Friday, December 22, 2017

The High Cost of Good Intentions

The High Cost of Good Intentions is a superb new book by my Hoover colleague John Cogan. It is a political and budgetary history of U.S. Federal entitlement programs. It is full of lessons for just why the programs have expanded inexorably over time, and just how hard it will be for our political system to reform them.

If indeed the Congress will now turn to entitlement reform, as house speaker Paul Ryan has promised, this will be the book to have on your desk. (Ryan already blurbed it (back cover) as did Bill Bradley, Sam Nunn, George Shultz and Alan Greenspan.)

If you think entitlement programs, and the political hash that enacts them, are recent problems, or the fault of one political party, think again. John's main lesson is that the emergence of bloated entitlements is a hardy feature of our (and many other countries') democracies.  He does this by just reading the history.

The habit of expanding entitlements started early. Chapter 2:
Revolutionary War pensions were the nation's first entitlement program. ... between 1789 and 1793, the federal government agreed to pay annual pensions to Continental Army soldiers and seamen who became disabled as a result of wartime injuries or illness. [later, as an inducement to service]... 
For forty years, Congress enlarged and expnaded these benefits until, by the 1830s, they covered virtually all Revolutionary War seamen and soldiers, including volunteers and members of the state militia and their widows, regardless of disability or income. 
That costs might balloon beyond forecasts was not a total surprise

Opponents of the 1818 law predicted that granting lifetime pensions to Revolutionary War veterans who were "in reduced circumstances" would be costly. Senator Nathaniel Macon of North Carolina observed, "Pensions in all countries begin on a small scale and are at first generally granted on proper consideration, an that they increase till at last they are granted as often on whim or caprice...[it] will on experiment, be found an endless task. It will drain any treasury, no matter how full." 
Yet, the service pension law of 1818, which granted such pensions to all revolutionary war veterans who were "in reduced circumstances"
produced a massive surge in applications and an unexpected and unprecedented cost to the Treasury. The law's proponents had estimated that fewer than two thousand veterans would qualify and that the annual cost might reach $115,000. But by the end of 1819, more than twenty-eight thousand individuals had applied... The 1818 law's annual cost to the Treasury had ballooned from $300,000 to a staggering $1.8 million. ..widespread charges of pension fraud and corruption. A law designed to assist destitute veterans was providing pensions to many financially well-off veterans and even many who had never fought for the nation's independence. 
...Congress's underestimate of the cost was on the first of many underestimates. These miscalculations are invariably due to Congress's failure to appreciate how an offer of entitlement assistance can cause individuals to change their circumstances to qualify for aid they have previously managed to live without. 
This is a familiar theme in entitlement programs, but just how far back it goes was news to me.

A bigger theme of the book is the politics of entitlements. That also starts long ago. Congressman Dudley Marvin of New York reports
"In the villages in his part of the country, when the semi-annual pay day arrived, they [pensioners] were in the habit of forming themselves into companies, then forming a column and thus marching to receive their quota of the public bounty" 
This spectacle served as an early hint of the sense of entitlement that can affect groups of recipients of public assistance... such groups can develop an expectation that society owes them benefits that initially were bestowed out of gratitude for military service or a desire to alleviate hardship. We will observe this expectation and the sometimes remarkable behavior it generates in later chapters on twentieth-century entitlements. 
For example, a century later, the linkage between individual payroll taxes and benefits was crucial to the "enactment, long-run endurance, and, ultimately high cost" of Social Secrurity
Paying payroll taxes gave [gives!] program participants a sense that by contributing to the program during their working years, they were establishing an earned right to benefits when they retired. ... Senate Finance Committee chairman Walter George noted" Social security is not a handout; it is not a charity; it is not relief. It is an earned right based upon the contributions and earnings of the individual.  
When [President Roosevelt] was challenged about financing Social Security with a regressive payroll tax rather than general fund revenues from the progressive income tax, he replied, "We put those pay roll contributions there so as to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics" 
Civil war pensions followed the same path, on a larger scale
The civil war pension program began with the same high-mihnded, noble, and limited goal as Revolutionary War pensons: to compensate soldiers for the loss of life and limb suffered in wartime service to their country... A half-century later the program evolved into a general disability and retirement program for virtually all Union soldiers...Congress also eventually stretched eligibility for pensions to virtually all widows and survivors of union soldiers, even those who had married many decades after the war had ended..
Costs ballooned, for example on the 1879 arrears law, that allowed soldiers to file disability claims after the original deadlines
The bill's senate floor manager, Sentaor John Ingalls, had put the total at $18 to $20 million. Hayes administration officials estimated a much higher cost of between $50 and $150 million. ... Two years after the law's passage President Chester A. Arthur reported that arrears payments had already cost taxpayers $235 million...It is fair to conclude that the law added nearly $400 million to pension expenditures during the 1880s alone  
New interest and lobbying groups emerged
claims agents led the advocates for arrears payments. These agents, certified by the pensions office, assisted veterans and widows with the complex application process, represented claimants in appeals before the pension office, and received compensation for their services. ... claims' agents had emerged as a powerful lobbying force. 
... The arrears act also spawned a second large national lobbying force: The Grand Army of the Republic (GAR). The GAR's evolution from a service organization ta special interest lobby..would be followed time and again by twentieth-centry lobby groups...
At this time, politicians discovered how important entitlements could be to electoral success, beginning the mad use of public money to buy votes that we see today.
The (1884) election campaign witnessed the use of the Pension office as a political machine to gain partisan advantage. (good story follows) 
... Along with this legislation came an important and powerful discovery by the Congress and the executive branch: broadly distributing cash benefits directly to a large segment of the voting population could produce significant electoral advantages. 
The story repeats again with WWI veterans.

