entitlements

Don’t Just Stand There, “Do Something”

“Activists” try my patience, and exhaust it. Their message — no matter the particulars of content or phrasing — boils down to this: Government should “do something” about “something.” This is a formula that has been invoked since the beginning of the Republic, though increasingly more often since the onset of the Progressive Era in the late 1800s. The exhortation betrays three beliefs, unconscious as they may be on the part of those who do the exhorting.

The first belief is that a particular phenomenon is so important — in the view of the exhorting person or group — that government should contrive to impose a particular outcome with respect to that phenomenon — regardless of the costs of that imposition, in treasure or liberty.

The second belief is a kind of prediction that proponents of government action usually cannot be bothered to test. This kind of prediction is known as the Nirvana fallacy: the logical error of comparing actual things with unrealistic, idealized alternatives. The actual things are the “somethings” about which government is supposed to “do something.” The unrealistic, idealized alternatives are the outcomes sought by the proponents of a particular course of government action. Thus legislation and regulation by mere mortals is taken as the functional equivalent of fiat lux.

This points to the third belief, which is that government — a mere creation of fallible, squabbling, power-lusting humans — is a kind of omniscient, single-minded, benevolent being that can overcome the forces of nature and human nature which gave rise, in the first place, to the “something” about which “something must be done.”

The evidence against these beliefs is so overwhelming that their persistence must be attributed to the psychological phenomenon summarized by Samuel Johnson as “the triumph of hope over experience.”

Proponents of government action will counter with the excuse that “something must be done” because of  “market failure,” which is the failure of markets to produce outcomes preferred by the proponents. And yet they overlook government failure, and often seek to rectify it by exhorting more government action, which leads to more government failure, and so on.

Here are some salient examples of government failure — and its correlate, misfeasance — that ought to (but will not) give pause to the “do something” crowd:

“Entitlements” (Social Security, Medicare, Medicaid, and their expansion through Obamacare) — These programs grew from an understandable (but ill-advised) urge to provide for the elderly who were seen as unable to provide for themselves. Through the predictable processes of constituency-mongering, the “social safety net” has acquired almost-inviolable status as a subsidy for millions of persons who could well provide for themselves. This dependency has discouraged thrift and, in the process, stripped away a key source of funds for investments in economic growth. The looming burden of taxation promises to cripple an already hobbled economy.

Welfare, the Minimum Wage, and Affirmative Action — Altogether, these programs have succeeded in breaking up black families, denying to many young blacks an opportunity to join the ranks of the economically productive (and to advance on their own merit), fomented crime, caused racial resentment, and positioned aspiring black students and professionals for failure.

The Great Depression and the Great Recession — These two devastating economic downturns, one of which became an excuse for the enactment of Social Security and the other of which still lingers, are quintessential examples of government failure. In the case of the Great Depression, the Federal Reserve’s monetary policies (first too loose, then too tight) caused a recession to deepen into a depression. That depression lingered for almost a decade (and ended largely because of a catastrophic war) because of interventionist, anti-business policies that began under Hoover and continued, with a vengeance, under Roosevelt. We owe the Great Recession to a combination of too-loose credit (the Fed again) and too-loose mortgage lending: a policy insisted upon by the Federal Reserve and influential members of Congress, and reinforced by their minions at Fannie and Freddie. “Wall Street” — as a willing maker of credit — deserves blame for the resulting financial meltdown and recession only in the way that a prostitute deserves blame for serving her clients.

Defense and Police Services  — These are public goods, but not for the reason advanced by believers in public goods, namely, that they would not be provided voluntarily because too many of their beneficiaries would try to take a “free ride” on paying customers, which would drive the prices of defense and police services too high to attract enough customers to pay for them. That is an unproved assertion, which runs counter to everyday experience (e.g., charitable giving and voluntarism) and ignores the very high stakes that could drive major corporations and very-high income earners to combine in a joint defense of their considerable interests in the U.S. and abroad — a defense that would unavoidably benefit free-riders. In this regard, it is noteworthy that in 2007 the combined pre-tax income of households in the top quintile was $2.5 trillion and pre-tax corporate profits came to $1.7 trillion. It is arguable that a consortium of taxpayers and corporations could underwrite the cost of defense and police forces (including courts, prosecutors, etc.), which in 2007 came to about $900 billion ($662 billion for defense and $230 billion for justice). In 2007, for example, taxpayers in the top 10 percent of adjusted gross incomes paid more than 70 percent of federal income taxes collected from filers of individual and joint returns. Who do you think pays the lion’s share of the costs of defense and police forces? The answer, of course, is high-income taxpayers, directly and through taxes on corporate income.

