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Archive for the ‘Dependency’ Category

A couple of years ago, filled with disgust at the sleazy corruption of the federal Leviathan, I put forth a simple explanation for what happens in Washington, DC.

I call it the “First Theorem of Government,” and I think it accurately reflects the real purpose and operation of government. Except I probably should have added lobbyists and contractors. And it goes without saying (though I probably should have said it anyhow) that politicians are the main beneficiaries of this odious racket.

I think this theorem has stood the test of time. It works just as well when Republicans are in charge as it does when Democrats are in charge.

But it doesn’t describe everything.

For instance, Republicans have won landslide elections in recent years by promising that they will repeal Obamacare the moment they’re in charge. Well, now they control both Congress and the White House and their muscular rhetoric has magically transformed into anemic legislation.

This is very disappointing and perhaps I’ll share some of Michael Cannon’s work in future columns about the policy details, but today I want to focus on why GOP toughness has turned into mush.

In part, this is simply a reflection of the fact the rhetoric of politicians is always bolder than their legislation (I didn’t agree with 98 percent of what was said by Mario Cuomo, the former Governor of New York, but he was correct that “You campaign in poetry. You govern in prose.”)

But that’s just a small part of the problem. The real issue is that it’s relatively easy for GOP politicians to battle against proposed handouts and it’s very difficult to battle against existing handouts. That’s because government goodies are like a drug. Recipients quickly get hooked and they will fight much harder to preserve handouts than they will to get them in the first place.

And that’s the basic insight of the “Second Theorem of Government.”

Here’s a recent interview on FBN. The topic is the Republican reluctance to fully repeal Obamacare. I only got two soundbites, and they both occur in the first half of the discussion, but you can see why I was motivated to put forth the new theorem.

Simply stated, I’m disappointed, but I’m more resigned than agitated because this development was so sadly predictable.

And here are a couple of follow-up observations. I guess we’ll call them corollaries to the theorem.

  1. You break it, you buy it – Government intervention had screwed up the system well before Obamacare was enacted, but people now blame the 2010 law (and the Democrats who voted for it) for everything that goes wrong with healthcare. Republicans fear that all the blame will shift to them if their “Repeal and Replace” legislation is adopted.
  2. Follow the money – What’s partly driving GOP timidity is their desire not to anger many of the interest groups – such as state governments, hospitals, doctors, insurance companies, etc – who benefit from various Obamacare handouts. That’s what is motivating criticism for politicians such as Ohio’s John Kasich and Alaska’s Lisa Murkowski.
  3. Don’t throw the baby out with the bathwater – The “Cadillac Tax” is the one part of Obamacare that’s worth preserving because it will slowly cut back on the distorting tax preferences that lead to over-insurance and third-party payer. For what it’s worth, the GOP plan retains that provision, albeit postponed until 2025.
  4. The switch in time that saved…Obamacare – I’m still upset that Chief Justice John Roberts (aka, the reincarnation of the 1930s version of Justice Roberts) put politics above the Constitution by providing the decisive vote in the Supreme Court decision that upheld Obamacare. If the law had been blocked before the handouts began, we wouldn’t be in the current mess.

For these reasons (as well as other corollaries to my theorem), I’m not brimming with optimism that we’ll get real Obamacare repeal this year. Or even substantive Obamacare reform.

P.S. Now you know what I speculated many years ago that Obamacare would be a long-run victory for the left even though Democrats lost many elections because of it. I sometimes hate when I’m right.

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While President Trump apparently intends to waste taxpayer money for more childcare subsidies and presumably is going to duck the critical issue of entitlement reform, there is some good news for advocates of limited government and fiscal responsibility. According a recent news report., he’s not a big fan of outlays for foreign aid.

The White House budget director confirmed Saturday that the Trump administration will propose “fairly dramatic reductions” in the U.S. foreign aid budget later this month. …news outlets reported earlier this week that the administration plans to propose to Congress cuts in the budgets for the U.S. State Department and Agency for International Development by about one third. …The United States spends just over $50 billion annually on the State Department and USAID.

