Tuesday, November 11, 2008

America's "Social Welfare State:" Worst of Both Worlds

In honor of Veterans Day, a question: how many congresspeople have children on active duty in the U.S. Armed Forces? (A few years ago it was 7 out of 535 members of Congress.)

We are all familiar with the "social welfare state" model of the northern European nations: very high taxes which pay for very high services to citizens. Taxes can run upwards of 60% in some northern European nations, and the benefits of those high taxes are free education up through the graduate level, universal healthcare, etc.

The U.S. has chosen a different model: social welfare for the nation's elderly, moderate taxes, a national security complex which spends more than the rest of the world's armed forces combined, and enormous deficits covered by borrowing trillions of dollars. I say this not to create an outpouring of outrage, but as a simple, undeniable statement of fact that the U.S. government spends the vast majority of its social welfare/entitlement funds on the elderly and very modest amounts (in comparison) on its young.

Education is still heavily subsidized of course, at the state level and at the Federal level; but nonetheless most college students in the U.S. exit their education with gargantuan student loans. In other words, though education is subsidized in the U.S. (at the graduate level, often through research grants), it is by no means paid in full by government.

Children in poor families can get subsidized healthcare through Medicaid and other programs, but we nonetheless have to draw a distinction between this sort of "apply and we may grant benefits" program and universal care.

All social welfare programs in all nations are heading for a demographic brick wall: the pool of retirees is growing far faster than the pool of workers needed to support the welfare spending. Despite the best intentions of all involved, 2 workers cannot support 1 retiree's pension, healthcare and elderly services. So governments all over the planet are running deficits to cover the rising costs of this "social contract"-- a social contract that no economy will be able to pay for out of taxes alone.

Borrowing vast sums is a short-term way to bridge the widening gap between workers and retirees, but it has its own costs--interest must be paid essentially forever on every dollar we borrow today.

In other words, even societies willing to trade 65% tax rates for universal education and healthcare will find they are unable to pay the benefits promised as the pools of workers and retirees approach parity.

The only way out is to reduce benefits and reduce the cost structure of the entire economy so the reduced benefits still provide the coverage we seek for our elderly.

The U.S. has the worst of both worlds: a "social welfare state" mindset of entitlements and a "low taxes promote growth" mindset of free market capitalism. The last 27 years has proven that low taxes do promote growth, but they are no match for entitlement and "national security" spending which rises at 6-8% every year even as the underlying economy grows at around 3% in good times and less in bad times.

Rather than face up to this fundamental contradiction, we have simply borrowed the difference, papering over the painful fact that low taxes and rich benefits cannot be reconciled:

Notice how the explosion in Federal deficits began when Reagan-era tax cuts kicked in, even as entitlements continued their steady upward march. 9/11 launched GWOT (global war on terror) which currently consumes $189 billion, not counting Homeland Security.
Here is fabulous depiction in detail of the Federal Budget. (Zoom in for more detail.) In general, here are the "biggies" of the $3.2 trillion Federal budget:

Medicare/Medicaid: $624 billion
Social Security: $644 billion
Department of Defense: $515 billion
other national security, non-Pentagon (intelligence services, Dept. of Energy, etc.) $101 billion Global War on Terror (grab-bag of goodies, something for everyone! Includes two "hot wars") $294 billion
Department of Education: $59 billion
Department of Health and Human Services: $68 billion
Interest on the external debt: $260 billion
2008 deficit: (estimated) $408 billion

As I noted in When Will Housing Really Bottom? (Part I) (October 6, 2008), the "real" Federal deficit is already $800 billion and rising:

Frequent contributor Michael Goodfellow located a fascinating and deeply disturbing data series on the U.S. Treasury site for "Debt to the Penny". According to these up-to-date figures, the Federal deficit has increased $1.061 trillion in only a year. Michael wrote:
Request 10/1/2007 to 10/1/2008 and you get a daily table. Here are the first and last lines:
10/01/20075,057,236,452,359 4,005,315,947,997 9,062,552,400,356
10/01/20085,850,791,254,967 4,273,433,812,160 10,124,225,067,127

Subtracting the Debt to Public (first column) you get $794 billion in the last 12 months. The Total Debt (last column) line goes up $1061 billion. I assume the difference is the amount owed to the Social Security Trust Fund. (Note: this last entry reflects the fact that the government "borrows" the Social Security surplus every year to spend and enters the theft as a "debt we owe ourselves.")

