“The Nature of Government,” The Virtue of Selfishness

“This is John Galt Speaking,” For the New Intellectual

“The Nature of Government,” The Virtue of Selfishness

“America’s Persecuted Minority: Big Business,” Capitalism: The Unknown Ideal

“What Is Capitalism?” Capitalism: The Unknown Ideal

“The Objectivist Ethics,” The Virtue of Selfishness

“The Roots of War,” Capitalism: The Unknown Ideal

“What Is Capitalism?” Capitalism: The Unknown Ideal

“What Is Capitalism?” Capitalism: The Unknown Ideal

“The Intellectual Bankruptcy of Our Age,” The Voice of Reason

“Global Balkanization,” The Voice of Reason

“The New Fascism: Rule by Consensus,” Capitalism: The Unknown Ideal

“The Cold Civil War,” The Ayn Rand Column

The Welfare State Versus Values and the Mind
By Andrew Bernstein

Most rational men know well the injustice of welfare programs. Their proponents redistribute wealth – from the productive to the non-productive – and claim the moral high ground by saying that their goal is to stamp out poverty. Opponents often accept the altruist premise but argue that welfare programs harm the poor individuals they are intended to benefit; i.e., they hold that welfare is not immoral, only ineffective. It is now five years since the conservative’s influence resulted in Congress’ 1996 legislation reforming welfare. Enough time has passed to profitably raise several questions. What has been the result of welfare reform?  Have the reforms been adequate to solve the problems? If not, why have the conservatives been largely silent on this issue in recent years? Are there deeper philosophical principles, generally unidentified, that the welfare state violates, that necessitates the practical damage it causes? Above all, what would solve the welfare problem – and why?  

The backbone of the welfare system is Aid to Families with Dependent Children (AFDC). The program originated during the New Deal era as a means of supporting  children of widows. In the 1950s and early 1960s it was amended – first to include an additional stipend for the mother or another caretaker adult, then to expand it to include a two-parent family in which the father was unemployed. In addition, during his Great Society initiative, President Johnson established Medicaid to provide for the health care of the poor, and expanded a small 1961 program into the Food Stamp program that we know today. Though LBJ’s programs were initiated in the mid-to-late-1960s, massive government welfare spending did not commence until the 1970s.

For example, Johnson started the current Food Stamp program in 1965 with 424,000 participants, which grew to 2.2 million by the time he left office in 1968. In the first two years of Nixon’s presidency, the number doubled; but between 1970 and 1972 it quintupled. By 1980, the number of people receiving Food Stamps was 21.1 million, fifty times the amount in 1965, ten times what it was at the end of Johnson’s administration. Further, using constant 1980 dollars, welfare spending grew by $30 billion during the five Johnson years, but by $80 billion between 1968 and 1973, an increase 2.7 times larger than under LBJ. The full truth is that, in principle, the United States became a welfare state under FDR in the 1930s, that LBJ increased the programs enormously in the late 1960s, and the massive spending of the past thirty years commenced in the early 1970s.¹  

Social scientist Charles Murray’s 1984 book, Losing Ground, was a landmark work in the welfare debate. Murray is one of the leading thinkers of the type referred to above, who do not challenge the moral premise of the welfare state. Rather, he argued based on hard economic facts that the enormous welfare spending of the 1970s had not helped the poor, that in fact might have harmed those it was intended to benefit, and that government welfare programs were incapable of attaining their compassionate goals.  Predictably, his book was savagely attacked by the Left. Murray examines the financial options open to a young poor couple in 1960. Prior to the massive government programs undertaken in LBJ’s “war on poverty,” marriage and minimum wage employment were financially superior alternatives to welfare. Relief payments were small, and even if a woman was pregnant or had a baby strict rules prevented her from supplementing her income by working. Further, if the woman had a boyfriend, they would be unable to live together because AFDC benefits were not granted if there was a man in the house.

