Tuesday, August 14, 2012

“Conservatism and a Social Conscience”

Sydney M. Williams

Thought of the Day
“Conservatism and a Social Conscience”
August 14, 2012

For at least eighty years there has been an implicit understanding among both major political parties that government has a role to play in the responsibility to look after the needs of the elderly, the sick and the poor. There may be debatable variances of the definition of the terms, but there are no differences when it comes to a sense of obligation. Fiscal conservatives, though, differ from their compatriots in their willingness to speak out about the fact that the path we are on will lead to the bankruptcies of our entitlement systems. They understand the importance of economic growth in addressing government’s obligations. While the elderly, the chronically ill and the disabled will need life-long care, fiscal conservatives feel the mission of most welfare programs should be to wean recipients from dependency, ala the welfare-to-work program of 1996. Most importantly, conservatives understand that the worst thing that can happen to the needy is for society to become poorer, which is the inevitable result when social programs crowd out economic growth.

Republicans are often cast by Democrats and mainstream media as the Neanderthals of the American political system. They are portrayed as insensitive and selfish, placing fiduciary responsibilities before the needs of the poor and the sick. While there may be a few deserving of that moniker, just as there are Leftists who believe in a total equal redistribution of wealth, in both cases their numbers are small.

There is no question of the needs of many people, and of the responsibility for society to care for the elderly and indigent. However, an inhibiting factor – one that many Democrats and leftists don’t like discussing – is the one of money. There are three important components. First, as mentioned above, the growth of entitlement spending is unsustainable. Second, as a nation, we are all (no matter if we work in the public or private sector) dependent on the growth of the private sector. Tax revenues generated by the private sector pay for the public sector. The larger the slice of GDP represented by the public sector, the smaller is the part available to the private economy – the engine that provides funds to the public sector. Third, in order to support this increase in federal spending, government has had to borrow, increasing the federal deficit by $5 trillion in the past four years. They have been borrowing at what are, in effect, teaser rates – rates so low that “balloon” payments will be coming soon.

Federal spending over the past three years has consumed 24% of GDP, versus a number closer to 20% for the prior few decades. Since the recession ended in June 2009 economic growth has been far below expansions emanating from earlier recessions. Spending on Social Security, Welfare, Medicare and Medicaid today comprise 56% of the federal budget. The rate of growth in those programs greatly exceeds both the growth rate of the economy and the budget as a whole. In doing so, it threatens private sector growth. The unilateral decision of the President to amend the definition and intent of the Welfare Reform Act of 1996, along with his executive decision to enact the Dream Act greatly increases the number of people on welfare and the concomitant costs to taxpayers. The Heritage Foundation estimates that by 2020 the United States will be spending a trillion dollars a year on welfare programs, versus $435 billion this year – a compounded increase of 11%, in an economy likely to grow between 2.5% and 3%. Social Security and Medicare reform should include the adoption of a means test and increasing the age of eligibility.

Tax revenues are closely aligned with economic growth. As economic growth increases, so do tax revenues. When the economy goes into recession, tax revenues shrink. Revenues are influenced by incentives. When capital gains taxes are high, investors hold on to their stocks. When income tax rates go up, wage earners, especially the wealthy, seek out tax shelters, such as municipal bonds. While bureaucrats in Washington use static accounting to determine the expected success or failure of any given tax plan, it is the behavior of people that should be measured. People and businesses respond to incentives. Last Wednesday, the Wall Street Journal noted: “Every major marginal rate income tax cut of the last fifty years – 1964, 1981, 1986 and 2003 – was followed by an unexpectedly large increase in tax revenues…” Over the past thirty years, the marginal tax rate on all categories of income has declined. In 1980, the highest earning Americans (the top 1%) paid a tax rate of 70% on their marginal earnings. They paid 18% of all taxes. In 2007, the top 1% of wage earners paid 35%, yet contributed 40% of all income tax revenue. We can debate what is “fair”, but it is only fair to acknowledge a trend that has been in place for more than thirty years. Ironically, but mathematically accurate, reductions in marginal rates have increased the progressivity of the tax code. As marginal tax rates increased, in the years following the passage of the 16th Amendment, so did the demand for deduction. Complexity followed. California Republican Congressman Duncan Hunter notes that there have been almost 5000 changes to the tax code in the past decade. Such unending alterations create income for lawyers and accountants, but breed uncertainty for individuals and businesses.

