This is a question that’s been on my mind for a long time.
Typically, when you envision an American farmer or farming family, you tend to picture rugged individual, self-reliant, conservative types, who pride themselves on knowing how to survive with minimal interaction with the outside world. Partly, it’s our strong and primordial emotional reaction of respect and admiration for growing your own food, the aura of grit and independence that radiates from such an endeavor and lifestyle. Partly it’s the romantic mythology of our agrarian past, both from our actual history and from its longstanding portrayal in American culture.
But there is another side to American farming that is much less discussed, and far less romantic: government subsidies. In 2020 alone, the government paid out around $46 billion dollars in farm subsidies. Just over $35 billion of that was for “emergency aid” to help bolster farms struggling with the economic effects of Covid (without even vetting the allocations based on need, of course, like most government programs). But the rest, over $10 billion, was for “traditional farm subsidies that were already in place.”
A theme that you’ll notice from me, from the very beginning and which you’ll see more and more over time, is that I believe in principles, and in philosophical consistency. And I expect that from everyone, from you, from me, “my side,” “the other side,” without exception. I consider it a requirement for me to view an individual, a group of people, or an organization as rational actors who can be engaged logically on a topic, and who can be given the benefit of the doubt as being generally fair and reasonable. And I will hold the people and groups with whom I align to the same standard, I will expect them to be logical, principled, and consistent just like everyone else. Which is why I have to call out as unprincipled and myopically selfish any person or interest group who asks or lobbies for government handouts and corporate bailouts, no matter which party they’re in, no matter how they vote, and no matter how much people hate me for it.
A true capitalist, a true adherent of free markets, and in my opinion, a true believer in the American philosophy of self-sovereignty and self-reliance, would not believe in or advocate for subsidies or bailouts for businesses, of any kind. This is no less true for a farmer than for a banker or someone engaged in any other type of business.
I would say this to a farmer or any other businessperson who thinks that they’re entitled to corporate subsidies or government bailouts: if you think you are entitled to them, then why not the guy who runs the sandwich shop down the street, the restaurant that just closed, or the bank that needs a billion dollar bailout? If we make an allowance for you and your business, we have to make one for everyone. If you have a right to a government subsidy, then so does everyone else involved in every other type of business. And now you have justified unlimited government expansion and interference with the free market, and all of the unintended and nasty consequences, like the government picking winners and losers, like central planners directing the behavior of businesses through financial incentives, and like bureaucrats punishing businesses or industries they disapprove of by cutting off their funds. You justify and unleash the full force of Leviathan if you can justify it for yourself to subsidize your business.
So are farmers capitalists or socialists? For me, this question usually comes to mind when the topic of health, sodas, and high fructose corn syrup comes up. By now, everyone knows that the cause of our obesity epidemic is the processed carbs and sugars that are the unfortunate staples of the American diet for most people. I’m a free market person, and I by no means want the government telling us what to eat or drink or do with our lives, not by “educating” us, or by force. (Side note: do you trust government education and social engineering? If you do, I would ask why, and ask you to think about the government’s track record of societal programming and reconsider). I want no part of Bloombergian soda bans or calorie counts. Not only do they do no good and have no practical effect, they are an untoward imposition on people’s liberty. Freedom means, it has to mean, the freedom to do dumb things and make bad choices as well as to do smart things and make good choices. These sorts laws also impose yet another undue compliance burden on businesses, another unnecessary cost that diverts resources from investing in research, improvements, and employees.
But at the same time, I admit that if we could snap our fingers and make soda or high fructose corn syrup disappear, it would go a long way towards improving people’s weight and health (assuming no replacement was found, etc…this is a utopian hypothetical, so we can imagine a single factor changing without having any other factors change in response, which is useful for thought experiments, but does not happen in the real world). Right now, a main if not the main culprit that is destroying people’s health in America is high fructose corn syrup, sweetening everything from soda to bread to yogurt to granola bars. It’s used as a sweetener because it’s a cheaper substitute for sugar, and because for taste purposes we do need at least a little bit of sweetener in most of our processed foods. And while a little bit of it seems to be in almost everything, it is of course far more concentrated in snacks, candy, and soda, which Americans consume far too much of.
So when I’m discussing health and obesity with my friends, the first obvious policy step when working on this issue is: stop subsidizing high fructose corn syrup. And while we’re at it, why not stop subsidizing, well, everything? In fact, the inspiration to write this article came from a snippet a friend sent me this week:
I’m not saying it’s a magic bullet, or that it would solve all our problems. But it’s an easy and obvious first step to try. And why wouldn’t we?
The answer to that is: the farmer’s lobby.