But by 1970, much had changed. In 1960, there were three practical objections to receiving welfare: too little money, no way to supplement it and no chance for couples to live together. By 1970, all three impediments had been removed. If a woman was pregnant, her AFDC payments were now significantly higher, and she received Medicaid, as well. The law had been amended so that she could now add to her income by working if she chose. Further, by Supreme Court ruling, the presence of a man in the house could not be used as a reason to deny a woman benefits. As long as a couple was unmarried, a woman could receive benefits and the man was free to work when and if he chose. Many poor individuals have, and have always had, strong moral objections to going on welfare – but by 1970, the government had removed any financial ones. It had made welfare and illegitimacy a superior short-term financial alternative to marriage and minimum-wage employment.²

Because a disproportionate number of black Americans were poor in the late 1960s, and because the Civil Rights Movement of that era was an attempt to redress a century of racial injustices, the government’s war on poverty coalesced into a campaign heavily (though not exclusively) directed toward blacks. Further, because the Left has long argued that capitalism necessitates a permanently exploited underclass as a condition of creating wealth, many American intellectuals and politicians (then and now) construed blacks as such a victimized class, requiring governmental programs to redistribute wealth as acts of “social justice.” In 1980, some 19.7 million white Americans were living beneath the official poverty line, roughly 2.3 times the number of blacks.³  Many of them were also hurt by the welfare state. But because blacks were so heavily the target group of the Left, its effects have been strongest on them. As a consequence, the conditions of black Americans before and after 1970 form the best laboratory in which to examine the impact of welfare on recipients. 

Tragically, in the 1960s, few people noticed the pronounced upward trend for black Americans prior to the huge expansion of welfare spending.  By 1970, black Americans had made enormous strides in education and income. A fundamental cause was the Second Great Migration of rural blacks from the south to northern cities during World War Two. With millions of men away at war, factory jobs in the northern cities opened up. Blacks moved north, taking those jobs and receiving the higher wages they offered. Their children now attended northern schools, which were superior to the segregated schools of the south. The 1940s saw the start of a dramatic increase in the education levels of blacks. In terms of income, the results of the migration were stunning. In 1940, 87 percent of black families lived below the official poverty line. In 1960, the number was 47 percent. In 1970, it was 30 percent. This upward economic movement represents an enormous and far-too-rarely-mentioned achievement on the part of black Americans. Still, in 1970, blacks were disproportionately poor. Then came the welfare state.⁴ 

In order to understand the full impact of the welfare state, we must examine several related changes made in governmental policy in the 1960s. In northern public schools, where liberal ideas were most influential, treatment of underachieving and disruptive students changed. For several reasons, including Supreme Court rulings Gault v. Arizona (1967), Tinker v. Des Moines School District (1969) and Goss v. Lopez (1975), public school officials were undermined in their ability to administer discipline. Administrators and faculty members were compelled to adopt a significantly more lenient attitude toward students who refused to study and/or who disrupted the study of others. Further, in the late 1960s and 1970s, the government initiated a less punitive approach toward underage urban criminals, committing far fewer to juvenile institutions and sealing or even expunging youthful criminal records. No matter the frequency or severity of the crime(s), by the time the youth reached his 18^th birthday it was if they had never been committed. This fact was, of course, well known to young criminals.⁵

The government’s post-1960s policies must be examined in their cumulative effect. The state made welfare a more lucrative short-term option than full-time minimum-wage employment. It made chronic illegitimacy a superior financial alternative to marriage and self-supporting family. It increasingly refused to discourage unruly behavior in school. By promoting even those who failed to learn, it undercut the motivation to study and get an education. By permitting disruptions and undermining motivation, it made learning as difficult as possible in the urban public schools. By decreasingly punishing youthful offenders, it encouraged crime. Governmental policies have encouraged indolence, illegitimacy, lack of family structure and supervision, disruptive school behavior, diminished education and crime.  

The effects have been predictable. The American historian, Clarence Carson, has referred to such paternalistic policies as “a war on the poor.”⁶ His assessment is accurate, and because American blacks were the government’s principal target, it is they who have borne the brunt of the assault. Consider the consequences regarding four major issues: marriage and two-parent families, labor force participation (LFP), upward economic mobility and crime.

During the Depression, the marriage rate for black Americans was higher than for whites, though blacks were considerably poorer. Through the 1940s and 1950s, unemployed black men were as likely to marry as were their unemployed white counterparts. Greater than 80 percent of black families in New York in 1905 were headed by the father. In 1925, only 3 percent of black families were headed by a woman under twenty. As of 1950, the percentage of black families that consisted of husband-wife households was 78 percent; as late as 1967, the ratio hovered in the range of 72 to 75 percent.All of this changed in the post-1960s period. Between 1950 and 1963, the illegitimacy rate rose from 17 percent to 23 percent of all black births. As early as 1965, facts such as these prompted Daniel Patrick Moynihan to claim in his famous report, “The Negro Family: The Case for National Action,” that disintegration of the family was the single greatest problem confronting black Americans. But concerned people such as Moynihan had seen nothing yet.⁷

