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Why Are People So Forgiving of Government Failure?

Politics / Government Spending Apr 05, 2011 - 09:36 AM GMT

By: Christopher_Westley


Best Financial Markets Analysis ArticleOnce upon a time, I developed a theory that we have much lower expectations for public-sector performance than we do for private-sector performance.[1] We saw this in accounting standards that — when applied to Enron — resulted in market forces shutting that firm down, while the Department of Defense loses billions of dollars annually. The difference in terms of waste between the two sectors is exponential, but while Enron is held accountable for its ethics, the government gets a pass.

Or consider what we tolerate from the US Postal Service (USPS) as opposed what we tolerate from firms like FedEx Express or UPS. Again, if those private-sector firms incurred the costs and waste that the USPS institutionalizes, they would be long gone, and their assets would be transferred to other entities that market institutions believe would use those assets more efficiently and profitably.

The list could go on. Compare Amtrak to private transportation; the billions of dollars of taxpayer money wasted on producing the Chevy Volt (the only thing electric about this car is that it is shockingly bad) compared to its competitors;[2] the standards applied to public-school students as opposed to those demanded in private and home schools; or the massive waste we accept in those federal transportation and "farm" bills Congress passes every five years, regardless of the party in control.

Such examples are so universally accepted that they are not even worth citing. The result is a huge dichotomy in modern life, and those of us who point it out are often left to feel like the little boy who wondered why there was so much fuss about the emperor's obviously nonexistent clothes.

The result of this dichotomy is government growth, which is inversely related to those characteristics we associate with a free and virtuous society. The result is growing animosity in society between net taxpayers and net tax consumers — and chaos when the artificial institutions, on which so many have become dependent, fail. Consider the sad case of Social Security. If ever there were a showcase for the difference in popular expectations maintained between public and private performance, Social Security is it.

It began in the 1930s, a time of state-orchestrated uncertainty in the economy. Much like today, this uncertainty emanated from multiple, unprecedented, and unpredictable interventions in the market system. (The Great Depression itself would last 17 years, ending when the New Dealers, who were the source of many of these interventions, were repudiated soon after the death of Franklin Roosevelt.) Looking back, what's striking is how limited the program was when it began. It claimed a mere 2 percent of payrolls and provided supplementary old-age payments to retired workers at a time when most people died in their 60s and when the worker-to-retiree ratio was 16 to 1. (It is now 3 to 1, and falling.)

Therefore, Social Security is a good case study of government interventionism in general. Public-sector growth begins on a small scale and develops a dependent class. When the unintended consequences inevitably come about, public officials expand their programs to solve these problems while blaming "forces of greed" or "market failure." While the role of such crises (real or imagined) in instigating this cycle was spelled out by economist Robert Higgs in his modern classic Crisis and Leviathan, the general cycle of intervention leading to unintended consequences leading to broader intervention was explained by the classical liberal Ludwig von Mises in the 1920s.[3]

Roosevelt knew that Social Security was primarily a political triumph.[4] In a story related by historian Arthur Schlesinger, Roosevelt told a visitor warning about the program's economic inconsistencies,

I guess you're right on the economics, but those taxes were never a problem of economics. They were politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes, no damn politician can ever scrap my Social Security program.[5]

He was damn right, too. Whenever the laws of economics rose against the politics of Social Security, Congress consistently expanded its benefits and raised payroll taxes to create more dependency. Much of today's unemployment results from the increased costs this program places on the labor market.

Nobel laureate Edward Prescott has shown that while Social Security's legal burden is shared between the employer and the employee, the economic burden is placed largely on workers, who receive lower wages and fewer employment opportunities. As a consequence, Prescott argues that employees respond to decreases in wages by further decreasing labor supply. (In economic terms, Prescott is highlighting the consequences of a highly elastic labor supply.)[6]

Congress's management of this program over the decades can only persist in a world in which people hold lower expectations for public-sector performance. It reflects the dominant Keynesian bias for short-run adjustments, because (as Keynes argued) the long run never arrives anyway. In the long run, we are all dead. A truer aphorism would say that in the long run, we are all screwed.[7] In the case of Social Security, this has become an actuarial certainty.