Trump’s skepticism of foreign aid is highly appropriate. Indeed, he’s probably being too soft on the budget for foreign aid.

Government-to-government handouts have a terrible track record. Indeed, the main impact of such transfers is to undermine good reform and enrich corrupt elites in poor nations.

Moreover, if the goal is to actually create prosperity in developing countries, there is no substitute for free markets and limited government.

Let’s look at some additional evidence about the harmful impact of aid.

We’ll start with a rather amazing admission from a 2016 study published by the International Monetary Fund.

Foreign aid is a sizable source of government financing for several developing countries and its allocation matters for the conduct of fiscal policy. This paper revisits fiscal effects of shifts in aid dependency in 59 developing countries from 1960 to 2010. …we show that upward shifts and downward shifts in aid dependency have asymmetric effects on the fiscal accounts. Large aid inflows undermine tax capacity and public investment while large reductions in aid inflows tend to keep recipients’ tax and expenditure ratios unchanged. …we find that the undesirable fiscal effects of aid are more pronounced in countries with low governance scores and low absorptive capacity, as well as those with IMF-supported programs.

Wow, I’m not a big fan of the IMF, but you have to give the authors credit for honesty. They admit that aid is especially harmful in nations that are also receiving IMF bailouts.

But the main takeaway is that foreign governments simply use foreign aid money as an excuse to raise and spend their own money. That outcome presumably should irk leftists. From my perspective, such nations have too much spending, regardless of whether it’s being financed by their own taxpayers or foreign taxpayers.

Instead, these nations should be copying the small-government policies that enabled western nations to move from agricultural poverty to middle class prosperity.

Let’s consider a couple of real-world examples.

We’ll start in South Sudan, where aid has subsidized awful behavior. Ian Birrell explains in an article for CapX.

…the fledgling state stumbles from the savagery of civil war into the horror of famine. …sadly these events also illustrate another example of the dismal failure of Western aid policies. …our politicians would be wise to stop spouting their usual nonsense about saving the world’s poor and start considering the corrosion caused by the billions already poured in to this failed state, pursuing naive ideas about state building based on floods of cash. …Experts such as the academic Alex de Waal say “looting food aid was elevated to military strategy” by militia commanders who later controlled the country. Despite these activities, $1 billion a year was handed over in aid in the years before independence, rising to $1.4 billion following arrival as the 193rd nation represented at the UN. …An estimated $4 billion was missing “or simply put, stolen”… But still aid poured in, leading to public spending per capita more than three times the levels seen in neighbouring Kenya. …there was a fake ministry of finance to deal with gullible donors and well-meaning armies of advisers, while the real version carried on under the generals with its backdoor dealings. …For all the fine words and good intentions, the West has ended up assisting and empowering a callous kleptocracy – again.

The bottom line is that foreign aid enabled and subsidized an awful government doing awful things.

Now let’s look at another African jurisdiction, only this one has been neglected by the international community.

But as Negash Tekie explains in another article of CapX, benign neglect can be a positive thing.

Over the years, the West has spent many millions to help stabilise the Horn of Africa, and alleviate the grinding poverty of many of its residents. …In Somalia, meanwhile, the international community is still trying – as it has for decades – to build a functioning government. Yet despite massive amounts in aid, …there is little hope of either building resilient and inclusive state institutions. What a stark contrast there is with neighbouring Somaliland. …Somaliland is, admittedly, desperately poor… But it is, in a volatile region, a beacon of security and stability. …Somaliland…claimed its independence from Somalia in May 1991, amid the chaos of the civil war there. But international bodies, and the African Union, have refused to recognise it.

But this absence of recognition has been a blessing in disguise.

