LTC Bullet: Have Your Cake Until It Eats You

Friday, March 23, 2018

Seattle—

LTC Comment: Americans want to have their cake (entitlements) and eat it too, but trends show this cake will eat our economy first. Scary evidence after the ***news.*** [omitted]


LTC BULLET: HAVE YOUR CAKE UNTIL IT EATS
YOU

LTC Comment: We invite your attention to two excellent columns published recently in the Wall Street Journal.

The first, titled “Americans Want Big Government,” by William A. Galston, explains how Americans want more “free” stuff, but neither they nor their political representatives say how to pay for it.

The second, “Why America Is Going Broke,” by John F. Cogan, explains how our prodigious appetite for the unearned will come back to bite us.

Here are some telling facts from the Galston piece:

“In the NBC/Wall Street Journal poll last month, 58% of Americans—the highest share ever recorded—agreed that ‘government should do more to solve problems and help meet the needs of people,’ compared to only 38% who thought that ‘government is doing too many things better left to businesses and individuals.’”

What more should we be doing and for whom?

“A Pew study last month found majorities endorsing the view that government does too little to help young people, the elderly, the middle class and the poor.”

“According to the Kaiser survey, 40% of Americans favor more defense spending while only 19% want less. Seventy percent want more spent on education, while only 7% want less. The Spring 2017 Pew survey found broad support for increased spending on veterans’ benefits, infrastructure, scientific research, environmental protection and assistance to the needy.”

Sounds great, right? But don’t we have to pay for all this largesse? Why worry?

“Not surprisingly, surveys also register a steep decline in public concern about the federal budget deficit. In 2013, according to the January 2018 Pew study, 72% of Americans regarded deficit reduction as a top priority. By the beginning of this year the figure had fallen to 48%.”

Well, at least our public officials are addressing this issue head on. Not.

“Last December, President Trump signed a Republican tax bill that will raise the deficit by an estimated $1 trillion over the next decade, and the new budget will add to this figure. Based on data from the Congressional Budget Office, the Committee for a Responsible Federal Budget calculates that the budget deficit will rise from $800 billion in 2018 to $1.19 trillion in 2019, and will increase even more in 2020. If the spending increases for these two years are made permanent, the annual deficit will reach an estimated $1.7 trillion by 2027. And political pressure will make it nearly impossible to roll back these increases.”

Oh well, “eat, drink and be merry for tomorrow we die,” right?

“We do not know for sure. But we do know that when the next recession comes, the government will have few fiscal and monetary tools left to fight it. If annual budget deficits already exceed $1 trillion, and if the burden of the national debt is already at an all-time high, little room will be left for the antirecessionary measures that governments of both political parties have employed since the early 1930s.”

“The American people have told Congress how much government they want. Responsible leaders would now inform the people what it will take to pay for this much government. In the absence of such responsibility, our fiscal policy will remain on a collision course with reality. The only question is when the crash will come.”

The second article, by John Cogan, focuses on entitlements as the elephant of anti-austerity. First, the problem:

“President Trump’s budget estimates a deficit of nearly $900 billion for 2018 and nearly $1 trillion (with total spending of $4.4 trillion) for 2019. Its balance sheet reveals that the public debt will reach $15.7 trillion by October. This works out to $48,081.61 for every man, woman and child in the U.S. That doesn’t count unfunded liabilities, reported by the Social Security and Medicare Trustees, that are four times the current public debt.

“How did the federal government’s finances degenerate this far? It didn’t happen overnight. For seven decades, high tax rates and a growing economy have produced record revenue, but not enough to keep pace with Congress’s voracious appetite for spending. Since the end of World War II, federal tax revenue has grown 15% faster than national income—while federal spending has grown 50% faster.”

Next, the cause:

“[A]ll—yes, all—of the increase in federal spending relative to GDP over the past seven decades is attributable to entitlement spending. Since the late 1940s, entitlement claims on the nation’s output of goods and services have risen from less than 4% to 14%. Surprising as it may seem, the share of GDP that is spent on national defense and nondefense discretionary programs combined is no higher today than it was seven decades ago.”

