The year has started on a warm note here in Washington D.C. We ran errands yesterday in flannel with sleeves rolled up. The sky is clear.
And yet, there’s a tension in the street and at the checkout line.
The government, you see, has been shut down for 12 days now.
And in a place where the feds employ three out of 10 workers directly or via contractors… the local government employs another one… and at least another three out of 10 rely on the government to make their living… everyone feels it when Uncle Sam’s money suddenly stops flowing.
The Wall Street Journal reports that some 380,000 federal employees are at home without any idea when they’ll receive another paycheck… and another 420,000 employees deemed “essential” are working without pay.
Of course, these folks will get paid when the government comes back online. They always have before… under President Clinton in 1995 and 1996, under Obama in 2013, and during the three “mini shutdowns” we had last year.
These so-called shutdowns are anything but.
Despite the headlines, they have no significant effect on the market… on the economy… or on the political process.
No matter your hopes and dreams, the government will never truly shut down.
It will remain – bigger than ever – with trillion-dollar annual borrowing, more than $20 trillion in total debt, and massive open-ended entitlement programs.
And while thinking about this shutdown-in-name-only, we found ourselves re-reading an essay that American Consequences editor in chief P.J. O’Rourke wrote in January 2017. He focused on just one part of the federal government… what would happen if it “shut down” its entitlement programs? We’ve reproduced it below for you with some light edits…
A ‘Thought Experiment’ About Federal Entitlement Programs
By P.J. O’Rourke
In the interest of adding a little cogitation to the process of governance, let’s conduct a “thought experiment.” Let’s think about just one of the purposes that the federal government has been put to – providing entitlement handouts.
Let’s think about not doing that anymore.
The term “thought experiment” was coined 200 years ago by Danish scientist Hans Christian Ørsted, who discovered that electrical currents produce magnetic fields. You take a well-defined hypothetical and apply logic to discover what the outcome of that hypothesis would be. You ask, “What if?” Then you really wrap your head around the “if” part.
What if the U.S. federal government got out of the entitlement business? Why is it even in this business? Entitlement spending makes up 60% of the federal budget. The United States was not founded as a charity.
Where in the U.S. Constitution does it say that the purpose of the federal government is to take money from one group of people and give it to another group of people in order to make a third group of people feel good? (That third group being the kind-hearted folks who are always eager to help right society’s wrongs – with somebody else’s money.)
The economic upside to ending federal handouts is so obvious that even a bleeding-heart economist with a column in the New York Times would notice it. (I’m talking to you, Paul Krugman.)
We take that 60% of the budget, set 10% aside to lower the debt and deficit, and give ourselves a 50% tax cut. A 19.8% top tax bracket! This is almost as good as living in Hong Kong (top rate 15%) except without having a communist dictator with the world’s largest military force on our doorstep.
But what happens to people when the federal government stops giving them handouts?
First, let’s talk about what doesn’t happen. Some federal government entitlements are not handouts. Namely veterans’ benefits. Here is a useful purpose for government. When our fellow citizens put themselves at risk to protect us (and are paid rather poorly for doing so), we taxpayers should pick up the tab for their medical care, retirement, and whatever else we’ve promised them.
Also, Social Security and the part of Medicare that’s paid for by the Medicare trust fund aren’t really handouts. People spend their whole working lives paying into these schemes that the government has the nerve to call “insurance plans.” People rightly expect to get a return on their “involuntary investments.”
We should get rid of Social Security and Medicare anyway.
But what will happen to the old folks? They’ll get rich.
Social Security and Medicare should have been privatized long ago. The libertarian think tank, Cato Institute, has been studying Social Security and retirement healthcare privatization for years. Google “Cato Institute” on the subjects to see a variety of well thought-out and practical ways that private wealth funds could replace the pitfalls of public funding (like this one).
In the meantime, let’s look at some figures from a liberal think tank, the Urban Institute. Its analysis of government retirement programs claims that a dual-income couple earning average wages and retiring in 2020 will typically receive $1,059,000 in lifetime Social Security and Medicare benefits.
Sounds pretty good – until you do the rest of the math. According to the Urban Institute that couple – each of them working from age 22 to age 67 – will have paid a total of $853,000 in Social Security and Medicare taxes.