The third factor – interest rates – seems insignificant at the moment, but is likely to grow significantly in importance over the next few years. In 2012, interest costs are expected to cost U.S. taxpayers about $224 billion, or about 6% of the annual Federal budget. In 1997, interest expense on Federal debt was $244 billion, or about 15% of the Federal budget. The difference has been interest costs. Today, the average interest rate on U.S. Federal debt is 1.98%. In 1997, it was 6.4% and total Federal debt was about $5.4 trillion. Today, it is about $16 trillion. Interest rates will not stay at this low level forever. I don’t pretend to know when they will rise. I just know it is inevitable that they will.

Conservatives are neither dispassionate nor mean. No conservative wants to do away with welfare, but we need to understand where this flood of spending is leading us. We need to understand that spending so much on entitlements limits options for other endeavors. Where, for example, will we find the funds to repair our infrastructure? Could we afford to send a man to the moon today? How will we respond should our nation be hit by another 9/11 type attack? Including interest expense, about eighty-six percent of the Federal budget is considered non-discretionary. We can raise marginal tax rates, and the Congressional Budget Office can provide an analysis that says doing so will raise x number of dollars. But what they can’t factor in is how doing so will affect behavior on the part of individuals and businesses. When, for example, does the law of diminishing returns kick in? We need meaningful tax reform, similar to what we got in 1986, with lower marginal rates and far fewer deductions and exceptions.

Reining in government spending is a herculean task. The bigger it gets, the more powerful are its constituents and defenders. Years ago, in my 20s, I was elected as a Democrat to the library board in the small Connecticut town in which my wife and I lived. Despite getting the fewest votes (or perhaps because I did!) I was named treasurer. That meant I had to go before the town meeting and request funds for the upcoming fiscal year. A wise, older board member pulled me aside and told me the first thing you have to do is make sure you spent every dime in last year’s budget, for if you don’t they will cut you back. It was a lesson, not only in government, but in bureaucracies as well. Neil Barofsky, the Special Inspector General, TARP, from December 2008 to March 2009, in his recent book Bailout, writes of a similar experience when he went to Washington in late 2008: “The priorities of government agencies, in order of importance, are: maintaining and increasing their budgets; giving the appearance of activity; and not making too many waves.” Government bureaucracies have little incentive, other than to get bigger. For government bureaucrats there are no virtues in shrinking budgets, or in reducing costs. My experience in that small Connecticut town changed me from a lefty Democrat to a fiscal conservative. We all know the road ends; we just do not know where. But the consequence of reaching the terminus unprepared should concern us all.

A country (or a state or a city) that impedes its ability to grow economically will end up forcing draconian cuts, as Greece and many European countries are discovering today, and as have states and cities within the United States. To peer into the crystal ball, one has to look no further than Central Falls, RI; Stockton, CA; or Jefferson County, AL. As Pogo once said, “We have met the enemy and he is us.” We are fortunate that the Dollar is the world’s reserve currency, so remains in demand, which helps keeps interest rates low. But that will not go on forever.

So when the current Administration, or the New York Times or Washington Post make sardonic and patronizing comments about Tea Party meetings, or when Hollywood, CNN and network TV studios speak derisively and condescendingly of Middle Americans marching for fiscal sanity, consider their fears. The Administration and mainstream media have chosen to demonize Paul Ryan because of his attempt to discuss issues they would prefer to ignore, hoping the future never arrives. It is not xenophobia that concerns them about illegal immigration and it is not a lack of compassion that drives them to cut welfare spending, it is fear that the country we all love and respect has been acting in a manner that bears no resemblance to common sense. It is the knowledge that forced cuts to social welfare programs will be far more draconian that those adopted willingly and preemptively.

It is, in fact, because Republicans like Paul Ryan and Mitt Romney have a social conscience that causes them to address current and future problems from which we, as a nation, can no longer hide, no matter the comfort that the darkness of ignorance provides. Who would be most responsible for deteriorating entitlements – those who acknowledge today’s problems, or those who will let the ship of state sail forth only to be dashed on the rocks of fiscal irresponsibility tomorrow?

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