“If you’re seeking the reason for the federal government’s chronic budget deficits and crushing national debt, look no further than entitlement programs. … Since the early 1970s, entitlements have been the federal budget’s largest spending category, the sole source of the federal budget’s growth relative to GDP, and the primary cause of chronic budget deficits.

“Today, entitlement spending accounts for nearly two-thirds of federal spending. Defense spending still only accounts for about a sixth of the federal budget, even with recent increases. Defense spending could be doubled and it would still be only half what the federal government spends on entitlements. Significant reductions in the budget deficit can only be achieved by restraining the growth of entitlement spending.”

But, unfortunately:

“The president has ruled out any significant reform of Social Security and Medicare, the two largest entitlement programs. His budget shows that this year Social Security and Medicare expenditures will exceed the payroll taxes and premium payments dedicated to supporting them by $420 billion. Social Security and Medicare deficits will account for half this year’s total budget deficit.”

Maybe Congress will step into the breach. Well, no:

“The situation is no better at the other end of Pennsylvania Avenue. Democrats are getting domestic spending increases and Republicans are getting increases to the defense budget. Instead of offsetting higher spending with reductions elsewhere, Congress simply increased both defense and domestic spending in the recently enacted continuing resolution to fund the government. At the same time, by eliminating the need to vote on a debt ceiling this year and ruling out the reconciliation process for any budget bill, Congress signaled that it has no stomach for entitlement restraint.”

The future bodes ill:

“Social Security and Medicare expenditures are accelerating now that baby boomers have begun to collect their government-financed retirement and health-care benefits. If left unchecked, these programs will push government spending to levels never seen during peacetime.

“Financing this spending will require either record levels of taxation or debt. Economics teaches us that high tax rates reduce economic growth and living standards. History teaches us that high public debt aggravates economic volatility and makes a country’s financial system more prone to crisis.”

LTC Comment: OK, so where does this leave us? We’re on a collision course with economic disaster. Neither the public nor its political representatives have the stomach to confront excessive entitlement spending. But, in the end, we can’t have that cake and eat it too. The suffering when the inevitable end comes will be tragically greater than the need these entitlement programs sought to meet in the first place.

It fascinates and frightens me that America, founded in the spirit of freedom, independence and individual enterprise, could have deteriorated to its current state of collective self-deceit, authoritarianism, and dependency. I find a clue to how this happened in the Galston article’s opening sentence:

“In a well-functioning democracy, the people articulate their desires and grievances, and their elected officials shape these sentiments into sustainable policies. With this division of labor between citizens and representatives, democracy can be both responsive and responsible.”

That statement is fundamentally mistaken. It is not democratic politics that bring us sensible policies and prosperity. Political majorities will always vote themselves more free stuff until they run out of other people’s money.  

That’s the fix we’re in now. And that’s why our founders and the Constitution they wrote tempered democracy with principled protection of individual rights and property. The Supreme Court’s failure to keep those principles inviolable has allowed government encroachment into economic spheres it was never intended to enter.

To wit: majorities of people demand more and more free stuff and their political representatives give it to them in order to remain in power. It’s a vicious downward spiral the awful bottom of which we’re nearing today.

What’s a better way?  Get government out of the business of being the people’s nanny. Have confidence that most human beings, left to their own devices (as the founders intended) will not only survive, but prosper. The resulting economic bonanza would enable private charity to provide for the few who need help better than the bloated, ineffectual social programs the needy rely on now.

Why will this happen? In free markets, unencumbered by excessive government interference, taxation and regulation, people vote with their hard-earned dollars for what they want. Entrepreneurs anticipate what people may want. If they get it right, they profit. If they get it wrong, they lose and disappear. Investors choose which entrepreneurs to support with their hard-earned capital. Smart ones win; others lose. The only guaranteed winners in capitalism are consumers. They are the net beneficiaries of the many risks entrepreneurs and investors take.

There is no room for self-deceit, authoritarianism or government dependency in such a system. No unearned free stuff stolen from producers undercuts individual initiative. The resulting prosperity unleashes the natural human generosity to help those less fortunate. Everyone is better off. But, alas, don’t hold your breath.