Social Security and Medicare

My uncle and a good friend got me thinking more about entitlement programs, especially in context with the health care bill, and so here are some thoughts. I don't have a high degree of confidence in these views, but perhaps they could contribute to a meaningful discussion.

Here is a perhaps conventional conservative narrative on where we are now. During the Great Depression, politicians began pandering to the masses by passing Social Security legislation, which over time has grown exponentially, and with the addition of other welfare programs like Medicare, have led to a current situation of fiscal crisis. Some people blame all this on the democratic party, but many conservatives see Bush’s war on Iraq (imperialism?) and the propping up of the banks after deregulation gave them too much freedom as serious contributors to the current situation. I don’t see many conservatives saying that Bush’s lowering taxes contributed to the deficit, but a deficit is the result of spending exceeding revenue, so at least it should be on the table. (I understand that Glen Beck takes the problems back to Theodore Roosevelt. I can see the passage of the federal income tax in 1913 as being a hinge point, but am not sure why this is T.R.’s fault, since he was no longer even president. Maybe this is just a rhetorical response to Obama’s claim that T.R. first tried to get universal health care for citizens of the U.S.)

In my first post on conservatism, I raised the deficit and future deficits as a legitimate problem, and referenced a post by Bruce Bartlett which detailed the magnitude of the problem. However, I am very uncomfortable with the current narratives that make up analysis in popular media because they simplify history, just get it wrong or selectively use certain facts to support a particular ideology. On both right and left, there is a nostalgia for the wisdom of the founders and a tendency to believe we have “fallen.” Just look at how often each side quotes Thomas Jefferson. But let’s be clear. The Articles of Confederation failed for very good reasons. Those believers in state’s rights ought to give some consideration to why it failed. More importantly for the current topic, we did not have a real democracy in 1787. Only white male owners of real estate could vote. Women, roughly 50% of the population, did not have the right to vote until 1920!! Until the 14th Amendment in 1868, the Bill of Rights did not apply to the state governments. Blacks did not effectively have the right to vote in the south until the 1960's. So, according to the conservatives, the downfall of the U.S. roughly coincides with the actual beginning of democracy for a majority of the people.

The Industrial Revolution led to a transformation in the urban workplace. Many jobs were reduced to simple operations that later could be performed by machines. Because of steam power, women and children could perform many factory jobs, and were hired because they could be paid less. The vast shift of power to large corporate entities in the Gilded Age led many to be ruled by a few. This led to many states passing laws to protect workers. However, the Supreme Court ruled many of these laws unconstitutional. It was not until the 1930's that they stopped reading a particular economic theory into the Constitution, about the same time many people stopped believing in the myths of laissez-faire capitalism...something which many conservatives do not understand today.

Of course, the old-time conservatives favored states rights because they supported slavery. However, I think that this is really distinct from the views of the thinkers in the more recent conservative movement. I think Andrew Sullivan got it mostly right when he said that “in the mid-twentieth century conservatism revived itself by a profound critique of liberal hubris and rationalism, of liberals' belief that they really could transform the world through better government, of the new left's critique that the personal is political, and of the stifling of human nature, individualism and freedom that socialism and communism had wrought.” There is no doubt that many in the intelligensia of the left went too far during the early part of the last century. So far that many could not recognize what a terrible place the Soviet Union was. In recognizing the differences from then to now, we should also resist the attempt by people like Thomas Sowells to group liberals across time into one mindset.

Going back to the Social Security Act, it seems that the worst mistake was a failure to recognize that there might come a time when the number of retirees vastly outnumbered the number of workers, a failure of long-term planning that is being made manifest by the baby boomer generation coming of retirement age, as well as medical improvements resulting in longer lives. In figuring out why the problem occurred, we must recognize that benefits for the old and the poor, protection from capitalist exploitation, and other measures are primarily the effects of having a real democracy. My brief history is far too simplified to be taken as a real corrective, but it is closer to the truth than many of the historical speculations floating around in popular culture.

While recognizing that the Social Security Act and Medicare may have been mistakes, there is little doubt that they are part of our institutional structure, and are not going away. It seems pretty clear that the solution to the Social Security problem is to raise taxes, increase the retirement age, decrease benefits, introduce means-testing, or some combination of measures. But I don’t think that the current generation of seniors is going to agree to reduce their own benefits, and I don’t think the majority of my generation will either. We are probably going to have to take a page from Reagan, who increased the retirement age for future retirees back in the 1980's.

