Economist Channel

The High Cost of Good Intentions is a superb new book by my Hoover colleague John Cogan. It is a political and budgetary history of U.S. Federal entitlement programs. It is full of lessons for just why the programs have expanded inexorably over time, and just how hard it will be for our political system to reform them.

If indeed the Congress will now turn to entitlement reform, as house speaker Paul Ryan has promised, this will be the book to have on your desk. (Ryan already blurbed it (back cover) as did Bill Bradley, Sam Nunn, George Shultz and Alan Greenspan.)

If you think entitlement programs, and the political hash that enacts them, are recent problems, or the fault of one political party, think again. John's main lesson is that the emergence of bloated entitlements is a hardy feature of our (and many other countries') democracies.  He does this by just reading the history.

The habit of expanding entitlements started early. Chapter 2:

Revolutionary War pensions were the nation's first entitlement program. ... between 1789 and 1793, the federal government agreed to pay annual pensions to Continental Army soldiers and seamen who became disabled as a result of wartime injuries or illness. [later, as an inducement to service]... 

For forty years, Congress enlarged and expnaded these benefits until, by the 1830s, they covered virtually all Revolutionary War seamen and soldiers, including volunteers and members of the state militia and their widows, regardless of disability or income. 

That costs might balloon beyond forecasts was not a total surprise

Opponents of the 1818 law predicted that granting lifetime pensions to Revolutionary War veterans who were "in reduced circumstances" would be costly. Senator Nathaniel Macon of North Carolina observed, "Pensions in all countries begin on a small scale and are at first generally granted on proper consideration, an that they increase till at last they are granted as often on whim or caprice...[it] will on experiment, be found an endless task. It will drain any treasury, no matter how full." 

Yet, the service pension law of 1818, which granted such pensions to all revolutionary war veterans who were "in reduced circumstances"

produced a massive surge in applications and an unexpected and unprecedented cost to the Treasury. The law's proponents had estimated that fewer than two thousand veterans would qualify and that the annual cost might reach $115,000. But by the end of 1819, more than twenty-eight thousand individuals had applied... The 1818 law's annual cost to the Treasury had ballooned from $300,000 to a staggering $1.8 million. ..widespread charges of pension fraud and corruption. A law designed to assist destitute veterans was providing pensions to many financially well-off veterans and even many who had never fought for the nation's independence. 

...Congress's underestimate of the cost was on the first of many underestimates. These miscalculations are invariably due to Congress's failure to appreciate how an offer of entitlement assistance can cause individuals to change their circumstances to qualify for aid they have previously managed to live without. 

This is a familiar theme in entitlement programs, but just how far back it goes was news to me.

A bigger theme of the book is the politics of entitlements. That also starts long ago. Congressman Dudley Marvin of New York reports

"In the villages in his part of the country, when the semi-annual pay day arrived, they [pensioners] were in the habit of forming themselves into companies, then forming a column and thus marching to receive their quota of the public bounty" 

This spectacle served as an early hint of the sense of entitlement that can affect groups of recipients of public assistance... such groups can develop an expectation that society owes them benefits that initially were bestowed out of gratitude for military service or a desire to alleviate hardship. We will observe this expectation and the sometimes remarkable behavior it generates in later chapters on twentieth-century entitlements. 

For example, a century later, the linkage between individual payroll taxes and benefits was crucial to the "enactment, long-run endurance, and, ultimately high cost" of Social Secrurity

Paying payroll taxes gave [gives!] program participants a sense that by contributing to the program during their working years, they were establishing an earned right to benefits when they retired. ... Senate Finance Committee chairman Walter George noted" Social security is not a handout; it is not a charity; it is not relief. It is an earned right based upon the contributions and earnings of the individual.  

When [President Roosevelt] was challenged about financing Social Security with a regressive payroll tax rather than general fund revenues from the progressive income tax, he replied, "We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics" 

Civil war pensions followed the same path, on a larger scale

The civil war pension program began with the same high-mihnded, noble, and limited goal as Revolutionary War pensons: to compensate soldiers for the loss of life and limb suffered in wartime service to their country... A half-century later the program evolved into a general disability and retirement program for virtually all Union soldiers...Congress also eventually stretched eligibility for pensions to virtually all widows and survivors of union soldiers, even those who had married many decades after the war had ended..

Costs ballooned, for example on the 1879 arrears law, that allowed soldiers to file disability claims after the original deadlines

The bill's senate floor manager, Sentaor John Ingalls, had put the total at $18 to $20 million. Hayes administration officials estimated a much higher cost of between $50 and $150 million. ... Two years after the law's passage President Chester A. Arthur reported that arrears payments had already cost taxpayers $235 million...It is fair to conclude that the law added nearly $400 million to pension expenditures during the 1880s alone  

New interest and lobbying groups emerged

claims agents led the advocates for arrears payments. These agents, certified by the pensions office, assisted veterans and widows with the complex application process, represented claimants in appeals before the pension office, and received compensation for their services. ... claims' agents had emerged as a powerful lobbying force. 

... The arrears act also spawned a second large national lobbying force: The Grand Army of the Republic (GAR). The GAR's evolution from a service organization ta special interest lobby..would be followed time and again by twentieth-centry lobby groups...

At this time, politicians discovered how important entitlements could be to electoral success, beginning the mad use of public money to buy votes that we see today.

The (1884) election campaign witnessed the use of the Pension office as a political machine to gain partisan advantage. (good story follows) 

... Along with this legislation came an important and powerful discovery by the Congress and the executive branch: broadly distributing cash benefits directly to a large segment of the voting population could produce significant electoral advantages. 