The result has been that, without international aid and support, Somaliland has had to fall back on its own resources. In contrast to other African nations, state-building programmes and public services have been entirely financed by domestic income, rather than being supported by international donors. …countries that are dependent on aid can afford to neglect tax collection, countries without it are forced to use taxation appropriately. In 1990-2000, the Somaliland ministry of finance reported that “95 per cent of the resource that finance the activities are locally mobilised, mostly through taxation”. Not only are taxes collected in a non-coercive manner… For example, in early 2000s the government attempted to increase taxes on the private sector and proposed a VAT rate of 30 per cent, but the business sector lobbied against it and the policy was reversed. …A number of aid experts have argued that heavy dependence on external assistance undermines democracy, creates a dependency culture, diminishes political accountability and makes the state more accountable to donors than its own citizens.Somaliland is an example that…the inhabitants of the Horn of Africa can still build functioning states. …Somaliland is a lesson to the world in how to achieve successful state-building without aid.

Somaliland is far from a success story, and the article acknowledges big problems with drought, Chinese influence, and other factors, but at least there are some positive developments.

The key lesson is that the absence of aid has a very sobering effect.

And you know I get a “thrill up my leg” when I read about a place that fights against the value-added tax.

So I’m crossing my fingers that Somaliland stays independent and begins to prosper.

Let’s close by sharing a startling confession by a former senior aid bureaucrat in the United Kingdom.

Foreign aid spending is “out of control” and the department responsible for it should be abolished, according to its own former minister of state. …Grant Shapps, who was second-in-command at the Department for International Development (DfID) until 14 months ago, attacked its “profoundly worrying” tendency to “shovel cash out of the door”. …Shapps, whose criticisms are unprecedented from a former insider, said he had “agonised” for more than a year about going public. …He described how, in the Foreign Office, he would protest to African dictators about their “denial of human rights and democratic values” but “then, with my DfID hat on, I would rifle through my red box [of ministerial papers] to find cheques for hundreds of millions of pounds payable to the same countries. …Money was thrown at wasteful multilateral aid providers, such as the European Union and the United Nations, to reach the required spending level.

Too bad we don’t have enough ethical bureaucrats to blow the whistle on similar examples of waste and corruption in America’s foreign-aid system (though at least we have two former officials who were in charge of the federal government’s asset-forfeiture office and now say it should be shut down).

P.S. Next time leftists want to make a satirical video attacking libertarianism, they should use Somaliland rather than Somalia.

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The United States is going to become another Greece, and it’s largely because of poorly designed entitlement programs. As the old saying goes, demography is destiny.

Let’s look at just one piece of that puzzle. James Capretta of the American Enterprise Institute has a very sobering summary of how Medicaid has metastasized into one of the largest and fastest-growing entitlement programs.

You should read the entire article, but if you’re pressed for time, I’m going to share two grim charts that tell you what you need to know.

First, we have a look at how the burden of Medicaid spending, measured as a share of national output, has increased over time.

What makes this chart particularly depressing is that Medicaid was never supposed to become a massive entitlement program.

It was basically created so the crowd in Washington could buy a few votes. Yet the moment politicians decided that it was the federal government had a role in subsidizing health care for the indigent, it was just a matter of time before the program was expanded to new groups of potential voters.

And every time the program was expanded, that increased the burden of spending and further undermined market forces in the health sector.

This is why entitlement programs are so injurious to a nation.

But Medicaid isn’t just a problem because of its adverse fiscal and economic impact.

The program also is exacerbating the redistribution culture in the United States as more and more people get trapped in the web of dependency.

Which brings us to our second chart from Capretta’s article. Here’s a look at the share of the population being subsidized by Medicaid.

As a fiscal wonk, I realize I should care more about the budget numbers, but I actually find this second graph more depressing. In my lifetime, we’ve gone from a nation where the federal government had no role in the provision of low-income healthcare, and now nearly one out of every five Americans is on the federal teat.

Even though we’re far richer than we were in the mid-1960s when the program was created, which presumably should have meant less supposed need for federal subsidies.

For further background on the issue, here’s a video I narrated for the Center for Freedom and Prosperity.

I urge you to pay close attention to the discussion that starts at 1:48. I explain that programs with both federal and state spending create perverse incentives for even more spending. This is mostly because politicians in either Washington or state capitals can expand eligibility and take full credit for new handouts while only being responsible for a portion of the costs. But it also happens because the federal match gives states big incentives to manipulate the system to get more transfers.

