The most important form of social insurance

Great and thorough piece about Our Democratic Debt from the July 21, 2014 issue of National Review is now available online.

What a mess.  $18 trillion of federal debt + $3 trillion more of state & local debt + $4 trillion in badly under-funded pension obligations to public sector unions (also at the state & local levels).

pic_giant_111714_SM_Federal_Debt-DTThroughout our history we’ve borrowed heavily – for infrastructure and wars.  But more recent (and current) borrowing is for consumption.  Author Chris DeMuth does a nice job describing how it’s different and why it matters:

Public investments often fail. Wars are lost at least half the time. But borrowing for consumption is not aspirational. It is intended to ease the present rather than enlarge the future; and, when pursued on the massive scale we have become accustomed to, it can only diminish the future.

The essence of our debt predicament is not so much its size as its source. It has grown to unprecedented levels not because of external crises or failed or overambitious public ventures, which would be bad enough. Rather, it has arisen from within, generated by our democracy itself. Through a long sequence of accommodations to immediate contingencies and opportunities, we have built a system in which the electorate expects, and political officials provide, a higher level of personal benefits than of tax collections to pay for the benefits. The difference is taxed to younger and future generations — to be paid in the future, by unknown subsets of them, through higher outright taxes, reduced benefits, debt defaults, or inflation. The situation is intractable because most of those being burdened are not voters (most are not even alive) and cannot be part of a constituency for reform

One can make a plausible case for only so many highways, battleships, foreign interventions, and cancer-research centers. But there is no inherent limit to the demand for more and better consumption, and for redistribution from the future to the present to pay for it.

There are “3 scenarios” for how we get out of this:  (1) politically difficult reforms “that have already been thoroughly worked out in academic and think-tank research,” (2) inflation – which exports the pain by screwing our foreign creditors, or (3) a crisis “that forces a choice between outright default and abrupt, severe benefit cuts.”

Whatever the path, it will lead to a welfare state that is more constrained and limited and less generous than the one we are enjoying today. It is possible to have a generous welfare state financed by current taxation; Sweden is close to one, and it has even put its retirement pensions on a budget. But Sweden is a small, homogeneous, collectivist, consensus nation, and America is a vast, heterogeneous, individualistic, fractious nation. Our transition from debt-supported to tax-supported consumption is going to be much more contentious

The purpose of maintaining low public debt is not to adhere to abstract notions of fiscal rectitude. Rather it is to maintain the government’s capacity to respond forcefully to severe emergencies that citizens cannot manage on their own. Such emergencies — foreign aggression, epidemics, natural disasters, financial collapses, and economic depressions — have occurred frequently throughout American history. Actuarially, at least one is likely to occur in the decades that it will take to reduce our debt to a manageable level of, say, 30 percent of GDP without risking serious social dislocations. If a severe shock should come our way soon, the government’s response will be seriously weakened by its inability to borrow massive resources immediately. And the very fragility of our financial circumstances will invite emergencies of the man-made kind.

The theory of social insurance is that government is able to reduce the lifetime risks facing individual citizens by spreading those risks among large populations and compensating for lack of individual foresight. Adding the expedient of massive borrowing to the equation has produced a different, untoward result. Whatever success our debt-financed welfare state has had in reducing risks among the citizenry, it has certainly centralized a great deal of risk in the government itself, thereby hobbling its ability to provide the most important form of social insurance of all.

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