What is most astonishing about the debate over the economics of entitlements and the national debt is the complacency on this issue among the political and economic establishment.
President Obama has adopted the Alfred E. Neuman Doctrine: “What, me worry?” Paul Krugman, who seems to be on a personal crusade to devalue the Nobel Prize in Economics, assures us that “despite years of dire warnings…we are not facing any kind of fiscal crisis. Indeed, US borrowing costs are at historic lows, with investors actually willing to pay the government for the privilege of owning inflation-protected bonds.”
Doesn’t any of this raise alarm bells? Doesn’t Krugman realize that a negative interest rate—investors paying you for the privilege of financing your debt—is an inherently unnatural and unstable phenomenon? Can’t a celebrated economist figure out that if rates are at “historic lows,” they have nowhere to go but up? Hasn’t he bothered projecting what will happen the moment after the government can’t borrow money for free? I guess Krugman is a true, died-in-the-wool Keynesian who follows his master’s infamous dictum: in the long run, we’ll all be dead.
Or perhaps there is something else at work: a willful blindness, a stubborn refusal to think ahead. A supposedly sophisticated economist like Krugman turns into Mr. Magoo because he doesn’t want to see what the future holds. He is so committed to the morality of the entitlement state that he has to block out any evidence that his moral ideal could actually be leading to suffering and destruction.
Krugman’s assurance that we don’t have to worry about interest rates is offered in service to his denunciation of any changes to the entitlement state. He describes this election as a referendum for preserving that system unchanged. “Voters are, in effect, being asked to deliver a verdict on the legacy of the New Deal and the Great Society, on Social Security, Medicare and, yes, Obamacare, which represents an extension of that legacy…. This election is…shaping up as a referendum on our social insurance system, and it looks as if Mr. Obama will emerge with a clear mandate for preserving and extending that system.” It goes without saying that this was written before the past week’s stunning reversal in the polls.
Krugman goes on to say that if Obama is re-elected, “Now is the time, he’ll be told, to fix America’s entitlement problem once and for all…. And Mr. Obama should just say no.” Krugman is the ultimate reactionary liberal. He feels about the entitlement state the way George Wallace felt about segregation. He wants it now, tomorrow, and forever.
Krugman is right that this election is a referendum, and he is right about what his side stands for. If Obama wins, he will keep the current entitlement state untouched, requiring either massive tax increases or ruinous borrowing—probably both—and keeping us on our current course to fiscal and economic disaster.
As to the other side, though, Krugman exaggerates. No, Romney and Ryan are not going to take us back to the “Gilded Age,” by which Krugman means the extraordinary period of inventiveness, economic progress, and runaway growth in the late 19th century. God knows, we wouldn’t want to return to any of that!
Nor is Ryan trying to implement the radical individualist philosophy of Ayn Rand. As an advocate of that philosophy, I think that’s a shame. But I understand that the political environment is not ready to go that far, which is why Paul Ryan felt the need to distance himself from Ayn Rand’s ideas. Yet I nevertheless think that Ryan’s proposals for entitlement reform—which have been incorporated into Romney’s agenda—would be a substantial moral advance toward individualism.
The reason is not that Ryan will be an advocate for Ayn Rand’s philosophy, nor even (as some other Objectivists have pointed out) that it will promote interest in and discussion of Ayn Rand’s ideas. Such an effect will be limited, partly because Ryan has disavowed certain aspects of Ayn Rand’s philosophy, and mostly because Ayn Rand’s works and ideas are already doing so well on their own. One might even argue that their best salesman these days is Barack Obama, who has made Ayn Rand’s warnings about the danger of collectivism seem prophetic.
I’m more interested in the impact Ryan’s proposals will have as substantive changes in policy, how they will affect the actual relationship between the individual and the state. The crucial reform in Ryan’s system—the part with significant moral implications—is the distinction between “defined benefits” and “defined contributions.”
Our current entitlement system promises “defined benefits.” It mandates that the state will provide you with certain goodies no matter how much they cost. Social Security, for example, is designed to provide its beneficiaries with a certain standard of living. For the past 40 years, the growth of Social Security payments has been indexed, not just to inflation, but to wage growth, which historically rises at a higher level. (Not now, though. In the Obama “recovery,” median income has been falling.) Similarly, Medicare is designed to provide unlimited medical treatment without consideration for cost. Which makes it no surprise that health-care costs are rising out of control. Imagine how you would run your business if someone handed over the federal Treasury to your customers and told them to buy whatever they need and not worry about paying the bill.