When you look into the matter, you get varying estimates on how much the U.S. spends on farm subsidies every year, ranging from $10 billion in the article I linked to above, to $14 billion, to $20 billion. In a longer view, we see that in a 15 year span $170 billion was spent in aggregate on these subsidies, and in a 25 year span, $116 billion on corn subsidies alone. Now I’m not getting into the weeds on farm subsidies, and for the purposes of this analysis, there’s no need to. As someone else said so eloquently, “The inner workings of subsidy programs is a subject best left to PhD economists.” We don’t need to know the details of these subsidies to know that they distort the marketplace and the choices that individuals and businesses would make if left to decide their preferences and best interests themselves.
The point that I’m making is that the very existence of these subsidies is anti-free-market, anti-self-sovereignty, and if you want to be dramatic about it (and why not?), anti-American. It is also apparent that the cost of these subsidies is not insignificant, year over year, and cumulatively over time. As the saying goes, “A billion here, a billion there, and pretty soon you’re talking real money.” There is real money on the table here for farm subsidies, and the ethical and economic questions surrounding this practice affect our pocketbooks, distort the market, and incentivize public consumption and business production of patently unhealthy goods.
As an average taxpaying citizen, not involved in farming or distribution of agricultural goods, I am opposed to government subsidies of farms just as much as banks or any other business (and I hope you are too). As a free market, economics-minded conservative, I am opposed to these subsidies on principle as much as I am on pragmatism (i.e. I would still oppose them if the cost were trivial).
My question is: if you are a farmer, or involved in the distribution of agricultural goods, are you willing to reject the idea of corporatism and government subsidies for your industry, just as much as for any other, and if you’re not, are you honest and transparent enough to admit that you prefer socialism for thee, and capitalism for me?
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When I was a young socialist (yes, you read that right), I had a lot of opinions about what people and society should do with their money. But I didn’t know a single thing about actual economics. No, not one thing. I was completely ignorant even that I should know things about economics, I was deep into the realm of Rumsfeldian “unknown unknowns.” I didn’t know what I didn’t know, and this meant that there was no way for me to learn on my own and teach myself to a better understanding. I was ignorant of my ignorance, which I now know is itself a well-understood and studied phenomenon: part of the condition of being ignorant is that you don’t know you’re ignorant. It’s kind like how part of being crazy is that you don’t know you’re crazy.
There’s even a fancy name for it:
This is a topic worthy of discussion in its own right, but I just want to mention it to paint a picture of where I myself have been regarding the topic of economics. This abstract basically describes my level of economic understanding in my 20s:
People tend to hold overly favorable views of their abilities in many social and intellectual domains. The authors suggest that this overestimation occurs, in part, because people who are unskilled in these domains suffer a dual burden: Not only do these people reach erroneous conclusions and make unfortunate choices, but their incompetence robs them of the metacognitive ability to realize it. Across 4 studies, the authors found that participants scoring in the bottom quartile on tests of humor, grammar, and logic grossly overestimated their test performance and ability. Although their test scores put them in the 12th percentile, they estimated themselves to be in the 62nd. Several analyses linked this miscalibration to deficits in metacognitive skill, or the capacity to distinguish accuracy from error. Paradoxically, improving the skills of participants, and thus increasing their metacognitive competence, helped them recognize the limitations of their abilities.
In essence, we argue that the skills that engender competence in a particular domain are often the very same skills necessary to evaluate competence in that domain—one’s own or anyone else’s. Because of this, incompetent individuals lack what cognitive psychologists variously term metacognition, metamemory, metacomprehension, or self-monitoring skills. These terms refer to the ability to know how well one is performing, when one is likely to be accurate in judgment, and when one is likely to be in error.
For example, consider the ability to write grammatical English. The skills that enable one to construct a grammatical sentence are the same skills necessary to recognize a grammatical sentence, and thus are the same skills necessary to determine if a grammatical mistake has been made. In short, the same knowledge that underlies the ability to produce correct judgment is also the knowledge that underlies the ability to recognize correct judgment. To lack the former is to be deficient in the latter.
If you would like to know more about the Dunning-Kruger Effect, you can read the Wikipedia article here, view and download the full paper here, or read it online in html here.
So there I was, Dunning-Krugered as hell about economics. So what happened? What always happens with me: I started arguing with people. I took my DK’d self with my DK’d ideas, and brought them all cocky and manly like to other nerds and wonks, and got my ass severely kicked and handed to me over, and over, and over again, in debate after debate. I literally cannot count the number of debates I lost, and how many times I didn’t just lose a debate, but basically got woodshedded like a red-headed stepchild.
[This was in my mid-20s, after a five year stint in the army, while an undergraduate at Columbia University]
But two things have saved me in life from having this sort of thing destroy me and ruin my self-confidence: one, that I can take a loss, and two, that I can learn from one. I would walk home from an argument outside of class or outside a bar, swearing and muttering to myself all the way home (on the inside, I hope). Mostly for being so stupid and so wrong, and occasionally, for being so arrogant. And each time, mad as I was, I was even more grateful, for having been so violently and suddenly disabused of such erroneous ideas. As one of my idols Sam Harris has said: I don’t want to believe a wrong thing for one minute longer than I have to. So I welcome intellectual challenges and people who can teach me something, or better yet, correct any wrong ideas I currently have.