Defense and police services are tax-funded not because they must be, but because there is something menacing about the thought of privately owned defense and police forces that could be employed in coups and oppressions. A main consequence of the “publicization” of America’s defense and police forces is that they afford a lucrative opportunity for various kinds of pork-barrel legislation (e.g., the location of military bases, the awarding of defense contracts, and patronage for political supporters), as well as the usual (and unavoidable) instances of waste, fraud, and abuse. Even worse are the fluctuations in political attitudes toward defense and policing, which in the ebb invite aggression and crime, and in the flow invite vast over-spending — though over-spending can be defended on the ground that it deters aggression and crime and thus the human and monetary costs that accompany them.

In any event, not even defense is a sacrosanct function of government, and its provision by government is far from an unmitigated blessing. If you think that I overstate the case against government-owned defense forces, consider that

  • They fought only one “popular” war in the past 100 years — a war that became “popular” only after the surprise attack on Pearl Harbor.
  • The thesis that Reagan’s defense build-up won the Cold War remains controversial.
  • The size of the defense budget rides on political whims more than on hard-to-come-by cold facts. Would it be worse if those with the most to lose took a direct hand in the provision of defense forces and in decisions about when to employ them? I doubt it.

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Perhaps there are examples of “government success,” but these are hard to identify because the intervention of government usually forecloses the alternatives to which the “do something” crowd is blind:

  • voluntary, cooperative solutions through the actions of markets, private charities, and other private institutions (family, church, club, close-knit neighborhood, etc.)
  • benign neglect, where persons with a “problem” choose not to act on it because the cost of action is greater than its likely benefits.

Anyone who says that government can be “managed” by limiting it to certain kinds of activities (e.g., defense or welfare) while eschewing others (e.g., welfare or defense), merely deludes himself; “democratic” governments cannot and will not function without throwing money in all directions, in an effort to placate all constituencies. As a minarchist, I must admit to sharing this delusion, but I am beginning to think that anarcho-capitalism has merit, if only the right kind of anarcho-capitalists could be in charge of police and defense forces.

Anyone who says that such-and-such a government program will succeed in accomplishing a certain goal at a certain cost — and that the cost will justify the accomplishment — proves himself a presumptuous fool. I cannot truthfully say that government-provided police and defense forces are worth their cost in money and liberty, and I scorn anyone who believes that any other type of governmental endeavor is remotely worth its cost in money and liberty.
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The Bowles-Simpson Report

The National Commission on Fiscal Responsibility and Reform (a.k.a. the Bowles-Simpson commission) issued a report on December 1. Voting on December 3, the 18 commissioners cast 11 votes for the report and 8 against it. Those who voted for it — including some fiscal conservatives — see it as a place to start. Presumably the fiscal conservatives who voted against it see it for what it is:

This report contains a ten-year net tax hike of over $1 trillion and increases tax revenues from their historical 18 percent of GDP to a record and permanent 21 percent.  This report shifts the debate from where it properly should be—spending—and onto deficit reduction, and thereby tax increases.

The report confirms my earlier view, based on the co-chairs’ proposal, that

It aims at too many spending targets, and misses the elephant in the room: “entitlement” commitments, namely, Social Security, Medicare, and Medicaid (and their promised expansion via Obamacare).

The report also confirms my view of Alan Simpson as a Bob Dole Republican: a tax collector for the welfare state.

Yes, there are proposals about Social Security, Medicare, and Medicaid, but their main thrust is to make those programs even more “progressive”; that is, to use them as instruments of income redistribution. Well, that’s to be expected from a gaggle of politicians, most of whom cannot imagine a world in which individuals take responsibility for themselves. There is much to criticize in the report, beyond the permanent tax increase noted above. Here are some of its more egregious statements and proposals:

P. 11 — Rising debt will also hamstring the government, depriving it of the resources needed to respond to future crises and invest in other priorities.

