Clause 61: The Pushback Blog

Because ideas have consequences

Posts Tagged ‘social contract

Declarations of Dependence

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In August 2011, speaking in Andover, MA, Elizabeth Warren made these comments:

I hear all this, you know, ‘Well, this is class warfare, this is whatever.’ No. There is nobody in this country who got rich on his own — nobody. You built a factory out there? Good for you. But I want to be clear. You moved your goods to market on the roads the rest of us paid for. You hired workers the rest of us paid to educate. You were safe in your factory because of police-forces and fire-forces that the rest of us paid for. You didn’t have to worry that marauding bands would come and seize everything at your factory — and hire someone to protect against this — because of the work the rest of us did. Now look, you built a factory and it turned into something terrific, or a great idea. God bless — keep a big hunk of it. But part of the underlying social contract is, you take a hunk of that and pay forward for the next kid who comes along.

As if building on this idea, President Barack Obama made these comments in a campaign speech in Roanoke, VA on July 13, 2012:

There are a lot of wealthy, successful Americans who agree with me — because they want to give something back.  They know they didn’t — look, if you’ve been successful, you didn’t get there on your own.  You didn’t get there on your own.  I’m always struck by people who think, well, it must be because I was just so smart.  There are a lot of smart people out there.  It must be because I worked harder than everybody else.  Let me tell you something — there are a whole bunch of hardworking people out there.

If you were successful, somebody along the line gave you some help.  There was a great teacher somewhere in your life.  Somebody helped to create this unbelievable American system that we have that allowed you to thrive.  Somebody invested in roads and bridges.  If you’ve got a business — you didn’t build that.  Somebody else made that happen.  The Internet didn’t get invented on its own.  Government research created the Internet so that all the companies could make money off the Internet.

The point is, is that when we succeed, we succeed because of our individual initiative, but also because we do things together.  There are some things, just like fighting fires, we don’t do on our own.  I mean, imagine if everybody had their own fire service.  That would be a hard way to organize fighting fires.
So we say to ourselves, ever since the founding of this country, you know what, there are some things we do better together. That’s how we funded the GI Bill. That’s how we created the middle class. That’s how we built the Golden Gate Bridge or the Hoover Dam. That’s how we invented the Internet. That’s how we sent a man to the moon. We rise or fall together as one nation and as one people, and that’s the reason I’m running for President — because I still believe in that idea. You’re not on your own, we’re in this together.

Some defenders of this idea claimed at the time that Obama’s remarks were being taken out of context. For this reason, I have included all the paragraphs that included when making such a claim.

Peggy Noonan wrote a very effective parody of this less than a month later:

From a friend watching the Olympics: “How about that Michael Phelps? But let’s remember he didn’t win all those medals, someone else did. After all, he and I swam in public pools, built by state employees using tax dollars. He got training from the USOC, and ate food grown by the Department of Agriculture. He should play fair and share his medals with people like me, who can barely keep my head above water, let alone swim.” The note was merry and ironic. And as the games progress, we’ll be hearing a lot more of this kind of thing, because President Obama’s comment—”You didn’t build that”—is the political gift that keeps on giving.
— “The Life of the Party”,

So — obvious truths or outrageous philosophical claims?

The Philosophy of Dependence

There is a philosophical pedigree for the ideas that Warren and Obama are promoting. Their statements call the question on fundamental ideas of:

  • Deserved reward: in a society in which the co-operation of others is necessary to get any meaningful results, what share of the results can any one person really deserve?
  • Moral responsibility: to what extent are you responsible for your actions? To what extent is the community?

