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Magic Accounting

by William Voegeli
Our entitlement programs are at war with themselves

‘Even Critics of Safety Net Increasingly Depend on It,” read the front-page headline in the February 12 issue of the New York Times. Reporting from Chisago County, north of Minneapolis, the paper’s Binyamin Appelbaum and Robert Gebeloff found several residents who, although they describe themselves as “self-sufficient members of the American middle class” and “opponents of government largesse,” are “drawing more deeply on that government with each passing year.” One says, “I don’t feel like I need the government,” even though he supplements his $39,000 income with Earned Income Tax Credit refunds, his three younger children receive federal subsidies for their school breakfasts and lunches, and Medicare recently paid for his mother’s hip surgeries.

Appelbaum and Gebeloff interviewed several other people who “continue to take as much help from the government as they can get,” despite being skeptical about government programs. “When pressed to choose between paying more and taking less, many people interviewed here hemmed and hawed and said they could not decide. Some were reduced to tears.”

The Times did not randomly select Chisago County for examination. Home to Representative Chip Cravaack, it provided his margin of victory in November 2010 when he became the first Republican congressman since 1947 from Minnesota’s Eighth district. Cravaack, a former airline pilot who had never run for public office before successfully challenging an 18-term Democratic incumbent, was impelled to politics by the tea-party reaction to the Obama domestic agenda. “We have to break away from relying on government to provide all the answers,” the Times quotes Cravaack telling his supporters. Many people in Chisago County, according to Appelbaum and Gebeloff, “say they are angry because the government is wasting money and giving money to people who do not deserve it. But more than that, they say they want to reduce the role of government in their own lives.”

The real subject of the story, then, is the sincerity, feasibility, and even coherence of conservatism’s renewed commitment to limited government. On balance, the article refrained from overtly disdaining its subjects or their political views. Liberal commentators, however, were only too happy to connect the dots. In a column headlined “Moochers Against Welfare,” Paul Krugman derided politicians who “deliberately encourage” voters to believe that slashing government spending means “cutting programs for the idle poor, not things they themselves count on.” Conservatives “hate . . . reliance on government programs,” he wrote, but “the regions in which government programs account for the largest share of personal income” are the ones where conservative candidates fare best at the ballot box. In “Ideological Hypocrites,” which appeared a few days later in the Washington Post, E. J. Dionne asked, “Can conservatives finally face the fact that they actually want quite a lot from government, and that they are simply unwilling to raise taxes to pay for it?”

The indictment is clear: Lots of Americans are conflicted and confused about our welfare state. That’s forgivable — its programs are numerous, enormous, and complex. What’s unforgivable is how conservative politicians, rather than disabuse people of these misconceptions, exploit them to win electoral victories. They do this, in some cases, because they share their constituents’ contradictory thinking about reducing programs while retaining protections. In other cases, they know full well that such an agenda is impossible, but cynically seek short-term political victories at the cost of long-term governmental problems.

Anecdotes about citizens’ demanding that government “keep its hands off Medicare” are Exhibit A in the prosecution’s case. In July 2009, for example, President Obama informed an audience that he had received a letter from a woman who wrote, “I don’t want government-run health care, I don’t want socialized medicine, and don’t touch my Medicare.” Such demands, wrote Timothy Noah at Slate, reflect a politics of “infantile denial.” It finds conservatives, far more frequently than liberals, inciting people to nurse imaginary grievances and make “flagrantly incompatible demands,” he continued, quoting Michael Kinsley. Expressing himself less stridently than Noah, as most people do, the president ascribed his correspondent’s confusion about Medicare to the problem that “sometimes we can’t sort out the myth from the reality.”

It was, however, the liberal architects and defenders of the welfare state, not its conservative opponents, who created the myth that spawned the subsequent confusion. Central to liberalism at high tide was a rhetorical effort to establish the untruth that Americans receiving social-insurance benefits were getting back nothing beyond what they had already paid for. A 1936 pamphlet describing the new Social Security system, for example, assured wage earners that “you will be earning benefits that will come to you later on” and “will come to you as a right.”