P.S. All of which explains why I think Medicaid reform should be the first priority when looking at how to fix the entitlements mess, even before Medicare reform and Social Security reform.

P.P.S. I’m not overflowing with optimism that Trump will tackle the issue, but there is a feasible scenario for him fixing the program.

P.P.P.S. Regardless, one would hope all politicians would agree that it’s time to tackle rampant Medicaid fraud.

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Which state gets the biggest share of its budget from the federal government?

Nope, not even close. As a matter of fact, those two jurisdictions are among the 10-least dependent states.

And if you’re guessing that the answer is New York, New Jersey, Maryland, Connecticut, or some other “blue state,” that would be wrong as well.

Instead, if you check out this map from the Tax Foundation, the answer is Mississippi, followed by Louisiana, Tennessee, Montana, and Kentucky. All of which are red states!

So does this mean that politicians in red states are hypocrites who like big government so long as someone else is paying?

That’s one way of interpreting the data, and I’m sure it’s partially true. But for a more complete answer, let’s look at the Tax Foundation’s explanation of its methodology. Here’s part of what Morgan Scarboro wrote.

State governments…receive a significant amount of assistance from the federal government in the form of federal grants-in-aid. Aid is given to states for Medicaid, transportation, education, and other means-tested entitlement programs administered by the states. …states…that rely heavily on federal assistance…tend to have modest tax collections and a relatively large low-income population.

In other words, red states may have plenty of bad politicians, but what the data is really saying – at least in part – is that places with a lot of poor people automatically get big handouts from the federal government because of programs such as Medicaid and food stamps.  So if you compared this map with a map of poverty rates, there would be a noticeable overlap.

Moreover, it’s also important to remember that the map is showing the relationship between state revenue and federal transfers. So if a state has a very high tax burden (take a wild guess), then federal aid will represent a smaller share of the total amount of money. By contrast, a very libertarian-oriented state with a very low tax burden might look like a moocher state simply because its tax collections are small relative to formulaic transfers from Uncle Sam.

Indeed, this is a reason why the state with best tax policy, South Dakota, looks like one of the top-10 moocher states in the map.

This is why it would be nice if the Tax Foundation expanded its methodology to see what states receive a disproportionate level of handouts when other factors are equalized. For instance, what happens is you look at federal aid adjusted for population (which USA Today did in 2011). Or maybe even adjusted for the poverty rate as well (an approached used for the Moocher Index).

P.S. For what it’s worth, California has the nation’s most self-reliant people, as measured by voluntary food stamp usage.

P.P.S. And it’s definitely worth noting that the federal government deserves the overwhelming share of the blame for rising levels of dependency in the United States.

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At the start of the year, I argued that capitalism was the way to get more growth in poor nations.

Foreign aid, by contrast, hasn’t worked very well.

…there’s a big difference between good intentions and good results. If you examine the evidence, it turns out that redistribution from rich nations to poor nations is just as counterproductive as redistribution within a society.

But don’t believe me. Professor William Easterly of NYU spent many years at the World Bank working on issues relating to economic development and he’s written entire books on the failure of foreign aid.

And here’s some of what he wrote for Cato back in 2006.

The West’s efforts…have been even less successful at goals such as promoting rapid economic growth, changes in government economic policy to facilitate markets, or promotion of honest and democratic government. The evidence is stark: $568 billion spent on aid to Africa, and yet the typical African country no richer today than 40 years ago. Dozens of “structural adjustment” loans (aid loans conditional on policy reforms) made to Africa, the former Soviet Union, and Latin America, only to see the failure of both policy reform and economic growth. The evidence suggests that aid results in less democratic and honest government, not more. …Economic development happens, not through aid, but through the homegrown efforts of entrepreneurs and social and political reformers. While the West was agonizing over a few tens of billion dollars in aid, the citizens of India and China raised their own incomes by $715 billion by their own efforts in free markets.