The subject touches on moral agency, free will and self-reliance. This is not a new topic of discussion. Friedrich Nietzsche wrote:

The desire for “freedom of will” in the superlative, metaphysical sense, such as still holds sway, unfortunately, in the minds of the half-educated, the desire to bear the entire and ultimate responsibility for one’s actions oneself, and to absolve God, the world, ancestors, chance, and society therefrom, involves nothing less than to be precisely this causa sui, and, with more than Munchausen daring, to pull oneself up into existence by the hair, out of the slough of nothingness.
— Nietzsche, Beyond Good and Evil, Chapter I

Informed by thinkers such as Nietzsche, communitarians have for a long time criticized the individualistic definition of the self. They have maintained that people are not, in the words of Charles Taylor, “self-sufficient outside of society,” and that the self is formed independent of social relations. From this, it would seem to follow that Taylor believes both that Nietzsche was correct in his criticism of individual moral responsibility, and that it is difficult for an individual to claim to deserve any distinct reward for contributing to a group effort, even if that contribution was to plan, organize and direct.

However, this is by no means a settled issue. Robert Nozick described humans as self-owners: in full control of their talents, abilities and labor and the fruits of their application of these. He also takes the position that human beings are ends in themselves. From this, it follows that a person is able to grant or withhold her participation in a group effort, is morally responsible for her decision and is entitled to rewards that she deserves for the contribution she provides.

As Andrew Cline explained, the positions of Warren and Obama are an inversion of all this. Instead of government deriving legitimacy from the consent of the governed, it is We the People who must ask the government what we deserve for our efforts:

In Obama’s formulation, government is not a tool for the people’s use, but the very foundation upon which all of American prosperity is built. Government is not dependent upon the people; the people are dependent upon the government.

The system “allowed you to thrive.” That is fundamentally non-Jeffersonian. You succeeded because a greater power — the state — bestowed its favor upon you. The setup, the whole reason for the argument, is Obama’s contention that your wealth is not your creation, but an allowance from the state:

“You didn’t build that” was the clincher that would justify the demand to “give something back.” Not “give,” but “give… back.” The distinction is critical. Your wealth, he clearly and unmistakably asserts, is not your creation, it was given — allowed — by the state. And now the state wants some of it back. Refuse and you are denying the state its rightful claim to the wealth it “helped” you to create.
— “What ‘You Didn’t Build That’ Really Means — and Why Romney Can’t Explain It”, The Atlantic (

A full treatment of the philosophy behind these remarks would be a book-length effort. If you are interested, I direct you to the following supplementary materials, which you can read without charge on the Internet:

  1. Internet Encyclopedia of Philosophy
    1. Autonomy
    2. Desert
    3. Moral Luck
    4. Nozick, Robert
    5. Responsibility
  2. Stanford Encyclopedia of Philosophy
    1. Communitarianism
    2. Desert
    3. Feminist Perspectives on the Self
    4. Free Will
    5. Incompatibilist (Nondeterministic) Theories of Free Will

I caution the reader that philosophy has trends, fads and fashions no less than any other subject of human study. These and the related materials are useful, but not the definitive last word.

How Stuff Gets Done

No one disputes that most of the interesting problems in the world require solutions designed and implemented by groups of people. Innovation, by definition, requires participation.

What are the appropriate rewards for various dissimilar contributions to group success? We can get some insights from everyday life at work.

A committee is a group that keeps minutes and loses hours.
— Milton Berle

Just putting a group of people together does not cause results to magically emerge. Many executives and managers have learned this the hard way. Someone has to stand up and risk being wrong, to take responsibility and overcome the indolence and inertia of others and guide the group forward.

Popular ideas link expectation of reward to hard work, but to hear people talk, everyone works hard. You can find a thousand people who are willing to work hard and still not one person who is willing to risk being wrong.

Victory has a hundred fathers, but defeat is an orphan.
— Usually attributed to President John F. Kennedy, but he got it from Tacitus, c. 98 AD.

After the results are in, if success is obtained, everyone standing downwind has a claim to deserve a share. However, if the effort fails, everyone who did not publicly take a position leading the effort will run and hide.

If the world worked any other way, we would not need salespeople. People looking for a solution would charge out into the marketplace, armed with perfect information, and select the best product without any guidance from anyone else. But in fact we do need salespeople to promote our product, establish mindshare and explain benefits. Salespeople also get prospects off dead center and lead them to make decisions to buy sooner rather than later.