Of course, as time went on, I sought to educate myself. Once I realized this was an intellectual weakness of mine, I read an uncountable number of articles on economics, sought out people who knew more than me (now to ask questions, rather than debate), and read a few foundational econ books. I realized through the course of these conversations that while I considered myself a policy wonk and a politics nerd, I was lacking a fundamental pillar of understanding these issues: that of basic economics. I realized that I was functionally illiterate in one of the core areas necessary to understanding our world, and to having an educated opinion on political topics. It was one of the most humbling intellectual realizations of my life, and maybe the first real moment and topic where I found myself sitting in silence with an awareness of my own profound ignorance of something so obviously important, if you actually knew anything about the world.
The reason I’m writing this essay is that I have come to realize that my own ignorance, while shameful and appalling, is not unique. In fact, I think it is the norm. Now just like I recently stated that I’m no mathematical genius, I’m also no economics genius. I’m not an economist, even by hobby, let alone trade. I’m no expert on economics or economic theories, even a lay expert or hobbyist. But here’s what I’ve come to fear/realize: I simply know basic economics very well, and that means I know more than 95% of people I meet. And I don’t mean 95% of people in the mountains of Arkansas. I mean 95% of college educated people with otherwise sophisticated and nuanced understandings of the world. I mean that just as I made it through high school and college without a single day of economics education, so does pretty much everyone else. Literally everything I’ve learned about economics has been self-taught. And in that regard, I think “the system,” whatever that means, our education system, society writ large, whatever, has failed me, and continues to fail current and future generations of Americans. I mean that you literally cannot have a reasonably educated and sophisticated understanding of politics and society without an understanding of basic economics. This is a disservice to all of us as a general citizenry, when most of our educated, voting adults pretty much know nothing about economic fundamentals.
And it’s not just politics. It’s personal. Understanding basic economic concepts has drastically improved my thinking and decision making in exponential, innumerable ways. I literally cannot imagine my life, thinking about politics, analyzing situations, or making decisions without knowing about things like opportunity cost, marginal utility, economies of scale, or comparative advantage. I cannot imagine how I could effectively analyze or understand pretty much anything about the world without these conceptual tools. Economics is in a very real sense an exercise in pure logical thinking. It’s about as close as you can get without using Actual Math or formal logic. That’s because it requires logical formulations and connections to make sense. It requires definitions and axioms (for example supply and demand and their effect on each other). It requires clear formulations and connections that can be reduced to formal logic terms such as “If A, then B” or “If A, then not B” (ceteris paribus reasoning, for example). You have to logically connect concepts and conditions to understand how they work together. It’s not a matter of interpretation, there is a right and wrong answer, and the strength of your logic determines your ability to find the right one, or to be as accurate as possible based on the available data. This is the beauty, the elegance, and the power of economic thinking.
A couple of examples from one of my favorite authors:
1. That which is seen, and that which is unseen
A very common economic fallacy, as well as general human cognitive error, is to evaluate a choice or an action by a very obvious (usually positive) effect, but to ignore a less obvious (usually negative) effect, which may precisely offset or even be greater than the apparent effect/benefit. Here’s an example: a trade policy, tax policy, subsidy, or other government action that benefits one group of people, let’s say farmers. Giving a generous tax break or subsidy or trade protection to this one group, on its face, at first blush, seems like a great thing…look at all the farmers we’re helping. Look how much better off they are. Isn’t it wonderful? How can you be against it? Do you hate farmers…?
What most people don’t see, because they’re not used to economic thinking, is that the benefits are obvious because they’re focused on a (relatively) small, discreet, graspable group of people, but the costs are distributed to everyone else in society. We may enact a policy that will help farmers, but the cost of that policy is that the cost of their goods rises for everyone else, or that the rest of us pay for their subsidies in other ways, perhaps in higher taxes. This is a tradeoff, and perhaps it is one we want to make, but most people are not even aware that we are making it, and therefore the tradeoff is not debated or factored in when crafting this policy. And we certainly ought to discuss if we do in fact want to make any of the necessary tradeoffs for any particular policy.
Again, benefits are focused, but costs are disbursed. We have to realize this whenever we craft any sort of economic policy. Everything has to be paid for. Yes, everything. Literally, everything. And we rarely ask what the costs are for our particular pet projects, and are typically discouraged from doing so if we try to bring it up. This actually raises another point, that everything has a cost, and we can’t just do everything that we’d like or that seems like a good idea, because we can’t afford it. That’s its own issue, but related to this one. If more people thought about the tradeoffs and costs involved in any particular policy, I believe most people would be a lot more conservative in their pet projects designed to help this or that particular group.
This is a long essay discussing this topic, but you can understand the principle well enough just reading the introduction and Part I.