A million-plus return on an $853,000 investment is swell – if it happened in yesterday’s day trade. But over 45 years?!
Averaging it out, the couple put almost $19,000 a year into their “involuntary investments.” Let’s say the two of them have no financial savvy at all. Let’s say they put their annual $19,000 into an ordinary savings account that since 1975 has paid on average 3.5% a year in interest. (The Urban Institute couple are a very average pair.)
The couple would be more than twice as rich!
As it is, they only get their million dollars if they live long enough and get sick enough to qualify for all their entitlements. What happens if they get struck by a meteor the day after they retire? Nothing. It’s the government’s money. Their $1,059,000 goes to some other old, sick couple.
If our Urban Institute couple had $2 million of their own, they could make a will and leave it to…
NOT to the federal government. They could leave it to an organization that was founded as a charity.
And charity will be needed if we stop federal government entitlement handouts.
We can privatize our way out of Social Security and Medicare and eliminate approximately $1.5 trillion a year in federal entitlement spending. But that still leaves us with the nearly $1 trillion in Medicaid and other welfare entitlements.
Which brings us to the most important part of this thought experiment.
What kind of a nation are we? If the federal government got out of the entitlement business, would we make it our business to feed the hungry, treat the sick, comfort the distressed, and help the helpless?
I hope to hell we would!
We might do it through state, city, town, and county programs that replace some of the federal entitlements. Surely local people know what the needy in their communities need better than Washington does.
But mostly we would perform real acts of charitableness with real charity. (Memo to those kind-hearted folks who are always eager to help right society’s wrongs: Giving somebody else’s money to somebody else is not charity.)
Americans already make more charitable donations than anyone else on earth. And the Gallup Poll “World Giving Index” says we are outranked in the percentage of what we give only by humble Myanmar. Good for you, people of what used to be called Burma!
The National Philanthropic Trust, a nonprofit that keeps track of these things, says that in 2015 individual Americans donated $373.3 billion to charity. Corporations gave $18.5 billion. And private charitable foundations contributed $57.2 billion.
That’s a total of $449 billion. In our thought experiment, we’re already halfway to meeting the needs that the remaining federal government entitlement programs were supposed to address.
And this is assuming that there’s no waste, fraud, and abuse in the $1 trillion federal poverty entitlement programs. (In which case, we’d have to work with a hypothesis that clearly isn’t true.)
But we can do better than $449 billion in charitable giving. We’ve just gotten a 50% tax cut. We have some extra cash. The average household contribution to charity is currently $2,974.
Let’s double it. Let’s triple it. However, not until we’ve spent some time pondering the fundamental purposes of the federal government.
As I said, it’s just a thought experiment. But I like what I see in the test tube.
Now here are a few things we’re reading…
Time to deal?
On Day 12 of the shutdown, President Trump plans to hold today’s meeting with congressional leaders in the Situation Room as a way of dramatizing security concerns at the border
A few market headlines to get your year started off on a nervous foot…
The hope on Wall Street is that the underlying economy of the United States is sound, that the recent selling will burn itself out and that stocks will resume their record-setting climb. But the risk is that the plunge, the worst annual decline in a decade, could be the start of something more sinister.
A Federal Reserve Bank of New York gauge puts the chances of a recession at almost 16 percent a year from now, the highest since November 2008.
The year-end stock selloff saddled major indexes with their worst annual decline since 2008 as concerns over global growth intensified, but retail investors are trying to hold on despite the intense volatility.
It’s tough to roll back regulations… and it’s likely to get even harder this year.
President Trump has rolled back more federal rules and regulations than any modern American president. But as 2018 ends and 2019 begins, can he keep up the pace?
Why do folks think we need troops in 150 countries around the world?
“The United States cannot continue to be the policeman of the world… We’re spread out all over the world. We’re in countries that most people have never even heard about. And, frankly, it’s ridiculous.”
Who beat the market last year? Those who looked outside the usual assets…
“Wine is something to drink and enjoy, and art is something to appreciate… You might enjoy the updraft of higher prices in beneficial markets but you shouldn’t be surprised if there is a downdraft.”
And let us know what you’re reading at [email protected].
Publisher, American Consequences
With P.J. O’Rourke and the Editorial Staff
January 2, 2019