Understanding the Central Issue behind Entitlements

How should our government assure that its citizens have enough to get by – enough food, enough shelter, good enough health, etc.? It is easy to forget that today’s fiercest political battles ultimately revolve around this simple question.

The question is “how,” not “whether.” It sometimes may appear otherwise, but both the political left and the political right agree on these precepts: that a minimum level of welfare should be guaranteed to everyone, and that the state should assist in its provision.

Consider, for example, the great Austrian economist Friedrich Hayek, an icon of free market libertarians. It’s widely assumed that his ideas amount to social Darwinism, but Hayek himself believed in a basic safety net, and said so directly in his popular 1944 book The Road to Serfdom, which warned against encroaching socialism. “In a society which has reached the general level of wealth which ours has attained … there can be no doubt that some minimum of food, shelter, and clothing, sufficient to preserve health and the capacity to work, can be assured to everybody,” Hayek wrote. “Nor is there any reason why the state should not assist the individuals in providing for those common hazards of life against which, because of their uncertainty, few individuals can make adequate provision.”

But Hayek’s disciples in the conservative movement and those on the left have very different ideas about the means to achieve those ends.

The venerable columnist John Kay of the Financial Times recently expressed one view in a piece titled “The welfare state’s a worthy Ponzi scheme,” namely that those with resources to spare should transfer them to those in need, in anticipation that others will do the same for them. In response, a Financial Times reader named Deri Hughes submitted a letter outlining another view, namely that resources should be transferred to the needy only insofar as they have voluntarily entered into contractual agreements covering the contingency of needing that transfer. These two perspectives provide sufficient background to explore the matter in depth.

John Kay’s view is encapsulated in the following excerpt, in which Kay is reacting to a talk that Tom Palmer, a Senior Fellow at the libertarian Cato Institute, recently gave in London. Palmer’s message was that the welfare state is a Ponzi scheme that will eventually lead to national bankruptcy.

The content of these rants is familiar. Levels of welfare provision are unaffordable; government finance is a huge Ponzi scheme. A common conclusion is to provide an estimate of the discounted value of the cost of some hated item of expenditure if its current provision were continued into the indefinite future. Mr. Palmer reported that the present value of unfunded liabilities of US medicine and social security is $137 [trillion].

Social security is a means of inter-generational transfer. The only bread fit to eat is bread baked today: but why should today’s bakers feed the retired bakers of yesteryear? Why should we look after old people, who can no longer do anything for us?

The obvious answer invokes Kant’s categorical imperative: it would be good for everyone (including ourselves when we are old) if everyone acted in this way. We feed the generations of our parents and grandparents in the expectation future generations will come along and do the same for us. But the consequences of this arrangement do have the character of a Ponzi scheme. One day, the world will end and the last generation of workers will have been cheated of their expectation of a peaceful retirement. In the meantime it is possible to calculate enormous measures of unfunded obligations, and it doesn’t matter. The value of these obligations is offset by the implied commitments of future generations.

Notice that there’s nothing in these lines about providing for one’s own needs by investing for retirement or purchasing insurance. It’s about transfers from the younger generation to the older in the case of social security, and from the less needy to the needy in the case of other minimum welfare needs, like medical care.