The MSM has reported that the Federal deficit is on track to hit $500 billion this year, yet here we see that it has already increased $800 billion, even without accounting for the $600 billion the Fed has loaned banks or the bailout costs of $850 billion ($700 billion to "friends of Hank" and $150 billion in pork/tax credit giveaways).

So what's the point? Just this: there is a fundamental dishonesty in our national spending. We refuse to cut our entitlements or "defense" spending, yet we also refuse to raise taxes to actually pay for the benefits and programs we say we want.

I submit that it is a moral wrong to borrow money to "fill the gap" between what we want from our government and what we are willing to pay in taxes. Either slash spending to match revenues or raise taxes, but it is morally bankrupt to borrow the money and saddle future generations with a debt so stupendous that the interest alone will crowd out spending for decades to come.

Disclosure: I am 54, a mere 9 years away from collecting Social Security. I should be clamoring for the illusions, lies and moral corruption to continue until I "get mine." I respectfully refuse. Everyone who draws any entitlement or pay or contract from our government should take a haircut, or they should convince the taxpayers that their entitlement, program and pay is worth us paying another 30% in individual and corporate income taxes (individual income taxes raise $1.1 trillion, and the deficit is $400 billion officially, $800 billion in reality; you do the math. Taxes would have to rise substantially to fund the $800 billion shortfall).

We all have our ideologically purified "sacred cows" and "sacrificial lambs." I for one think most of the money allotted to Homeland Security is utterly wasted on useless contracts and useless procedures. Objective studies conclude that up to 50% of all Medicare spending is waste/fraud/paper-shuffling. Pentagon waste is legendary, and despite good-faith efforts at reform, there is undoubtedly billions lost, wasted, siphoned off, etc. in every large government program.

Many voice the opinion that any bureaucracy is wasteful, but this seems more an excuse to do nothing. Clearly, any bureaucracy is only as thrifty as its management has to be; the default setting is of course waste, poor oversight, etc.

Even as we load our children and grandchildren with crushing debts to fund spending on ourselves, notice how paltry the sums we spend on youth are compared to what we spend on the elderly.

Perhaps this is exactly what we should be doing, but we should own up to the Federal budget being a value-driven reflection of what we (or those of us involved in lobbying) value most.

"We in America do not have government by the majority. We have government by the majority who participate." -Thomas Jefferson

I am outraged that we spend 4.5 times as much paying interest on money which was mostly wasted/frittered away/mismanaged than we do on education at the Federal level. Is this any way to run a business, just run up the deficits and interest due until it crowds out all other spending?

Do we need both the F-22 and the Joint Strike Fighter? Maybe if the choice had to made between those billions and Medicare drug coverage, we would start caring more. If there were sharp limits on total Medicare coverage for any one individual, maybe we'd start caring more how the funds were spent on our behalf. Maybe we'd forego that second MRI test or decide we don't need 11 medications, that maybe 5 should be enough.

But as long as we can just borrow the difference between what we want and what we're willing to pay, all the hard choices are loaded onto future generations. That is morally wrong, morally corrupt, morally bankrupt.

The "easy" answer is to relentlessly cut the cost structure of our entire economy; no fighter aircraft should cost $300 million a piece, no MRI should cost thousands when the same machine produces tests for under $100 in other nations, no hospital stay should cost $10,000 or more a day, no drug should cost $1,000 a dose, and on and on and on and on.

Choice helps. That's also called competition. Let the military services themselves choose which aircraft to buy, rather than let pork-barrel politics in Congress decide who gets funded. Let the first specification be that no aircraft can cost more than $30 million, period; loading up the aircraft with too many specs is a cost-killer. Faster, better, cheaper should be the watchword in every agency, not just the Pentagon.

As long as we continue the immoral fantasy that we can just borrow from our children to avoid any hard choices, we richly deserve the completely insolvent, fiscally bankrupt government we're going to get to match the moral bankruptcy in our hearts.

New essay by Chris Sullins: "The Good Life", a thought-provoking mediation on hunting, living off the land, resource depletion, delusion, weaponry, war and much more--highly recommended.

Thank you, Ben Z. ($25) for your longstanding encouragement and generous donation to this site. I am greatly honored by your support and readership.

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