High cost of the best intentions

I just finished reading John Cogan's book, the High Cost if Good Intentions. This is a comprehensive work examining the history of entitlement programs, starting with pensions for Revolutionary War veterans. The work is fascinating and illuminating and has relevance to our current political and economic environment. The basic tenants of the book are rather simple. Entitlement programs throughout history start out similarly, based upon real needs to specific segments of the population. In the early periods of the Republic, all of these programs were pensions for war veterans; Revolutionary War, War of 1812, and Mexican Wars. They started out as small programs to assist veterans who were injured during their respective service obligations. In each case, the pensions were modified and expanded over time, over decades after the actual service. Furthermore, those deemed worthy of pensions morphed and expanded over time, first to veterans who were not injured during service, then to widows, then to dependents.

After the Civil War, the pool of potential recipients expanded markedly. The pool of pension eligible individuals grew over time with widows and dependent children added. While the original purpose of Civil War pensions was to compensate veterans whose function was impaired as a consequence of service-related injuries, over time criteria were changed which allowed for larger and larger numbers of veterans to qualify for benefits. The Grand Old Army was an extremely effective lobbying force after the Civil War.  Remarkably, there is still one child of a civil war veteran who is collecting pension benefits now.

Early in the republic there were attempts to forward fund pensions for navy veterans. Sailors on active duty could purchase insurance to protect them. Those who opted to participate funded a trust fund to pay for future pensions. However, the trust fund was almost immediately raided by Congress. Furthermore, the Federal government ended up providing pension benefits to sailors who did not opt into paying insurance premiums.

A similar story characterized the Social Security entitlement program. Early trust fund surpluses enticed the Congress to expand pension benefits. Payment increases were almost invariably t imes to happen during election years, often with big bumps in payments hitting October payments right before elections. Buy votes in the present and defer actual payment to later tax payers.

It does not appear to be politically possible to put scale back entitlement benefits once they are deployed and historical experience shows a consistent pattern of expansion with increased payments leveraged to optimize vote capture. The implications for our current political and fiscal environment are stark. Between Social Security, Medicare, and Medicaid, entitlements are growing faster than the economy. Entitlements make up 14% of GDP, dwarfing Defense spending (~3%) and non-defense discretionary spending (~2%).  By 2032 debt service and entitlement spending are projected to consume the entire Federal Budget.

How did this reality come to pass. At each step of the way, the parties lobbying for pensions or other payments were not totally undeserving. Limits set at the onset of any given program always leave some parties just outside the scope of the benefit. It serves as a huge incentive to push for modest expansion. However, the expansion always works as a one way valve, always expanding and always leaving some parties just on the wrong side of some line drawn in the sand.

That which cannot go on for ever won't. Barring some extraordinary change in economic growth, the Federal Government will not be able to meet it's promises. Entitlements are growing at a rate that outstrips overall growth of the economy (538). Pushing tax rates may buy some time, but equally possibly may accelerate the time line to Federal bankruptcy.

The current dysfunction in Washington regardign budgets is directly related to uncontrolled entitlement spending. It is only going to get worse as actual discretionary $'s get scarcer and scarcer; and they will.