The moral premise of a “defined benefit” program is that the state has an unlimited claim on the individual. Whatever other people need, the state can take, and if the entitlement programs begin to grow uncontrollably, well, the answer is just to keep raising your taxes. Society can seize your wealth and effort without limit.
The Ryan plan will almost certainly be modified and watered down, but its basic idea is more important than the details. The basic idea of the Ryan plan is a system of “defined contributions.” The government pledges to provide a certain level of monetary support to the beneficiaries of entitlement programs—but nothing beyond that level. The government guarantees its level of support, but not the result. It guarantees that it will pay a certain amount to help you buy health insurance, for example, but if you want coverage that goes beyond what that can buy, you have to make up the difference without government help. Similarly, a previous Ryan proposal on Social Security rolled back the indexing of benefits to wage growth. Retirees would be paid enough to maintain the standard of living that prevailed at the time this reform was implemented, but the government would no longer promise them the privilege of keeping up with subsequent decades of economic growth.
The fiscal advantages of a “defined contribution” program are obvious. It allows the government to actually budget its future expenses and limit them. It makes it possible to say, this is how much the government will spend and no more, and it makes it possible to match government revenue to government expenditures without mandating an endless series of tax increases.
But the moral principle is equally important. Under this system, the state still has a claim on the wealth and effort of the individual, but only up to a certain amount. And what is true for the individual is true for the nation as a whole. The wider idea behind a defined contribution program—the goal of Ryan’s “road map” over a period of decades—is to limit and reduce the size of government as a percentage of GDP. Under such a proposal, government programs become an increasingly marginal aspect of the economy and of the average person’s life, which is as it should be.
Ryan’s approach—which Romney has endorsed and, by selecting Ryan, adopted as a part of his platform—is still a welfare state, but it is a welfare state built on new and better terms.
From its beginning, America has always had competing individualist and anti-individualist strains—a belief in the freedom of the individual and the sanctity of his property rights, balanced against the view that it is noble to sacrifice individual self-interest for the “public good.” Early on, the balance was much farther on the side of individualism. Alexis de Tocqueville, the great observer of early 19th-century America, noted that Americans universally adopted the moral doctrine of “self-interest properly understood.” This was not full, Ayn Rand-style individualism. It was used to justify the occasional sacrifice of the individual to the public good, but on the grounds that such a sacrifice would somehow redound to the good of the individual in some larger sense, over the long term—even if the claim was often a little dubious. Self-sacrifice had to be justified by dressing it up as self-interest.
Today, the balance between the morality of individualism and the supposed prerogatives of the state has swung far, far in the other direction. The claims of the state are virtually unlimited and the moral prerogatives of the individual are virtually unrecognized. That is the precipice on which we now stand, and it is in service to this moral outlook that the Paul Krugmans of the world are willing to drag us into an economic abyss. The Romney-Ryan plan represents a step back toward individualism. It does not fully recognize the right of the individual to live for his own sake, but it does limit the moral claims made on him by society and the state.
The unlimited welfare state is billed as a system of benevolence: we’re going to do whatever is necessary for people in need. But it is actually a system that sacrifices the life, prosperity, and happiness of a whole society. Given the disastrous long-term fiscal and economic consequences of this entitlement state—the inevitable road to a Greek-style crisis—its basic premise is that you are required to sacrifice for your fellow man even if it pushes the entire country into economic collapse. It is a code of mass suicide, and its proponents want us all to drink the Kool-Aid.
The Ryan plan, by contrast, re-establishes the premise that the main business of life is the individual’s pursuit of his own prosperity and happiness and that the government’s claims on him should be limited and marginal.
That is the real referendum of this year’s election. By voting for Romney and Ryan, we will send the message that entitlement reform is no longer the untouchable “third rail”—that it can, in fact, help get a presidential ticket elected to office. That would set an important precedent, and it would be a significant step to restoring the original American moral creed of individualism. That is something worth voting for.