In the department of economy, an act, a habit, an institution, a law, gives birth not only to an effect, but to a series of effects. Of these effects, the first only is immediate; it manifests itself simultaneously with its cause — it is seen. The others unfold in succession — they are not seen: it is well for us, if they are foreseen. Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee. Now this difference is enormous, for it almost always happens that when the immediate consequence is favourable, the ultimate consequences are fatal, and the converse. Hence it follows that the bad economist pursues a small present good, which will be followed by a great evil to come, while the true economist pursues a great good to come, — at the risk of a small present evil.
In fact, it is the same in the science of health, arts, and in that of morals. It often happens, that the sweeter the first fruit of a habit is, the more bitter are the consequences. Take, for example, debauchery, idleness, prodigality. When, therefore, a man absorbed in the effect which is seen has not yet learned to discern those which are not seen, he gives way to fatal habits, not only by inclination, but by calculation.
This explains the fatally grievous condition of mankind. Ignorance surrounds its cradle: then its actions are determined by their first consequences, the only ones which, in its first stage, it can see. It is only in the long run that it learns to take account of the others. It has to learn this lesson from two very different masters — experience and foresight. Experience teaches effectually, but brutally. It makes us acquainted with all the effects of an action, by causing us to feel them; and we cannot fail to finish by knowing that fire burns, if we have burned ourselves. For this rough teacher, I should like, if possible, to substitute a more gentle one. I mean Foresight. For this purpose I shall examine the consequences of certain economical phenomena, by placing in opposition to each other those which are seen, and those which are not seen.
2. Comparative advantage
One thing you will find in common with all professional and lay economists is a universal disapproval of trade barriers, tariffs, and protectionism. This is not because they don’t value the farmers, merchants, and tradesmen of their own country, or that they do not have proper patriotic feelings. It is because they understand basic and universal economic maxims. One such maxim is that every country, society, and culture has its own unique advantages for producing goods, and we all benefit when everyone uses them as freely and as maximally as possible. Conceptually, there is a bit of “what is seen and unseen” in this as well, but has the additional condition of specific advantages residing in each discreet group of people.
A very easy example of this is the environmental conditions for growing natural produce. It is probably possible to grow oranges, for example, in Minnesota. You could grow them for a few months in the summer, and conceivably build indoor facilities to grow them indoors year-round. But though such a thing is economically possible, it is not wise. We could do it if we tried, but it is obviously much more advantageous to everyone if oranges are grown in a climate naturally suited to their thriving, all year long, say in Florida.
Labor and Nature collaborate in varying proportions, depending upon the country and the climate, in the production of a commodity. The part that Nature contributes is always free of charge; it is the part contributed by human labor that constitutes value and is paid for.
If an orange from Lisbon sells for half the price of an orange from Paris, it is because the natural heat of the sun, which is, of course, free of charge, does for the former what the latter owes to artificial heating, which necessarily has to be paid for in the market.
Thus, when an orange reaches us from Portugal, one can say that it is given to us half free of charge, or, in other words, at half price as compared with those from Paris.
Now, it is precisely on the basis of its being semigratuitous (pardon the word) that you maintain it should be barred. You ask: “How can French labor withstand the competition of foreign labor when the former has to do all the work, whereas the latter has to do only half, the sun taking care of the rest?” But if the fact that a product is half free of charge leads you to exclude it from competition, how can its being totally free of charge induce you to admit it into competition?
To take another example: When a product—coal, iron, wheat, or textiles—comes to us from abroad, and when we can acquire it for less labor than if we produced it ourselves, the difference is a gratuitous gift that is conferred upon us. The size of this gift is proportionate to the extent of this difference. It is a quarter, a half, or three-quarters of the value of the product if the foreigner asks of us only three-quarters, one-half, or one-quarter as high a price. It is as complete as it can be when the donor, like the sun in providing us with light, asks nothing from us. The question, and we pose it formally, is whether what you desire for France is the benefit of consumption free of charge or the alleged advantages of onerous production. Make your choice, but be logical; for as long as you ban, as you do, foreign coal, iron, wheat, and textiles, in proportion as their price approaches zero, how inconsistent it would be to admit the light of the sun, whose price is zero all day long!
Simply put, every society and region has its own economic advantages, whether it be advantages of nature, a particularly developed and sophisticated industry, a highly skilled workforce (generally or in specific areas), cheap labor, the list is endless. When we do not restrict trade between all of these splendidly diverse regions and people, we all benefit, by everything being cheaper and more readily available in greater quantities than would be if we institute tariffs or other trade barriers to protect our own “hard working, indigenous” whatevers. Protectionism is, economically speaking, always bad, because it raises the cost and limits the supply of everything it touches. Again, this is not advanced, mathematical economics, accessibly only to calculus geeks. This is basic, common sense knowledge that allows us to maximize everyone’s economic and material well-being, and saves us from costly errors harming not just society in general, but the very people we seek to protect with trade barriers.
