By Gary North
Here is the first political jingle I ever heard.
“They promise you the sky.
They promise you the earth.
But what’s a Republican promise worth?
Don’t let them take it away!”
It was sung by a quartet at the 1952 national convention of the Democratic Party. If you substitute the word “political” for “Republican,” you get the right idea.
I have repeatedly returned to the theme that all welfare schemes are paid for in the present. You cannot get something for nothing. There is no such thing as a free lunch. The resources that are used to fund every government program are extracted in the present from asset owners, and then these assets are transferred to new owners. The losses are borne in the present by the people who pay taxes to the government. Their taxes are then used to finance government spending. The losses that are sustained by those from whom the money is taken are offset politically by the benefits gained by the recipients of money sent to them by the government. This transfer of wealth is inescapable. It is inescapably a cost borne in the present.
In order to reduce the costs of extracting this wealth from the victims, politicians set up a massive system of IOUs. The government issues promises to pay, which we can think of as carrots, rather than issuing threats of fines and imprisonment, which we can think of as sticks. It is much less expensive for politicians to extract wealth from people if they issue promises in exchange for the extracted wealth. “Stick with the program. You’ll get yours someday. We promise. Trust us.”
This is analogous to how international trade is conducted. An exporter transfers valuable economic resources to an importer on the other side of the border. The exporter is given money for the goods — money issues by the importer’s central bank — but then he invests the money in the nation where the importer has taken the goods. The exporter thinks he has not suffered an economic loss, because he has gained what he regards as a valuable asset. This may be a bond, meaning a promise to pay. It may be an equity position in a business. It could even be real estate, although this is rare. The point is, the exporter has transferred a valuable economic resource to someone across the border, and he has accepted some form of promise in exchange for the resource.
A Ponzi scheme
There is nothing wrong morally or even economically with such an exchange, if voluntary, as long as the person who is surrendering the economic wealth understands the risks involved. But Social Security and Medicare taxes are not voluntary. By paying taxes to a government that is incapable of repaying, and which is obviously going to default at some point, the taxpayer is participating in a wealth-redistribution system that is based on an illusion. At today’s late stage in the IOU game, you would imagine that taxpayers would understand that they are playing a game of musical chairs. They would understand that, when the music stops, most of the taxpayers will lose in the transaction. There will be a default, and they will be left holding worthless IOUs. This analysis also applies to investors who buy U.S. government debt.
This is comparable to the mentality of the Ponzi scheme. The economics of the transaction clearly reveal that there is no possibility that all of the lenders will be repaid. It is also becoming clear that the lenders will not even be paid interest on their money. Everyone who lends to the government today is in a losing proposition if he determines that he will forever roll over the debt. The only way of escape is to decide at some point to take the money and run. In other words, this is a standard Ponzi scheme. The government relies on its knowledge that the vast number of people who get involved in the Ponzi scheme become psychologically committed to the scheme, even though it is statistically guaranteed to fail.
The government is as committed to the Ponzi scheme as the founder of any Ponzi investment system. So are the investors. So are all the people who are dependent upon the checks that are sent on a regular basis by the government. Everyone in the system becomes convinced that he can beat the system, even though it is obvious statistically that no one can beat the system who does not get out in time.
With respect to Social Security and Medicare, the people who get out in time are the people who die before the system goes belly-up. These are the big winners in any government-mandated Ponzi scheme that promises future medical care and future income to masses of oldsters. Nobody gets out of the scheme except somebody who dies.
Because the government issues a promise to pay, which statistically it cannot possibly fulfill to more than a small fraction of the people who buy the IOUs, the government conceals the nature of the permanent, immediate transfer of wealth from taxpayers to tax recipients. The IOU is the basis of an illusion. It is part of the Ponzi scheme nature of all modern government promises. The IOU creates an illusion that future generations will pay for the goods that have presently been transferred from those with wealth to those without wealth.