There are occasional retrenchments and reforms, especially useful to ponder now.
Candidate Cleveland renewed his previous campaign promise to `cleanse the pension rolls and limit ... benefits to 'worthy' veterans. ...Voter backlash against the tariff and pension corruption contributed to President Cleveland's landslide victory.... Cleveland took immediate actions... The GAR rallied against this minor reform as if the pension rolls had been purged, decrying "false economy which shaves and pares to the quick at the expense of honor, justice and principle." ... by the time Preisdent Cleveland left office in 18997, there were 12,500 more Civil war pensioners than when he had taken office. 
Interestingly, Franklin Roosevelt was a great enemy of large veteran benefits. Roosevelt
shared the founding fathers' belief that all citizens had an obligation to serve their country in wartime, and therefore did not represent a special class of individuals entitled to government benefits merely because they had served during wartime. .. His views were decidedly at odds with Congress, which invariably concluded that all wartime veterans, especially when they reached old age, stood as a special class. 
 Roosevelt also thought balanced budgets were important. He acted cleverly:
On Sunday night, the President gave the first of his legendary fireside chats, reassuring the public that the US banking system was in should shape. On Monday he sent to Congress his third message: to modify the Volstead Act to permit the sale of beer... an extremely popular proposal. Now the Senate was in a bind. Under Senate rules, action on the Volstead act could not take place until the Economy act had been addressed... 
and they passed it
The law repealed all entitlements to pensions that had been granted to veterans of World War I, the Spanish American War, the Boxer Rebellion and the Philippine insurrection.. For the first [last?] time in US history, a large-scale entitlement had been repealed. ... 
Several factors account for President Roosevelt's remarkable success in reducing veteran's pensions. The economy and federal budget's dire situation presented the president with a national emergency, and in Washington such emergencies are a strong predicate for action.. President Roosevelt was also willing to use his veto power to sustain his policies... 
Roosevelt's attitude to veterans did not last.


I'm up to the beginning, really, of the book, "The birth of the modern entitlement state." The centerpiece of the book is not these historical antecedents, but the political story of how the current US entitlements system evolved.

That story starts with the New Deal. It also brings in the judiciary, the "role of the federal courts in making public policy:"
The new Deal entitlements ushered in a new era for the federal courts. ... once federal entitlement rights had been granted, the nature and extent of these legal right had to be adjudicated....In the 1960s and 1970s, the federal courts .. expanded[ed] the legal rights of entitlement claimants in welfare, health care, and nutrition. Ultimately federal court decisions created welfare entitlement right where none had been legislated. 
There are many more themes worth stressing, even in the ancient history, and I won't prolong the quotes delicious as they are.

One theme: Our government routinely liberalizes entitlements when budget surpluses are strong, and at least slows down their expansion in bad fiscal times. It also liberalizes entitlements in bad economic times.