Collectivism and Its Discontents

When these remarks were made, particularly those by the President, there was a lot of pushback. I am grateful that the country was paying attention. I hadn’t expected as much of a reaction over what is essentially a philosophical issue. I think that many people whose views align with those of Warren and Obama hadn’t expected it, either, and were scrambling for a response.

The “out of context” defense is disingenuous, and also lame. If the point of the remarks had been only that no man is an island, we already knew that. No one ever asserted that anyone ever did get rich “on his own,” without the participation of others or without the legal and physical infrastructure of society. The question is what to focus on: the person taking initiative or the group being led, the innovation or the ground that has already been paved by others. The point was, as Cline articulated, a radical reorientation of the relationship between governing and governed. That has always been the point of planners and collectivists. It was explained by Lester Thurow back in 1971.

Warren claims the existence of an “underlying social contract.” Yes, I believe there was a social contract in existence — in the forties and fifties. It unraveled because everyone decided to “improve” it in their own way, including the Federal government, after which there was no longer a societal consensus. The government does not have the prerogative to unilaterally redefine the rights and obligations of the polity. In its wisdom, our government helped abrogate the social contract. This is a major cause of the support for Donald Trump this year: people who feel that rewards in society are being directed to the undeserving. The correctness of this view is out of scope of this discussion; the relevant fact is that the view exists.

Although the viewpoint of Warren and Obama is not a perspective I share, I believe that the discussion that arises from these remarks is necessary. There are so many different concepts of who the deserving people are that we need to have a conversation about them, taking the subject on directly and coming to some sort of conclusion. We can’t just muddle through anymore; we need to face the conflict and work out what kind of society we want to have.

Let’s You and Him Fight

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In 1857, a North Carolina man published a book which he expected would cause quite some trouble in his community. The book was The Impending Crisis of the South by Hinton Rowan Helper. He took an objective look at conditions in American and appealed to ordinary Southern people to act in their own economic interest to abolish slavery:

Nothing short of the complete abolition of slavery can save the South from falling into the vortex of utter ruin. Too long have we yielded a submissive obedience to the tyrannical domination of an inflated oligarchy; too long have we tolerated their arrogance and self-conceit; too long have we submitted to their unjust and savage exactions. Let us now wrest from them the sceptre of power, establish liberty and equal rights throughout the land, and henceforth and forever guard our legislative halls from the pollutions and usurpations of proslavery demagogues.
— Helper, p. 28 (

Helper set up side-by-side comparisons of northern and southern states grouped by 1790 populations: New York and Virginia, Massachusetts and North Carolina. He showed statistically how the economies of the southern states had fallen behind because of slavery. He explained how slavery reduced the prospects of the free whites of the South who did not own slaves, and appealed to them to refuse to fight a war to defend the rights of slave-owning planters to further impoverish them.

We know from history that Helper’s appeal was not heard. The economic reality he described asserted itself in the superior forces the Union would ultimately deploy against the Confederacy. After losing the war, the planters reasserted themselves in the peace. They instituted sharecropping, keeping blacks and poor whites in wage slavery for decades. They continued to play off poor whites against blacks while maintaining their own economic position. Even Helper lost his way, becoming a white supremacist later in life.

The game that the planters were playing and Helper was describing is called “Let’s You and Him Fight.” I’ll divide two parties and keep the hostility going, while I calmly walk up the middle with all the marbles. This game was described at an individual level by Eric Berne in Games People Play (1964):

The internal and external psychological advantages for [the initiators] are derived from the position that honest competition is for suckers …
— Berne, p. 124.

All my life I have seen the same game played among groups of Americans by people who want to set themselves up as the arbiters of what is fair. These latter people inflame the citizens, often along racial lines, playing one group against another while the instigators further their careers. In 1971, Lester Thurow wrote The Zero-Sum Society, providing a theoretical justification for this game at the national level:

Every time a tax is levied or repealed, every time public expenditures are extended or abolished, an equity decision has to be made. Since economic gains are relatively easy to allocate, the basic problem comes down to one of economic losses. Whose income “ought” to go down?
— Thurow, p. 17.

