Furthermore, when the Statist exercises authority arbitrarily, substituting his own ideological preferences for the rational decisions of tens of millions of individuals operating in the free market, he not only creates short-term misery, such as shortages and price spikes, but also long-term misery, because he discourages longer-term investment as well. The individual cannot reasonably know or predict how best to apply his labor and plan for his future. The government ceases to be a reliable force for stability. The oil company cannot be sure how best to direct its resources in developing alternative energy sources. The farmer cannot be sure how best to use his land. The automobile company cannot be sure how best to meet consumer demand. The family cannot be sure how best to invest and save for its own financial security. Chaotic tyranny overtakes ordered liberty.
The Conservative understands that if America is to remain a vigorous, civil society in which the individual can continue to improve and progress, the forces arrayed against the free market must be interrupted and their course ultimately reversed. President Abraham Lincoln encapsulated it well when he said, “Property is the fruit of labor…property is desirable…is a positive good in the world. That some should be rich shows that others may become rich, and hence is just encouragement to industry and enterprise. Let not him who is houseless pull down the house of another; but let him labor diligently and build one for himself, thus by example assuring that his own shall be safe from violence when built.”68
7
ON THE WELFARE STATE
IF THE STATIST WERE
to devise a scheme whereby a grandparent would be stealing future earnings from his own grandchild, would the grandparent consent to such immoral behavior? Yet entitlement programs tend to be intergenerational swindles that threaten the well-being of future generations with massive financial obligations incurred from benefits received by today’s generation. The Holy Grail of such programs is Social Security, followed closely by Medicare and Medicaid. In 2008, David Walker, then the comptroller general of the United States, reported that the total burden in present value dollars of these and other entitlement programs, including the federal government’s liabilities, commitments, and contingencies, is about $53 trillion. He added, “Imagine we decide to put aside and invest today enough to cover these promises tomorrow. It would take approximately $455,000 per American household—or $175,000 for every man, woman, and child in the United States.”1 Medicare and Medicaid spending alone “threaten to consume an untenable share of the budget and economy in the coming decades. The federal government has essentially written a ‘blank check’ for these programs.”2
Walker closed his report with this ominous declaration: “Budgets, deficits, and long-term fiscal and economic outlooks are not just about numbers, they are also about values. It is time for all Americans, especially baby boomers to recognize our collective stewardship obligation for the future. In doing so, we need to act soon because time is working against us. We must make choices that may be difficult and unpleasant today to avoid passing an even greater burden on to future generations. Let us not be the generation that sent the bill for its conspicuous consumption to its children and grandchildren.”3
In the United States, the concept of “social insurance” can be traced back to the beginning of the twentieth century and the work of Columbia University professor Henry Rogers Seager. The ideas expounded by Seager in his work “Social Insurance: A Program of Social Reform” provided a rationale for the modern welfare state. Seager, in turn, was heavily influenced by European models of socialism. As he explained, “For other great sections of the country—the sections in which manufacturing and trade have become the dominant interests of the people, in which towns and cities have grown up, and in which the wage earner is the typical American citizen—the simple creed of individualism is no longer adequate. For these sections we need not freedom from governmental interference, but clear appreciation of the conditions that make for the common welfare, as contrasted with individual success, and an aggressive program of governmental control and regulation to maintain these conditions.”4
Of course, Seager’s advocacy for “an aggressive program of governmental control and regulation” was a radical departure from the nation’s founding principles and constitutional system. Yet Seager’s views are featured today by the Social Security Administration, which has republished his book in its entirety on its website.5
During the Great Depression, President Franklin Roosevelt handpicked a Committee on Economic Security to provide recommendations for alleviating the debilitating effects of the Depression. This committee “recommended that the federal government create a national program that would establish a system of unemployment and old-age benefits and enable the states to provide more adequate welfare benefits.”6 To no one’s surprise, Roosevelt quickly acted on the recommendations. When pressing for the passage of his proposed Social Security legislation, Roosevelt stated: “[Economic] security was attained in the earlier days through the interdependence of members of families upon each other and of the families within a small community upon each other. The complexities of great communities and of organized industry make less real these simple means of security. Therefore, we are compelled to employ the active interest of the Nation as a whole through government in order to encourage a greater security for each individual who composes it…. This seeking for a greater measure of welfare and happiness does not indicate a change in values. It is rather a return to values lost in the course of our economic development and expansion.”7
Roosevelt strayed little from Seager’s statism. Social Security was a complete change in the relationship between the individual and the federal government. Indeed, it marked one of the earliest and most tangible breaks from American economic and constitutional traditions. And that was Roosevelt’s intention. He designed Social Security to entangle the individual in a methodological fiction—the illusion of insurance—that would addict the individual to the opium of entitlements. Roosevelt wanted individuals to believe that they were making “contributions” toward an “insurance program” that would fund a “trust” from which they would receive an “earned benefit.” Roosevelt rejected the idea of providing direct welfare payments to the aged and the unemployed because he believed such financing would eventually lose support among those who were taxed to fund it. He insisted that even the lowest wage earner covered by the program pay the same fixed payroll tax as the millionaire.