Vincent M. Miles, one of the inaugural members of the Social Security board, explained the basis of this right in a 1936 speech: The program’s old-age benefits “are best understood if we compare them to insurance.” The monthly checks from the government are “like the installments on annuities from an insurance company.” And, “like an insurance-company policy, the worker’s old-age benefit from the government must be paid for in advance. Instead of weekly, monthly, quarterly, or yearly premiums, however, the government collects weekly or monthly payments which are called ‘taxes.’”

One of the authors of the Social Security Act, J. Douglas Brown, went further in a 1955 speech, “The American Philosophy of Social Insurance.” The “first and foremost element” of this philosophy, he said, is that “the system must provide protection as a matter of right and not as a benevolence of a government, an institution, or an employer.” Establishing social insurance “reversed the presumption that a payment to an eligible individual was a generous act of mercy by a sovereign, to the presumption that such a payment, under social insurance, was the honest fulfillment of a contract between the citizen and the state.” Through “his individual contribution to our economy,” according to Brown, the citizen establishes his contractual rights, which define “the level of his protection.” Complex formulas determine social-insurance benefits on the basis of each individual’s unique wage history, since “we still believe in America that a man should be rewarded for his own efforts.”

President Johnson invoked this principle of individually earned benefits in 1965 when he signed Medicare into law. (The new legislation amended the Social Security Act.) Through Medicare, he said, “every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age.” He was to do so the same way workers were already paying for their old-age, survivor, and disability benefits — by contributing “through the Social Security program a small amount each payday for hospital-insurance protection.”

An American who warns an elected official to keep the government’s hands off a social-insurance program doesn’t misunderstand our welfare state but has grasped its central argument exactly as it has been presented. Social insurance, we have been told (and told and told), is a mechanism through which we insure ourselves against financial vulnerabilities. The benefits are ours because we paid for them in advance. They vary because the amount we paid for them varies. Having “contributed” our taxes, we insist on receiving our benefits, since we were assured that the former are just like insurance premiums, and the latter just like insurance settlements.

The “infantile denial” expressed by the woman who wrote to President Obama is nothing more than the demand for “the honest fulfillment of a contract between the citizen and the state.” Having discharged her contractual duties as the people who wrote the contract explained them, she resents the possibility that the government might, to her detriment, unilaterally revise its contractual obligations. Appelbaum and Gebeloff summarize the attitude of the Medicare recipients they interviewed: “They paid what they were told; they want to collect what they were promised.”

But the fulfillment of our social-insurance contracts has become a grave problem because the myth of social insurance cannot be reconciled with the reality, political and fiscal, of social welfare. The Times cites an Urban Institute study showing that the value of social-insurance benefits is typically a multiple of the value of social-insurance taxes. In one example, a woman born in 1965 earns a midrange salary during her working years and deposits her (and her employers’) Medicare withholding taxes into an account that compounds annually at the inflation rate plus 2 percent interest. That account would be worth $87,000 by the time she retired in 2030 at age 65. “But on average,” Appelbaum and Gebeloff report, “the government will then spend $275,000 on her medical care.”

Our welfare state is a system at war with itself. It offers us, in our capacity as beneficiaries of its programs, a terrific deal. Not only do we receive the material benefit of enormous windfalls on our “investments,” ones that entail no participation in any kind of capital formation and, therefore, never expose us to any risk of capital destruction. We also receive the moral benefit of strenuous reassurances, delivered over many decades, that our windfalls are not really windfalls because we’re merely getting back what we’ve paid for. And so we have no reason to think of ourselves as recipients of charity or dependents on welfare. We’re entitled to every last dollar of our benefits. They come to us as a matter of right.

What the welfare state offers us in our capacity as taxpayers supporting its programs, however, is a terrible deal. We are the ones who’ll have to cover the difference — $188,000 in the Urban Institute’s example — between what each American actually did pay in social-insurance taxes and the much larger amount he’s been told again and again he’s entitled to get “back.”