It is safe to infer that, by writing the book and arguing for these positions, Thurow, who was the dean of the Sloan School of Business at MIT, was humbly offering himself for the job of croupier at the economic casino he was proposing. A casino is a zero-sum institution, and every gambler knows the house always wins.

Want to see what a zero-sum America actually looks like? Here you go:

Fight during cancelled Donald Trump rally in Chicago, 11 Mar 16.

Fight during cancelled Donald Trump rally in Chicago, 11 Mar 16. Image from CNN.

I am confident that this is not what Lester Thurow had in mind when he wrote his book. Neither did the people who led the introduction of entitlements in the 1930s; they were seeking to avoid this very thing. Neither did the people who strove to broaden the reach of these entitlements since the 1960s.

They all had the best intentions — but those are what the road to hell is paved with.

Yes, Il Donald has appealed to the lowest instincts of people. But he is made possible by those who have gone before. Where Thurow says, “whose income ‘ought’ to go down?”, Trump’s followers say, “Not ours, Jack!”

Whatever level of political awareness they are operating on, the Trumpkins have sufficient common sense to realize that more government handouts for other people means less for them. A Nobel laureate economist is only starting to get his mind around this:

Put it this way: There’s a reason whites in the Deep South vote something like 90 percent Republican, and it’s not their philosophical attachment to libertarian principles.
— Paul Krugman, “Clash of the Republican Con Artists”, The New York Times (

Ya think? For eighty years politicians educated people to expect handouts from the government: why do you think they’re called entitlements? Whoops, but you’re not entitled, cause we want to give them to these other people over here, who we have decided are more deserving. What happened to the social contract?

What about the Democratic con artists who are also playing Let’s You and Him Fight, asserting the moral high ground because only they know the secret of how to distribute government largesse equitably? What game are you playing, Paul? Are you honest enough with yourself to even know?

Paul Krugman looked into the future and saw Donald Trump staring back at him. This is what you get when you work very hard to build the zero-sum society. Krugman doesn’t want a class war; he wants to put his policy in place and have the people who lose out just quietly take their medicine. If we just quietly took our medicine from the authorities, there would never have been an American Revolution.

If you think this is bad, wait until you see the cage match between the mortgage interest deduction and the Earned Income Tax Credit. Two go in; one comes out.

The antidote to all this is not very complicated. It is not to demonize blacks, whites or Mexican immigrants. It is to turn them all loose to live their lives and keep your hands out of their pockets. We’ve known this for some three thousand years:

You shall not covet your neighbor’s wife. You shall not set your desire on your neighbor’s house or land, his manservant or maidservant, his ox or donkey, or anything that belongs to your neighbor.
— Deut. 5:21 (NIV)

That commandment is not there to protect your neighbor. It is there to protect you from the dark forces within you.

Every con in the history of man has required you, the mark, to want something you haven’t earned.

Written by srojak

March 13, 2016 at 12:27 pm

The Roots of Republican Populism

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In more than fifty years of living, I have listened to a lot of people. While my sample is unscientific, it is not deliberately biased. I have heard from a lot of people who are not like me. What I have consistently heard is that the American people are generous, not mean-spirited. This includes Americans who are also Republicans.

So what is going on with the Republican Party lately? One watches or reads the news and one would believe that the Republican Party is made up of haters. On the debate stage, the candidates’ language was certainly strident, with key exceptions such as Rand Paul and John Kasich who are, to put it charitably, not leading the pack.

Writing in The Atlantic, David Frum has contributed to our understanding with a thoughtful analysis that avoids commonplace stereotypes ( The best part of the article is his analysis of populist sentiment:

These populists seek to defend what the French call “acquired rights”—health care, pensions, and other programs that benefit older people—against bankers and technocrats who endlessly demand austerity; against migrants who make new claims and challenge accustomed ways; against a globalized market that depresses wages and benefits. In the United States, they lean Republican because they fear the Democrats want to take from them and redistribute to Americans who are newer, poorer, and in their view less deserving—to “spread the wealth around,” in candidate Barack Obama’s words to “Joe the Plumber” back in 2008. Yet they have come to fear more and more strongly that their party does not have their best interests at heart.