That bears centrally on the current reform question.  Our entitlements are, no surprise, on an unsustainable path. We will either reform them, in a way that reduces federal spending, or we will substantially raise taxes on the "middle class," including a large payroll tax increase and likely a european style VAT on top of growth-killing income and corporate taxes.

If one wishes for a reform on the expenditure side, the great question is whether it must be done directly or via "starving the beast" of tax revenue. For example, I advocate a VAT. A common complaint is that the VAT is not only a much more economically efficient way of raising a given revenue, it is a great way to raise much more revenue, and my critics complain it soon will do that and provoke even greater spending. The VAT shifts the top of the Laffer curve to the right, and in my critics' view, the US government will operate at the top of the long-run Laffer curve given structural limitations on its tax code.

I have held out hope that our democracy could contain itself to spend less than the top of the Laffer curve allows, so we can jettison the insane inefficiency and corruption of our tax code, and have one that is vastly more economically efficient. The opposite view really amounts to belief that democracy is fatally flawed. Moreover, I note that starve the beast tax reductions have led to massive deficit expansions, yet large debt and deficits have not yet seemed to provide much pressure against entitlement spending.

John's history is a strong push toward starve the beast, at least in the negative direction. Surpluses lead to benefit expansions, quickly.

Another theme: The accounting gimmicks such as "trust funds." Surpluses in trust funds lead to benefit expansions, even if there are huge deficits outside. And "trust fund" accounting gimmicks also go back a long way.

As we (hopefully) start to think about reform, I think the only hope is to break out of "we're spending too much there will be a debt crisis" vs. "you heartless evil person, just look at (deserving person). How can you throw her off the bus." The way to do that, I think, is to focus on the disincentives of our social programs, not on the cost or the worthiness of recipients. I find some comfort in John's history, that occasional retrenchments, including the above and the welfare reforms of the 1990s got through politically by looking at fraud (a form of disincentive) and other disincentives.

This is a history and a political history, not a reform proposal, nor an economic analysis of disincentives. Still, John's history is also full of quotes reflecting the centuries old tension in welfare programs between helping those in need and disincentives, which I'll cover in the next post. That history ought to help.

A note for graduate students: This book is very well written, and you should read it to emulate writing style as well as for the subject. No, it does not knock you over the head with beautiful sentences as John McPhee might. It is, however, beautifully structured. The whole book and each chapter starts with a complete summary of the argument, and the chapter fills it out. It could go on for thousands of pages, but manages to tell just enough of the story so you see the historical detail, but not enough so you get lost in what must been have fascinating historical detail. Yet this is not a standard quickie book aimed at a policy controversy. This is a deep piece of scholarship. Everything is footnoted -- 78 pages of footnotes and reference all together.


  1. Surprised not to see any comment about government handouts to businesspeople, such as farm support.

  2. I agree with the thrust of this post.

    Still, the VA is a rapidly growing entitlement and social welfare program, with a communist health program embedded with in it, for former federal employees.

    The Paul Ryan cited in this post is the same Paul Ryan who specifically and pointedly exempts the VA from any cuts going forward.

    As for "good intentions" we had plenty in Vietnam, Iraq and Afghanistan….and $10 trillion later the results appear counterproductive.

    As a pro-business type of guy…the left and right-wings of this country are unappealing to me

    1. Yes but, you and I have the luxury of insisting on perfection and not trying to get bills passed or get reelected. We should temper criticism of public servants both left and right with the fact that they face these realities. Ryan in particular advances some pretty purist positions, even if not all the ones we might like.

  3. Outstanding essay!

    Reminds one of Buchanan and Tullock: "The Calculus of Consent".

    Reminiscent of "Government Failure" - Tullock, Gordan and Brady.

    As well as "Beyond Politics"- Mitchell and Simmons.

    Yep, public choice theory is an eye opener.

  4. No Government cannot have a welfare system. You have to provide for the poor and needy. Simply means test it as we do in Australia.

