The Entitlement Quandary—Posner

Although I do not place any weight on long-term economic forecasts, there is no doubt that we face a growing burden of federal and state entitlement spending—“entitlement” signifying that expenditure levels are automatically financed, rather than having to be reauthorized every year as defense expenditures (and indeed all nonentitlement government expenditures) are. Government entitlement spending is concentrated on pensions and elder health care. Both forms of spending increase as a function of the growing percentage of elderly people in the population, and healthcare spending grows additionally because of increases in cost caused by new technologies plus the normal upward-sloping supply curve, implying that increases in demand for health care (because of the increasing number of elderly) cause a rise in average and therefore total costs.

 

Becker rightly adds to entitlement costs the cost of servicing government debt, since lenders to government have an entitlement to the repayment of their money with interest at the rate specified in the loan. Costs of debt service can easily grow at a compound rate, because the more the government borrows, the higher the interest rate it is likely to have to pay; instead of borrowing $1 billion at 5 percent interest, for a total annual interest expense of $50 million, it might have to pay 7 percent interest to borrow $2 billion, for a total annual interest expense of $140 million—which is more than twice the interest expense on a loan that is twice as large. Because of the United States’ huge public debt (the part of federal government debt that the government is contractually committed to repay), interest rates on the public debt are likely to rise, creating the compounding effect that I just illustrated.

 

I am less concerned about nonfederal government debt than about federal government debt. The nonfederal debt problem centers on public workers’ pensions, and public workers are of course a minority of all workers. Moreover, because states and cities cannot create money, and because they compete with other states and cities for businesses and people, they are compelled by market forces to restrict spending. The federal government’s entitlement obligations extend to the entire elderly population of the United States. And any commitment to federal fiscal prudence is diluted by knowledge that the United States can always inflate its way out of deficits or borrow at low rates as long as the dollar remains the principal international reserve currency, so that foreign nations have to buy dollars from us, which means have to lend to us.

 

Deficit projections are pretty worthless. At the beginning of 2007 the Congressional Budget Office, which has an inflated reputation but is at least nonpartisan, projected the federal deficit for fiscal 2010 at $333 billion (it will be at least four times that)—and that was a short-term projection. In 2001 it had predicted a 10-year budget surplus of more than $3 trillion. Its forecasts are largely just extrapolations, which assume that the future will be just like the past. All that can be said about future deficits with an approach to confidence is that if nothing is done they will grow, and that nothing is likely to be done until they grow to a point at which there is a palpable impact on the standard of living.

 

In 1983, Congress amended the social security act to provide that, for people born in 1938, the age of eligibility for full social security benefits would rise gradually from 65 to 67. (Hence the first effects of the reform were not felt until 2003, when people born in 1938 reached the age of 65, and the full effect will not be felt until 2026, when people born in 1959 reach 67—it is the deferral of the hurt that made the program politically feasible.) It is a sad commentary on our political system that there is no movement today for a similar reform, which would raise the future age of entitlement to full social security benefits to 70 in recognition of continuing increases in longevity, health, and income. We are in ostrich mode so far as dealing with our fiscal problems is concerned, even though the problems are far more serious than they were in 1983.

 

The basic problem is that our two political parties, although they pretend to be ideologically opposed and certainly do disagree on a number of details of public policy (many of which however are economically inconsequential), are agreed on the basics of fiscal policy: that taxes are bad and government spending is good. The Democrats used to believe that since spending was good, taxes had to be heavy, and Republicans that since taxes are bad, spending had to be limited so that taxes could be low. Eventually the parties discovered from election results that taxes are unpopular and spending popular, so Democrats stopped pushing for higher taxes (except on very high earners) and Republicans for lower spending. Both parties have embraced fiscal irresponsibility.

Comments

[NEH]

So when is a contract not a contract? When the terms and conditions become onerous for one of the signatory parties? Are we about to witness, "The Death of Contract"? This may well become the new fertile ground for the intelligentsia in the Law Acadamies.