By the late 1960s and 1970s, the welfare system was in place, and its effects were fully felt. In many cases, families never formed, as AFDC payments allowed men to reject marriage and full-time employment. In New York City in 1970, 600,000 children belonged to welfare families, of whom 445,000 had no fathers in their lives. By 1980, 48 percent of black babies were born to single mothers, compared to 17 percent in 1950. In that same year, 82 percent of all children born to black girls aged 15-19 were illegitimate. By 1998, the illegitimacy rate for black children stood at a staggering 70 percent.⁸  

The news is equally grim regarding the trends in LFP. In 1954, 85 percent of black males aged sixteen or older were participating in the labor force, i.e., were either working or actively seeking employment. Such a high figure was not unusual, for black males had been participating in the labor force at rates as high or higher than white males back to the turn of the 20^th century. But from 1966-1976, the black reduction in LFP was 271 percent higher than for whites, with the overwhelming preponderance of the decline centering on young males aged 16-24. However, older black men (those born before 1950) showed a significant rise in employment during the same period. This means that young black men were showing vastly less interest in working than had their fathers, grandfathers and even older brothers.  Something had changed for those who reached their late teens in the late 1960s and 1970s.⁹

Regarding crime, the situation also deteriorated. In the decade of the 1950s, the rate of homicide victimization dropped 22 percent for black males despite the fact that blacks were increasingly moving into large cities where crime tended to be the highest. Further, the elderly who have lived for decades in black urban neighborhoods repeatedly report that life in those neighborhoods was not especially dangerous in the years leading up to the late 1960s. This is a claim borne out by police records. Black Americans had no pre-welfare-state history of crime rates comparable to those of the welfare period. Since the late 1960s the rate of violent crime has soared in the once-relatively-safe black urban neighborhoods. Black men today are murdered at twice the rate they were in 1960. Half of all the murder victims in the U.S. in 1995 were black, though blacks compose but one-eighth of the population. An anonymous survey of criminal victims conducted by the Census Bureau shows that 80 percent of black victims of violent crime report that the perpetrators were black. In 1993, Jesse Jackson stated, “There is nothing more painful to me than to walk down the street and hear footsteps and start thinking about robbery – then look around and see somebody white and feel relieved." Tragically for the black community today, the Reverend Jackson’s feelings are grounded in reality.¹⁰ 

Economically, the news is also bad. After decades of rapid economic progress, culminating in the 1970 figure of a 30 percent poverty level, the black movement toward prosperity significantly slowed. In 1980, 29 percent of black families still lived below the official poverty line; in 1995, the figure was 26 percent. It is significant that economic progress slowed so drastically during the era in which governmental paternalism was at its height.¹¹

The government’s effort to help the black urban poor has resulted in reduced employment, diminished economic progress and soaring rates of illegitimacy and crime. Conservatives have long pointed out one level of causation. If the government financially encourages indolence, illegitimacy and the decline of two-parent households, and if it adopts a more permissive attitude toward disruptive behavior in the schools and criminal behavior in the streets, then it makes a direct assault on the ethics of personal responsibility necessary for individuals to lead a productive life.

One telling indication of the welfare state’s harmful impact is what happens when it is curtailed. In 1996, Congress passed the Personal Responsibility and Work Opportunity Act, requiring able-bodied welfare recipients to find jobs within two years. The Left was appalled. The Department of Health and Human Services predicted that the child-poverty rate would increase by 11 percent. Robert Greenstein, director of the Center on Budget and Policy Priorities, warned: “If this bill is enacted into law, it will increase child poverty more than any other piece of legislation enacted in decades.” But from the liberals’ perspective, a peculiar thing happened when welfare recipients got off the dole and started to work: their income rose. The percentage of Americans living below the poverty line dropped significantly, from 13.8 percent in 1995 to 11.8 percent in 1999.¹²  But the horrors of the welfare state cannot be measured exclusively in terms of diminished living standards, because the governmental paternalism on which welfare is based attacks the requirements of man’s life at a deeper level.

