Monday, July 04, 2011

Fourth of July & America's Porkiest Generation

Last week I wrote this post discussing, on the occasion of economics Nobel Laureate Michael Spence's excellent Wall Street Journal editorial, why the US may be carrying a significant percentage of unemployed for years to come, thanks to global trade, strong foreign competition, and the end of of a fortuitous 30 year post-WWII era of economic dominance.

Today, being July Fourth, is a traditional celebration of American Independence and, coincidentally, though perhaps less so than Memorial Day or November 11th, a day that honors American service personnel. The link, of course, is that freedom, independence and liberty have cost American lives since 1776 to purchase and maintain.

Liberal network icon Tom Brokaw bestowed the moniker "The Greatest Generation" on those Americans who came of age to fight WWII.

I think the time has come to consider and acknowledge that generation's total impact on America, and rename it The Porkiest Generation.

Some of that generation were young Democratic Congressmen, like LBJ, who helped FDR enact the Social Security Act in 1935. That was the first true misstep down the road of social pork.

After winning WWII, the Porkiest Generation came home to, after some uncertain steps by the federal government to absorb those millions, fairly smooth economic and job growth for thirty years. Along the way, many of the Porkiest became the entitled blue-collar middle class who ran the steel mills, auto plants, manned the dockyards and drove the trucks and trains that supported America's post-war economic expansion. They demanded, and were given, promises of lavish health care and pensions as defined benefits plans.

When these mostly-unionized employees wanted more, the unions struck until a profoundly dumb American management class, being, as I contended in that prior, linked post, luckier than smart, simply promised more future defined benefits to bring the workers back into the factories.

Between the 1930s commencement of the folly of Social Security as a defined benefit scheme, and the use of that template by private unions for the next forty years, the idiocy of defined benefits amidst war and economic havoc in the rest of the world became the rule in America.

I should add, here, as a footnote, that defined benefit schemes were given a boost by the federal government's wartime wage and price controls. In order to entice skilled workers to change companies, so-called "fringe benefits," now simply defined benefits, were promised. As non-cash compensation, they didn't trigger federal wage control violations, while, as future benefits, they didn't affect current profitability. Being rather new concepts, accounting principles weren't yet well-established to correctly reflect the costs of such expensive promises.

By the late 1960s, the Porkiest Generation, then firmly in control of Congress, tripled-down on intellectual economic stupidity by enacting two more general-pool, defined benefit programs, Medicare and Medicaid. And, for good measure, every so often, they larded up Social Security's benefits, too, so that children of deceased Americans began to have their college education funded by this social safety net.

What astounds and confounds me is that, for forty years, from 1935-75, apparently no economist of standing bothered to note that it was a mistake promise defined benefits, over time, from the proceeds of a national economy subject to the vagaries of recessions, depressions, monetary crises, global competition and occasional wars. After 1945, the same economists should have warned Congress not to use a temporary period of US economic hegemony as the baseline from which to forecast the availability of lavish wealth for decades hence, from which to pay ever-growing defined benefits of health insurance, care, and retirement pensions.

How is it that out of some 200MM+ citizens, nobody was smart enough to point out that promising defined benefits to be funded by varying levels of economic activity and production, i.e., GDP, was folly from the get-go? That the best that could be offered was contemporaneous, annual contributions to individual accounts for health care and old-age pensions?

As I wrote in the first post on this blog, union leaders are to fault for accepting promises of future benefit payments from industry, rather than current cash contributions to individual worker accounts.

But, I digress.

My point for today's patriotic post is to highlight how the generation that deserved credit for fighting and dying to win WWII promptly rewarded itself, through unionism and Democratic control of Congress, by promising itself defined levels of health care and old-age pensions which were never going to be affordable. The mistaken belief that a brief period of unrivaled American economic supremacy would endure and fund such lavish promises should have been challenged and crushed before it could become cemented into the American workers' expectations.

Can it really be that nobody was smart and courageous enough throughout the 1930s-1970s to point out this folly? That no society in history had ever managed the trick of working for about 30-40 years, then being paid near-working wages in retirement for another 20-30 years? That the mechanics of actuarial math and compounding wouldn't sustain those promises without economic assumptions never before seen in global economics?

When you think about it, most of the intent of dedicated health care and old-age pension benefits have more to do with societally-enforced saving for these needs, and necessarily less to do with societal funding of them.

If all Social Security had ever been was a law to mandate workers and employers to dedicate defined percentages of the formers' wages to individual, single-use accounts, it's not clear that federal assistance would have ever been necessary.

After all, using federal funds to augment such accounts is simply a wealth-transfer from those making higher incomes to those making lower incomes. But if actuarially-determined amounts were deducted from compensation, federal funding never would have been required. Besides, society pays, either way. It's just that when the government is involved, it is taking from some to give to others, rather than have those others behave responsibly and live within their means.

But, thanks to the Porkiest Generation, we are now, eighty years on, saddled with their originally self-imposed promises of defined benefits, the crushing burdens of which on the next generation, and subsequent ones, they now complain can't be changed.

What a Ponzi scheme, eh? You get control of unions and Congress, you pass laws to promise wildly unrealistic and unaffordable benefits to be paid by subsequent generations, then retire and complain when the next generation realizes what the Porkiest had done.

In my opinion, enacting foolish and economically impossible legislation and promises is no defense to simply stripping them away- now- totally- and reverting to defined contribution schemes.

Just because one generation managed to gain control of the levers of labor and legislative power to promise itself unaffordable and unsustainable financial benefits is no reason not to reverse those outlandish promises now.

Happy Fourth! Let's declare Independence from the economic enslavement of our nation by the Porkiest Generation!

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