In 2012, Mitt Romney got into a lot of political trouble when he asserted that 47% of Americans did not pay taxes.
But how about the other side of the ledger?
“Fifty-five percent of all U.S. households receive cash or in-kind assistance from at least one major federal entitlement program,” says John Cogan, the author of The High Cost of Good Intentions.
He further colors in the picture as of 2017:
“Among all households headed by a person under age 65, over 40 percent receive entitlement program benefits. Eighty percent of all people living in households headed by single mothers receive entitlement benefits, and nearly six out of every ten children in the United States (58 percent) are growing up in a family on the entitlement rolls. The labyrinth of overlapping entitlement programs, each with its own eligibility rules, allows 120 million people, two-thirds of all entitlement recipients, to simultaneously collect benefits from at least two programs. Forty-six million people, nearly one-third of all recipients, collect benefits from three or more federal entitlement programs simultaneously…These numbers, remarkable as they appear, are likely to understate the true extent of the entitlement system’s reach. It is well known that the CPS significantly underestimates program participation, particularly among means-tested entitlement programs.”
Figure 1. Still, the government has a plan. The U.S. Fish and Wildlife Service has identified the American taxpayer as eligible for endangered species protection.
Incredibly, the amount the U.S. government spends each year annually on entitlements is enough to give $7,500 to every man, woman, and child in the U.S. – “an amount that is five times the money necessary to lift every poor person out of poverty.”
And if the amount of money wasn’t scary enough, our aid to families breaks up families, our aid to the poor discourages work, and our medical aid drives up medical costs. In one estimate, the main medical program of the federal government drove up costs 50% in the first five years after enactment – never mind the next fifty. And of course ObamaCare has made things worse.
Figure 2. Most likely the next major government program will provide a college degree for everyone while rendering them unemployable poet sociologists.
There are programs that can do good – like Social Security – but that politicians have lied about, abused, and robbed for decades. A brief tour of the program is worthwhile.
FDR enacted the largest tax increase in American history to pay for it: 6x as many people were paying taxes after Social Security was passed, including 95% of workers. And he had a theory: “We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren’t a matter of economics, they’re straight politics.” Still, FDR wanted the program to be self-financing – taxes would initially be a little higher than they needed to be so that a reserve of money could be built up, gain interest, and new recipients would reap the reward. This was put in place rather than a tax rate that would change based on what the commitments were. Trouble awaited.
Well into the 1950s, lots of recipients of Social Security paid nothing into the system. The vast majority of those who did could expect not only to get a return from Social Security that exceeded a parallel private account but also would get back all they put in (plus their employer contribution) within a matter of months. A well-worn observation is that life expectancy at the time of Social Security’s enactment was smaller than today, and that is true but overstated. More interesting is that the original program only covered 50% of the workforce and, in 1946, only 1 in 6 people over 65 received benefits. Because there was little inflation, there were no cost-of-living adjustments.
Figure 3. To give you an idea of price stability at the time, the price of Coca-Cola did not change between 1886 and the late 1950s: 5 cents. Let’s hope that the ineptitude and wrongheadedness of politicians and central bankers does not lead again to 1 in 6 receiving benefits.
As with every surplus the U.S. government had produced in any fund, the Social Security surplus became extremely attractive to politicians. So they decided to use an accounting gimmick to claim that it was still in the fund while using it to finance other government expenditures. Since that seemed to work, and the Social Security balance sheet looked so healthy on paper, Congress regularly voted to increase the benefits (almost always in an election year, with the bigger check arriving just before voting, mostly redistributing bigger payers’ dollars to smaller payers.) In the late 1960s, a powerful Senator hijacked a must-pass debt-ceiling vote and added an amendment that dramatically altered the Social Security payouts – making multiple significant mathematical errors along the way: (1) it dramatically misunderstood what was available; (2) it added a particular inflation measure that did not account for the problems that lay ahead; and (3) it did not take into account shifting demographics where Baby Boomers had fewer kids. Soon, the program was headed for bankruptcy.
Figure 4. There is immense irony in our reliance on the government to teach kids math
Ronald Reagan delayed the day of reckoning but Social Security trustees say it will not be able to make full payments in just over a dozen years. So now may be a good time to reform some other things to allow us to ensure Social Security’s solvency, our defense needs, and whatever else you find important. This is not easy. Reagan quipped that the closest thing to immortal life on this earth is a government program. Luckily, there are some lessons.
To remind you what happens when entitlements begin:
Congress identifies a really worthy recipient of aid and proposes something to try to help them. While doing so, Congress dramatically underestimates cost and often structures the aid in such a way that it actually hurts the people intended to be helped. Over time, if good times produce a surplus, Congress feels that there’s money to be spent and that another worthy recipient should benefit. If there are bad times, Congress feels that the needs of worthy recipients are great and they should get more. At some point, sometimes at the beginning, Congress realizes that there is great politics to giving stuff away – both to the voters themselves and to the places that might be indirect beneficiaries who would be happy to write checks to keep the program going. Rinse and repeat until “Financing this expenditure burden will require either massive borrowing or economically crippling taxes. Reliance on borrowed funds would cause the national debt to soar past 100 percent of the nation’s output of goods and services by 2032. Reliance on higher taxes would require a 33 percent increase in every federal tax. Middle-class households would face combined federal income and payroll taxes of nearly 40 percent”
Figure 5. In the Congressional coin flip, it’s heads they win, tails you lose. Are you ready to play? It only costs 33% more taxes than you owe now.