What crises and what priorities? The only crises contemplated by the Constitution are insurrection, rebellion, and war. But that isn’t what the authors have in mind. Is this a signal that the authors approve the federal government’s bailouts and “investments” in failing businesses?

P. 12 — We must ensure that our nation has a robust, affordable, fair, and sustainable safety net. Benefits should be focused on those who need them the most.

Why must “we” have any kind of tax-funded safety net? Family, friends, and private charities could provide an ample “safety net,” if only government would leave the money in the private sector where it could be invested. As a result, there would be fewer persons in need and more sources of private support for those who are. I will not even bother to say anything about moral hazard and the cycle of dependency, except that they are natural and inevitable consequences of things like Social Security, Medicare, and Medicaid.

P. 13 — We need to implement policies today to ensure that future generations have retirement security, affordable health care, and financial freedom.

We” do, do “we”? See the preceding comment.

P. 21 — RECOMMENDATION 1.2: CUT BOTH SECURITY AND NON-SECURITY SPENDING. Establish firewall between the two categories through 2015, and require equal percentage cuts from both sides. — In other words, balance the budget on the back of national defense. This, combined with later recommendations about war spending, suggests that Bowles-Simpson believe in instant defense. There’s no need, in their view, to build and maintain defense capabilities against undetected and unforeseen threats. No, the necessary capabilities will materialize magically, as they are needed.

P. 23 — [F]ederal budgets rarely set aside adequate resources in anticipation of such disasters, and instead rely on emergency supplemental funding requests. The Commission plan explicitly sets aside funds for disaster relief and establishes stricter parameters for the use of these funds.

What is the federal government doing in the business of disaster relief, anyway? “Stricter parameters” will vanish in a bleeding-heartbeat. And, with a permanent fund to milk, the idiots will continue to build homes and businesses in places where floods, tornadoes, hurricanes, and wildfires are as predictable as sunrise. Talk about moral hazard and cycles of dependency!

P. 24 — RECOMMENDATION 1.7: FULLY FUND THE TRANSPORTATION TRUST FUND INSTEAD OF RELYING ON DEFICIT SPENDING. Dedicate a 15-cent per gallon increase in the gas tax to transportation funding, and limit spending if necessary to match the revenues the trust fund collects each year.

How far we have come from the Constitution’s grant of authority to build “post roads” and make interstate commerce regular (i.e., regulate it) so that it flows freely. This proposal, like the one about disaster funding, is simply designed to ensure that an unconstitutional function enjoys a permanent claim on tax dollars. And it opens the door to more bridges and roads to nowhere. I would like to put Bowles and Simpson on a flight to nowhere.

P. 25 — The Commission recommends creating a new, bipartisan Cut-and-Invest Committee to be charged each year with identifying 2 percent of the discretionary budget that should be cut and identifying how to redirect half of that savings, or 1 percent, into high-value investment. Over the next decade, the Cut-and-Invest Committee will be expected to recommend more than $200 billion in discretionary cuts, freeing up $100 billion for high-priority investments America will need to remain competitive, such as increasing college graduation rates, leveraging private capital through an infrastructure bank, and expanding high-value research and development in energy and other critical areas.

It is depressing to think that a bunch of politicians and bureaucrats get to decide how the hard-earned income of citizens should be spent, and to presume that their judgments are better than the judgments of individuals and businesses acting cooperatively through free markets. A serious deficit-cutting exercise would include a proposal to get government completely out of “investing” in anything other than defense and law enforcement.

Pp. 29-30 — Maintain or increase progressivity of the tax code. Though reducing the deficit will require shared sacrifice, those of us who are best off will need to contribute the most. Tax reform must continue to protect those who are most vulnerable, and eliminate tax loopholes favoring those who need help least…. The Commission proposes tax reform that relies on “zero-base budgeting” by eliminating all income tax expenditures….