One of the best critiques of foreign aid was written by an Indian back in 1972. The late Minoo Masani, who began his political career as a believe in socialism, learned through experience that markets work better than handouts.

…government-to-government aid distorts the international division of labour. It comes in the way of the natural laws of the market which should decide which country should produce what. …Government-to-government loans encourage socialism, communism and Statism, concentration of power, and waste. When a government aids another government, who disburses that aid? The government of that country. Aid thus transfers economic power from the people, the industrialists, the businessmen and the people to the hands of bureaucrats and politicians. The patronage the politician can dispense increases; the politicisation of economic life goes on. So, in a very direct way, every rupee of aid given by America or any other country or the World Bank to any aided country, including India, directly strengthens the forces of Statism, socialism and communism and weakens the forces of people’s free enterprise. It also breeds irresponsibility and waste.

He makes a great point that it is private investment that produces sustainable growth, not government-to-government transfers.

…one of the greatest disadvantages of government-to-government aid is that it discourages the investment of private equity capital in these countries. It does so because when one gets government-to-government aid at cheap rates, the temptation is not to raise equity capital abroad. This is a pity because our countries need foreign equity capital desperately. When foreign capital comes into India from any part of the world, it brings in foreign plant or machinery and engages Indian labour to work on it. It takes its profits out of the country only when it makes a profit. So such investment is in the interests of the Indian people. When a government-to-government loan comes, we have to repay the capital and the interest to the foreign government, however badly the money may have been wasted by our government. This is against the interests of the Indian people. So foreign private equity capital is good for India; government-to-government loans are bad for India. Let us hope we shall be spared them from now on.

Let’s look at some real-world evidence from the modern era.

In her recent Wall Street Journal column, Mary Anastasia O’Grady explains how aid has stifled the private sector in Haiti.

…why are so many Haitians still living in such dire poverty in the 21st century? Paradoxically, the answer may be tied to the way in which humanitarian aid, necessary and welcome in an emergency, easily morphs into permanent charity, which undermines local markets and spawns dependency. …The trouble is their assumption, too often, that poverty is caused by a lack of money or resources. This produces the wrong solution, one that prescribes getting as much free stuff to the target economy as possible. …The country has also been the recipient of billions of dollars in foreign-government bilateral and multilateral aid over the last quarter century. This enormous giving has created harmful distortions in the local economy because when what would otherwise be traded or produced by Haitians is given away, it drives entrepreneurs out of business.

Mary shares a couple of concrete examples.

The country was once self-sufficient in rice thanks to the work of rural peasants. That changed, according to the testimony of one development expert in the film, in the early 1980s. That’s when Haiti opened its rice market and the U.S. began dumping subsidized grain in the country with the goal of ending hunger—and helping Arkansas rice growers with U.S. taxpayer money. Most Haitian farmers could not compete with Uncle Sam’s generosity, and they lost their customers. …Donations of bottled water, clothing, shoes and even solar panels destroy local businesses in the same way. Just ask Jean-Ronel Noel, who co-founded the solar-panel company Enersa in his garage in the mid-2000s and expanded it to more than 60 employees. He is proud of his workforce…comes mainly from Port-au-Prince’s notorious slums. …The company was doing a robust business until the 2010 earthquake. “After the earthquake we were competing mostly against NGOs . . . coming with their solar panels . . . and giving them away for free. So what about local businessmen?” As Alex Georges, Mr. Noel’s partner puts it, “The demand stopped because it’s hard to compete with free.”

And here is the problem from a national and cultural perspective.

Mr. Noel zeroes in on another related problem: “Those NGOs are changing the mentality of the people. Now you have a generation with a dependency mentality.”

In other words, handouts from rich nations are destroying the social capital of Haiti.

Let’s go back to 2009 and see what Dambisa Moyo wrote about foreign aid to her home continent.

