Is the New Deal a Broken Promise?

 by Roland Hulme

 

Denver Post, December '08

Will America default on the New Deal?

The venerable Siger forwarded an article to the Exchange Coffee House the other day by British journalist Janet Daley. In If We Are To Survive The Looming Catastrophe, We Need To Face The Truth she challenged not just America's recent response to the looming credit debt ceiling, but also the fundemental philosophy behind most first work nations: The concept that a capitalist economy could support a government funded welfare state.

And that's pretty much what exists in most European countries - and, to a slightly lesser extent, the United States. While ostensibly driven by the free market economy, the large governments of these countries provide a variety of taxpayer funded or subsidized services; from socialized medicine in the United Kingdom, to government-owned high speed railways in France. In the United States, the government has obligations to millions of senior citizens; providing social security payments and massively subsidized health care to those over the age of 65.

But the fundamental problem, as Janet Daley sees it, is that the ever-expanding costs of providing these government entitlements is being met by an ever shrinking pool of tax contributors.

Over promise. Under deliver.

In America, the problem is the so-called "baby boomers." They're the post-World War 2 babies who vastly outnumber the proceeding generations and are all hitting retirement age right about now. What had once been a large pool of taxpayers supporting a small pool of retirees is now the opposite - and it doesn't take Warren Buffett to work out that this is financially untenable.

The cold, hard fact this this: In a decade, medicare alone will be responsible for a $35 trillion deficit. There is no way, no how that the United States government will ever be able to meet that financial obligation; even if they render all taxpaying Americans into indentured servants.

As for social security - unfortunately that's passed the point of no return. Currently, the administration faces the problem of social security revenue (the payroll taxes workers pay into social security) being less than the amount they're obligated to pay out to retirees. It's untenable; and tax hikes or benefit cuts will provide only a temporary solution.

And what's really sad is how, as opposed to medicare, this situation should NEVER have arisen in the first place.

Social Security by Bernie Madoff
 
Back in FDR's day, when he proposed social security int he first place, it was a system already insulated against the current disparity between the numbers of workers and retirees. Over the course of their lifetime, American workers would pay a percentage of their income into the social security fund which would, with sound investment strategies, an accumulation of interest and consolidation of the different contribution rates, have enough in the bank to pay them what they were owed when they retired.

The problem was, successive US presidents started to treat social security like a Ponzi scheme; taking money out of the fund whenever they needed it because they realized that there were always more workers than retirees; so their contributions effectively "paid forward" to cover the costs of what they owed leaving the capital untouched.

That worked fine until, just like with Bernie Madoff's infamous scheme, they reached the tipping point at which revenue was outstripped by obligation and there was no more money in the kitty to cover the difference.

Quite frankly, if the government had just operated social security like it was intended to be run, we wouldn't be facing the crisis we are now. Instead they looted it - and unlike Bernie Madoff, who went to jail, most of the politicians who raided the social security funds are still incumbent in congress or the senate.


So where do we go from here?

The answer seems depressingly simple. Short of a miracle, the American taxpayer cannot pay for everything the government has promised them. The real issue is not that America will default on its loans, but that it will default on its obligations to social security and medicare recipients.

And it will. I don't see any other solution to this economic nightmare.

I fear the second decade of the 21st century will be remembered as when America's experiment with the welfare state finally came to a brutal, ignoble and bloody end.