In the eight decades since the dawn of the New Deal, liberal politicians and intellectuals have tirelessly urged their countrymen to disregard all the evidence and common sense telling them to worry about this fiscal disparity. The most notorious example was the prediction of the economist Paul Samuelson in 1967 that our social-insurance programs could go on and on, paying each beneficiary far more than he had ever contributed, because of our “growing population” with “more youths than old folks,” and because “the national product is growing at a compound interest rate and can be expected to do so for as far ahead as the eye cannot see.”

Twenty-nine years later, altered economic and demographic prospects found even Paul Krugman conceding that Social Security was built to look like “an ordinary retirement plan,” where “what you get out depends on what you put in.” It has, in reality, “turned out to be strongly redistributionist, but only because of its Ponzi game aspect, in which each generation takes more out than it put in.” The trends Samuelson thought eternal having proven transient, “the Ponzi game will soon be over.”

More recently, liberals have encouraged the belief that the high costs of Obamacare, the most dramatic expansion of the welfare state since the Great Society, will be offset by that law’s mechanisms for incorporating remarkable new efficiencies into our health-care system. Newly constituted groups of experts, in bodies including the Independent Payment Advisory Board and the Center for Medicare and Medicaid Innovation, will, we are assured, discover ways to significantly reduce the long-term growth rate of health-care spending and preserve or enhance the quality of health care while never even considering any recommendation to “ration health care, increase Medicare premiums or cost-sharing, cut Medicare benefits, or restrict eligibility.”

One might reasonably suppose that if our federal health programs, the most important of which are nearly 50 years old, do indeed offer billions of dollars in potential savings that won’t have the slightest adverse impact on the quality of the health care we receive, this low-hanging fruit would have been harvested by now. Not only has it not been picked, however — it can’t even be named. Obamacare’s defenders exhort us to place the highest hopes in the discovery, just over the horizon, of marvelous new health-care efficiencies, but decline to provide examples of these painless improvements.

Moreover, Obamacare’s savings are more likely to be spent twice than realized even once. As Steven Rattner, a former adviser to the Obama Treasury Department, was honest enough to admit in a New York Times op-ed, the government is counting expected savings on Medicare against both the new benefits established by Obamacare and the old revenue shortfalls that were already baked into the Medicare cake.

The thread connecting all such efforts to banish fears about paying the bills we’re running up is the belief that we should be unapologetically militant about defending and enlarging our claims for benefits from the welfare state but serenely complacent about meeting our financial obligations to it. Something — economic growth, a permanently ample supply of young people, experts’ brilliant discoveries about getting more social-welfare bang from taxes that only rich people and big corporations will have to worry about — something will cover the gap between the welfare state’s debts to us and our debts to it. It is indisputable at this late date that liberals have been much more attentive to the political foundation of the welfare state than to its financial one. When hard choices or hard truths about the financial requirements of the welfare state would have compromised their efforts to gain and keep support for its programs, liberals have reliably done and said what is necessary to make social-welfare programs popular rather than what is necessary to make them solvent. These efforts have made the politics of curtailing the welfare state extremely challenging — just like the politics of adequately funding it.

The most direct way to ensure that the welfare state grows more popular as it grows more financially precarious is to extend its benefits to more and more people. Paul Starr, a Princeton sociologist and a co-founder of The American Prospect, explained the rationale in 1991. Liberalism’s domestic-policy objective “should be, above all, to eliminate poverty and maintain a minimum floor of decency to enable individuals to carry out their own life plans.” Though conservatives would interpret and apply the principle differently, it is consonant with Ronald Reagan’s insistence in 1980 that it is “essential” to maintain the “strength of the safety net beneath those in society who need help.” For Starr, however, it is urgent to broaden that agenda in order to fulfill it. Garnering and keeping the political support required to maintain a minimum floor of decency is part of liberalism’s “overall task of constructing democratic majorities. And that imperative will often mean support for programs that provide universal benefits to all groups, including the middle class as well as the poor.” This idea had occurred to the architects and supporters of the welfare state before 1991, of course. It is not by happenstance that, according to the Times’ summary of a recent study by the Congressional Budget Office, the percentage of federal safety-net outlays directed to Americans in the bottom quintile of income distribution “declined from 54 percent in 1979 to 36 percent in 2007.”