  5. John Cogan's book is, as you say, a strong push toward reforming entitlements, which means cutting them. In your post you also said that spending on social welfare programs is not sustsinable and, if not contained, will lead to higher taxes on the middle class. Please look at debt to GDP ratio of countries with large social welfare expenditures. Denmark, France, Finland have lower debt/GDP ratio and their spending on social programs as a percentage of GDP is ~50% larger. Look at other indicators: crime rate, incarceration rate, infant mortality rate,... and compare the numbers to ours. So we are not in danger of going bakrupt because of social programs. If higher taxes are needed so be it. But first they will be raised on the wealthy, just wait. It is unlikely that John Cogan or you are not familiar with these facts. Cogan's push to cut social programs is not really based on science but on ideology. The real goal is, of course, wealth redistribution.

  6. Have you ever looked at the tax burden on the middle class in those countries you referenced?

    1. Yes. Taxes on the middle class are higher. But look at the benefits you would get, if you lived say in Germany. You would not have to worry about health care, education. Your chances of being a crime victim are much lower. If you lose your job, the state will take care of you. In this country, if lose your job and get seriously sick, you can die if you cannot afford medical treatment. Your chances of being a crime victim are much higher. High taxes are like a good insurance policy in case something bad happens to you. Look at Denmark which wins the most happy country in the world contest every year. If you tell a Dane that a the social system in which some citizens do not have access to health care or education is actually better, because taxes are lower, do you think they will even understand?

    2. The typical tax system in Europe is about 20%-40% social insurance (payroll) taxes, 20-25% value added (sales) taxes, 50% income taxes starting at a much lower level than in the US, estate taxes, plus various excise taxes. I gather it's about 100% extra tax to buy a car in Denmark. Not every Dane I have talked to is altogether overjoyed about this, so "a Dane" meaning every Dane is not quite true. Europe also has reformed social program incentives in a way we have not. Denmark got in hot water recently for demanding that refugees lose all their assets before getting social insurance. Well, they responded, Danes have to do that too. The stick for getting a job if on unemployment, for losing your house if you default on your mortgage (not subsidized), and so forth is much more hard nosed in much of Europe. Generous social programs must manage incentives, as we manifestly do not. Also, Denmark scores way higher than the US on ease of doing business. They apparently have figured out not to kill the golden goose, given they want its eggs. Much of Europe is also backpedaling furiously from free health care. And their 100% debt/GDP ratios, low birthrates, aging populations and low growth put the whole house of cards just as much up in the air as ours is.

    3. You criticized the author for arguing that "spending on social welfare programs is not sustsinable and, if not contained, will lead to higher taxes on the middle class." You then proceeded to cite three countries where the middle class does indeed pay much higher taxes. As for the "wealthy," look at the top rates on regular income, capital gains, or corporate income. None of these are particularly low in the United States. We're a (relatively) low tax country because those rates kick in at higher levels than most countries as well as the lack of a VAT.

      When it comes to crime rates, I'll simply note that places like Switzerland, Hong Kong, and Singapore also have some of the lowest crime rates in the world.

      Also, if I'm not mistaken doesn't the U.S. typically spend more money per capita on education that most of Europe?

    4. I like Switzerland. They implemented their version (only better) of Obamacare back in 1995. In some regions, you can pick from 200 different health insurance plans there. As for Denmark, their debt to GDP ratio is ~60%. not 100%, like John seems to imply (ours is ~108%). Denmark social welfare expenditures to GDP ratio is ~29%, compared to ours ~19%. Taxes on mew cars are very high (but going down to 105% :), but in developed countries of Europe luxuries tend to be expensive, so necessities could be affordable. Cars are not that necessary there, public transportation and bikes are a way to go (good for the environment!).

    5. It is also worth noting that the Europeans have the ability to spend heavily on social programs in part because of the blanket of protection the US military provides them, both in freedom from the fear of attack and in security of shipping on the high seas.

  7. Paul Ryan has been talking about entitlement reform for a long time. It is time for him to reveal his proposals so that the United States can have an open and honest debate about the choices before the country. The public is entitled to both honesty and candor from Ryan.

    1. Like there was an open and honest debate about the tax plan that squeaked through Congress? That doesn't seem to be the Republican style - does it?