As I said, I’m no economic genius. I couldn’t calculate a supply and demand curve to save my life. But I know what one looks like, and have seen plenty of them. I can’t punch up a formula to calculate producer surplus or consumer surplus, but I know what they are, conceptually, and this basic economic knowledge allows me to rationally analyze the world around me, political decisions, and economic decisions on both a personal level and a societal level. I don’t consider my economic understanding to be advanced, but it is still greater than almost everyone I encounter when I discuss economic subjects. I think my grasp of economics is the bare bones baseline required to understand our world, and I think it’s a crime that we seem not to care about it as a society, and that we completely neglect it in the education of our young people. To have a functional, rational society, everyone should have at least a basic understanding of democratic and republican principles, our constitutional history and framework, and the core economic principles that dictate the success, failure, and cost of our political policies.
If I could snap my fingers and change one thing about our society, it would be to require at least two years of basic economics in high school and one in college (non-math intensive for the math-challenged), as a pillar of being an educated citizen with an ability to fulfill your basic civic duty. Until we make basic economic literacy a pillar of our education system and civic culture, we are likely to continue the economic and political deterioration of the last few years, and eventually, the consequences are going to catch up to us, in dramatic and painful fashion.
“I was surprised to find myself so much fuller of faults than I had imagined, but I had the satisfaction of seeing them diminish”
I leave you with this: a great text, from The Great Man Himself. I have a few other recommendations for economics reading, more short essays with great economic realizations and truths that you can get through in one sitting, but I’ll save those for later.
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As I mentioned in my last post, America is staring down the barrel of an impending financial crisis, and the question is not if, but when we’ll have to eat that bullet, or several of them. Put simply, we have an out of control spending problem with both entitlement programs (Social Security, Medicare, Medicaid, etc.) and national defense. Each of these expenditures are currently at monumental and unsustainable levels, which are going to have to be dealt with eventually. Making matters worse, both of the parties in power, as well as the majority of American citizens, are quite unwilling to look this problem squarely in the eye, let alone do something about it, so the most likely scenario is that rather than solving it before it causes a massive economic crises, everyone will just keep their eyes closed and heads down, hoping to get as much out of it as they personally can until the gravy train runs out.
Neither party is going to do anything about it because as I previously mentioned, Republicans are religiously attached to an infinitely increasing amount of defense spending, and Democrats seem to have the same feelings about entitlements. To Democrats, our problem isn’t that we spend so much on entitlements that we’re careening towards a humiliating national bankruptcy, but that we don’t spend nearly enough on them. To Republicans, there is literally no such concept as “too much defense spending.” It’s a thing that they don’t recognize as existing in the universe. And as bad as Republicans are on defense, Democrats explicitly want to add trillions more to our spending and debt problem by vastly expanding entitlement programs generally and specifically, for example by enacting jaw-dropping expenditures like Medicare For All.
And then of course, there is the fact that neither party wants to upset voters by even talking about taking away or reducing entitlements they’ve grown used to. Which, a conservative would argue, is exactly the problem with too much government and too much reliance on it. It’s also why government can never shrink, only grow: once someone gets used to having something, you can’t take it away from them, at least without incurring a massive political cost which likely amounts to career/party suicide. Liberals count on this whenever they pass new entitlements, such as the ACA for example.
So for the foreseeable future, American voters will continue to force their politicians to keep kicking the can down the road. But something that can’t go on forever, eventually will end. And the longer it goes on, the harder and uglier that end will be.
Earlier I mentioned eating bullets. There are several types of economic bullets we may be forced to eat, and they are all equally unpleasant:
— Massive tax increases (on everyone, not just the wealthy)
— Hyperinflation, as the economic geniuses in our government try to print money to get out of the crisis they’ve created
— Massive austerity, in general and in cuts to the very programs we are so attached to that are taking us down this road
We are definitely going to have to eat one of these, if not some combination of all three. I’ll say a bit about each one.
One of the core tenets of liberal/left-wing politics is a fundamental belief that we can pay for every single program and entitlement we ever dream of if we only tax “the rich” enough. There are a lot of philosophical and economic problems with this point of view and the overall hostility towards “the rich” on the left, but the one relevant to this particular issue is this: there is simply not enough money in the hands of “the rich” to solve this problem, even if we confiscated every single dollar from every single one of them. The only possible outcome if we rely on tax revenue to balance our budget is a massive tax increase on everyone, from the richest person all the way down to the poorest individual we as a nation decide to tax. What this future looks like is a lot like present-day Europe, with tax rates at 50% and well above, up to 60 and 70% of income, for rich and middle class alike, large value-add taxes (sales taxes) on top of that, and even outright confiscatory taxes on overall wealth, such that a person could be taxed at more than 100% of their income in a given year if they’ve committed the economic sin of being “too rich” overall through the course of their lives. This is a system and an economic view that the left admires and sees as the most virtuous vision for our future, so that is definitely not a philosophical or economic problem as far as they are concerned. Any way that we can be more like “Enlightened Europe” we should, including spending 50-70% of our work hours to pay the government to spend as they, in their infinite wisdom and grace, see fit. This is definitely a debate we should have out in the open, both because I would like to see the left defend this view economically, rather than on the basis of emotional anecdotes about people who could benefit from an infinitely increasing social safety net, and because I don’t believe that they could persuade a majority of Americans to their position, if we discuss it in unemotional economic terms.