Regarding Medicare, I am not so confident of a solution. How are we going to get people to agree to cut costs? I don’t have the answer, but maybe we should all have the same Medicare benefits. That way, we would not be pitting one group against another. Conservatives, now pandering to seniors, resist any change in Medicare. Conservatives resisted universal health care benefits in the 1950's. Instead, the powerful unions got benefits for themselves, which could not be sustained over time. Instead we got employer-based health care by giving tax advantages to its provision, a system that has also failed. Here I will give some conservatives credit; I can’t see that maintaining such a system over the long run is going to work.

Executive pay cuts (and Social Security)

A good friend writes:
The president's comments on executive pay. While it seems true that shareholders should have a voice in how their "employees" are paid and most shareholders would agree that they are being decidedly overpaid, there is a problem with the government limiting pay in this particular event. The government made a contract with the banks and car companies (which I did not and do not agree that they should have). Then after agreeing to the terms of that deal comes back and unilaterally changes the terms apparently for political purposes IE: the taxpayers deserve better. A notion that should have occurred to our politicians long before now but still flies in the face of contract law. Done properly, it should have been part of the original contract's terms not an afterthought. Worse, the decision to do this is not being made by Congress but by appointees of the current administration. By the way, this is not entirely without precedent as they did it to social security recipients by adding a tax to their benefits and are trying to be more egregious by trying to means test social security benefits. That would mean that in spite of paying premiums for forty plus years some bureaucrat will just decide that you already have enough retirement funds so you won't need any from your social security "insurance" fund.
http://online.wsj.com/video/obama-comments-on-executive-pay-caps/909115ED-8E6A-4195-B7D5-75363F247869..html

Was there a contract between the government and the banks? I don’t know. If so, you may have a point. I doubt that there was time to draw up contracts when Paulsen began bailing out the banks. The meltdown was occurring.

Let me address Social Security first, where there clearly is no such contract. Retirees’ benefits are paid for by current workers. It is an ongoing pay-as-you-go system that is already hugely welfare-oriented. That is, those who put in the most get a far lower return than those who put in little. Those who first got benefits got an even better deal; they didn’t pay in anything, which leads some to call it a ponzi scheme. However, I think Social Security has been a great idea. I think that those who can work ought to pay for our elders when they get old. The problem becomes that people live longer now and as boomers retire there are going to be fewer workers paying for more retirees. You have to raise the retirement age, lower the benefits or raise the FICA taxes. Geezers like me might think it is unfair to do either of the first two, but I imagine younger workers would think it is unfair to raise the taxes they pay (for a system they doubt will continue to exist because we can’t face our problems as a society).

My biggest beef about the pay cuts is that they will do little to change the incentives on Wall Street. John Cassidy had a good piece called Rational Irrationality about this. And I believe Henry Blodgett originally made the distinction between the risky deals that were being made and the career risk of a trader who wasn’t in on the action. So if people were being rational and taking these huge risks that almost melted down the economy and made the current recession much worse, then something needs to be done about the financial system from a regulatory or structural point of view. Does banker pay even matter?

A panel of business bigshots at the Aspen Festival this last year had some interesting thoughts on the short-term thinking that has become too common in the boardroom. Below is Steve Pearlstein’s take on its history (the link to the Aspen Festival report is here, too).

The roots of this short-termism go back to the 1980s, with the advent of hostile takeovers mounted by activist investors. This newly competitive "market for corporate control" promised to reinvigorate corporate America by replacing entrenched, mediocre managers with those who could boost profits and share prices. In theory, the focus was on increasing shareholder value; in practice, it turned out to mean delivering quarterly results that predictably rose by double digits to satisfy increasingly demanding institutional investors. Executives who delivered on those expectations were rewarded with increasingly generous pay-for-performance schemes.
As fund managers grew more demanding of the short-term performance of corporate executives, investors became more demanding of the short-term performance of fund managers. To deliver better returns, managers responded by moving money from bonds and blue-chip stocks to alternative investments -- real estate, commodities, hedge funds and private equity funds -- where there was more risk, higher leverage and bigger fees. In time, the managers of these alternative investment vehicles began looking for new strategies to improve their results, and Wall Street was only too willing to accommodate with a dizzying new array of products.

I will leave discussion about what should be done about Wall Street for another day as I barely have a clue other than making derivatives and hedge funds more transparent (and current proposed legislation seems be giving companies huge loopholes). Even if there was no contract, you may have a moral point. But it gets way harder to make. In the first place, the bankers had the information. Maybe the most critical thing I can say about the pay cuts is that many of the people who got the cuts have left and the rest just may go somewhere else. If the American public thinks these cuts are really going to solve any problems, then maybe that just shows how uninformed we are.