In defense of the politicians

In the past year, budget crises have forced the issue of entitlement spending into the spotlight in Greece, Portugal, the United Kingdom, and the United States.

The general reaction to any suggestion of cutting government welfare programs has been howls of protest. Even in the face of the eventual collapse of such programs if they continue on their current track, the citizens who elect the politicians send their elected officials the clear signal that if entitlements are cut, the politicians will pay a price.

The situation is analogous to an addict who refuses to stop asking for injections, even if he knows those injections will eventually kill him. Once the welfare state was created, removing it became almost impossible. The fact that politicians have gone along with and even encouraged this addiction is not surprising, given ongoing studies which show that their constituents overwhelmingly oppose any suggestion of scaling back.

In a recent article entitled "This is going to hurt," author and senior Cato Institute fellow Michael Tanner points to statistics from the US showing that:
  • "According to the most recent Gallup Poll, two-thirds of Americans oppose cutting Social Security benefits."
  • "Even self-professed supporters of the Tea Party oppose cutting Social Security by 2–1."
  • "Nearly as many voters, 61 percent, oppose cutting Medicare."
In the United States, Social Security accounts for about 20% of the annual federal budget. Medicare, Medicaid and CHIP account for another 21%. Another 14% goes to other aid (other than Social Security and health insurance) to individuals and families facing hardship. Recently-enacted legislation will greatly increase the outlay of federal government dollars for healthcare, without reducing the other welfare programs such as Social Security and other aid.

The idea that government should take care of everybody led to a grand social experiment around the world that has proven to be unsustainable. Unfortunately, the recipients (including majorities of voters from all political persuasions) like the idea so much that ending this experiment may be impossible.

We have called this issue "The Question of Our Time" (see previous posts here and here for further discussion).

Investors should be very concerned about this issue on many levels.

For one, it is intimately connected to the phenomenon of inflation, by which governments devalue their currency in order to monetize their excessive debts and liabilities (see discussions here and here).

For another, it tends to lead to higher taxes, which impacts the entire economy but especially impacts risk capital and the willingness of entrepreneurs to form new companies (see discussions here and here).

At the same time, it makes growth and innovation more important than ever. The growth and innovation in the United States over the past century has helped it so far to avoid the severity of the problems faced by European countries which do not enjoy the same levels of growth and innovation (where the welfare state plays a far larger role). We have argued that investment is primarily a process for connecting capital with innovation, and believe that in times of greater inflation, taxation, and government interference, the need to search for pockets of growth and innovation becomes more critical than ever.

We are not trying to excuse the politicians who have continued to enable the addiction to suicidal social welfare policies in the US and other nations. As elected leaders, they need to be able to step up and explain why a policy may be unpopular but necessary, and get people to understand that cuts in other areas will simply not solve the problem if entitlement spending is not reduced (and especially not if they are increased!).

We are simply pointing out that, based on the poll numbers cited by Mr. Tanner above, the problem does not only lie with the politicians.

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For later discussions on this same subject, see also: