Tuesday night’s election result was a victory for deep partisan stalemate, polarization, dysfunction, and acrimony throughout the halls of government. The market badly wanted a Republican victory, and sometimes you get what you wish for. Unfortunately, Mr. Market’s innocent dreams of a more “business friendly” government will turn out to be a nightmare of fiscal profligacy on a scale that’s virtually unprecedented in modern history.
It’s now guaranteed that the hapless soul who succeeds to the White House in January 2013 will preside over a nation with $15 trillion of reported public debt, that is, debt at 100% of GDP and counting. On top of that will be tens of trillions more in unfunded (and unreported) entitlement liabilities – the financial burden of which will only intensify as the baby boomers become fully retired. Worse still, Obama’s successor will have no way to stop the headlong rush into national bankruptcy he or she will inherit from this week’s earthquake because the specious ideological shibboleths of both parties will have poisoned the only policy tools – tax increases and entitlement cuts – that can make a difference.
To see why this scenario will play out, start with the bloodbath in the House. The only specie of Democrat that’s even entertained the notion of entitlement reform was the Blue Dog Democrat. As of this morning, that particular specie is extinct. The remnant of the Democratic caucus consists of aging, hard-core liberals who have spent a political lifetime accumulating anti-Republican bile against the policies of Reagan and the Bushes. Now, they’ll play the only card they have left – fostering hysteria among elderly voters about social security cuts.
The Democrat’s prospects for success are excellent and the reasons will shortly be evident. The gumption-challenged group of statesman appointed to the president’s deficit commission by the pols of both parties will soon issue the big cop-out – opining that Social Security has a long-term funding problem, but not one that requires immediate, deep cuts in current benefits. That proposition, of course, is a convenient dodge that rests on the fiction of trust-fund accounting.
The fact is, the Social Security trust fund has $3 trillion of paper IOUs issued by the Treasury Department over the last 70 years, but not one dime of real money. Over that time span, we collected a modest excess of payroll taxes over current-year benefit payments, and spent the excess cash on cotton subsidies, student loans, and aircraft carriers. It’s all long gone.
The truth is, the Social Security program is a $700 billion per year inter-generational transfer payment program in which lifetime taxes paid by current recipients bear only a faint and arbitrary relationship to benefits now being received. So when the retirement “insurance” and trust-fund fictions are cut away, the underlying program cries out to be means-tested. To be sure, that would amount to a default on the implicit social compact that has undergirded the program since its inception. But in the context of the massive fiscal retrenchment which is now unavoidable, there’s no rational alternative.
This is made starkly evident by viewing the alternatives. The only other element of the domestic budget of comparable size is the $600 billion we spend on means-tested safety-net programs including Medicaid. Yet unlike in the early days of the Reagan Administration when the president could fairly make points about the abuses of what he called welfare queens, today’s facts are very different. The safety net programs were substantially reformed in 1981, and then thoroughly tightened once again under President Clinton’s bipartisan welfare reform. Any additional savings are thus likely to be in the tens of billions, not the hundreds of billions actually needed.
Moreover, the burden of safety-net spending is now likely to rise for decades into the future because we’re inextricably mired in a failed national economy. It turns out that there was no miracle of economic growth, productivity and prosperity over the last several decades – even if Wall Street stock peddlers and Republican orators still cling to that illusion. What we had, instead, was serial bubble after bubble – fueled by a tsunami of public and private debt and printing-press money.
The deflationary aftermath will be with us for years, and so will low single-digit GDP growth, chronic double-digit unemployment rates, and swollen levels of economic hardship among the lower ranks of society. In that context, we won’t see the recent tripling of food stamp and unemployment compensation expenditures recede in the conventional cyclical manner, nor can we grow our way out of the currently ramped-up level of safety-net spending. Like much else, the current $600 billion social safety net is the new normal.