The transfer has been made in the present, and this reduces the wealth of all of the taxpayers from whom the wealth has been extracted. It also decreases the wealth of everyone who has lent money to the government. By concealing the fact that Social Security taxes and Medicare taxes are in fact taxes rather than investments, politicians have lured virtually all American workers into a trap. The victims caught in the trap assume that the promises are the equivalent of present wealth. A promise to pay is considered the same as the asset which is given up to the government. The asset is real and in the present. The promise is in the present, but not the assets that are required to fulfill the promise. Those are in the future. In other words, all the costs of the system are borne in the present, but the promise of future support by the federal government reduces the cost of extracting the wealth from the victims of the wealth-redistribution scheme.
A hallucinatory drug
The promise is a form of hallucinatory drug. Medicare promises are the most widely used hallucinatory drug in the world. The magnitude of the promises, and the vast number of people who accept the promises in exchange for wealth, reveals that Americans are addicted to the most addictive form of hallucinatory drugs. There is nothing to match the addictive nature of government promises of future retirement security. Any attempt at withdrawal will be resisted by existing recipients of the wealth transfer. It will also be resisted by workers who are paying into the system, and who think that past promises will be fulfilled as long as they and workers in the future continue to transfer present assets to the government in exchange for promises of future assets.
The hallucinatory effects of this drug are permanent. Almost no one is able to admit that he is addicted, and even among those who are addicted, they all say the same thing: “I can quit anytime I want to.” Of course, they cannot quit. They are addicted to a constant stream of money, meaning assets, which are supplied by the government. With respect to those who are providing the money, they are also addicted. They think that their continued participation in a statistically doomed system will guarantee that they will be paid, even though statistically they cannot possibly be paid. As I say, this is a hallucinatory drug.
This hallucinatory drug is promoted constantly by politicians, by professional educators, and by talking heads in the mainstream media. The drug completely distorts the taxpayer’s perception of reality, and it also distorts the welfare recipient’s perception of reality. The welfare recipient at least has this justification: he is closer to death, statistically speaking, than the typical worker is. So, he may be able to get out of the Ponzi scheme ahead of the game. But the system is hallucinatory for virtually everyone involved in it.
There will come a time when enough voters who are being forced to pay into the system will realize that the present costs of maintaining their membership in the system are too high. Only the pain of increased taxation and immediate loss of income will persuade people to get out of the Ponzi scheme. Taxes have got to go up considerably before this takes place. But it will take place. The pain will no longer be suppressed by the drug. The effects of the drug will no longer provide enough “rush.”
The main victims will be people who have made retirement plans, and who then find that the age of participation in the program has been raised. This will silence the existing recipients, but it will send a message to the other workers: “It is going to happen to you, too. You will pay into the system indefinitely. You will not collect on the promises. But you will have to continue to pay.”
At some point, when the age of eligibility has been risen high enough, workers at the margin will begin to perceive that they have to get out of the system. They will perceive that they must reduce their mandatory payments to existing participants who are on the income side of the equation. At that point, there will be something like a political revolution. It will not take place all at once, but there will be a tipping point phenomenon.
At that point, all recipients who are dependent on the continuing flow of resources from the government, meaning from other taxpayers, will find themselves in a desperate situation. So will their legally liable children. The oldsters will have to be taken back into the households of the children. Their medical expenses will have to be paid for by the children. The children will not have budgeted for this expense. This will take place at the margin. It will not be a universal, all-or-nothing decision. It will take place over time.
When this takes place, the welfare state ideology which has sustained the West since the 1930s will erode away. Along with the tax revolt will come an ideological revolt. Liberalism as we have known it will begin to fade as a rallying cry for politicians and special-interest groups. This is why we have a responsibility to build the case against the welfare state. We have to prepare future voters, future educators, and future politicians that the welfare state ideology is based on this principle: “Thou shalt not steal, except by majority vote.” Most people are not going to make the shift to this new position, meaning a very ancient position, until they experience sufficient pain economically. But they will shift when the pain becomes intense.
That is why we are going to win this debate. It is going to be very expensive to win it, but we are going to win it. People who finally decide that they will not remain as victims in this massive wealth transfer will be looking for moral justification to demand the end of the system. That is when large numbers of people will shift to a far more libertarian view of civil government. We have to do the groundwork today in order to reap the harvest over the next generation.
Used by permission. © 2005-2013 GaryNorth.Com Inc. All Rights Reserved. Dr. North is one of my favorite economists.