Now for an absolutely crystalizing illustration of why tax increases on the rich or in general cannot solve this problem, and proof that we have a spending problem rather than a revenue problem, Tony Robbins has put together one of the most impressive presentations on any subject I’ve ever seen to address our nation’s spending for one fiscal year. I’ll link from where the relevant part of the presentation starts, which runs about 15 minutes, but it’s worth watching the whole 20 minute presentation as well to help grasp the scope of our spending problem.
The bottom line on taxes is that
1. There is no possible tax increase that could even pay for our current annual spending, let alone resolve our long-term debt
2. Any attempt to do so will raise taxes to catastrophic, economy-killing levels
3. Such tax increases will be across the board, not just on “the rich”
When unsustainable spending reaches its end, when a ponzi scheme runs out of rubes, when your last check finally bounces…then, at last, you will stop spending, because you are forced to. When we run out of money to spend on these benefits, we will be forced to as well. When that day comes, we will require truly massive reductions in benefits to these programs, and likely other fiscal austerity measures, in order to be able to fund them at all, at any level. To understand why this will be necessary, we need to understand how we got here.
Sometimes it helps to use relatively small, digestible numbers to help us understand trends and patterns that involve bigger numbers or a big problem. So here are a few numbers to help us understand what we’re dealing with in regards to entitlement spending over the next few decades:
— Every day, 10,000 baby boomers turn 65 (about 4 million a year)
— When Social Security was first passed, there were about 42 workers for every beneficiary
— In 1950 there were 16 workers for every beneficiary
— We are now at less than 3 workers for every beneficiary (2.8 in 2016)
— In the next 15-20 years, we are approaching 2 workers for each beneficiary
I hope those numbers hit you hard and give you pause, as they did me. Let’s sit with this for a minute, with a couple of helpful graphs:
Now I’m no mathematicical genius, but to ME, that looks unsustainable. I know a lot of intellectuals like to talk a lot about nuance and complexity when it comes to public policy, and certainly understanding every aspect of an issue and crafting specific laws and regulations is a pretty complex and nuanced undertaking. But I prefer to focus on breaking things down to the core facts and fundamental principles, to examine the foundations so that we can actually understand these issues and the big picture reality and problems they represent. Understanding is the first step on the journey to solutions, and that requires breaking things down to their core.
Now I just said I’m not a mathematician, so I can only offer what come to mind as simple, common sense first steps to at least alleviating the stark arithmetical problem above. The first would be to raise the retirement age. When Social Security was first passed in 1935 with a retirement age of 65, the average life expectancy for men was 60 and for women was 64. In 1960 they were 67 and 73, respectively. Even as late as 1980, it was 70 and 77. Now we’re looking at 77 and 81 for average life expectancies.
But, good news for the elderly: it’s even better than that if you make it to retirement age!
The point I’m trying to make, what nobody tells you, is that when social security was first enacted, it was never intended or imagined as a subsidy from the rest of society to live 20 more years without working. It was more like a social welfare benefit you could count on if you struggled to pay your bills in your old age (as defined then), if you could no longer work or had no family that could help take care of you. And even then, it wasn’t intended for you to collect for decades, but for a few short twilight years.
Although “mid-sixties” is typically the age range defined as the beginning of retirement, history shows that until fairly recently, it was common for men to be employed after they reached 65. In 1880, 76 percent of men were employed at age 65, a proportion that declined to 43 percent in 1940, and 18 percent in 1990. Although the current recession has caused more workers to postpone retirement, a 2009 survey of retirees found that 84 percent had entered retirement at age 65 or earlier.
When Social Security was established in 1935, state pension systems were split equally between those that determined 65 as the retirement age and those that determined 70 as the retirement age. The Commission on Economic Security, which designed the system under FDR, was swayed to adopt age 65, partly because the federal Railroad Retirement System, which was established in 1934, used 65, and partly because analyses at the time showed that 65 was actuarially feasible at low levels of taxation [emphasis mine].
Taking all this into account, the CES planners made a rough judgment that age 65 was probably more reasonable than age 70. This judgment was then confirmed by the actuarial studies. The studies showed that using age 65 produced a manageable system that could easily be made self-sustaining with only modest levels of payroll taxation [emphasis mine].
