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Archive for July 1st, 2020

Before our depressing discussion today about the fiscal impact of entitlement programs (Social Security, Medicare, Medicaid, EITC, Food Stamps, welfare, and Obamacare, etc), here’s a video of how it all began.

I think this is a great introduction to the issue, particularly since you learn how “public choice” (i.e., politicians engaging in self-serving behavior) played a key role in the development of today’s welfare state.

But if you don’t have the time to watch a long video, here are four key things to understand.

  1. Entitlements (budget geeks sometimes use the term “mandatory spending”) are programs that automatically give people money if they meet certain requirements (such as reaching a certain age or having income below a certain level).
  2. Since these programs automatically give people money, they are not part of the annual appropriations process (the “discretionary spending” parts of the budget that are determined on a yearly basis).
  3. Some entitlement programs are “means tested” and designed to funnel money to low-income individuals. This type of spending is sometimes referred to as “unearned benefits.”
  4. Some entitlement programs are “social insurance” since people pay specific tax in exchange for specific benefits. This type of spending is sometimes referred to as “earned benefits” (though in many cases recipient receive much more than they paid).

By the way, there’s one additional thing to understand.

Indeed, it may be the most important thing to understand if you care about America’s fiscal and economic future.

5.  Entitlement programs are a slow-motion fiscal train wreck.

Let’s look at a new study authored by James Capretta of the America Enterprise Institute. He also has some sobering observations on the history of entitlement programs.

The growing expense of entitlement programs has occurred steadily for more than a half century and is reflected in the shifting distribution of federal spending activity. …by the early 1960s, two-thirds of all spending continued to require approval by the House and Senate appropriations committees each year, and less than a third was spent on entitlement programs. … By 2019, nearly two-thirds of all spending in the budget was for entitlement programs, and less than a third went to annually appropriated accounts.

If you prefer this information visually, here are a couple of pie charts from the study.

While there are dozens of entitlement programs, the big three are Social Security, Medicare, and Medicaid.

The largest entitlement programs are Social Security, Medicare, and Medicaid. Together, they now make up nearly half of all federal spending. Their combined growth over the past half century is the primary source of intensifying fiscal pressure. …In 2019, combined federal spending on them was 9.8 percent of GDP, up from 3.7 percent in 1970. CBO expects them to cost 17.2 percent of GDP in 2050, which is almost equal to the average annual revenue collected by the federal government from 1970 to 2019.

And here’s how they’ve been consuming ever-larger shares of America’s economic output.

What’s driving this ever-increasing fiscal burden?

In part, it’s because we have more and more old people and they are living longer.

So what does all this mean?

Capretta points out that uncontrolled entitlement spending may lead to a debt crisis.

I don’t disagree, but I think that’s a secondary concern. The real problem is that government spending will become an ever-larger economic burden. And that will hinder growth whether it’s financed by borrowing or taxes.

Speaking of taxes, here’s the chart from the study that deserves our close attention. It shows the relationship between demographics, benefit generosity, and tax burdens.

Here’s how Capretta describes the relationship.

…for each of the stipulated replacement rates (25, 50, and 75 percent), the tax rate necessary to keep the program solvent rises with increases in the aged dependency ratio. This explains why social insurance taxes in many aging societies have been increased to high levels in recent decades.

I’ve taken the liberty of augmenting the chart to show how these factors interact (though the order of #1 and #2 doesn’t matter).

The bottom line is that the United States is on track to become a high-tax, European-style welfare state if fiscal policy is left on autopilot.

In other words, unless there’s genuine entitlement reform, future Americans will be condemned to lower living standards.

P.S. Here’s some more history. In a column for the American Institute for Economic Research, Richard Ebeling looked at British history to explain how the private sector played a role in social insurance before being displaced by government.

Throughout the 19th century, a primary means for the provision of what today we call the “social safety nets” was by the private sector outside of government. The British Friendly Societies were mutual assistance associations that emerged to provide death benefits for the wives and children of the breadwinner who had passed away. But they soon offered a wide array of other mutual insurance services, including health care coverage, retirement pension programs, unemployment insurance, savings clubs to purchase a family house, and a variety of others. …by the end of the 19th century around two-thirds to three-quarters of the entire British population was covered by one or more of their programs and insurances. The research also discovered that a large majority of the subscribers were in the lower income brackets of the time… What stands out is that these were all private and voluntary associations and exchanges, in which the government paid little or no role.

On a related note, here’s an excellent short video on the English “poor laws” from the 1800s.

P.P.S. In addition to the fiscal burden of entitlement programs, there’s also a major problem in the way these programs discourage work.

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In a perverse way, I’m kind of sad that Bernie Sanders is fading from public view.

Sure, he’s an unreconstructed leftist with genuinely horrid ideas, but Crazy Bernie has generated plenty of clever humor (see, for instance, here, here, here, here, and here).

Fortunately, Alexandria Ocasio-Cortez is ready, willing, and able to take his place.

So let’s share some AOC-themed satire, starting with this bonding moment with Congresswoman Ilhan Omar.

Next, we have some humor from America’s top satire site, the Babylon Bee.

Democratic congressional candidate Alexandria Ocasio-Cortez scolded American leaders for not setting the minimum wage as high as Venezuela, whose hyper-inflated currency is forcing minimum wage increases all year long. …“Venezuela’s minimum wage is, like, millions per month, and ours isn’t even close to that,” she said. “…We call ourselves a developed country, but we don’t even just like print nearly as much money as Venezuela and give it out for free, because of businesses and corporations and things like that.” She also called Venezuela’s leaders “really smart” for overloading the economy with more currency, and called on America’s leadership to do the same. “It just goes to show that socialism is better because you can inflate the currency to a lot more, and more is better than less, obviously.”

Ouch.

Here’s Spock from Star Trek, attempting to detect logic.

To be momentarily serious, I’ve interacted with plenty of socialists over the years, and I don’t think their problem is lack of cognitive ability. Indeed, many of them are quite bright. And AOC is probably smart as well.

The problem is that they have a religious-like zeal for equality of outcomes and refuse to believe that the policies needed to achieve that goal will lead to serious consequences.

But let’s save that discussion for another day and stick with satire. Here’s another gem from Babylon Bee.

Democratic candidate for Congress Alexandria Ocasio-Cortez was in the middle of a run-of-the-mill interview—blankly staring at the interviewer for a minute straight after being asked how she’d pay for all the social programs she’s proposing—when disaster struck. She noticed a book on a table nearby and reached over to pick it up before anyone could stop her. …Ocasio-Cortez screamed as her hand burst into flames from touching the book on rudimentary economic concepts. …She was immediately rushed to the hospital. “As socialism has become increasingly popular, we’ve been seeing more and more of this,” said Doctor Pauline Hudson, who treated Ocasio-Cortez for third-degree burns. “Often it’s a severe-allergic reaction to math.

Last but not least, I don’t think this final image is close to being laugh-out-loud funny, but I nonetheless liked it a lot because it points out that leftists in the capitalist world are usually very happy to enjoy the benefits of free markets.

Indeed, the Fund for American Studies should remake this video with AOC in the starring role.

P.S. If you want other examples of Ocasio-Cortez humor, click here and here.

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