by Bruce Thornton
The on-going negotiations over avoiding the tax hikes and spending cuts we call the “fiscal cliff” are simply the latest act in a farce of self-serving political denial. For decades now both parties have overseen and nurtured the expansion of the entitlement state all the while ignoring the slow-motion economic implosion whose predictable end can be seen today in a bankrupt Greece currently surviving on EU handouts. But American voters and politicians are so marinated in expectations of endless federal and state largess that modest reductions in spending, such as those proposed earlier this year by Congressman Paul Ryan, are attacked as draconian “cuts” that will “shred” the safety net and throw millions into Dickensian penury.
And make no mistake. The “cliff” might not be reached in January, even without a deal. But it’s still waiting down the road. Baby Boomers, 75 million strong, are retiring at a rate of 200,000 a month, and they can expect to live on average until 84 if they make it to the retirement age of 65. The two big drivers of entitlement spending, Social Security and Medicare, weren’t designed to transfer money to retirees for so long, or pay for artificial knees and hips for Boomers who want to be active in their 70s and 80s. If left unreformed, spending just on Social Security and Medicare will eat up 14% of GDP in 40 years, necessitating even more federal borrowing than the 40 cents currently borrowed for every dollar the feds spend. That’s not a cliff, that’s an economic abyss.
Reining in entitlement spending, then, is the major problem that everybody needs to focus on. And a good place to start is Nicholas Eberstadt’s A Nation of Takers. Eberstadt’s grim documentation of the reckless expansion of what he calls the “vast and colossal empire of entitlement payments that it [the state] protects, manages, and finances,” and his analysis of the ill effects such transfers have had on the American character should be read by everyone serious about the fiscal threats to our way of life.
Redistributing wealth through programs like income maintenance, Medicaid, Medicare, Social Security, and unemployment insurance has become the federal government’s most important function. This development would have astonished the Founders, who codified national security and defense as the national government’s primary role. And this momentous shift has led to an accelerating number of Americans on some sort of dole. In the early 1980s, 30% of Americans received at least one government benefit. By 2011 just over 49% were. The costs of this increase have accelerated as well. In 1960, entitlement spending by government at all levels was $24 billion in today’s dollars. In 2011, the cost was almost $2.2 trillion. As Eberstadt glumly prophesizes, we are heading for “the day in which entitlement spending comes to exceed all other activities of all levels and branches of the US government.”
The costs of such profligacy, however, are more than economic. These wealth transfers have had deleterious effects on traditional American character. Observers of the American character traditionally had remarked on what Eberstadt describes as a “fierce and principled independence” and “proud self-reliance.” This independence extended to financial self-reliance as well. Americans “viewed themselves as accountable for their own situation through their own achievements in an environment bursting with opportunity,” Eberstadt writes, and had “an affinity for personal enterprise and industry” and a “horror of dependency and contempt for anything that smacked of a mendicant mentality.” Accepting help or handouts was considered “an affront to their dignity and independence.” These are the strengths of character and virtue that have created the richest, freest, and most powerful nation in world history. But the federal government’s ever- increasing handouts — which these days are not considered signs of shame, but deserved legal and civil rights — are eroding these virtues.
This corruption of character insidiously spreads throughout the culture, enabling politicians to expand these benefits in order to create electoral clients. One malign result has been what Eberstadt calls the “male flight from work.” The government has replaced husbands and fathers as providers, leading to “the proliferation of fatherless families and an epidemic of illegitimacy.” This change can be seen in the decline of men participating in the labor force. Between 1948 and 2011, male labor force participation sank from 89% to 73%, a drop twice as large as the number of men who left the workforce because of the Great Recession. For more and more Americans food stamps and welfare have replaced the wages of a working male.
Or consider the abuse of Social Security disability insurance. In 1960, Eberstadt reports, an average of 455,000 workers were receiving monthly disability payments. In 2010, 8.2 million were, four times the number of people on welfare. Worse yet, the average age of those receiving disability insurance has lowered. In 2011 the rate of workers in their thirties and forties receiving disability was more than double that of the same cohort in 1960. Given the big improvements in healthcare and longevity during that time, these increases do not reflect a more dangerous work environment. What happened was the addition of “mood disorders” and “musculo-skeletal” ailments to the diagnostic categories that made workers eligible for disability. Since doctors can’t disprove the existence of potentially subjective conditions like “depression” or “back pain,” we shouldn’t be surprised that these days nearly half of all disability claims are based on these ailments.
The costs of food stamps, welfare, or disability insurance, however, are spare change compared to the monstrous costs of Social Security and Medicare, which in fiscal 2012 totaled $1.2 trillion, 37% of non-interest federal spending. Nor are these programs “earned” through payroll taxes that were saved. As economist Robert Samuelson wrote recently, “But they weren’t saved; they paid the benefits of earlier retirees. Even had they been saved and earned interest, they typically wouldn’t cover lifetime Social Security and Medicare benefits, estimate the Urban Institute’s C. Eugene Steuerle and Caleb Quakenbush. A couple with average wages retiring in 2010 would receive $966,000 in benefits against taxes of $722,000.” Rather than endowments funded by worker contributions, Eberstadt writes, Social Security and Medicare funding are “accounting contrivances built upon a mountain of future IOUs.” And this problem will only worsen as the number of retired Boomers reaches 72 million by 2030. According to the Heritage Foundation, Social Security alone is projected to run a $344 billion deficit in 2035. Looking farther down the road, the unfunded liabilities of Social Security for the next 75 years is $8.6 trillion, and those of Medicare from $27 to $37 trillion.
The monstrous deficits and debt the government has been amassing for four decades correspond in part to the need to borrow money to pay for these two programs. But this downward spiral of increasing entitlements and growing debt — which in Obama’s first term has increased 83% — will damage more than just our budget and character. We have already seen defense budgets targeted for reductions, even though we spend 3 times as much on entitlements as on defense. When President Eisenhower in 1961 warned of the “military-industrial complex,” the ratio was 2-1 in favor of defense spending, which represented 9.4% of GDP compared to 4.8% in 2010. And we are looking at another half a trillion of cuts over the next decade, on top of the half a trillion Obama has already slashed. The point is not that we can’t afford to spend more on defense, but that we have other priorities. As Eberstadt notes, “By the calculus of American policymakers today, then, US defense capabilities seem to be the primary area sacrificed to make the world safe for the unrestrained growth of American entitlements.”
Yet despite this looming disaster, President Obama and the Democrats have taken entitlement reform off the table in the current negotiations over the “fiscal cliff.” Indeed, Obama’s latest offer included $600 billion in vague future spending cuts, but $200 billion in new spending along with $1.6 trillion in new taxes. According to economist Keith Hennessy, in reality this offer would lead to a spending increase, not a reduction. Clearly, Obama is not interested in heading off the fiscal disaster Eberstadt documents. Rather, he is pursuing the old progressive dream of income equality through the redistribution of wealth. Unfortunately, for future generations that dream will be a nightmare of bankruptcy at home and compromised national security abroad.
©2012 Bruce S. Thornton