You Gotta Love Irene Triplett

EconTalk Extra
by Amy Willis
John Cogan on Entitlements and... Brink Lindsey and Steven Teles...

entitlement.jpg If you're unhappy about the growth of government entitlement programs, perhaps it's time you stop harping on the New Deal. According to this week's EconTalk guest, John Cogan, you'll need to look back a lot further...a lot further.

What can the history of the federal governments role in transfer payments teach us about tax reform today? How much of a safety net should the government provide for its citizens? These are complicated questions. So take a trip back in time with us this week, and examine your own thoughts about transfer payment programs then and now.

Please share your thoughts with us...Respond to our prompts in the Comments below, or consider using these questions with your class or your friends. Let's continue the conversation.

1. How did the veterans' benefit program instituted after the American Revolution come to set the pattern for all US entitlement programs to follow? How does Cogan distinguish this entitlement trend from the one begun in the wake of the Great Depression?

2. Roberts and Cogan spend a lot of time on Social Security. (Who's planning their next trip to Parkersburg, West Virginia?) How has the Social Security program changed since its inception? What do you think should be done to shore up the system?

3. What does Cogan mean when he says, "Entitlements have profoundly changed the priorities of our government?"

4. Why is Roberts so incensed by the payroll tax? To what extent would you favor Roberts's suggested plan of rolling the payroll tax into income tax?

P.S. I took this week's title from Russ on twitter...If you're not following him yet, make sure you do!

P.P.S. You do know who Irene Triplett is now, right???

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COMMENTS (5 to date)
Greg writes:

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James Pass writes:

Amy asks: Why is Roberts so incensed by the payroll tax? To what extent would you favor Roberts's suggested plan of rolling the payroll tax into income tax?

I don't know if I'd say Russ is "incensed," but I think he objects to payroll taxes because they are relatively hidden, and if they were rolled into the income tax they would be more visible (and hence more painful). In general, I think Russ believes that taxes should be as visible as possible in order that people feel them more directly. I suppose Russ believes that more visible taxes would lead to smaller government.

Amy asks: What do you think should be done to shore up the [Social Security] system?

My goodness, that's a big question. Some good books have been written on that topic. Of course, some people think that Social Security should be replaced by a libertarian alternative. But I still haven't found a good book on libertarian alternatives to social programs.

Greg G writes:

Russ is incensed by the payroll tax because he believes it is part of a system that deceives taxpayers into thinking that it is not really a tax they are paying but instead is part of "hoax" that causes them to believe the dollars they pay in payroll tax go into some kind of metaphorical "lockbox" or dedicated personal account that their retirement benefits are later paid out of. He would prefer to see payroll tax rolled into income tax because he believes that would cause taxpayers to be able to see through this illusion. Russ believes that Social Security should only be available to seniors who are genuinely poor.

I disagree on all points. I think the overwhelming majority of citizens understand full well that the money they pay in is used to pay for the current spending of government. I think they understand full well that this is a system where each generation agrees to pay for the social Security benefits of their parent's generation. I think most people understand that they probably would not save enough for retirement in the absence of this system and benefit from its existence. I think that most people find a lot more dignity in receiving payments from an entitlement system than a welfare system and consciously prefer it that way.

I think that most people understand that the law that established the Social Security System was accompanied by a tax to pay for those benefits and that this tax would not exist otherwise. I think that most people understand that if government did not have the funds represented by the bonds held by the Social Security System the government would have to pay this interest out to other lenders.

There is some irony in Russ's position. Libertarians usually are keen to insist that people know what's best for themselves. For some reason the payroll tax is taken to be an exception to this principle despite the fact that the way the system works is quite transparent. I have never met one of these people who are supposed to believe that the payroll taxes they paid are sitting in some "lockbox" until the day they are used to pay out benefits. I think most people understand how the system works and like it that way.

Michael Byrnes writes:

There are things that did not come up in this week's episode, focused as it was on the accounting side of entitlements.

I would not disagree that our entitlement system is suboptimal, but I think any serious discussion of entitlements needs to also consider the real, not financial accounting aspects of it.

1. In "Economic possibilities for our grandchildren", Keynes famously predicted that after a couple of generations, productivity growth would allow most people to drastically reduce their working hours. At first glance, he was obviously wrong - for the most part, we work as hard today as we ever did, if not harder. The increased productivity did not lead to shorter work weeks. But if we consider the concept of "retirement", maybe Keynes was less wrong than he seems. People in effect DO take more leisure than in Keynes' day, they just delay it to retirement age. With Social Security there for all workers (and spouses), retirement is something everyone can look forward to, not just the upper classes.

So, the question that I've never heard anyone ask in a serious way: do people increase their work output during their prime working years in expectation of retirement? If retirement at a reasonable living standard was unrealistic, would people take more leisure (ie, expend less work effort).

2. The next question is, without Social Security and Medicare, what happens to our retirees? It is true that some could replace SS (though not Medicare/Medicaid) with private savings, but that won't work for enough to cause huge problems, it will subject people to the whims of the business cycle, etc. Death panels? I don't think that will be popular. Supported by their children? That will work for many, but it isn't a free lunch - people who have to expend more effort caring for elderly relatives are going to be less productive and thus less wealthy. So there will still be an element of the younger generation supporting the older - it will just be different in form to what we do today and the costs, financial and otherwise, will be different. And those who have no families probably wind up on the dole anyway - so still someothing of an government spending type entitlement - unless we go the death panel route.

John Stock writes:

I just listened to this episode.

Wow. Russ I have to say I'm a bit shocked, and dismayed, to hear you, as a free-market economist, be such an advocate of wealth redistribution, vis a vis means testing of the Social Security system. (You didn't use the words "means testing" I don't believe, but that's what was directly implied.)

The SS system does not function as, and was never intended to be, a welfare system. It is insurance - specificially insurance against old age (thus the "OASI" which is "Old Age Survivors Insurance" and disability DI = "Disability Insurance"). It is not intended to be insurance against just general "poverty". Look at the naming, the legislation, and how it functions. There is *some* welfare component, in that the distribution rates are a bit higher for poorer people, however for the most part its function and intent is just like a pension plan - to provide a steady income when you're old; an income that is supposed to be there regardless of other assets and income (i.e. savings) you may have.

The problem with only providing benefits to "people who need them" (a very subjective term) is that it will discourage saving for retirement - at least in the official white-market economy. Instead it will encourage growth of the black market economy, including people moving their money overseas and/or into untracked assets (things like gold, bitcoin, etc.), in order to make it appear they are poorer than they really are, so that they can receive SS funds. Aside from that it discourages savings in general, if people know that they will not only have income from the government after they retire, but also know that that income will only be available if they have not saved their own money. IMO this is not a good thing, and should not be encouraged.

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