See, the thing about Social Security, Medicare, or any other social safety net or benefit is that they’re noble, they’re compassionate…and they’re luxuries. These are great institutions and policies for civilized societies and advanced economies to enact…if they can afford them. But it seems like the “if we can afford it” point was lost to history somewhere. Now we decide what we want and cook the books and kick the can to finagle it, rather than figuring out what we can afford and crafting policy from there. Doesn’t that seem kind of backwards, if not outright irresponsible?
And this is how we arrive at our current untenable situation regarding Social Security. We’ve come to view everyone’s individual retirement at 65 as some sort of inherent, god-given right, and the taxpayer subsidy along with it. But rather than an individual retirement plan, doesn’t social security make a lot more sense as a safety net for those who just happen to need financial help in their old age, rather than the economic right of anyone over a certain age to have wealth transferred from younger working people, no matter how well off they may be in old age?
It’s right there in the name: “Social.” “Security.” Doesn’t that sound like a…I don’t know…safety net, rather than a taxpayer funded 20 year vacation? Doesn’t that sound like a plan for a compassionate society to help senior citizens in need, and specifically those in need, rather than the primary source of retirement income for the vast majority of Americans? Especially when you consider how much healthier and active each generation of retirees is than the last, doesn’t it seem reasonable we should expect them, and ourselves, to work longer than previous generations, well past 65?
This isn’t something that can, or should, be done overnight, or sprung on elderly people who have relied on this promise and expected to retire in their 60s for their entire working lives. But it is something that we can phase in, say perhaps raising it one year at a time in five year generational increments, let’s say starting a decade from now (or whenever we get off our asses). The retirement age is currently being incrementally increased to 67, but that is a statutory change enacted 35 years ago, based on obsolete actuarial tables, and before we blew out our debt like a prom dress at a Springsteen concert.
Imagine if we applied the actuarial tables of 1935, the year Social Security was enacted, to today’s retirees. Using the same math, you wouldn’t be eligible for Social Security until you were 82, a year past the average female life expectancy and five years past the average male life expectancy. Does that help clarify how drastically out of proportion our current system is to its original intent, and how different the worker-to-retiree ratio could be?
Now I agree with what you must be thinking, that we are a much more compassionate and civilized society than we were in 1935…and a hell of a lot richer, too. Fair points. But when you understand where we are versus where we came from, and compare the two versions of the same system side-by-side, it helps clarify what’s happening and where we’re headed, and can maybe help us think about what to do about it.
All of which is the $10,000 way of saying “raise the retirement age, Stupid.”
Final point on Social Security: it should be means tested. Again, look at the name. I know this is controversial, and people are emotionally attached to “their” social welfare benefits that they “earned” when they “paid into the system.” Like a lot of harsh truths, this is something that people don’t want to hear, but must be told, and must accept if they wish to avoid economic disaster: we cannot afford Social Security as a program that everyone is entitled to, but only as a safety net for those who need it. This will require some radical rewiring of Americans’ expectations and notions of what Social Security is, which is why reform is just as unlikely to emerge from grass roots public opinion as it is from congress taking the initiative, especially since the one precedes the other.
But like it or not, it is true. Our whole notion of Social Security has to be revamped to be understood as a safety net, or it will not survive, and our economy will, eventually, buckle under its weight.
Here’s a depressing graph to help get the point across:
A couple of anecdotes nicely illustrate my point. A distant relative of mine had a very successful career, and in retirement, received a pension of just over $100,000 annually, which was on top of substantial earnings that allowed him to save for retirement and accumulate assets throughout his life. Can you really justify taxpayers forking over social welfare benefits to him for 20 or 30 years, as some sort of “security” guaranteed by “society?” Wouldn’t it be better to save that money, leaving it in the pockets of today’s workers, who are still building their families, careers, and wealth? Or, if need be, redirected towards individuals truly in need? Whether you’re liberal or conservative, this should be a layup: lower taxes, or more resources going to the truly needy…or both!
On an even more ridiculous level, munch on this, if you will: I have friends at all levels of society, some fairly high. Some of them rub elbows with millionaires and billionaires, and have told me that when they turn 65 and are eligible for Medicare* and Social Security, these guys get super excited about it. I mean, really! They will literally go on about how they just signed up for Medicare, or just received their first Social Security check…like this is the accomplishment they’ve been working towards their whole lives, not their first million or their first billion. What do they do with this lunch money, you may ask (I sure did)? Buy a cheap car to toodle around in at their vacation property. Give it to their grandkids for an allowance, or for spending money in college. Who knows what else. This particular group is a small percentage of retirees, but this extreme example illustrates the principle: it is a ridiculous public policy to spend “social welfare” money on people who have done very well in life. But even these people would most likely fight tooth and nail to defend “their” social welfare that they “earned” when they “paid into it.” You see the problem here…?
What I hope I have conveyed in this section is how dreadfully unsustainable our current approach to retirement benefits is, from an economic standpoint, and a sense of how disastrous the train wreck is going to be if we don’t take some pretty serious steps to restructure our system to avoid it.