The underlying philosophy of paternalism – which originates in the thought of Kant and Hegel – is profoundly mistaken. Its essence is the claim that an individual’s thinking and character are conditioned by his society; that he is immersed in its fundamental concepts from infancy, absorbing them from his family, the educational system, religious organizations, the legal system, etc. An individual is cognitively, morally and behaviorally molded by society, a helpless plaything of the group. Marx added to this theory of social determinism, claiming that the poor are victims of capitalist oppression, unable to rise by means of individual thought and effort. Since the poor are powerless victims of capitalist exploitation, a benign government must redress the injustice by redistributing income. Further, Marx and his contemporary heirs are philosophical materialists, who hold that man is exclusively physical and that manual labor is the source of all production. As materialists, they believe that man is conditioned specifically by his economic class and that simply giving people the money necessary to buy material goods is sufficient to improve their existence. Poor individuals then become wards of the state, and are not expected to assume personal responsibility for their lives.

But a fundamental fact of man’s nature and of the world in which he lives is that he must create the values upon which his survival depends. Human beings must work productively to support their existence, and that of any children they choose to bring into the world. Any ostensibly benign scheme of paternalism, which offers to support men with no productive effort on their part, gives to human beings a false message. It severs the tie between productivity and values, between an individual’s creative work and his capacity to consume. It tells man that he can subsist without the creating values. The welfare state is the secularized equivalent of religion’s Garden of Eden, substituting a bountiful Society for God as the source of man’s support. The theory is as false as the religious fantasy it is based on; it is false in reality, it is metaphysically false, whatever  Marxist intellectuals and politicians believe.

The welfare state conducts a war on value creation – and its recipients remain mired in poverty, because having been seduced onto the dole they have struck a Faustian bargain with the devil. Once having accepted AFDC with its perverse incentives, the average family’s stay on it is thirteen years.¹³   Though it came as a shock to the Left that government handouts diminished men’s living standards and productive work raised them, both phenomena were predictable to thinkers who understood that man cannot prosper or even survive in the absence of value achievement. The welfare state, by encouraging parasitism and undercutting the work ethic, necessarily diminishes the production, achievement and living standards of its recipients. 

But the welfare state’s fundamental horror is its assault on the mind. Man’s rational faculty is the fundamental means by which he creates values and achieves prosperity on earth. The welfare state, by severing the connection between values and productive work, renders the mind unnecessary as a tool of survival. Its development and use is no longer required, because it has been replaced by a paternalistic state. It is no accident that research shows “lessened cognitive development” in the illegitimate children of welfare mothers. Researchers find that young children who have averaged at least two months per year since birth on AFDC have IQs 20 per cent below those whose families have received no welfare, even when such factors as race, income and neighborhood are controlled for. The state has undercut the mother’s need for education and the father is absent; the result is that serious family discussion, intellectual stimulation and incentives for cognitive development are vastly reduced. A tragic indication of the harmful cognitive impact of welfare is that current drives for welfare reform find it necessary to require welfare recipients to ensure their school-age children attend school regularly as a prerequisite of continuing benefits.¹⁴

Personal responsibility and value achievement are intellectual virtues; they require planning, thought and education. Under paternalism, there is a diminished need for these virtues; consequently, there is diminished education, cognitive development, planning and serious thinking. This is the deeper reason that black urban welfare neighborhoods suffer from a culture that is largely physicalistic and hedonistic, emphasizing sports, sex, drugs and unremitting violence. Young men often feel the need to “nine” anyone who dares to “diss” them, i.e., kill with a nine-millimeter automatic anyone who disrespects them. Education and intellectual development are contemptuously viewed as unmanly and, among many young black males from welfare families, “a white man’s gig.” A heartbreaking but not uncommon example was the case of Cedric Jennings, an outstanding young student in Washington, D.C., who strove for an Ivy League education but was threatened by local toughs who hated his intellectuality. In a story referred to by the Wall Street Journal as “the Crab Bucket Syndrome” (for the phenomenon of crabs in a bucket dragging down one that seeks to climb out), the thugs harassed Jennings – and other top students – because they believed his brilliant mind was a manifestation of “trying to be white.” Fortunately, in Cedric’s case, his relentless work ethic won him a scholarship to an MIT summer program and eventually acceptance into Brown University, where he majored in math.¹⁵ Cedric escaped the violence. Others were neither so independent – nor so lucky.

A grim fact is that though black males aged 14-24 constitute but one percent of the population they make up 17 percent of the homicide victims and 30 percent of the homicide offenders.¹⁶ The devaluation of the mind, of man’s tool of survival, is the reason that so many young males from welfare families do not survive. When the mind is viewed as unnecessary for survival, it is scornfully rejected. The rise of brutality and criminal violence is then a certainty. Researchers June O’Neill and Anne Hill found that growing up in a single-parent family in a neighborhood with numerous such families on welfare triples a young man’s probability of committing criminal actions.¹⁷ The message implicit in paternalism is that human beings do not require the mind as a means of survival. Because many individuals get the government’s message and repudiate their rational faculties, the tragic results follow. This war on the mind is the most evil of all the welfare state’s legacies. 

