Wednesday, February 24, 2010

Our Entitlement Problem

One of my favorite economics journalists is Robert Samuelson. Early this week he wrote about the crisis in Greece as the first of many days of reckoning for all the welfare states of the world. Samuelson included the U.S. on the list of nations facing a serious debt crisis as a result of unfunded entitlements. He sees the problem as primarily an issue of demographics; too much being promised to an aging population or to public service employees or to some other needy group than can be paid for by a shrinking body of tax payers. Our problem is that this shrinking source of revenue means we are financing these entitlements through debt, and it is the debt that will bring us to the day of reckoning. We may claim that we are only taxing the "rich" but this strategy guarantees either that we will have less "rich" to tax (either through tax havens or through reduced activity) or a reduction in GDP growth and overall prosperity as taxes pay for entitlements rather than remaining in the economy for investment and growth.

What has made the problem virtually unsolveable is the fact that the dependency created by the entitlements makes it impossible to ever reduce much less eliminate them. Once a group within society is granted an entitlement, that group becomes a powerful constituency that prevents any reduction. The senior citizen lobby is a perfect example, making social security a "third rail."

It is this constituency/dependency problem that should make us very cautious about expanding entitlements. As we watch the chaos in Greece (and coming soon to California and New York), it should cause us to think twice about moving 1/6th of our economy on the path toward becoming an entitlement. We can argue all we like about the merits of comprehensive health care coverage, but if we don't think carefully about how this will contribute to both our entitlement obligations and long term debt we are fools of the first order.

It is because of this stark reality that the American people should have paid close attention to the statements of Rep. Paul Ryan at the health care summit on Thursday. He was the voice both of economic reason and long term realism in pointing out not only how expensive the bill will actually be, but also how much it will contribute to the deficit. And the problem isn't just an additional entitlement, it is how it will exacerbate the problem with the already bankrupt Medicare and Medicaid.

The one ray of hope in the economic crisis in Greece, California, and New York is that it will force the American people to demand of their politicians the kind of difficult choices required for entitlement reform and debt reduction. I actually think we are closer than we were even a year ago to having a serious discussion about long term debt. If we do have this discussion, we can thank two groups: the Tea Partiers and the Greek rioters.

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