In response to criticism that the payroll tax was regressive, Roosevelt answered, “Those taxes were never a problem of economics. They are politics all the way through. We put those payroll taxes 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.”8
The taxes may never have been a problem of economics to Roosevelt, but the economic problem he unleashed on American society has become immense, thanks to the politics he played with the people and their future. And it continues to this day, as he knew it would. Social Security is a widely popular program because the individual has been deceived by the Statist to believe that the government has been prudently and diligently managing his accumulated pension investment in his Social Security account, which he presumes to be funded by his own payroll taxes. He is led to believe that he is a stakeholder in the system and that he has earned whatever benefits the Statist may cook up. And this view is reinforced with a variety of propaganda tools, including the government regularly sending the individual information through the mail giving him the false impression that his payroll taxes have been set aside for his use upon retirement based on some incomprehensible formula. It is a thorough ruse involving all parts of the government—from the elected branches to the Social Security Administration.
As the late economist Milton Friedman explained,
To preserve the fiction that Social Security is insurance, federal government interest-
bearing bonds of a corresponding amount have been deposited in a so-called trust fund. That is, one branch of the government, the Treasury, has given an interest-bearing IOU to another branch, the Social Security Administration. Each year thereafter, the Treasury gives the Social Security Administration additional IOUs to cover the interest due. The only way that the Treasury can redeem its debt to the Social Security Administration is to borrow the money from the public, run a surplus in its other activities or have the Federal Reserve print the money—the same alternatives that would be open to it to pay Social Security benefits if there were no trust fund. But the accounting sleight-of-hand of a bogus trust fund is counted on to conceal this fact from a gullible public.”9
Stung by critics, the Social Security Administration responds by insisting, “Far from being ‘worthless IOUs,’ the investments held by the trust funds are backed by the full faith and credit of the U.S. Government. The government has always repaid Social Security, with interest.”10 Of course, lost on the agency is its affirmation that Social Security is not based on any known insurance model. The taxpayers are, after all, “the full faith and credit” behind the U.S. government. The agency holds trillions of dollars in IOUs that the taxpayers have unwittingly assumed and will one day have to make good on, because there are no funded accounts from which individuals can draw. The payroll taxes are spent by the government from the moment they are deducted from the employees’ salaries.
Friedman explained: “[Social Security] gives too much attention to ‘need’ to be justified as return for taxes paid, and it gives too much attention to taxes paid to be justified as adequately linked to need.”11 And because the actual cost of Social Security is masked in insurance terminology, the pressure to increase the adequacy of benefits is constant. Today Social Security pays benefits for retirement; to surviving widows, widowers, children, and dependent parents; and for disability. Further expanding and complicating the program, most are unaware that it now even taps into general tax revenues to pay supplemental income to elderly who are disabled and blind, and cash for food and clothing.
But the Statist has always considered Social Security the foundation for building his counterrevolution. Roosevelt and a relatively small band of cronies, most of whom came from academia and the labor movement and worked their will in the halls of the bureaucracy and Congress—usually out of public view—had wanted to include government-run universal health care as part of Social Security. But it was seen as too politically ambitious even for an overwhelmingly Democratic Congress. They knew if they persisted incrementally, however, manipulating public information and perceptions and adding more and more people to Social Security’s rolls, over time they would achieve their ends.
In 1940, about 220,000 people received monthly Social Security checks. By 2004, the number reached 47 million, plus another 7 million received cash payments under Supplemental Security Income.12 In 2030, Social Security is expected to cover 84 million people and consume 6 percent of the nation’s economy, up from 4 percent.13
How could the federal government legally force employers and employees to “contribute” to an “insurance” program—particularly a program that was conceived in deceit and punishes their children and grandchildren? The program’s constitutionality was challenged and in 1937 the Supreme Court ruled in Helvering v. Davis that “the proceeds of both taxes are to be paid into the Treasury like internal-revenue taxes generally, and are not earmarked in any way.”14 Therefore, while Roosevelt was insisting to the public that Social Security was an insurance program based on segregated funds and earned benefits, his lawyers were in Court insisting that it was no such thing—and the Supreme Court played along and betrayed the Constitution.