Kibera, the largest slum in Africa…is…just a few yards from…the headquarters of the United Nations’ agency for human settlements… Kibera festers in Kenya, a country that has one of the highest ratios of development workers per capita. …Giving alms to Africa remains one of the biggest ideas of our time — millions march for it, governments are judged by it, celebrities proselytize the need for it. Calls for more aid to Africa are growing louder, with advocates pushing for doubling the roughly $50 billion of international assistance that already goes to Africa each year. Yet evidence overwhelmingly demonstrates that aid to Africa has made the poor poorer, and the growth slower. The insidious aid culture has left African countries more debt-laden, more inflation-prone, more vulnerable to the vagaries of the currency markets and more unattractive to higher-quality investment. It’s increased the risk of civil conflict and unrest… Aid is an unmitigated political, economic and humanitarian disaster.

She has some very grim numbers.

…aid can provide band-aid solutions to alleviate immediate suffering, but by its very nature cannot be the platform for long-term sustainable growth. …Over the past 60 years at least $1 trillion of development-related aid has been transferred from rich countries to Africa. Yet real per-capita income today is lower than it was in the 1970s, and more than 50% of the population — over 350 million people — live on less than a dollar a day, a figure that has nearly doubled in two decades. …The most obvious criticism of aid is its links to rampant corruption. Aid flows destined to help the average African end up supporting bloated bureaucracies in the form of the poor-country governments and donor-funded non-governmental organizations. …A constant stream of “free” money is a perfect way to keep an inefficient or simply bad government in power.

If foreign aid money was “merely” wasted, that would be a bad outcome.

But that’s the optimistic version of the story.

In reality, the evidence suggests that these handouts actually subsidize bad policy in the developing world.

None of this would surprise the late Peter Bauer.

Lord Bauer was famous for observing that “government-to-government transfers . . . are an excellent method for transferring money from poor people in rich countries to rich people in poor countries.”

That’s good, if you happen to be a third world kleptocrat and you have a nice bank account filled with stolen funds in New York.

But if you’re a poor person in a poor country, you’re the one victimized by a bigger government that’s riddled with more corruption.

Amazingly, many western politicians accept corruption as the price of giving away money.

But this brings me back to where we started. If foreign aid achieved good results, then there would be a utilitarian case for accepting a degree of waste and corruption.

But since the evidence shows that these programs lead to slower growth and less prosperity, it’s a lose-lose-lose situation.

Here’s a video trailer for a great documentary on how foreign aid is helpful, but only for the people in charge of the programs.

Let’s close with something that probably should be called Bauer’s Paradox since I’m almost sure he said something making this point.

But until I find proof (maybe it was Easterly or some other scholar), we won’t attribute this sentiment to anyone in particular. We’ll simply go with a rather anodyne title.

But even if the title is boring, this Paradox makes a critical point. The poor nations that have become rich nations in recent decades did not rely on handouts and redistribution.

Instead, they generated growth by limiting the size and scope of government while allowing markets to function.

The nations that got the most aid, however, have stayed relatively poor.

P.S. The foreign aid bureaucrats and contractors have been the only real beneficiaries, much as the “poverty pimps” are the only real beneficiaries of the failed War on Poverty.

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Over the years, I’ve shared some clever images, jokes, and cartoons to expose the flawed mindset of those who hope to achieve coerced equality of outcomes with redistribution and high tax rates.

The size of a pizza vs the share of a slice.

The modern version of the Little Red Hen.

Washington’s Byzantine welfare state.

Chuck Asay’s overburdened tractor.

A left-wing nursery rhyme.

The Wizard-of-Id parody.

Two pictures showing how the welfare state begins and ends.

A socialist classroom experiment (including a video version).

The economics of redistribution in one image.

As you can see, this is a common-sense issue. When you give people money on the condition that they don’t earn much money, you create a perverse incentive for them to be unproductive.

Especially since, when people work more and earn more, they get hit by a combination of fewer handouts and more taxes. The net result is very high implicit marginal tax rates, in some cases rising above 100 percent.

Needless to say, it’s very foolish to have a welfare state that puts people in this untenable situation where the welfare state becomes a form of economic quicksand.

And it’s also foolish to punish the people who are pulling the wagon with high tax rates and pervasive double taxation of income that is saved and invested.

