Fiscal Death by Welfare

by Andrew Mellon

Ironically enough, the medicine applied by our state as the antidote for our ills has proven to be poison.  The welfare state is killing our nation.  Today entitlement spending makes up nearly half of our budget.  Long term, we know that there will be no way to pay off our unfunded obligations — we will go bankrupt.  There will be three options ultimately, though ultimately can come quite suddenly: default, hyperinflation or abolition of the welfare state.

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Default is considered by many to be an impossible option as it would likely lead to mass chaos given the necessary suspension of many government services, not to mention the practical reality that WE are the collateral in the event of default.  To default is to be honest, and to be honest is anathema to the state.

Hyperinflation in my view is the most likely outcome given the massive increase in the money supply, which is good for politicians until it hits because it allows them to kick problems down the road and impose a stealth tax.  Currently, government is toeing the line between monetizing debt and intervening to keep its borrowing rates down, while incentivizing banks to keep money in their vaults or pump it into the stock market.

I believe that as the downturn goes on the government will blame the banks for the lack of economic growth and force them to allocate credit to chosen political entrepreneurs and other bad credit risks, leading to massive inflation in prices which they will likely blame on evil speculators and greedy price gouging companies.  Hyperinflation would allow the government to pay for the welfare state –  by writing entitlement checks in worthless dollars and lead to economic paralysis as constantly rising prices would make economic calculation and thus commerce impossible.

The final option would lead to the crucifixion of politicians.  Of course, this might not be such a bad thing.  All joking aside, there is a reason that entitlement spending is categorized as “mandatory” spending in our budget.  It is wrongfully viewed as an essential function of a civilized western nation, and its end would be met with a serious backlash from all of the welfare state’s recipients.

Yet while default is the most honest option, hyperinflation the most likely and abolition the most untenable, in my view it is the third option which is the inevitable end, regardless of the path we choose, with the only question being whether we take our lumps now or at some unknown and jarring point in the future.

But it never had to be this way.  Back in February of 1887, Texan farmers were struggling as a severe drought was killing their crops.  Congress was looking to pass an appropriations bill to bail out the ailing farmers.  President Grover Cleveland had the following to say on the matter:

Though there has been some difference in statements concerning the extent of the people’s needs in the localities thus affected, there seems to be no doubt that there has existed a condition calling for relief; and I am willing to believe that, notwithstanding the aid already furnished, a donation of seed grain to the farmers located in this region, to enable them to put in new crops, would serve to avert a continuance or return of an unfortunate blight.

And yet I feel obliged to withhold my approval of the plan as proposed by this bill, to indulge a benevolent and charitable sentiment through the appropriation of public funds for that purpose.

I can find no warrant for such an appropriation in the Constitution, and I do not believe that the power and duty of the general government ought to be extended to the relief of individual suffering which is in no manner properly related to the public service or benefit. A prevalent tendency to disregard the limited mission of this power and duty should, I think, be steadfastly resisted, to the end that the lesson should be constantly enforced that, though the people support the government, the government should not support the people.

The friendliness and charity of our countrymen can always be relied upon to relieve their fellow citizens in misfortune…Federal aid in such cases encourages the expectation of paternal care on the part of the government and weakens the sturdiness of our national character, while it prevents the indulgence among our people of that kindly sentiment and conduct which strengthens the bonds of a common brotherhood.

Unfortunately, as we well know future politicians failed to heed these words.  Due in large part to the New Deal and Great Society legislation, post-Lochner era court decisions and ideological subversion of the left in media and academia, the state became the paternalistic figure that it is today.  The welfare state imposed on the people the notion that we were morally required through the force of government to help out our fellow man, an inherently immoral argument.  In so doing, the state became the institution of moral hazard.