  8. I like John Cogan, worked with him,and for him, when he was Assistant Secretary for Policy at the U.S. Department of Labor.I worked primarily on unemployment benefits and employment services. Yes, Cogan comes at things as a conservative, but he is a serious thinker. I'll get and read his book. But I will say this even before I read it. Roosevelt may have been right about the payroll tax and it's role in protecting Social Security. It seems to have worked. Poverty among the aged has been seriously reduced, almost eliminated really, and while Social Security isn't the only reason for that, it is most likely a major reason. And how else other than with "entitlements" can we get some amelioration of the tendency for capitalism to generate inequality in income,and in wealth especially; inequality that itself can imperil capitalism and free markets in a democracy. Just look at what happens to programs for the poor that are not billed as "entitlements." They don't often fare well. Maybe Richard Nixon's guaranteed annual income would have been the way to go? But it would have to have been labeled an entitlement if it were ever to have survived politically. And if I recall the research on the experiments with such, they showed that such a program did not have strong work disincentive effects.

    I look forward to reading Cogan's book.

    1. I think you have the causation mixed-up. The reason (certain) entitlements are so popular is that they are NOT billed as equality measures. Simply labeling a redistribution program an "entitlement" accomplishes nothing.

      Look, for better or worse U.S. voters are split on whether "equality" and "fairness" are relevant policy objectives. In contrast, nearly all U.S. voters believe some minimum baseline level of well-being should be provided to the old, sick and unlucky. People might endlessly debate the particulars, but at a macro conceptual level there is a consensus that social safety nets must be provided by government. Trying to disguise an inequality reducing redistribution program as a social safety net won't work.

  9. John,

    "Revolutionary War pensions were the nation's first entitlement program. ... between 1789 and 1793."

    Wrong, just plain wrong. The first entitlement program that the United States engaged in was paying interest on incurred federal debt.

    The Constitution of the United States under Article 1, Section 8 states that the Congress can borrow money, it doesn't say it must borrow money.

    The argument is pretty straightforward, if a bank (or pension fund, mutual fund, etc.) can receive monetary payments from tax revenue in the form of interest while not producing any goods, then why shouldn't military pensioners, or Social Security recipients, or Medicare recipients, receive the same type of benefit - monetary payments from the government while producing nothing?

    "If indeed the Congress will now turn to entitlement reform, as house speaker Paul Ryan has promised, this will be the book to have on your desk. Ryan already blurbed it (back cover) as did Bill Bradley, Sam Nunn, George Shultz and Alan Greenspan."

    Bankers (like Greenspan) love to point at every other entitlement program out there except the original one. And don't even get me started on Paul Ryan and spending restraint of any kind:

    John Boehner - House Speaker (Jan 2011 to Oct 2015)
    Federal Spending - 1st Quarter 2011 - $3.8 Trillion
    Federal Spending - 4th Quarter 2013 - $3.79 Trillion

    That is what spending restraint looks like. It does not look like this:

    Paul Ryan - House Speaker (Oct 2015 to present)
    Federal Spending - 4th Quarter 2015 - $4.06 Trillion
    Federal Spending - 3rd Quarter 2017 - $4.23 Trillion

  10. John,

    "Moreover, I note that starve the beast tax reductions have led to massive deficit expansions, yet large debt and deficits have not yet seemed to provide much pressure against entitlement spending."

    Payments on the debt ARE ENTITLEMENT SPENDING.

    It's just that bankers don't like to identify them as such.

    "We will either reform them, in a way that reduces federal spending, or we will substantially raise taxes..."

    "If one wishes for a reform on the expenditure side, the great question is whether it must be done directly or via starving the beast of tax revenue."

    Or we will conclude, that debt financed spending is really double spending - once on the original good / benefit and a second time on the interest payments. The only way to eliminate the double spending is to eliminate government borrowing altogether.

  11. For those who are interested, John Cogan was a guest on EconTalk earlier this month.

  12. John,

    Important point - suppose a company does want to buy back it's shares, but it's voting shareholders refuse to sell?

    The presumption seems to be that a company can force it's shareholders to accept their money back, when in fact, shareholders are under no legal obligation to do so.

    Debt is different in that way. Holders of debt are legally obligated to accept payments on debt obligations in the same way that borrowers are legally obligated to make those payments.

    With regard to share buybacks, I don't know how non-voting shares are treated, though I am curious to find out.

  13. Same here in Europe.
    The cost of the Allies good intentions in creating a peaceful united Europe after two desastrous wars is extremely high: loss of territorium and even the right to exist.
    What a pity, with hindsight Hitlers bad intentions would have delivered a strong productive fertil white Europe, so what sense did the incredible carnage of WW II have?


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