it gets worse.

Ask yourself this question:  “What if the money paid into Social Security had actually been invested in real, physical capital assets—American business enterprises, for example—instead of taxpayer-backed IOU’s?”  The answer is that in a relatively free economy, that investment really would have been the source of future financial security, just as private savings and investments are today.  Instead, three generations of King Louis wannabes have created a promise to levy unfathomable taxes on future generations, while they consumed the Social Security tax revenue that should have gone into saving and investment.  Now, the future has arrived; and it’s us.
At the most basic level, the coming debate about entitlement reform will serve to highlight a conflict of philosophies.  America was founded on the philosophy of Individualism; of the unalienable right of each individual to pursue his own happiness in his own way, asking only that he use neither force nor fraud in that pursuit.  Social Security—and Medicare, Medicaid, and Obamacare, as well—are premised upon the philosophy of Collectivism or Social Contract6; of subordination of the individual’s freedom to a presumed and so-called “greater good.” 

The scarcely concealed premise of collectivism, though, is that the average individual is too stupid or too lazy to plan and manage his own life; and therefore, he must rely on the government to rescue him.  In practice, we now know, when the power of government intervenes between the real providers—the people whose work, savings, and investments are ultimately to be taxed—and the receivers, “to rely” becomes “to demand”.  This is amply illustrated today by the European PIIGS (Portugal, Ireland, Italy, Greece, and Spain).  Are we next?

The first step in any recovery is to recognize the problem.  With the report and recommendations of President  Obama’s National Commission on Fiscal Responsibility and Reform, we can now see clearly that the consequences of lavish entitlement programs—not just in Europe, but here, too—are the eventual economic destruction of the nation through the undermining of real saving and the compounding of the national debt.  The bond rating agencies have issued their warnings, too.

There is also, I’m sorry to report, the potential for geriatric holocaust.  That will be the result when millions of elderly people—the Baby Boomers, most likely—without savings of their own, wake up to find that their children and grandchildren have grown tired of supporting them; or are simply unable to do so.

So yes, just as the doomsayers tell us, we do face a growing debt threat of runaway inflation and/or worldwide deflationary collapse. But, the doomsayers underestimate the American people.  We’re only beginning to see the nature of the game that’s been played by our King Louis wannabes, and we don’t like being pawns.  Moreover, we won’t submit to the indignity of stealing our grandchildren’s future.  We’re better than that!

The history of American free enterprise informs us that for every human need and desire, a free-market solution will sooner or later emerge, that is better and cheaper than anything that government can provide. And, with the report of the National Commission on Fiscal Responsibility and Reform to prompt and guide us, we’ll soon begin the tortuous process of dismantling and replacing Social Security, Medicaid, Medicare, Obamacare, and other bankrupting entitlements with free-market solutions.  In that process, which will take a generation or more to complete, we’ll reignite the entrepreneurial flame that defines America, and put every adult citizen back in charge of his or her own life.  ….Now, I can hear someone asking, “But, what if…?”

Call me an incurable optimist, or just call me stubborn—I see myself as a student of history: If the federal government defaults on its debt, or if the Federal Reserve creates a runaway inflation, or both;  history tells me that I will—more than ever—want to rely on myself, and on the earnings and resources of America’s great companies, to secure my livelihood and protect my family’s future.  mh

  1. http://www.fiscalcommission.gov/
  2. http://www.heritage.org/budgetchartbook/unfunded-liabilities-entitlements
  3. http://www.creditloan.com/infographics/how-the-average-consumer-spends-their-paycheck/
  4. Man vs. The Welfare State, Henry Hazlitt, Arlington House, 1969.
  5. Leviathan, Thomas Hobbes, 1651.

The Catallaxy Revisited

Originally Published in eFlourishing Issue 19, June 15, 2010

 “We see in almost every part of the annals of mankind how the industry of individuals, struggling up against wars, taxes, famines, conflagrations, mischievous prohibitions, and more mischievous protections, creates faster than governments can squander, and repairs whatever invaders can destroy.”

– Thomas Babington Macaulay (1800 – 1859), quoted in The Rational Optimist, by Matt Ridley.

Because I am a confirmed optimist, some of you may think that I don’t understand how bad things are out there. I assure you that I do, and this article is offered in evidence.

According to Neil Barofsky, special investigator general for TARP (Troubled Asset Relief Program), the United States has now spent approximately $3 trillion on programs designed to heal our financial system and replace jobs lost during the recent financial crisis and recession.

As I mentioned a couple of weeks ago, the European Union (EU) has created a loan fund of almost €1 trillion (Euros). The fund’s purpose is to rescue euro zone countries like Portugal, Italy, Greece, and Spain – unfortunately, but accurately, referred to in the media as “the PIGS”. The European Central Bank (ECB) has announced that it’s ready to buy both government and private bonds “to ensure depth and liquidity” in the market for deadbeat debt. The Federal Reserve, the Bank of Canada, the Bank of England, the European Central Bank, and the Swiss National Bank have all agreed to help facilitate this bailout. This is a spendthrifts’ consolidation loan, complete with austerity mandates that, in my opinion, will ultimately lead to violence. In Europe, I believe that that’s the good news.

Just as in our mortgage meltdown, banks are at the epicenter of the current European debt and currency crisis; and German banks are some of the most highly leveraged institutions in the world.

I could go on, but I think the point is made. Ballooning budget deficits, already out of control prior to the orgy of bailout and stimulus spending, are beyond ineffective; in my opinion. (I have intentionally omitted the $100 trillion of unfunded liabilities associated with Social Security and Medicare, and the truly negative budget implications of Obamacare that don’t kick in until 2014. What would be the point?) We should learn from the poor Europeans, whose cradle-to-grave entitlement dogma is rotting their once-great civilizations.

I get all that, and I understand why people are concerned.

Nevertheless, I remind you that some American non-financial corporations have more cash on their balance sheets than at any time in more than fifty years. That does not mean that there are no opportunities for businesses to expand and profit; there are many. Rather, with interest rates on savings still less than 1%, increasing corporate cash may be a measure of the irrationality and unpredictability of government policy. Prudence trumps profit.

Last week, I suggested that you read The Rational Optimist: How Prosperity Evolves, by Matt Ridley. That recommendation stands, and will stand; it’s an important book, and one that is destined to become a classic. It reveals that throughout human history, voluntary exchange in the marketplace has been the golden goose of human progress. Exchange is to human nature as nest building is to birds – it’s what we do. Over the past two centuries, exchange has been greatly facilitated by advancements in transportation and communication technologies. Progress has gone viral. Today, American business represents humanity performing its highest functions at an extraordinary level of proficiency; it is the most rational, most innovative, most life-serving, most achievement oriented, and the most forward-looking institution in the history of the world.   

Be an optimist.

*Deficits: 2008 = $680.469 billion; 2009 = $1.471 trillion; 1Q2010 = $328.929 billion.

Sources:

Heflin, Jay, The Hill, May 20, 2010. http://thehill.com/blogs/on-the-money/banking-financial-institutions/93285-government-has-spent-3-trillion-and-counting-on-financial-crisis

Bureau of Economic Analysis, March 26, 2010. http://www.bea.gov/newsreleases/national/gdp/2010/gdp4q09_3rd.htm

Council of Economic Advisers. http://www.whitehouse.gov/administration/eop/cea/estimate-of-job-creation/

McPheters, Lee, February 3, 2010. http://knowledge.wpcarey.asu.edu/article.cfm?articleid=1857

Bureau of Labor Statistics, U.S. Department of Labor, May 7, 2010. http://www.bls.gov/news.release/pdf/empsit.pdf