The roots of this populism go back to, of all things, the New Deal. Back in the 30s, people were talking about the “common man”, the “little guy”. Yes, there was a high smoke-and-mirrors factor to the rhetoric, but that was the central theme that obtained broad support among the American people. It resonated with people’s beliefs. FDR did not win four terms in office by publicly dismissing the concerns of ordinary people. Whatever he actually implemented, he spoke to them in his addresses, including his fireside chats.

In a 2013 article (, Josh Freedman and Michael Lind set the breakdown of the New Deal social contract around 1980. When Elizabeth Warren discusses the decline of the middle class, the baseline she uses for comparison is 1970. However, the consensus supporting the social contract was already unraveling in 1970.

To Deserve Help

During the 1960s, the Democratic Party shifted focus from the “common man” to the permanent underclass. In this view, everyone deserved help; no one should live in poverty. Help became an entitlement.

However, the New Deal was a social contract, not merely an economic contract. We’re going to help you as long as you deserve it. I am my brother’s keeper, but my brother has to be someone I would want to keep. It’s not OK for my brother to do nothing to help himself and demand that I help him, and it’s not OK for the government to speak for him and require me to help him unconditionally.

Note that whether or not the people receiving help actually are doing the best they can to help themselves is irrelevant. It is not my intention to argue what the recipients of help actually are or are not doing to help themselves. Maybe they are helping themselves in ways others don’t recognize. The point is that others who were fighting to hang on to their own socio-economic position perceived that help was being extended to those who did not deserve it, and did not like this direction one bit. Archie Bunker didn’t like it, and neither did my mother.

The ascent of Nixon is typically attributed to factors such as the Republican southern strategy, intended to exploit racial divisions after LBJ put civil rights legislation through. However, a very real motivation for those who mourned for FDR in 1945 to turn their backs on the Democratic party in the 60s was the breakdown of the New Deal social contract.

It was these pessimistic Republicans who powered the Tea Party movement of 2009 and 2010. They were not, as a rule, libertarians looking for an ultraminimal government. The closest study we have of the beliefs of Tea Party supporters, led by Theda Skocpol, a Harvard political scientist, found that “Tea Partiers judge entitlement programs not in terms of abstract free-market orthodoxy, but according to the perceived deservingness of recipients [italics in original]. The distinction between ‘workers’ and ‘people who don’t work’ is fundamental to Tea Party ideology.”

That distinction was always fundamental, and was woven into the New Deal social contract. You even had to work to get federal old age benefits (a.k.a. Social Security).

The Unraveling Coalition

The people I have met who go to Tea Party events are not ideologues. They would much prefer to use their disposable time in the same ways that they had always been using it in years past: primarily for recreation, leisure and social activities. They were motivated by the sense that the direction in which the country is going is intolerable to them, and this reality politicized them.

Yet even as the Republican Main Street protested Obamacare, it rejected the hardening ideological orthodoxy of Republican donors and elected officials. A substantial minority of Republicans—almost 30 percent—said they would welcome “heavy” taxes on the wealthy, according to Gallup. Within the party that made Paul Ryan’s entitlement-slashing budget plan a centerpiece of policy, only 21 percent favored cuts in Medicare and only 17 percent wanted to see spending on Social Security reduced, according to Pew. Less than a third of ordinary Republicans supported a pathway to citizenship for illegal immigrants (again according to Pew); a majority, by contrast, favored stepped-up deportation.

The pundits, donors and thought leaders of the Republican Party did not get it:

As a class, big Republican donors could not see any of this, or would not. So neither did the politicians who depend upon them. Against all evidence, both groups interpreted the Tea Party as a mass movement in favor of the agenda of the Wall Street Journal editorial page. One of the more dangerous pleasures of great wealth is that you never have to hear anyone tell you that you are completely wrong.