No matter how it's sliced and diced, we're in for some tough times ahead. Especially, for the signatories to these Contracts.

[John David Galt]

Once one concedes that Congress is entitled to hand out "pork", its members are in an incentive trap: each one has to try to bring home pork greater than what his constituents pay in taxes, or they'll replace him with somebody who will.

But I do not so concede.

If we're going to talk about contracts in this regard, then let's start with the contract that is supposed to trump all others: the Constitution in Exile, as explained in Judge Napolitano's book. Congress is not authorized to be in the entitlement business. Period.

[NEH]

Really? Ever bothered to read and develop a proper interpretation of the "Preamble to the Constitution"? Pay special attention to the clauses of "ensuring domestic tranquility", and "promoting the general welfare"... What ever happened to the legal/political philosophical concept of Social Contract? Is that even taught in schools anymore?

[Brian Davis, Austin, TX]

I'm resigned to believe the key trade-off for cooperative reflation will be rapid evaporation of the restrictions that remain on foreign investments in and direct ownership of U.S. assets, technologies, and financial intermediaries. Direct influence by foreign enterprises (including state-controlled and sovereign-wealth-funded) in U.S. political processes will follow in near lockstep. Americans will drink the kool-aid if enough of us are promised we can keep (or get) a paying job, our publicly-subsidized benefits, and our bread & circuses.

[NEH]

Ahh Yes, "Bread and Circuses" ..., they kept the Empire afloat for a thousand years. Until the "Barbarians" decided they wanted the same and then the whole deck of cards came tumbling down.

Sound familiar.

[Glenn]

One point neither Becker nor Posner makes is that the government can to some degree inflate its way out of debt, as happened in the 1970's, although inflation also has the effect of raising interest rates. The government cannot inflate its way out of entitlement obligations, since most of them one way or another are tied in to COLA's or other devices. The only way to reduce those is by actual reforms, including those mentioned by Becker and Posner.

[Jack]

Posner suggests: "It is a sad commentary on our political system that there is no movement today for a similar reform, which would raise the future age of entitlement to full social security benefits to 70 in recognition of continuing increases in longevity, health, and income."

........... Well, maybe, and "in the future". Just now as boomers age through retirement years it would simply add more working folk to a perhaps structurally stagnant economy unable to employ our workforce and in which we've 2 million unemployed recent college grads. Seventy might be OK for office workers but tough on those engaged, in the trades, assembly lines, coal mines, and god-forbid, injury prone meat packing plants where working conditions are again much like Upton Sinclair observed in "The Jungle".

........ What? No lament about successful or failed CEO's retiring at early ages via rigged "stock options" and golden parachutes? Ah! Those are private transactions and Ha! Ha! up to the stockholders.

.......... Posner correctly points out the kiddies "not likely taxes" making a presidential campaign based on slopping the hogs a near winner. Perhaps in the future when they gin up a war an immediate tax surcharge should accompany a proper declaration.

John Galt: Indeed, And same for industry tax breaks and benefits sought by an army of 150,000 lobbyists? But surely law enforcement including oversight of underwriting standards and imprisonment for those blatantly selling fictional bond ratings in cahoots with the Great Ponzi of the last decade? Would Aynn Rand conservatives like to try out the power of capitalism with a lot fewer distortions and short-circuits?

[John]

this partial deposition transcript just arrived:

Q. Posner, where were you when Dick Cheney said, "deficits don't matter?"

A. Ostrich mode, with my head in the sand and my . . . in the air.

Q. Do Deficits matter to conservatives and republicans when they are in power?

A. No, only cutting taxes for the rich matters. That is why no republican president in 80 years has run a surplus.

Q. Name our three most Keynesian presidents?

A. Reagan, Bush1 and Bush2 (deficits growing from 1st year in office to last year in office)

Q. Since WWII,our three least Keynesian presidents?

A. Truman, Clinton and Obama

Q. To reduce deficits, how does one vote

A. vote her straight Democratic

[Jack]

Ha! John! Good one. Irrefutable truth!

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