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Tuesday, March 29, 2005

 

Social Security - Medicare - The Entitlements Crisis

Part 1 - Background

Courageously, the Bush Aministration has not only tiptoed over the third rail of politics - social security, they have literally run amok on it. To understand why they would risk so much of their new found credibility and their mandate, one has to look at the history of social security and medicare in context. Only then can one intelligently address the basic questions;

Is there a social security funding crisis?

Is there a medicare / medicaid crisis, and if so, is it true that it dwarfs the social security funding predicament?

Can we really intelligently predict demographic trends and project revenues and outlays over periods ranging from 30 to 75 years?

Would private accounts make a meaningful difference in the funding picture, or is it really just a matter of adjusting taxes and benefits?

What are the agendae of the Administration and its various opponents on this issue?

Throughout history, the nature of governments is to overpromise and overspend. Promises have varied from bread and circuses to wars of conquest and enrichment, to lower taxes and more welfare, ad nauseum. The common denominators have been that governments generally overtax anyone with the ability to pay, and even so, spend beyond their means. Wars, roads, bread, circuses, social programs, utility projects, conservation projects, mass transit, etc. etc. are expensive propositions. Yet, when you tax, you take money out of the economic system, reducing economic activity versus what it might have been.

Keynesians looked at the depression and concluded that government spending could revive a moribund economy, but they were looking at a special case, drew the wrong conclusion anyway, and ignored the friction inherent in government solutions. However, they provided the intellectual capital for several generations of socialists and quasi-socialists to justify every imaginable social program to be funded by government. Their work, taken to the extreme, is what you see in the moribund EU economies today - a sclerotic mess where workers are aghast at the prospect of so much as a 35 hour work week.

In the US, Keynesians ran into a stronger work ethic and a tradition of individual toughness and responsibility that forced them to compromise. In recent years, the Reagan and Bush Administrations, drawing on the intellectual ideas of Senator Barry Goldwater, had great success at stemming the socialist tide and marginal success at reversing it. Even Democrats in this country are torn between the impetus to follow the pragmatic socialism of Roosevelt and Johnson, and the strong identification with their anti-government spiritual founder, Thomas Jefferson.

What governments do to survive the cycle of overpromising, overspending and overtaxing is to debase the currency, a tradition older than the Roman Empire. Today, we know this process as inflation. Inflation punishes lenders and benefits borrowers, such as the Federal Government. Again, US political history has seen cyclical swings between those favoring strong currency and weak currency (recall Bryan's cross of gold speech), and we have reached another of those inflection points where inflation is emerging, following a period of sharp deficit spending. In this case, the Keynesians were right - deficits lead to inflation, surpluses to a stronger dollar, and we have seen that in spades the last ten years or so. The reason is that inflation is a monetary phenomenon, and governments can't resist the temptation to monetize their deficits, causing inflation.

What does all this have to do with social security? Social Security is the most important legacy of the socialist movement in this country - essentially, an unfunded liability of the government, a program that began modestly but whose promised benefits grew unnecessarily and exponentially over the years, to the point where it is one of a few liabilities on our national balance sheet that will force the government to tax and inflate. UNLESS, the program is radically changed. Not just a little tax and benefit tweak as was done in the 1980's but a major overhaul. This is why the Bush insistence on private accounts. Whether they will make much fiscal difference in reality is beside the point. Bush realizes this is a once in a lifetime opportunity to radically change the program, make it less an instrument of social policy, and restore individual responsibility for saving.

His opponents are just as determined that the program be funded by general tax revenues only, that it be considered nothing less than a sacred promise of the federal government, and that taxes can be raised to any level necessary to provide those benefits.

More to come...

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