Much like the intelligence officers in the US Army were competing to analyze the Germans out of the war in late 1944, the Republican Party establishment marginalizes and dismisses the Tea Party. The establishment doesn’t want to hear it, thinks it can ride out the storm and keeps monopolizing the conversation. Yet the casualty list grows — Bob Bennett, David Dewhurst, Eric Cantor, John Boehner.

Cantor’s loss to Brat jolted House leaders. Immigration reform slipped off their agenda. Marco Rubio repudiated his own deal. But Republican elites outside Congress did not get the message. They rationalized Cantor’s defeat as a freak event, the sad consequence of a nationally minded politician’s neglect of his district. They continued to fill the coffers of Jeb Bush and, to a lesser extent, Rubio and Scott Walker, all reliable purveyors of Conservatism Classic.

The Immigrant Thing

What is the great animus toward immigrants? Didn’t everyone descend from someone who came here from someone else? Frum identifies more immediate concerns on people’s minds:

Owners of capital assets, employers of low-skill laborers, and highly compensated professionals tend to benefit economically from the arrival of immigrants. They are better positioned to enjoy the attractive cultural and social results of migration (more-interesting food!) and to protect themselves against the burdensome impacts (surges in non-English-proficient pupils in public schools). A pro-immigration policy shift was one more assertion of class interest in a party program already brimful of them.

The Peasants Are Revolting
(I’ll Say They Are!)

Into this seething brew Donald Trump inserts himself.

When Trump first erupted into the Republican race in June, he did so with a message of grim pessimism. “We got $18 trillion in debt. We got nothing but problems … We’re dying. We’re dying. We need money … We have losers. We have people that don’t have it. We have people that are morally corrupt. We have people that are selling this country down the drain … The American dream is dead.”

That message did not resonate with those who’d ridden the S&P 500 from less than 900 in 2009 to more than 2,000 in 2015. But it found an audience all the same. Half of Trump’s supporters within the GOP had stopped their education at or before high-school graduation, according to the polling firm YouGov. Only 19 percent had a college or postcollege degree. Thirty-eight percent earned less than $50,000. Only 11 percent earned more than $100,000.

The media, obsessed with demographics and identity politics, was completely blindsided by this development. He’s arrogant, he’s adolescent, he’s crass, he’s rude. He doesn’t play by the rules. He invited Hillary Clinton to his 2005 wedding; how much of an outsider can he really be? Are these people blind, deluded or just stupid?

The people we are talking about already know that journalists and political insiders are condescending toward them. It’s a dog-bites-man story by now.

It’s uncertain whether any Tea Partier ever really carried a placard that read keep your government hands off my medicare. But if so, that person wasn’t spouting gibberish. The Obama administration had laid hands on Medicare. It hoped to squeeze $500 billion out of the program from 2010 to 2020 to finance health insurance for the uninsured. You didn’t have to look up the figures to have a sense that many of the uninsured were noncitizens (20 percent), or that even more were foreign-born (27 percent). In the Tea Party’s angry town-hall meetings, this issue resonated perhaps more loudly than any other—the ultimate example of redistribution from a deserving “us” to an undeserving “them.”

Seen from a viewpoint of conservative political orthodoxy, “Keep your government hands off my medicare” doesn’t make any sense; who created Medicare in the first place? The government can modify it anytime they want to; it’s their program. When you dine with the devil, you had best use a long spoon.

But spin around and look at it from the point of view of the New Deal social contract. Over the past eighty years, people made sacrifices and accepted obligations in the expectations that they would get certain benefits. That’s the contract part of social contract. The social part is tied to the idea of deserving. If “undeserving” people — however defined — can jump the queue and have prior claim to benefits, then the social contract is rubbish, a device to sucker the rubes.