The numbers do not look good. Social Security was in surplus when the 78 million baby boomers were at the height of their earning power, but it is now in deficit; retirees are increasing in number and starting to collect some of the wealth that was coercively transferred from them into this Ponzi-like scheme. Its unfunded obligations were listed in the tens of trillions well before the stresses of the 2008 financial crisis and the various expansions in government since then. Boston University economist Laurence Kotlikoff recently calculated that, due to decades of spending like this on Social Security and other entitlements, the difference between funded and unfunded liabilities totals $202 trillion.[8]

Adding insult to injury, the Congressional Budget Office ran more than 500 possible simulations reflecting different possible outcomes for the program, given its current fiscal health. The purpose was to measure which generation among the cohorts born in the 1940s, the 1960s, and the 1980s would not receive Social Security benefits.[9] The results, published in October 2010, were not promising, as recently spelled out by Bruce Krasting in Business Insider. Krasting writes,

If you were born in the 1940's the probability that you will receive 100% of your scheduled benefits is nearly 100%. The people in this age group will die before SS is forced to make cuts in scheduled benefits. If you were born in the Sixties things still do not look so bad. Depending on how long you will live the odds (76+%) are pretty good that you will get all of your scheduled benefits. However, if you were born in the Eighties you have a problem. The numbers fall off a cliff if you are between 30 and 40 years old today. In only 13% of the possible scenarios you will get what you are currently expecting from SS. If you were born after 1990 you simply have no statistical chance of getting what you are paying for.[10]

Krasting thinks the end result will be age warfare, as younger generations realize they are being forced to pay for the fiscal irresponsibility of previous generations. The youths with whom I come into contact are as mad as hell — at least those who have studied the issue. University of Nottingham economist Kevin Dowd, in a speech to young people about the welfare-state promises for which they will spend the rest of their working lives paying, asked the question, "Do you want a life of toil and slavery, followed by ultimate destitution, or do you want to stand up for yourselves and fight for the chance of a decent life? It's your choice."

Indeed it is. Social Security is a microcosm of politicians' tendency to let short-term political benefits blind them to the economic problems inherent in welfare and warfare programs. More importantly, this government program highlights the dichotomy between public and private expectations. Social Security only persists because we have been conditioned to approach public-sector performance with lower expectations. In the long run, we are forcing future generations — possibly including the one I find in my economics classes today — into an easy choice.

[1] Westley's law states that governments grow on low expectations. In an article explaining the law, I wrote "Government grows on low expectations because it keeps tax dollars coming in and paychecks going out, and as a result, it simply does not pay for many to question its efficacy. There is, in fact, an inverse relationship between expectations and government funding.".

[2] General Motors reported total sales for the Volt in January and February of 2011 as 602 cars. See the official figures here. In a column last November, George Will lists the various bribes offered by the government (and financed with other people's money) to generate consumer interest in this modern, four-seat "People's Wagon" that costs $41,000. See Will, George F., "What's Driving Obama's Subsidies of Chevy Volt?" The Washington Post, Nov. 14, 2010.

[3] See Higgs, Robert, Crisis and Leviathan: Critical Episodes in the Growth of American Government (New York: Oxford University Press, 1989) and Mises, Ludwig von, Liberalism: In the Classical Tradition, trans. by Ralph Raico (Irvington-on-Hudson, NY: Foundation for Economic Education, [1927] 1985).

[4] On the political invulnerability of Social Security, see the late journalist John Attarian's Social Security: False Consciousness and Crisis (New Brunswick, NJ: Transaction Publishers, 2002). See David Gordon's review here.

[5] Schlesinger, Jr., Arthur M. The Age of Roosevelt, vol. 2, The Coming of the New Deal (Boston: Houghton Mifflin, 1958), p. 308.

[6] Prescott explains this phenomenon in "Why Do Americans Work So Much More than Europeans?" Federal Reserve Bank of Minneapolis Quarterly Review, Vol. 28, No. 1 (July 2004), pp. 2–13.

[7] I ascribe this interpretation of the effects of Keynesian policies to my friend (and economist) Bill Anderson of Frostburg State University.

[8] See Kotlikoff, Laurence, "The US is Bankrupt and We Don't Even Know it," Bloomberg online.

[9] Congressional Budget Office "CBO's Long-Term Projections for Social Security," October 2010.

[10] Krasting, Bruce, "Now 30 Year Olds Have Only a 13% Chance of Getting Full Social Security Benefits."

Christopher Westley is an adjunct scholar at the Ludwig von Mises Institute. He teaches in the College of Commerce and Business Administration at Jacksonville State University. Send him mail. See Christopher Westley's article archives. Comment on the blog.

© 2011 Copyright Ludwig von Mises - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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