In other words, Bowles-Simpson would raise taxes by cutting so-called tax expenditures, while trying to disguise that fact by advertising lower rates. And they would shift the burden of higher taxes in the direction of high-income earners. It so happens that high-income earners already “contribute” a disproportionate share of their incomes. (You know you’re up against con-men when their word for “taxes” is “contributions,” and they view as “spending” anything that reduces the tax-collector’s take.) Greater progressivity is a recipe for slower economic growth because it will (a) further reduce the incentive to acquire and apply skills and (b) further reduce the amounts invested in capital formation.

P. 37 — RECOMMENDATION 3.3: PAY FOR THE MEDICARE “DOC FIX” AND CLASS ACT REFORM. Enact specific health savings to offset the costs of the Sustainable Growth Rate (SGR) fix and the lost receipts from repealing or reforming the CLASS Act. To offset the cost of the SGR fix and recover lost receipts in the first decade from repealing or reforming the CLASS Act, the Commission proposes a set of specific options for health savings that, combined, total nearly $400 billion from 2012 to 2020.

Everything that follows on pages 37-40 could — and should — be done anyway. This isn’t deficit reduction, it’s window dressing.

P. 41 — RECOMMENDATION 3.6: ESTABLISH A LONG-TERM GLOBAL BUDGET FOR TOTAL HEALTH CARE SPENDING. Establish a global budget for total federal health care costs and limit the growth to GDP plus 1 percent.

What follows is a classic cop-out. Some of the commissioners want more government intrusion into the health-care business, others want less. Ho-hum. The “compromise” is a victory for those who want more government intrusion, which is a main reason for the growth of government-funded and private health-care costs in the first place. They’re like idiots who try to put out a fire by pouring gasoline on it.

P. 45 — IV. Other Mandatory Policies

Slightly less than one-fifth of the federal budget is dedicated to other mandatory programs. These include civilian and military retirement, income support programs, veterans’ benefits, agricultural subsidies, student loans, and others.

These mandatory programs are not projected to be the main drivers of rising deficits over the next ten years, but they nevertheless should be part of a comprehensive plan to correct our fiscal path. This is especially true because mandatory spending is not subject to the scrutiny of the annual appropriations process – so poorly directed spending can continue for years with minimal oversight. The Commission’s goals in reforming these policies are:

Protect the disadvantaged. About 20 percent of mandatory spending is devoted to income support programs for the most disadvantaged. These include programs such as unemployment compensation, food stamps, and Supplemental Security Income (SSI). These programs provide vital means of support for the disadvantaged, and this report does not recommend any fundamental policy changes to these programs.

End wasteful spending. The first place to look for savings must be wasteful spending, including subsidies that are poorly targeted or create perverse incentives, and improper payments that can be eliminated through program integrity efforts.

Look to the private sector. Some mandatory programs, like federal civilian and military retirement systems, are similar to programs in the private sector. When appropriate, we should apply innovations and cost-saving techniques from the private sector. (p. 45)

Gee whiz, how compassionate and original. The “compassion,” of course, is the cheap kind that politicians purchase with other people’s money. The “originality” is found in the bankrupt view of government as business: “end wasteful spending” and “look to the private sector,” indeed. Government is neither a charitable institution nor a profit-motivated one. It is an instrument of force, and ought to be recognized and treated as such. What follows, on pages 45-47, is mostly pap, when it isn’t merely wrong-headed.

Take government pensions and government pay, for example. Studies that purport to compare the compensation of government employees with the compensation of private-sector employees are simply a waste of time and money, and usually end up justifying government’s largesse toward a large, safely Democrat, voting bloc. The way to attain pay and pension equity is as follows:

  • Abolish all the unconstitutional departments, agencies, and bureaus.
  • Cut the pay of the employees in the surviving departments, etc., until the government quit rate rises to the level of the private sector. (Exclude from the private sector any firm that derives more than, say, 50 percent of its revenues from government contracts. Such firms tend to have padded salaries and benefits.)
  • Add 25 percent to resulting pay level, in lieu of benefits. Government employees would have the choice of how to take allocate the 25 percent between cash compensation, participation in a health-insurance plan (e.g., a local Blue Cross-Blue Shield group), and tax-sheltered contributions to a private retirement plan. The accrual of government pension benefits would cease immediately upon adoption of this plan, and active government employees would receive a tax-free, lump-sum settlement in lieu of future benefits, based on length of service and years spent at various pay grades.