One could argue that, once the New Deal contract was extended to all deserving Americans — most notably blacks, who were substantially excluded by design in the 30s — the cost soared out of reach. One could argue that the social contract was never adequately defined; it exists in the eye of the beholder, an agreement with yourself. But nobody of any note is making these arguments. Instead, they view Tea Partiers and Trump supporters as a circus freak show and dismiss their dissatisfaction.

Whatever Donald Trump’s limitations are, the people who are supporting him have their own ideas. David Frum is the first public person I have encountered who takes them seriously instead of trying to delegitimize them.

Written by srojak

December 24, 2015 at 1:40 pm

Voting Ourselves Rich

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A former co-worker sent me a link to a polemic on Social Security by Michael Goodwin, the author of Economix. Since the material is presented as a series of drawings, I have to include the drawings in order to quote them. All the drawings on this page are the work of the author, Michael Goodwin, and the illustrator, Dan Burr.

There is a lot of misinformation on this site, so let’s dig in.

The Pay-As-You-Go System?

"pay-as-you-go" system, from Economix
They way Social Security was advertised to the GI generation was as a pay-as-you-go system: your Federal Old Age Benefit payments (some pay stubs used to have a column F.O.A.B.) went into a fund to pay for your retirement. The first year anyone actually received Social Security benefits was 1940.

In fact, such a system would be unimplementable. What would the government do with such an enormous pile of money, anyway? Stick it in a vault? It would never keep up with normal economic growth. Invest it? The position would be impossible to manage and would swamp competing private investments.

Meanwhile, there would be this enormous pile of money in the Treasury, and somehow politicians were going to be able to keep their hands off it?

So what Mr. Goodwin describes, a pay-as-he-goes system, is actually closer to how the system worked than was the story that was sold to people who were voting adults back in the day. However, there is a fundamental problem with this. If you were to set up a private investment fund along this model, paying earlier participants out of the proceeds from later entrants, it would be called a Ponzi scheme and you would be slung in jail.

And Reagan Screwed Us All, Right?

Reagan borrowing, from Economix

Actually, no. This was getting out of control before Ronald Reagan ever came to town. Howard Ruff was calling Social Security a Ponzi scheme back when Jimmy Carter was still president.

Any fund that a government sets up to collect taxes now and pay benefits in the future is going to have a hard time keeping up with normal economic growth. Government is not a wealth-producing entity. You can’t “invest” in government, because there is no wealth production from which to obtain returns. It is just one big cost center.

Some of those costs are unavoidable and necessary, such as law enforcement, road repair, diplomats, soldiers and food inspectors. You may not agree with the levels at which they are funded, but they are necessary. However, their necessity doesn’t change the fact that none of them are producing wealth, and therefore none of them can contribute returns to an investment designed to provide for citizens in their old age.

But the event that really put Social Security underwater was the inflation of the seventies. Given that there was nothing in which the government could invest a fund of that size and keep up with normal economic activity, there was absolutely no chance of the government being able to keep up with the currency inflation it was driving back then.

By 1980, mortgage rates were pushing 13% and the prime rate for commercial borrowing was near 15% (See this New York Times article). This was completely unsustainable and a threat to the proper function of the economy. Business managers were beginning to question their ability to extend 30-day payment terms. Banks were starting to get interested in workarounds to avoid state usury laws, which would change the credit card business forever.

There are only 3 ways to finance government operations:

  • Levy taxes;
  • Borrow;
  • Print the money.

Taxes were off the table, because they would have pitted some voters against others. Uncle Feelgood didn’t want that. States were already experiencing tax revolts, such as the one led by Howard Jarvis in California that passed Proposition 13 in 1978. Having pushed inflation to the apparent limit, borrowing was the only unexplored avenue. Well, other than not spending — what do you think of that, Mr. Goodwin?

I’m Entitled

Social security entitlement, from Economix

Apparently not much.

Hey, wait — previously, you said that our social security payments were paying for current retirees’ benefits. So how, exactly, does this entitlement thing work?