So what can we do?
If something new is being considered, don’t trust Congress: their cost estimates are atrocious and their promises of future restraint are lies. Assume that programs will only get bigger and think about the long term financial impact. Look very hard at the unintended consequences where helping hurts. Try as much as possible to give responsibility over to states: they can’t print money and are far more compelled to balance their budgets.
Figure 6. Congress has broken so many promises it could easily feature in country song.
Very few federal entitlements have ended and all marginally successful efforts can be summarized in a paragraph: Revolutionary War pensions, and very eventually Civil War pensions, ended because all recipients ultimately passed away. The Freedmen’s Bureau was eliminated completely – but was wrapped up in the politics of a Civil War that we hopefully never have to repeat. Benefits for World War I veterans without wartime injuries were dramatically reduced – but FDR simultaneously pursued an aggressive spending program that might have benefitted them in other ways (and, despite FDR’s efforts, they received their bonus years early). Cogan considers a program where the federal government shared general revenue with the states to be an entitlement but that’s highly debatable. The Reagan Administration eliminated it with the President asking, “How can we afford revenue sharing when we have no revenues to share?” Yet states to this day rely on the federal government for between 20 and 50% of their budget. The 1980s also saw the passage and the prompt repeal of a Medicare program whose recipients already felt they had private insurance to cover their needs and were paying higher taxes. With practically no one a fan, it was a simple repeal. Trade Adjustment Assistance was supposed to help those displaced by free trade agreements but, in the late 1970s, a majority of recipients were already back at their original jobs by the time they received money. Its costs were reduced by over 90% by the Reagan Administration after some changes that, among other things, forced recipients to use up their unemployment insurance before receiving help from the program. Both Ronald Reagan (disability payments) and Grover Cleveland (Civil War veteran pensions) attempted to aggressively curtail particular programs they thought were subject to abuse – and, in each case, the backlash resulted in the programs becoming larger. Finally, in the 1990s, welfare reform was passed that made a substantial difference in one program – but was quickly undermined by the unrestrained growth in other programs.
So what are we to make of that?
Presidents must prioritize reform from the very beginning and be willing to spend political capital. Grover Cleveland, FDR, Ronald Reagan, and even Gerald Ford were willing to vigorously use their veto power and their political skills to fight for reform they desired. Cleveland ended up failing, FDR succeeded in the area of reform he desired, Reagan substantially slowed growth, and Ford managed to stop the onslaught of new programs. But, at least since FDR, all other presidents have taken the opposite approach: often choosing to expand programs instead of contracting them and, if they manage to target reform, only too late.
Highlight the unsympathetic but reach out to the sympathetic: ultimately, public anger is the primary driver for reform – so note how crazy the abuse can be and how harmful the everyday aid can be. At the same time, always keep in mind that you are really trying to help people. Even if they did not fix all the problems, realize that Civil War pension reform and welfare reform were built on literally decades of bad stories. Welfare reform in particular was driven by the fear that the help was hurting. On the flip side, know that public anger can fuel the opposite impulse: food stamps were created in response to a extremely emotional national television special that began with video of a child supposedly dying of hunger and reported in a grave voiceover that the child did die. Startlingly, the child not only had a different ailment but ended up very much alive – yet by then, the searing image was stuck in people’s minds. Today, a teacher friend of mine witnessed kids on free and reduced lunch taking Bentleys to prom. Whatever the debate, clarify the terms and make sure you are actually helping people in need – which may mean people helping themselves.
Figure 7. We have come a long way since Cadillac
Appoint the right judges (and central bankers). Never underestimate how much impact these players can have on our entire culture.
Cogan suggests you have to “Go slow.” Examples abound where proposed immediate large cut-offs are not executed and it may be more realistic to wean recipients off over time. Still, FDR’s experience with the World War I veterans is a counter-example where speed was its essential quality. Did the national emergency of the Great Depression and the cornucopia of other FDR spending make that the exception that proves the rule?
Know the battlefield of lobbyists. The G.I. Bill proved resilient not just because returning soldiers were able to benefit – but because the money passed through the hands of banks and schools who instantly became advocates themselves. The American Medical Association has routinely been the biggest player in fighting government takeover of healthcare because they fear the effect on doctors. Whatever the program, find out who benefits and who hurts.
Ultimately, starve and distract the beast. FDR wanted a big expansion of the New Deal in 1944 but Congress was in no mood while fighting for national survival in World War II – and spending nearly 20% of GDP. A spendthrift Congress in the 1960s and 1970s was only tamed by large structural deficits and inflation. As Nixon economist Herb Stein observed, “anything that can’t go on won’t.”
The High Cost of Good Intentions is perhaps the most important history book you can read because it covers what very well may end the American dream. Read it.
Figure 8. Click here to buy The High Cost of Good Intentions 10/10. The book does not provide as much detail about events since the Reagan administration as it does prior years but, especially since the framework of the welfare state has been with us since the 1970s, you will get a pretty clear picture.
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I read over 100 non-fiction books a year (history, business, self-management) and share a review (and terrible cartoons) every couple weeks with my friends. Really, it’s all about how to be a better American and how America can be better. Look forward to having you on board!