Home lessons from abroad - Philadelphia Society's ideas on welfare cuts - Gekko Balances the Budget

National Review, June 26, 1995 by Linda Bridges

WHOEVER coined the image about the difficulty of dismounting from a tiger you've been riding, it certainly applies to getting out of a welfare state. ``The welfare state,'' after all, isn't just what we think of as ``welfare''; it's everything from agriculture subsidies and the National Endowment for the Arts to HUD and the Small Business Administration, with Medicare and Social Security squatting in between. And, as Madsen Pirie of the Adam Smith Institute put it at this year's Philadelphia Society meeting, in a situation where every identifiable group of voters gets some special benefit from the government -- even if government doesn't do things nearly as well as they could do them for themselves -- no group wants to give up its benefit unless everyone else does so simultaneously. The Philadelphia Society, meeting just after the Hundred Days had concluded, could be more hopeful than at any time since about 1981, and the program was accordingly titled ``Thinking the Unthinkable: The Successful Challenge to the Welfare State.'' And yet the problems of how to kill programs without inflicting serious harm on people who have come to count on them, and how to maintain a few safety-net functions without constructing perverse incentives, were on everyone's mind -- not to mention how to avoid getting eaten by the tiger in the 1996 elections. And yet we cannot funk the challenge, because we are reaching the limits of the Ponzi scheme. To quote Antonio Martino (briefly Italy's foreign minister, but a Chicago-trained economist by profession), ``The cumulative effect of decades of socialism has produced a state of near-bankruptcy which makes further expansion of government interference almost impossible.'' Even if we thought Medicare did a good job of allocating medical resources, it literally cannot continue on the same basis for very much longer. No one under about age 45 has much first-hand recollection of how services were supplied to the needy before the Great Society; no one under about 75 for the New Deal. So talk of dismantling these programs is, as Newt Gingrich knows too well, ``scary.'' When Britain's National Health Service first came under close scrutiny a couple of decades ago, even as solid a conservative as Ferdinand Mount hotly defended it against serious reform. But this is where scholarship can come to our aid: first-hand recollection isn't the only kind there is. Two of the Philly Soc speakers, Patricia Morgan of the Institute of Economic Affairs and David Beito of the University of Alabama, showed how a combination of charity and mutual aid once covered a large part of the poorer sections of the population. In both Britain and America there is a solid history of charity -- of those who have giving to those who have not. But human nature includes a desire not to be beholden, and this is where ``friendly societies'' and ``fraternal orders'' came in -- not charity from above, but assistance among peers. The societies -- a shadow of which still survives in the Elks Club, the Oddfellows, and so on -- were a combination of social club and insurance plan. Members paid dues when they could, knowing that they were helping their fellows, and that they in turn would be helped in time of need. And these societies covered a large majority of the working class -- in Britain, some 91/2 million out of 11 million people; in America, more than 80 per cent of lower-income workers. Indeed, a huge percentage of black men, although working for very low wages, regularly contributed to their fraternal societies -- 93 per cent in 1919. If these societies were so great, what killed them? Essentially, the Progressive movement, concerned no doubt for the 11/2 million people in Britain, the 7 per cent of blacks and 15 per cent of native white Americans who fell through the cracks. And so the Progressives passed unemployment insurance, widows' support, workmen's compensation -- all aimed at ``the deserving poor,'' but inevitably undermining both initiative and a feeling that one was doing one's bit. We see here too the root of the entitlement mentality. Thirty years ago older people who no longer had a regular income would still hotly resist taking anything from any arm of government -- that was ``charity.'' But with the rise in taxation, people understandably feel that they have been paying all their working lives and are indeed entitled to a ``comfortable retirement.'' But of course any commercial annuity provider that was run along the same lines as the Social Security Administration would have been had up on charges of fraud long ago. As Lee Edwards, author of a new biography of Barry Goldwater, recalled, Goldwater pointed out during the 1964 campaign that Social Security was actuarially unsound -- and was pilloried for it. In a way, as Madsen Pirie explained, the meltdown makes it easier to sell real reform. The problem is that Social Security is, despite the ``Social Security Trust Fund,'' in reality an unfunded system -- one, that is, in which funds are not earmarked for those who contributed them, as in a commercially run Individual Retirement Account, but new funds are used to pay older obligations, with the assumption that later contributions can be used to repay the current contributors; or, as Mr. Pirie put it, that the next guy in the chain letter will be a bigger mug than you were. But if a reforming government tries to move from an unfunded to a funded system, won't there be one generation that pays twice? Yes -- but Mr. Pirie cited the experience of the Conservative government in Britain as a useful guide to Newt and his troops. What the task force studying the British system found was that a privatized system is so much more efficient that much less needs to be contributed in order to yield the same return. Hence the transitional group won't be paying 200 per cent of what its predecessors did, but more like 120 per cent. Not pleasant, but, again, it's not as if we had much choice: the future of Medicare and Social Security don't look very encouraging for anyone who isn't already retired. However, Mr. Pirie did add one caveat: in a fully funded system, one has to abandon universality of benefits: if you don't pay in, you don't draw out. That still leaves the politically tough question of how capacious a safety net will be provided by taxpayers, and how much will be left to private charity. One obstacle to reform is that the welfare-dispensing bureaucrats have no incentive to reduce their caseload. David Somerville of the National Citizens' Coalition recounted an ingenious plan being tested in New York State. Some job training has been contracted out to an outfit called America Works. So far from being paid for failure -- i.e., for keeping people on the rolls -- America Works is rewarded only if it succeeds in training and placing people in jobs. Again, though, it will not be quick; as Alejandro Chafuen of the Atlas Economic Research Foundation put it, the last thirty years cannot simply be wiped off the slate -- the policies instituted in the Sixties have shaped our world. Reshaping that world is at least as thorny a problem in the field of welfare per se as on the Social Security side. Society may well have a duty, as Patrick Fagan of the Heritage Foundation argued, to try to rescue people whom our government's policies have lured into a life of welfare dependency. From a purely utilitarian point of view, too, a personalized approach to getting people off the dole (talking with them, teaching them, as the Hudson Institute is doing in Wisconsin, under contract to Governor Tommy Thompson's administration) may stand a better chance of success in the long run than simply changing the benefit structure, even if it costs more in the short run. Also, politically, the talk of Scroogey Republicans can be undercut if, as Dr. Fagan suggests, we give a ``sense that we are concerned that people belong -- not just that they behave.'' Meanwhile, as Congress argues over the number of strings that should be attached to block grants, Antonio Martino offered, from Forza Italia's election platform, a truly liberating thought: instead of having the bulk of taxes raised by the central government, with portions being sent back to the states after much attrition, why not have all taxing power at the state and local levels, with a small percentage going to the national government for those few tasks, like providing for the common defense, that properly belong to it? The trick is to convince a majority of citizens that you are not taking something away from them -- or at any rate nothing that they couldn't better purchase for themselves if the government were taking fewer of their dollars in taxes. Two views of the political strategy were aired at the Philadelphia Society, echoing those in the halls of Congress. Don Devine, head of the Office of Personnel Management under Ronald Reagan, counseled waiting for the more radical parts of the agenda until 1997, instead of facing vetoes and evocations of Oliver Twist now. (``It's the veto that makes the President relevant -- everyone laughed when he said it, but it's true.'') John Blundell of the Institute of Economic Affairs, on the other hand, warned against sticking with what seems politically possible -- ``Those concerned merely with the possible soon find that it becomes impossible, and they are passed by.'' As Barry Goldwater could tell us, however, it all depends on where the voters are on the boldness curve.