This touches on another idea that periodically lumbers out of the woods to be beaten to a bloody pulp: means-testing Social Security. Every so many years, somebody floats it, and you will hear it trotted out again before long. But it never goes anywhere, because politicians know that means-testing Social Security will be the death of large-scale political support for the program. If a significant number of voters never expected to receive Social Security benefits, it wouldn’t be long before a revolt against Social Security started. However, with all of us in the system, expecting to receive benefits if we live long enough, there are payoffs for everyone. We can vote ourselves rich!

Only one problem: what happens when we go to collect our entitlement and the cupboard is bare?

The New Dealers never believed that there was enough wealth to make everyone above average. That is why they allowed unfavored groups, such as blacks and Asians, to be shoved to the back of the line. That mentality did not survive the sixties, and I can’t say I’m sorry about that. Nevertheless, the mentality that replaced it was that we were so rich, cool and smart that we really could vote ourselves rich. All of us.

And, yes, you’ll get your entitlement — sort of.

Furthermore, we have the capacity under the Constitution, the Congress does, to coin money, as well as to regulate the value thereof. And therefore, we have the power to provide that money. And we are going to do it. It may not be worth anything when the recipient gets it, but he is going to get his benefits paid.
— Senator William Proxmire, Senate hearings, 1976

Sure, you can have your $2,000/month Social Security benefit. Of course, a gallon of gas might be $1,000 and a gallon of milk $500. Remember that the Core Consumer Price Index does not include food or energy. The feds are never going to overtly default on federal obligations. They are going to constructively default by inflating the currency to the vanishing point.  The process is already under way:


Monetary Base 1979-2014. Federal Reserve Bank of St. Louis.

Monetary Base 1979-2014. Federal Reserve Bank of St. Louis.

The right side of that graph shows a 5x increase in the monetary base since 2008. Ultimately, that means more dollars chasing the same amount of wealth. Why do you think there are all these people advertising to buy your gold?

You can be entitled to something, but you still can’t get blood out of a stone. Imagine how much fun it is going to be when five people with competing claims to a dollar meet in the public square to fight over 35 cents. What do you think all that rioting in the Club Med countries was about? People there had made life decisions in the expectations of receiving benefits, and suddenly the government pulls out its pocket linings. Coming soon to a nation uncomfortably near you.

So Can’t We Default on Someone Else?

So here is Mr. Goodwin’s solution:

Components of debt, from Economix

OK, let’s think about this practically and realistically. Our plan is to flip off the people who are lending us the money to live beyond our means. That won’t cause a problem, will it?

The politicians are hooked on vote buying. Wall Street is their connection that makes it possible. Both Wall Street and Washington believe that Wall Street has the federal government by the short hairs.

As of 2012, $5 trillion in federal debt was to mature within 36 months (see this Wall Street Journal article). It’s not like the feds have the means to pay it off; they have to roll it over. And over. And whose co-operation do they need to do that?

Without the active assistance of Wall Street, elected officials have no chance of buying the votes they need to stay in office. In 2008, we had an election that sent the Senator with the most progressive voting record to the White House. And what changed in the financial sector? The heavens opened up — and a feather fell to earth. Yes, we can … keep on going just the way we have been.

You’ve heard it on the radio all your life:

Meet the new boss
Same as the old boss
— Pete Townshend

By the way, the foreigners are all too familiar with the concepts on these panels. When the wheels really start to come off, you will see foreigners dumping both government debt and dollars.

But Everything’s Cool

Social Security trust fund, from Economix

Try this simple experiment: Apply for a home mortgage. Write yourself an IOU for $1 million and list it as an asset on your mortgage application. Note the reactions of the mortgage originators. Do they laugh? Make rude gestures? Call the men with nets?

Remember the plan to stiff the rich people who lend the money? The intended suckers are the holders of government bonds. The Social Security trust fund is a very large rich person, weighing in at about $2.6 trillion as of mid-2012. When — not if — the government can’t keep with the vote-buying treadmill, the value of those bonds will be significantly impaired. As in a 99% haircut. The kind of haircut that leaves you with a razor through your throat.