Now, that’s the kind of deficit reduction the overburdened taxpayers of this country deserve.

P. 48 — V. Social Security

Social Security is the foundation of economic security for millions of Americans. More than 50 million Americans – living in about one in four households – receive Social Security benefits, with about 70 percent going to retired workers and families, and the rest going to disabled workers and survivors of deceased workers. Social Security is far more than just a retirement program – it is the keystone of the American social safety net, and it must be protected….

The Commission proposes a balanced plan that eliminates the 75-year Social Security shortfall and puts the program on a sustainable path thereafter. To save Social Security for the long haul, all of us must do our part. The most fortunate will have to contribute the most, by taking lower benefits than scheduled and paying more in payroll taxes. Middle-income earners who are able to work will need to do so a little longer. At the same time, Social Security must do more to reduce poverty among the very poor and very old who need help the most.

There’s nothing in these pages (pp. 48-55) but recommendations that would increase moral hazard and reinforce the cycle of dependency, topped off with a healthy dose income redistribution. There’s not even a hint of real reform, which would be to phase out Social Security and replace it with private accounts. Those would fund actual investments in economic growth, raise incomes, and reduce the incidence of “poverty,” which isn’t the fault of high-income earners in the first place.

P. 56 — VI. Process Reform

The few pages under this heading (pp. 56-58) deliver more pap and mirrors. Here’s a sample, consisting of paraphrases (bold italics) followed by my comments:

Hide the rising cost of living by switching to chained CPI. — Not that I’m a big fan of CPI-indexed pay and benefits — I’m not. But a chained price index is simply a dishonest way of representing price increases. If the price of apples rises relative to the price of oranges, and consumers buy fewer apples and more oranges as a result, simple introspection will tell you that consumers (most of them, anyway) are worse off unless their “real” incomes have risen and they switch from apples to oranges as a matter of taste.

Adopt a “debt stabilization” process to enforce deficit reduction. — If it ain’t happening, it ain’t happening. A spendthrift Congress can change the law at a whim, and that’s exactly what will happen with this idea. What’s needed is a balanced-budget amendment to the Constitution that very strictly spells out what’s in the budget (namely every red cent spent by government for any reason), and imposes harsh civil penalties on the president, Senate majority leader, speaker of the House, and other leading lights if the budget is not balanced. Period. No excuses about economic conditions. (We’ve seen how “stimulating” the “stimulus package” has been.) Just do it.

Replace ad-hoc extensions to unemployment benefits with automatic triggers. — In other words, make Congress even less accountable than it is now.

*     *     *

I am sorely underwhelmed by the work of the Bowles-Simpson Commission. “The Moment of Truth” — the grandiose sobriquet applied to the report (by Bowles and Simpson, presumably) — is nothing more than a waste of time, money, paper, and electrons.

The report begins with what seems to be a honest effort to estimate the size of the problem. But in the end it amounts to nothing more than a quibble about how to spend our money.

I’ll tell you how to spend my money. Just defend the country, administer justice, and send me a bill at the end of the year for my share of the cost — and don’t try to pad the bill, because I’ll be watching what you do.

There’s nothing to see in the Bowles-Simpson report, folks. Move along.

The Deficit Commission’s Deficit of Understanding

There are only three problems with the work of the Deficit Commission to date, as it has been revealed to us in the co-chairs’ briefing slides:

  • It will not survive the onslaught of special interests because it contains something to offend almost everyone, from homeowners, lenders, builders, and realtors (kill the mortgage interest deduction, indeed) to affluent retirees (bend the SS benefits curve downward, indeed).
  • It proposes higher taxes.
  • It aims at too many spending targets, and misses the elephant in the room: “entitelment” commitments, namely, Social Security, Medicare, and Medicaid (and their promised expansion via Obamacare).

The looming debt crisis and the cycle of dependency on government can be solved and broken, respectively, through the straightforward act of announcing that Social Security, Medicare, and Medicaid benefits will shrink steadily toward zero. The degree and rate of shrinkage would vary according to the age of the prospective recipient; for example:

  • Everyone now over the age of 55 would receive their current or currently promised benefits, as adjusted for inflation but not for wage growth (see next item).
  • The costly wage-parity feature of Social Security would be abolished. (Why should we subsidize retirees to keep up with the Joneses?)
  • Future benefits for persons aged 25 to 55 would be reduced on a sliding scale: from 95 percent for 55-year-olds to 5 percent for 25-year olds.
  • There would be no future benefits for persons under the age of 25.