*All of my arguments about a means test for Social Security apply to Medicare, and it seems reasonable to assume the worker-to-beneficiary pyramid is the same as it should be the same people
Going back to the beginning, the three pillars that are the foundation of our impending financial meltdown are Social Security, Medicare, and military spending, the latter of which I’ve addressed here.
If we don’t get our spending under control, we are going to have make some very ugly choices, which will most likely include some sort of drastic benefits cuts and austerity measures, in this and other areas of the federal budget. And of course, any plan we devise will be hasty and imperfect, so more than likely a lot of truly needy and deserving elderly people and others will be deprived of needed resources, and our county will betray the promises it made to them in the nastiest bait & switch in modern economic history.
This is the future I want to avoid, but I see absolutely no sign from either our electorate or our elected officials of even admitting these structural problems, let alone doing something about them. I fear it is far more likely that we will have a crippling economic meltdown in our lifetime that will dwarf the housing crisis of 2008. If that should occur, your most pressing concern may not be what will happen to your savings account or your 401k, or whether you’ll be able to afford to send your kid to college. It may be whether you have enough beans and bullets.
And then we will be here:
After serving you all this delicious gloom and doom for your main course, let me offer you some more for dessert. No whine. I want to leave you with a few more things to think about and a few more resources to dig into in order to further your understanding of our economic future.
See, even the depressing facts I mentioned above do not describe the totality of the fiscally irresponsible policies our country is engaged in. Those are just the most costly federal ones. But state governments have their own self-created economic icebergs, and are veering towards them just as fast. Take a few minutes to read this 60 Minutes article from 2010, and you’ll see that our national economic situation is much, much worse than I described above. The article is four pages, here are the first few paragraphs:
By now, just about everyone in the country is aware of the federal deficit problem, but you should know that there is another financial crisis looming involving state and local governments.
It has gotten much less attention because each state has a slightly different story. But in the two years, since the “great recession” wrecked their economies and shriveled their income, the states have collectively spent nearly a half a trillion dollars more than they collected in taxes. There is also a trillion dollar hole in their public pension funds.
The states have been getting by on billions of dollars in federal stimulus funds, but the day of reckoning is at hand. The debt crisis is already making Wall Street nervous, and some believe that it could derail the recovery, cost a million public employees their jobs and require another big bailout package that no one in Washington wants to talk about.
“The most alarming thing about the state issue is the level of complacency,” Meredith Whitney, one of the most respected financial analysts on Wall Street and one of the most influential women in American business, told correspondent Steve Kroft.
Whitney made her reputation by warning that the big banks were in big trouble long before the 2008 collapse. Now, she’s warning about a financial meltdown in state and local governments.
“It has tentacles as wide as anything I’ve seen. I think next to housing this is the single most important issue in the United States, and certainly the largest threat to the U.S. economy,” she told Kroft.
Asked why people aren’t paying attention, Whitney said, “‘Cause they don’t pay attention until they have to.”
Whitney says it’s time to start.
If the written word doesn’t frighten you, then by all means, watch the actual segment for more bone-chilling economic facts that will keep you up at night, wondering how many AR-15s you can buy in the next few years.
Then there was this recent projection by the Congressional Budget Office covered in the Wall Street Journal: the interest alone on our national debt is soon going to surpass even our outsized defense budget.
In 2017, interest costs on federal debt of $263 billion accounted for 6.6% of all government spending and 1.4% of gross domestic product, well below averages of the previous 50 years. The Congressional Budget Office estimates interest spending will rise to $915 billion by 2028, or 13% of all outlays and 3.1% of gross domestic product.
Along that path, the government is expected to pass the following milestones: It will spend more on interest than it spends on Medicaid in 2020; more in 2023 than it spends on national defense; and more in 2025 than it spends on all nondefense discretionary programs combined, from funding for national parks to scientific research, to health care and education, to the court system and infrastructure, according to the CBO.
Debt as a share of gross domestic product is projected to climb over the next decade, from 78% at the end of this year—the highest it has been since the end of World War II—to 96.2% in 2028, according to CBO projections. As the overall size of our debt load grows, so too do the size of interest payments.
Ben Shapiro mentioned this impending financial crisis in a recent show, and discusses the terrifying worst case scenario at 22:30 – 26:17 below.
Last but not least, this article is one of the best resources on this issue. It’s short, digestible, and discussed in layman’s terms.
If you prefer your depressing information to be conveyed verbally, most of the text is included in the video description below.
Phrase of the Day, kids: unfunded liabilities
Note: if you want to watch the embedded videos from the start time I recommend, you have to click on the embedded version and watch it on this page. Clicking it into a new tab will take you to the video from the beginning, I just learned that. They are extremely enlightening, so I encourage you do check them out if you can. If you can’t now, you can bookmark them for later or return to this post and watch them later.
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