This clearly is not what the Framers had in mind. In a letter to Edmund Pendleton, a Virginia delegate to the First Continental Congress as well as an influential statesman, James Madison wrote, “If Congress can do whatever in their discretion can be done by money, and will promote the general welfare, the government is no longer a limited one possessing enumerated powers, but an indefinite one subject to particular exceptions.”15
President Harry Truman picked up where Roosevelt left off. In his State of the Union address in 1948, Truman asserted, “The greatest gap in our social security structure is the lack of adequate provision for the Nation’s health…. I have often and strongly urged that this condition demands a national health program. The heart of the program must be a national system of payment for medical care based on well-tried insurance principles…. Our ultimate aim must be a comprehensive insurance system to protect all our people equally against insecurity and ill health.”16
In 1965, President Lyndon Johnson, building on the New Deal with his Great Society, used the umbrella of the Social Security Act to establish two massive new entitlement programs—Medicare and Medicaid. As Johnson said when he signed the Medicare bill, “In 1935, when…Franklin Delano Roosevelt signed the Social Security Act, he said it was, and I quote him, ‘a cornerstone in a structure which is being built but it is by no means complete.’ Well, perhaps no single act in the entire administration of the beloved Franklin D. Roosevelt really did more to win him the illustrious place in history he has as did the laying of that cornerstone…. And those who share this day will also be remembered for making the most important addition to that structure, and you are making it in this bill, the most important addition that has been made in three decades.”17
Johnson explained, “Through this new law…every citizen will be able, in his productive years when he is earning, to insure himself against the ravages of illness in his old age. This insurance will help pay for care in hospitals, in skilled nursing homes, or in the home. And under a separate plan, it will help meet the fees of doctors.”18
So Johnson, like Roosevelt, understood the import of deceiving the American people by packaging Medicare’s potential costs in the lie of insurance.
Moreover, the economic viability of Medicare was of little consequence to Johnson, who, also like Roosevelt, saw political advantage as a primary consideration. As Wilbur Mills, the chairman of the House Ways and Means Committee, told Johnson when informing him that his committee had passed the Medicare bill, “I think we’ve got you something that we won’t only run on in ’66 but we’ll run on from here after.”19 And so they have.
Today Medicare covers most people age sixty-five and older, some people under sixty-five with disabilities, and people with end-stage renal disease. It covers most inpatient hospital care, some inpatient skilled nursing home care, some home health care, hospice care, doctors’ services, outpatient hospital care, outpatient physical and speech therapy, ambulance services, some medical equipment and supplies, and most prescription drugs.20 Because Medicare pays providers directly, Medicare users have little incentive to behave cost-efficiently. As in Social Security, virtually everyone “contributes” to the system through a payroll tax, regardless of income level. Medicare is also “funded” through income taxes and relatively small deductible payments. Again, there is no relationship between taxes paid and benefits received and there are no trust funds set aside for future payments.
Nineteen million individuals initially enrolled in Medicare. As of 2006, it covered 43 million people—about 36 million elderly and 7 million disabled.21 In 2030, Medicare is expected to cover 79 million people and consume 11 percent of the nation’s economy, up from 3 percent.22
Medicare is running up bigger IOUs, and more quickly, than even Social Security. In 2008, the Medicare trustees issued a funding warning for the second year in a row, calling attention to the extreme cost pressures in the program resulting from an aging population and escalating costs, and to the excessive use of general tax revenue to pay benefits, and urging Congress to do something about it.23 “The longer action is delayed, the greater the required adjustments will be, the larger the burden on future generations, and the more severe the detrimental economic impact on our nation.”24 The trustees also estimated that Medicare’s
un-funded obligation is more than $36 trillion.25
Also in 1965, Johnson and the Democratic Congress passed the Medicaid bill. Of course, it, too, was established under the Social Security Act. It is a federal-state program that was originally limited to paying most of the medical bills of low-income people. At first Medicaid covered 4 million individuals. It has since evolved into much more, covering the elderly, people with disabilities, children, and pregnant women—about 51 million people.26 In 2006, the federal taxpayer paid 57 percent of Medicaid costs. The state taxpayer paid most of the rest.27 Still, Medicaid consumes on average more than 21 percent of total state spending, making it the largest state expenditure.28
Medicare and Medicaid together cover 86 million people (8 million are covered under both programs) or about a quarter of the nation’s entire population.29
Social Security, Medicare, and Medicaid are built on a family of frauds—the fraudulent concealment of material facts, the fraudulent representation of material facts, and the fraudulent conversion of one’s money for another’s use. They are a complex mix of taxes, benefits, obligations, and rights from which no individual can make much sense and about which the government sows disinformation and confusion. The “working poor” subsidize “the wealthy,” “the wealthy” subsidize “the working poor,” “the middle class” subsidizes itself as well as “the working poor” and “the wealthy,” and future generations are left paying off the crushing debt created by all of it, since the government spends far more than it raises. Yet so virtuous are the programs said to be—pensions for the elderly, compensation for the unemployed, medicine for the sick, and assistance for the disabled—few dare ring the alarm of looming economic catastrophe that threatens to destabilize the civil society.