The costs would be defrayed by a unified payroll tax, which would rise (initially) to cover persons who are older than 55 when the plan is adopted. The tax would decline — by law — as persons who are 55 and younger when the plan is adopted become eligible for benefits (or not, as the case may be).

How would individuals fund retirement and pay for health care when they have retired? A plan like the one I’ve outlined would be a great inducement to save more — and individuals could save more without sacrificing consumption as the payroll tax declines. Unlike the Social Security Ponzi scheme — where one’s “contributions’ merely pay off those who got in earlier — the higher rate of saving would generate economic growth and, thus, real returns on saving (as opposed to the phony returns on SS “contributions”). As for health care, insurance companies could get back into the business of competing to insure older Americans. And I have no doubt that joint ventures by insurance companies and health-care providers would lead to innovative and less costly ways of delivering medical care.

Following the tradition of William of Ockham, I shun the turgid, Rube-Goldbergish proposal of the Deficit Commission in favor of a frontal attack on the main cause of the deficit problem: “entitlement” commitments.

Related posts:
Economics – Growth & Decline
The Economic and Social Consequences of Government

A Moral Dilemma

A classic moral dilemma goes like this:

You are at a train track and see five people tied to the track ahead. A switch is in front of you which will divert the train, but as you look down you see a man is strapped to that track and will be killed. Is it permissible to flip the switch and save the five people at the expense of one?

If you are like most people, you said yes.

Now imagine in order to save the five people, you have to push a stranger in front of the train to stop it. You know for certain it would stop the train in time to save the five people tied to the tracks. Is it permissible to push the man and save the five people at the expense of one?

You probably said no. But the results are the same — the only difference is the method (passive vs. impassive). But in both cases you sacrifice one life to save five.

The problem is squeamishness. It is easier to be passive than active, even if being active has the same result as passivity.

Politicians in Washington face an analogous moral dilemma, to which I will come after setting the stage.

Government debt is rising, and will continue to rise unless the laws governing Social Security, Medicare, and Medicaid are changed to reduce future benefits from “promised” levels. (It has long been understood that the “promises” are not legally binding, and may be changed at any time.) Alternatively, taxes must rise considerably.

Barring benefit reductions or tax increases, government debt will reach a point at which it becomes unsustainable. That is, it would become impossible for government to borrow, except at extremely high rates of interest. Those high rates would spill over into the private sector and make corporate borrowing an unattractive source of capital for business expansion. At the same time, stock prices would drop, in response to higher interest rates, therefore making stock issuance an unattractive source of capital for business expansion.

The developments I have just outlined would lead to prolonged (perhaps permanent) economic stagnation, such as Japan has experienced. Stagnation would, in turn, magnify the burden on future workers, who will (no matter what) foot the bill for Social Security, Medicare, and Medicaid. At some point, politicians would confront two stark options: cut benefits even more deeply than they would if action hadn’t been postponed; maintain “promised” benefits and drive future generations into penury.

In a nutshell:

  • Today’s “promises” to future recipients of Social Security, Medicare, and Medicaid cannot be kept without doing harm,  in the form of onerous taxes and/or economic stagnation (at best), in the not-too-distant future.
  • Despite the certainty of that harm, most politicians are afraid to suggest that today’s “promises” cannot be kept. And they are equally afraid to raise taxes to the levels required to keep those “promises.” They are afraid because they believe that the truth will cost them their jobs.

Politicians who are unwilling to acknowledge the facts about Social Security, Medicare, and Medicaid are like the squeamish bystander who refuses to save five persons by pushing one person onto the train tracks. The one person, of course, is the politician, who fears that he would lose his job for the simple act of doing it.

For most politicians, there is no moral dilemma. Their course of action is preordained by their lack of morality. They will save themselves and sacrifice the well-being of millions of Americans.

Related posts:
Presidential Chutzpah
Can Markets Force Fiscal Discipline?
As Goes Greece . . .