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February 11, 2019

On the Edge: America Faces the Entitlements Cliff

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The United States is approaching an “entitlements cliff.” That is certain. The only question is whether the U.S. economy will happily jump off the cliff, unknowingly meander over the edge, be pushed off—or recognize the imminent danger and find a way to stop its fall at the last possible moment. Time for that last option is running out.  

Everyone knows the story. Congress creates a new entitlement program promising that it is much needed, financially sound and even that it will likely create jobs and spur economic growth. While some programs are needed, and may even create some jobs and economic growth, they are never financially sound. In these pages we offer a financially sustainable solution. 

When entitlement programs begin facing the inevitable financial problems, the government redirects more and more taxpayer dollars to them. However, taking that money out of the private sector hinders economic growth, reducing tax revenue and job creation, which leads to more people depending on safety net entitlement programs that provide just enough assistance to allow them to get by.  

Because the benefits are often scaled back if the recipients earn just a little more, they have an economic incentive to limit their income. As a result, the programs create a culture of dependency that can be passed down from parents to children, who themselves often become trapped in poor housing and low-performing school districts with little hope of ever escaping.  

Entitlement-program defenders claim they only seek a “fair” or “just” society, which they assert is more economically prosperous than a free society. They believe that when the government picks who prospers, more people prosper. That asking “the wealthy to do a little more,” in the words of one former president, means everyone will do better.  

Theirs is a long-term strategy to take from the haves and give it to the have-nots in the hope of reducing the number of have-nots. What usually happens is that we have just as many or more have-nots and often fewer haves.  

Fortunately for the United States, solid U.S. economic growth, at least for most years prior to the Great Recession and the Obama economy, has helped to postpone the entitlements cliff. Financially speaking, a country can redistribute more income if it has a robust economy that produces growing tax revenues—though whether redistributing that money is good policy is a different question.  

But the redistributionists are never satisfied; they always want to give away more. In 2015, the federal and state governments spent $1.1 trillion on means-tested welfare programs, larger than the total GDP of all but 15 countries, and that does not even include the two largest entitlement programs, Social Security and Medicare. And yet the redistributionists clamor that it isn’t enough.  

Unfortunately, many politicians and voters are willing to embrace the redistributionist approach. Sympathy is cheap, entitlement programs are not.  

Over the past 50 years, beginning with the 1965 creation of the Medicare and Medicaid programs and President Lyndon Johnson’s “War on Poverty”—a “war,” incidentally, that we have lost, badly—Washington and state governments have dramatically expanded the entitlement state.  

The pleas for help often come from rent seekers and advocacy groups that benefit from the creation of entitlement programs, but also from ill-informed economists and politicians who argue that taking a dollar from Peter and giving it to Paul stimulates the economy. Well, it stimulates Paul’s economy; Peter’s not so much.  

Many politicians and the media have embraced those arguments and regurgitated them ad infinitum so that they have become part of the conventional wisdom. To question those assumptions is to demonstrate beyond question how unsophisticated and cold-hearted the skeptic is. And yet those policies did not work in the past and do not work now.  

It is a testament to the failure of any rational political system  that some economists, politicians and the media can continue to promote failed redistributionist policies in the face of all the evidence to the contrary and still be taken seriously. Those redistributionist policies have brought the U.S. to the entitlements cliff, which is one reason why on November 8, 2016, the American people shouted “enough!” They elected Donald J. Trump president of the United States. 

His victory was a slap in the face of the conventional wisdom. He wanted to cut entitlement spending—Social Security and Medicare excepted—not grow it. He wanted to grow the economy by lowering tax rates, especially on corporations, simplifying the tax system, and rolling back burdensome regulations. And he called out media organizations that constantly misreported or refused to report the damage caused by the entitlement state.  

Remaining a healthy distance from the entitlements cliff—along with its high levels of unemployment, economic stagnation, poverty and civil disobedience—should be of the utmost importance to society. Doing so requires dealing with a multitude of existing entitlement programs that may be very popular, but that we can no longer afford. While avoiding the fall may not be entirely painless, the longer we wait the further the fall—and the bigger the crash at the end. 

This book attempts to inject a factual, demonstration-based and objective voice into the entitlements debate. The only way to solve the problem long term is to gradually shift to a system of privately funded or temporary, means-tested safety nets.  

The stakes are too high to give into the subterfuge that is all around us. The economic and actuarial issues facing our nation and the world are rapidly approaching a crisis point after many decades of irresponsible policies and actions by elected officials and others. 

Politicians and the public have managed, with few exceptions, to avoid facing the truth regarding the inevitable collapse of programs such as Social Security and Medicare because the crisis was always decades into the future. The people who will   have to deal with the collapse, when it comes, either were not born yet or did not vote.  

Stopgap measures, along with other gestures in the general direction of fiscal prudence, have kicked that can down the road again and again. That road is coming to an end sooner rather than later. At the end of that road there is no warning sign or protective rail—only a cliff with a yawning economic abyss.

The proposals in this book are an effort to save us from that abyss.

Note: The pdf attached is an interactive document. To launch a footnote reference hover over the url displayed and click. 

 

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