Russell Jaffe, one of our Cato interns, helpfully cranked out a clever little image showing how redistribution is bad for both those who receive and those who pay.

No wonder the welfare state and War on Poverty have been bad news for both taxpayers and poor people.

And the problem is getting worse, not better.

Let’s begin to wrap up. I shared a Thomas Sowell quote at the beginning to today’s column.

Now let’s read some of his analysis.

He aptly and succinctly summarized why redistribution is a no-win proposition (h/t: Mark Perry).

The history of the 20th century is full of examples of countries that set out to redistribute wealth and ended up redistributing poverty. …It is not complicated. You can only confiscate the wealth that exists at a given moment. You cannot confiscate future wealth — and that future wealth is less likely to be produced when people see that it is going to be confiscated. …Those who are targeted for confiscation can see the handwriting on the wall, and act accordingly. …We have all heard the old saying that giving a man a fish feeds him only for a day, while teaching him to fish feeds him for a lifetime. Redistributionists give him a fish and leave him dependent on the government for more fish in the future.

So what’s the bottom line?

The simple (and correct) answer is to dismantle the welfare state. State and local governments should be in charge of “means-tested” programs, ideally with much less overall redistribution (a goal even some Scandinavian nations are trying to achieve).

In effect, the goal should be to replicate the success of the Clinton-era welfare reform, but extending the principle to all redistribution programs (Medicaid, food stamps, EITC, etc).

P.S. Some honest leftists admit that the welfare state cripples independence and self reliance.

P.P.S. For those who like comparisons, you can peruse which states provide the biggest handouts and also which nations have the most dependency.

P.P.P.S. To end on a sour note, our tax dollars are being used by the Paris-based OECD to produce junk research that argues more tax-financed redistribution somehow is good for growth.

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I’m like a broken record when it comes to entitlement spending. I’ve explained, ad nauseam, that programs such as Medicare, Medicaid, Obamacare, and Social Security must be reformed.

In part, genuine entitlement reform is a good idea because you get better economic performance when you replace tax-and-transfer schemes with private savings and competitive markets.

Demographic 2030But reform also is desperately needed because of changing demographics. Simply stated, leaving all the entitlement programs on autopilot is a recipe for a Greek-style fiscal crisis.

If you want a rigorous explanation of the issue, my colleague Jeff Miron has a must-read monograph on the topic. You should peruse the entire study, but here’s the key conclusion if you’re pressed for time.

…this paper projects fiscal imbalance as of every year between 1965 and 2014, using data-supported assumptions about gross domestic product (GDP) growth, revenue, and trends in mandatory spending on Social Security, Medicare, Medicaid, and other programs. The projections reveal that the United States has faced a growing fiscal imbalance since the early 1970s, largely as a consequence of continuous growth in mandatory spending. As of 2014, the fiscal imbalance stands at $117.9 trillion, with few signs of future improvement even if GDP growth accelerates or tax revenues increase relative to historic norms. Thus the only viable way to restore fiscal balance is to scale back mandatory spending policies, particularly on large health care programs such as Medicare, Medicaid, and the Affordable Care Act (ACA).

Jeff’s report is filled with sobering charts. I’ve picked out three that deserve special attention.

First, here’s a look back in history at the growing fiscal burden of entitlement programs.

Second, here’s a look forward at how the fiscal burden of entitlement programs will get even worse in coming decades.

Keep in mind, by the way, that the two above charts only show the fiscal burden of entitlement programs (sometimes referred to as “mandatory spending” since the laws “mandate” that money be given to anyone who is “entitled” based on various criteria).

When you add discretionary (annually appropriated) spending to the mix, as well as interest that is paid on the national debt, the numbers get even more grim.

Jeff adds everything together and shows, for each year between 1965 and 2014, the “present value” of the gap between what the government is promising to spend and how much revenue it is projected to collect.

These numbers are especially horrific because “present value” is a measure of how much money the government would have to somehow obtain and set aside in order to have a nest egg capable of offsetting future deficits.