The political calculation to make more and more people eligible for more and more government benefits reinforces the administrative logic that constantly works to expand social programs. It will always be the case that households with an income one dollar too large for them to apply for a particular program will be barely distinguishable from the slightly less affluent families who do qualify. The logical response of the gatekeeping bureaucracy is to move the cutoff point to include those who just missed the last iteration. The families one dollar above the new cutoff point will, inevitably, be included after subsequent revisions.

The Times notes, for example, that the maximum income a family can report and still be eligible for the Earned Income Tax Credit was, after adjusting for inflation, 82.7 percent higher in 2010 than when the program was established in 1975. (The 2010 maximum, $49,317, was only $128 less than the median household income that year.) Little surprise, then, that almost half of all American households received benefits from at least one federal program in 2010. Even before the recession, the proportion had grown from 37.7 percent in 1998 to 44.5 percent in 2006.

The facts on the ground, as they have been arranged there and then interpreted by liberals, would place the welfare state in a politically unassailable position. First, make sure that every American stands to receive benefits from at least one and preferably several social-welfare programs. Second, stipulate that the only people with the moral standing to criticize the welfare state are those in line for no benefits whatsoever from it. These premises combine to reduce the ranks of opponents liberals deign to recognize to survivalists living off the grid.

This effort to rig the political contest over the welfare state wouldn’t be quite so objectionable if liberalism had a history of candor regarding the welfare state’s costs. The two most recent Democratic presidential nominees, however, upheld a long tradition of disingenuousness about the price tag of their party’s agenda. Both promised, repeatedly and categorically, that the federal government could meet all the obligations it had assumed over the 20th century, and then add many new ones to further the cause of social justice, while exempting more than 95 percent of the population from any kind of federal tax increase.

Having been assured their entire lives that moderate taxes would somehow sustain generous welfare-state benefits, the Times subjects in Chisago County come by their cognitive dissonance honestly. Unlike the Obama administration, they regard with alarm the prospect of rising federal indebtedness as far ahead as the eye cannot see. They are looking for a way out of a burning building that was designed without exits.

Ever since the late Irving Kristol introduced the concept of the “conservative welfare state” into our political discussions, people have argued about what it means. To some critics, left and right, it’s a contradiction in terms. A useful way to understand the idea, however, is to say that conservatives who want to cut the welfare state down to size want to cut it down to a particular size, one where the programs’ expenditures equal but never exceed the revenues generated by the taxes that liberals have told us the welfare state will require. Right-sizing the welfare state until it balances with that revenue stream means, as in the budget proposals Representative Paul Ryan has advanced, big cuts and big changes, such as turning Medicaid into block grants to the states, and Medicare into a means-tested voucher program for buying private health insurance.

It’s fair to say that Democrats have not received Ryan’s framework warmly. Speechwriters and editorialists have ransacked thesauruses for the censorious mot juste, with “cruel,” “cold-blooded,” and “savage” leading the field.

What’s more interesting is the response we haven’t heard. After 80 years of clearing their throats, liberal politicians still can’t summon the language or the courage to make a simple, candid argument:

Every nation in the world with the kind of welfare state we want for America pays for it by taxing a large majority of its citizens far more heavily than we do. To pretend we can do otherwise is to invite our countrymen to indulge a fantasy rather than call on them to make a serious commitment. Building the welfare state we need means most Americans are going to have to pay significantly higher taxes. No one likes such taxes, of course, but the reality is that they’ll fund an array of government programs that leave all of us better off than we will be with the rudimentary welfare state we’re forced to live with if we insist on a much lower tax burden.

There. Was that so hard? The Ryan framework challenges Democrats to show some confidence in their agenda, their own powers of persuasion, and Americans’ ability to listen to reason. If, instead, they remain committed to magic realism as a method of public finance, they’ll betray an infantile denial far worse than anything in Chisago County.

– Mr. Voegeli is a senior editor of the Claremont Review of Books, the author of Never Enough: America’s Limitless Welfare State, and a visiting scholar at the Salvatori Center at Claremont McKenna College.

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