Trillion-Dollar Welfare State

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On Borrowed Time: How The Growth in Entitlement Spending Threatens America's Future, by Peter G. Peterson and Neil Howe, San Francisco: Institute for Contemporary Studies, 430 pages, $24.95

Capitalism's critics have long held that private entrepreneurs are too short-sighted, with an excessive concern for the next quarter's balance sheet. Because such myopia may have negative economic consequences, critics urge that the market system be placed under greater political control "in the public interest."

This criticism of the market system never did hold much water. It doesn't explain, for example, why so many businesses can be short-sighted year in and year out and yet survive for decades (without government subsidies). It also ignores the role of market forces, such as the market for corporate control, in providing managers with long-term incentives.

The biggest shortcoming of such criticism is its failure to acknowledge that politics is actually excessively myopic, with a focus never any more far-reaching than the next election. Any politician overly concerned about the future of America will have great trouble surviving in office, for a successful political career requires that current constituencies be pleased, often at the expense of future generations.

On Borrowed Time, by Peter G. Peterson and Neil Howe, exposes how federal politicians have "mortgaged our future" by promising an extensive package of entitlements to mostly middle- and upper-income Americans without providing a means of paying for them. Citizens who read the book cannot help but laugh the next time they hear proposals for lengthening the time horizon of American business by subjecting it to greater political control.

Peterson, whose numerous articles on budget issues and international economics put him in the ranks of influential "pop" intellectuals, and Howe, senior fellow of the Retirement Policy Institute, present a sobering account of how "government…keeps massive, unfunded pension liabilities off-the-books, where their real costs are hidden." Government has already saddled taxpayers with "10 trillion in unfunded federal benefit liabilities above and beyond our official national debt." To pay for all these promised benefits, taxes will take as much as half of every worker's paycheck by the middle of the next century, according to Peterson and Howe.

The authors argue that current entitlement spending is eating up the country's capital stock and thereby undermining hopes for posterity. What's worse, most entitlements do not help the poor and the needy but instead benefit the affluent and politically effective middle class. "Most of the redistribution of income is from middle-income people to other middle-income people."

Peterson and Howe also debunk the entitlement myth that "the elderly are, by definition, needy and dependent." For the most part the elderly are much better off financially than the average nonelderly family. The former have more assets, fewer liabilities, and in many cases, more income. As economist Gordon Tullock has often said, the main reason for government redistribution of income is that the recipients want the money!

If the system of entitlements is not altered, say Peterson and Howe, we are in for a "fiscal nightmare." Should we continue on the same spending course "until the year 2040 our federal budget will be consuming 86.1 percent of GNP, with entitlement spending and interest on the national debt accounting for more than three-quarters of the total."

A big reason for this scenario is that we are an "aging society." The future will see more and more retirees living longer and longer and receiving more and more government subsidies. At the same time, the entitlements will be almost impossible to pay for without a dramatic increase in productivity. Fueling the future explosion in entitlement spending is health care hyperinflation. Social Security payments, and particularly, the federal pension system.

Research by economist Sharon Smith has shown that public employees' wages are as much as 40 percent higher than wages of private-sector employees with the same age, education, and experience. On top of that, Peterson and Howe show that federal pensions are far more lavish than private retirement benefits. This is another manifestation of the shortsightedness of politics. There may be taxpayer resistance to raising taxes now to finance higher public employee wages, so politicians impose tax liabilities on future generations by passing out patronage in the form of lavish retirement benefits.

What should be done about all this? Peterson and Howe offer some suggestions for reform, but they all amount to minor tinkering with various welfare programs.

While their reform proposals are uninspiring, their explanation for the present state of affairs, set forth in the final chapter, is downright bizarre and out of character with the rest of the book. The title of the chapter, "The Failure of the Libertarian Welfare State," makes about as much sense as "jumbo shrimp," "military intelligence," and other oxymorons.

The real problem with the welfare state, write Peterson and Howe, is that it "has become 'libertarian'.…its foundation has been shifted to private, contractual arrangements with government." Describing the system as based on claims of "individual rights to debt-financed consumption," the authors call it "the new libertarianism."

Of course, they have it all backwards. The welfare state is a gross violation of individual rights made possible by majoritarianism run amok. It is the welfare-state philosophy embraced even by Peterson and Howe that is really the root of the problem. They bemoan, for example, a lack of "collective goals or stewardship" by government and romanticize the New Deal and Great Society spending programs as efforts to protect widows, orphans, and the disabled against "the worst vicissitudes of modern capitalism." They believe all these programs originally served "the common interest" but were corrupted by the spread of libertarianism!

The authors are most certainly wrong when they further conclude that the "ideologies of the left and right are now irrelevant to the issues at stake." Some kind of ideological or philosophical vision, even if it isn't explicit, necessarily underpins all public policy. Ideology determines the path government policy will take in the future. Are we to continue to expand the welfare state, with only marginal tinkering such as that suggested by Peterson and Howe? Or is fundamental reform, such as privatizing Social Security and deregulating and privatizing the health care sector, the more appropriate policy route? The former can only be justified by a collectivist ideology, in which individual sacrifice and redistribution of wealth is made for the good of the "public." In contrast, the latter set of policies requires an individualistic ideology that respects individual rights and responsibilities.

On Borrowed Time does a good job of exposing some of the worst failures of the American welfare state. But the authors' philosophical confusion keeps them from offering anything in the way of fundamental reform.

Thomas J. DiLorenzo is Scott L. Probasco, Jr., Professor of Free Enterprise at the University of Tennessee, Chattanooga.

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