The story repeats again with WWI veterans.

There are occasional retrenchments and reforms, especially useful to ponder now.

Candidate Cleveland renewed his previous campaign promise to `cleanse the pension rolls and limit ... benefits to 'worthy' veterans. ...Voter backlash against the tariff and pension corruption contributed to President Cleveland's landslide victory.... Cleveland took immediate actions... The GAR rallied against this minor reform as if the pension rolls had been purged, decrying "false economy which shaves and pares to the quick at the expense of honor, justice and principle." ... by the time Preisdent Cleveland left office in 18997, there were 12,500 more Civil war pensioners than when he had taken office. 

Interestingly, Franklin Roosevelt was a great enemy of large veteran benefits. Roosevelt

shared the founding fathers' belief that all citizens had an obligation to serve their country in wartime, and therefore did not represent a special class of individuals entitled to government benefits merely because they had served during wartime. .. His views were decidedly at odds with Congress, which invariably concluded that all wartime veterans, especially when they reached old age, stood as a special class. 

 Roosevelt also thought balanced budgets were important. He acted cleverly:

On Sunday night, the President gave the first of his legendary fireside chats, reassuring the public that the US banking system was in should shape. On Monday he sent to Congress his third message: to modify the Volstead Act to permit the sale of beer... an extremely popular proposal. Now the Senate was in a bind. Under Senate rules, action on the Volstead act could not take place until the Economy act had been addressed... 

and they passed it

The law repealed all entitlements to pensions that had been granted to veterans of World War I, the Spanish American War, the Boxer Rebellion and the Philippine insurrection.. For the first [last?] time in US history, a large-scale entitlement had been repealed. ... 

Several factors account for President Roosevelt's remarkable success in reducing veteran's pensions. The economy and federal budget's dire situation presented the president with a national emergency, and in Washington such emergencies are a strong predicate for action.. President Roosevelt was also willing to use his veto power to sustain his policies... 

Roosevelt's attitude to veterans did not last.

*****

I'm up to the beginning, really, of the book, "The birth of the modern entitlement state." The centerpiece of the book is not these historical antecedents, but the political story of how the current US entitlements system evolved.

That story starts with the New Deal. It also brings in the judiciary, the "role of the federal courts in making public policy:"

The new Deal entitlements ushered in a new era for the federal courts. ... once federal entitlement rights had been granted, the nature and extent of these legal right had to be adjudicated....In the 1960s and 1970s, the federal courts .. expanded[ed] the legal rights of entitlement claimants in welfare, health care, and nutrition. Ultimately federal court decisions created welfare entitlement right where none had been legislated. 

There are many more themes worth stressing, even in the ancient history, and I won't prolong the quotes delicious as they are.

One theme: Our government routinely liberalizes entitlements when budget surpluses are strong, and at least slows down their expansion in bad fiscal times. It also liberalizes entitlements in bad economic times.

That bears centrally on the current reform question.  Our entitlements are, no surprise, on an unsustainable path. We will either reform them, in a way that reduces federal spending, or we will substantially raise taxes on the "middle class," including a large payroll tax increase and likely a european style VAT on top of growth-killing income and corporate taxes.

If one wishes for a reform on the expenditure side, the great question is whether it must be done directly or via "starving the beast" of tax revenue. For example, I advocate a VAT. A common complaint is that the VAT is not only a much more economically efficient way of raising a given revenue, it is a great way to raise much more revenue, and my critics complain it soon will do that and provoke even greater spending. The VAT shifts the top of the Laffer curve to the right, and in my critics' view, the US government will operate at the top of the long-run Laffer curve given structural limitations on its tax code.

I have held out hope that our democracy could contain itself to spend less than the top of the Laffer curve allows, so we can jettison the insane inefficiency and corruption of our tax code, and have one that is vastly more economically efficient. The opposite view really amounts to belief that democracy is fatally flawed. Moreover, I note that starve the beast tax reductions have led to massive deficit expansions, yet large debt and deficits have not yet seemed to provide much pressure against entitlement spending.

John's history is a strong push toward starve the beast, at least in the negative direction. Surpluses lead to benefit expansions, quickly.

Another theme: The accounting gimmicks such as "trust funds." Surpluses in trust funds lead to benefit expansions, even if there are huge deficits outside. And "trust fund" accounting gimmicks also go back a long way.

As we (hopefully) start to think about reform, I think the only hope is to break out of "we're spending too much there will be a debt crisis" vs. "you heartless evil person, just look at (deserving person). How can you throw her off the bus." The way to do that, I think, is to focus on the disincentives of our social programs, not on the cost or the worthiness of recipients. I find some comfort in John's history, that occasional retrenchments, including the above and the welfare reforms of the 1990s got through politically by looking at fraud (a form of disincentive) and other disincentives.

This is a history and a political history, not a reform proposal, nor an economic analysis of disincentives. Still, John's history is also full of quotes reflecting the centuries old tension in welfare programs between helping those in need and disincentives, which I'll cover in the next post. That history ought to help.

A note for graduate students: This book is very well written, and you should read it to emulate writing style as well as for the subject. No, it does not knock you over the head with beautiful sentences as John McPhee might. It is, however, beautifully structured. The whole book and each chapter starts with a complete summary of the argument, and the chapter fills it out. It could go on for thousands of pages, but manages to tell just enough of the story so you see the historical detail, but not enough so you get lost in what must been have fascinating historical detail. Yet this is not a standard quickie book aimed at a policy controversy. This is a deep piece of scholarship. Everything is footnoted -- 78 pages of footnotes and reference all together.