Friday, July 29, 2011

"Mandatory Spending" and Positive Economics

The Road to a Downgrade is obligatory reading as it describes our current American reality resulting from at least fifty years of governmental financial mismanagement.

The editorial offers a brutally honest historical overview of how we arrived at the sorry U.S. financial condition of today. It represents positive economics at its best, and deals with promises made with respect to entitlement programs and related benefits. It also details how we've neglected to adequately fund those promises.

It's a brief step-by-step history of legislated entitlements and how we arrived at our current national debt level of $14.3 trillion. The article makes it all too clear that the rose colored glasses our politicians wear today have been around for a very long time. The politicians project fairy tale costs and have no idea of what the actual costs will be. Either that or they just lie. In any event, promises are made which can't be kept, and the charade begins.

Then we proceed to pay the legislated benefits as promised, at least until the quasi Ponzi scheme is finally revealed for what it is. By then we have new politicians who pledge to make things right for the future. And if you believe that one, .............. But I believe we're getting closer and closer to the end of the scheme, and will definitely be there in another ten years. So we have time to decide what the future will hold. Let's review the pertinent history of entitlements in America.

Although our welfare state began somewhat modestly during the Depression years with social security and unemployment benefits, we really got serious in the 1960s with the introduction of the "Great Society" programs by the Johnson administration. Medicare, medicaid and a governmental health care system were enacted with totally bogus future cost estimates. Guess which way the estimates missed.

In addition to this new health care government involvement, "War on Poverty" programs were also introduced providing such things as food stamps, public housing and greater government involvement in public education. In 1972 the Nixon administration expanded social security benefits dramatically and introduced cost of living benefits for social security recipients at the same time.

Needless to say, adequately funding these programs wasn't undertaken by the congress or the administration at the time of enactment, or at any future time either. We continue that "ignoring reality" tradition today. In fact, these social security, medicare and related benefits represent what we call "mandatory spending", meaning that these benefits must be paid regardless of whether the funds are available to pay them or higher priorities for these monies would dictate that we spend the money on other things.

The above referenced editorial contains a treasure trove of facts and background about what Pogo type activities we've engaged in as a society these past fifty plus years. The facts contained in the editorial are a sterling example of reality based POSITIVE ECONOMICS (if-then). IF A, THEN B will follow is the idea. It's testable and a version of the scientific method at work.

In the current case, we could say it thusly: If we spend more than we have, we'll end up in a world of hurt. Although positive economics doesn't require that the assertion be proven true, it is a good way to find the reality and causation of end results. In my view, spending more than we have does put us in a world of hurt. That's today's big story and will be for some considerable time to come.

Deciding whether or not to continue down this socialistic path toward the Europeanization of America is ahead of us. That's where NORMATIVE ECONOMICS (should be) will take center stage. That means only that value judgments come into play, and some say we "ought to" raise taxes, others say cut we "should" spending and so forth. In other words, it's not testable but dependent upon our values and beliefs.

Therefore, positive economics deals with finding reality and normative economics is about value judgments and what ought to happen. People shouldn't disagree about reality, but normative values are usually in conflict between individuals and groups, too.

We now have government schools, government health care, government retirement benefits and government nursing home care, among other things. At some point in the very near future, we'll either elect to raise taxes by ~25%, 50% or more or we'll begin to unwind these underfunded commitments by reducing future benefits.

No matter what we opt to do about the future, we'll still be part of a country called America. But just as today we live in a different America from what once was, hopefully we'll choose to be part of a different America from what we now are.

That's why the debt ceiling discussions are a sideshow. An interesting and sometimes exciting one, but not even close to the main event. That's ahead of us.

Thanks. Bob.

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