By providing aid to untapped politically lucrative constituencies for many of life’s woes, the state altered the character of the American people.  When before, life was based on self-reliance, innovation and entrepreneurship, today a wide swath of American life is based on dependency, complacency and politics, an ironic assertion in that we built our wealth that funded the welfare state on the very foundations that the welfare state undermines.  George Will outlined this transformation eloquently in his CPAC speech.

The demoralizing nature of the welfare state in absolving people from making decisions on matters of health, career and retirement in altering our character necessarily altered our actions, the sum of which make up our economy.  By taking long term planning out of the hands of people, the welfare state led us to increase our time preferences.  Time preference refers to our relative short term or long term orientation.  When we prepare for the long term, we make prudent decisions such as saving more and borrowing and spending less, in expectation of reaping greater rewards down the road.  On the other hand, when government taxes, reducing returns on capital and removes the need for cogent planning, we become more short term oriented, valuing more highly instant gratification achieved through spending and borrowing more to consume today.  High time preferences result in low capital formation, high real interest rates and diminished prosperity.

It should be noted that politicians are not immune to time preferences.  Since politicians are concerned most with getting re-elected, and the state came to be seen as the mechanism for spreading the wealth around to various voting blocs, naturally there grew a conflagration of welfare programs (using the term welfare loosely) funded through direct taxation, inflation and debt with little regard for the future.

The psychological and concomitant economic effects of the redistributive state cannot be understated.  What has been consistently understated is what the world would look like without the welfare state.  If we were to abolish Social Security, Medicare and Medicaid, billions of dollars would return to the hands of the people.  People would have to plan their lives more carefully and responsibly and redevelop the drive that had been taken from them by the state, and they would allocate these new funds accordingly.  This influx of new cash to be reallocated according to the preferences of consumers would lead to unimagined innovations.

How many new hospitals, pharmaceutical companies and insurers would crop up?  How many more dollars would people save for retirement and in so doing invest in the private sector?  How many charitable organizations would be created for people to voluntarily help their fellow man?  How many government bureaucrats would be unleashed into the economy and employed in productive jobs?  How many productive jobs would the private sector create?  How many people would pick themselves up out of poverty?  One fascinating anecdotal example of the types of innovations that occurred when the government did not coddle people from cradle to grave was the institution of the fraternal society, one of the functions of which was healthcare provision under “lodge practice,” whereby society members could voluntarily pool their money and draw upon it when in need of medical care.  Prices were low and service was of quality until government intervened and destroyed the practice.

Now surely, as a practical matter the scrapping of the welfare state would cause great disruption, and people expecting to receive and/or reliant on benefits would incur immediate hardships.  But with the infusion of capital back into the hands of private individuals making decisions for themselves, in the long run our standard of living would increase, our competitive advantage in the world would widen and we would restore the national character to which Cleveland spoke.  We would reverse the demoralization and economic stagnation induced by the state.  We would see the bountiful unseen benefits blocked by the massive edifice of the state that holds our people back.  It bears remembering that we didn’t grow wealthy with a safety net under us in the first place.

Our society was built on the non-aggression principle.  Individuals should be free to pursue purposeful ends so long as they do not harm others.  Government’s role is to protect us from external harm by providing defense, public safety and the courts.  By government attempting to protect us from the harm of our own decisions, imposing morality on the people through forcing some to subsidize others, government becomes an immoral, socially and economically destructive institution and perpetuates a cycle of intervention, dependency, crisis and further intervention.

As the healthcare debate rages on, and in context of the reality on the ground today, it surely seems as if we are miles from the end of the welfare state.  But indeed, we are going to arrive at the end of the experiment of the Ponzi welfare scheme, and it will not be by government fiat but by gravity.  This will be a blessing in disguise, though the short term pain of a sudden collapse will be great.  Traumatic as the collapse of the welfare state will be for those reliant on it, collapse will go quite a ways towards restoring power back with its rightful owners, the people.


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Posted Feb 28th 2010 at 5:01 pm in Congress, Culture, Federal Spending, History, Politics, Tax Reform, Tea Party | 135 Comments