Needless to say, the federal government did not have access to $118 trillion (yes, trillion with a “t”) in 2014. And if there were updated numbers for 2015 and 2016 (which would probably be even higher than $118 trillion), the federal government still wouldn’t have access to that amount of money either.

Especially since the total annual output of the American economy is about $18 trillion.

So now you can understand why international bureaucracies like the IMF, BIS, and OECD estimate that the fiscal challenge in the United States may be even bigger than the problems in decrepit welfare states such as France and Italy.

Let’s get another perspective on the issue. James Capretta of the Ethics and Public Policy Center warns about the scope of the problem.

Despite what presidential candidates Donald Trump and Hillary Clinton have been saying on the campaign trail, the need to reform the nation’s major entitlement programs cannot be wished away. The primary cause of the nation’s fiscal problems, now and in the future, is the rapid rise in entitlement spending. In 1970, spending on Social Security and the major health care entitlement programs was 3.6 percent of GDP. In 2015, spending on these programs was 10.3 percent of GDP. By 2040, CBO expects spending on these programs to reach 14.2 percent of GDP. …entitlement reform is needed to put the federal government’s finances on a more stable foundation.

He outlines his preferred reforms, some of which I heartily embrace and some of what I think are too timid, but the key point is that he succinctly explains the need to act soon to avoid a giant long-term problem.

…reforms are not intended to create budgetary balance in the short-run. Large-scale change cannot be implemented in the major programs without significant transition periods, which means the reforms need to be enacted soon to reduce costs in fifteen, twenty, and twenty-five years. Skeptics may say it’s pointless to worry about fiscal problems that are more than twenty years off. They’re wrong. …The result is a misallocation of resources that undermines long-term economic growth. …Entitlement reform is an absolute necessity, as will soon become evident to everyone, one way or another.

The recent testimony by Nicholas Eberstadt of the American Enterprise Institute also is must reading.

In just two generations, the government…has effectively become an entitlements machine. …transfers have become a major component in the family budget of the average American household-and our dependence on these government transfers continues to rise. …Fifty years into our great social experiment of massive expansion of entitlement programs, there is ample evidence to indicate that the unintended consequences of this reconfigutation of American political and economic life have been major and adverse.

You should read the entire testimony, which is a comprehensive explanation of how entitlements are eroding American exceptionalism.

And I’ve previously shared some of Eberstadt’s work on the growing dependency crisis in America.

In effect, our “social capital” of self reliance and the work ethic is being replaced by an entitlement mentality.

At the risk of understatement, that won’t end well. Heck, I don’t know which part is more depressing, the ever-growing burden of spending or the fact that more and more Americans think it’s okay to live off the labor of others.

All I can say for sure is that this combination never was, is not now, and never will be a recipe for national success.

Let’s conclude with some sage observations by George Melloan of the Wall Street Journal. He summarizes the problem as being a combination of too much spending and too little political courage. Here’s the too-much-spending part.

…we seem richer than we actually are because we have borrowed so heavily from future generations. …the nation’s slow growth and rising debt are already reducing the opportunities for upward mobility. …Recent projections of the future cost of current government obligations certainly won’t relieve…people’s worries. Those promises have expanded far beyond any reasonable projection of the government’s ability to extract enough revenue to cover them. …The Congressional Budget Office projects a steady rise in “mandatory” (i.e., entitlement) costs as a share of GDP out into the distant future. …The upshot: Americans are deep in debt, mainly thanks to government excesses.

And here’s the too-little-political-courage part.

The only real answer is that the entitlement programs will have to be reformed, and sooner better than later, because the longer reform is postponed the greater the fiscal imbalance will become and the greater its drain will be… Donald Trump is out to lunch on this issue, as he is on most questions that require more than a fatuous sound-bite answer. As for Hillary…, forget about it.

Sigh, how depressing. It seems like America will be “Europeanized.”

For additional background on the issue of debt, unfunded liabilities, and present value, this video is a great tutorial.

P.S. I must have taken LSD or crack earlier this year. That’s the only logical explanation for saying I was optimistic about entitlement reform.

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