Individuals must always take responsibility for their own lives, and those who have been seduced onto the dole by Washington’s welfare pimps are no exception. They have made a horrendous, self-destructive choice. For the sake of their own lives and that of their children, they must change it. Nevertheless, this in no way exonerates the federal and state governments that have made large elements of personal irresponsibility financially more rewarding in the short term than marriage, two-parent families and full-time employment. After more than thirty years of the welfare debacle, there can be no doubt: the government is the first cause and prime mover in the development and perpetuation of a sizable minority of Americans whose lives have been shattered by welfare, illegitimacy, disintegration of two-parent families and crime.

Any type of welfare state is unjust to the productive individuals who are forced to finance it. Perhaps equally bad is the horrific harm it perpetrates on the poor. It is an open question whether its impact is most detrimental on the payer or payee. On the one hand, the men forced to finance it are not merely the most productive individuals in society who are now prevented from expanding their productive operations and/or enjoying the fruits of their labor. More important, they bear no necessary culpability in their own victimization, for they perhaps did not vote for welfare policies.  On the other hand is the repudiation of value achievement and the mind surreptitiously embodied in the welfare state’s siren call to the poor. Whichever way this question is ultimately decided, welfare’s universal, undiluted harm cannot be denied.

For these reasons the welfare state cannot be reformed. Its first premise, that it is just to force the productive to support the nonproductive, is false. Its second premise, that welfare payments are in the interest of the poor, is worse than false; it leads to a virtual all-out war on the part of the government against poor individuals. The welfare system needs to be entirely eliminated. If it could be blasted from the face of the earth, a sincere humanitarianism would compel us to do so. Those who are able, must find jobs. Those who are unable, must seek support from friends, family, neighbors and/or private voluntary charity. The pro-capitalist literature is filled with examples of private charity organizations who, though often themselves permeated with altruist premises, help the poor more effectively than do the government welfare agencies.¹⁸

The deeper philosophical principles involved explain why the conservatives are content merely to reform welfare. Many hold religious premises, including an altruistic ethics that blinds them to the true nature of selfishness and the enormously positive impact of a life devoted to rational values. When a man construes the good – a la Jesus – in terms of mawkish service to the needy, he is blinded to the achievements possible to each man, and is unable to crusade on their behalf. He clings to the belief, despite all evidence to the contrary, that men can be helped by self-sacrificial service. Worse, given the religionists’ faith-based epistemology, they can never fully embrace the mind or the conditions necessary for it to flourish. They are unable to see the welfare state as an assault on man’s survival instrument and are left wondering regarding the deeper reasons of welfare’s devastating impact. Their philosophy therefore blinds them to the fundamental reason that welfare needs to be eradicated. 

Based on Christian premises, many conservatives think of man as a sinful being, motivated by greed or other “low urges.” Because of this, they often lapse into Marxist style arguments, thinking welfare recipients are motivated solely by economic incentives and overlooking the key role of philosophy. Welfare causes such widespread destruction because economic incentives are used to support the philosophical view that man is helpless and utterly dependent on society for sustenance. Welfare places economic incentives in service of collectivist ideology. It lures unwitting poor individuals to sell their minds and souls to the state for 30 pieces of silver – and in that combination lies the secret of its devastating impact.

In fact, poverty is not like an incurable disease. It is a problem that is resolved by full-time employment. But the poor individual must be willing to examine and change the destructive values that underlie and give rise to his poverty. In some terms, he must understand both the nature of selfishness and the role of the mind, if he is to achieve success and happiness. The welfare state militates against such understanding and supports his most irrational premises. This is why it must be eliminated. 

Why every American born today owes $184,000 and what to do about it.

Stealing from Our Children

If you've noticed the trillions of borrowed dollars sent out from Washington in the recent bailout and stimulus packages, you already know that the federal government has a spending problem. But when it comes to "entitlements" like Social Security, Medicare, and Medicaid, this recent spending binge is a drop in the bucket. We're talking about a difference of $2 trillion that went out the door in the recent spending spree compared to $45 trillion (that's in today's dollars, so it will amount to even more down the road in, say, 2050) that we're committed to spending in coming years.

How in the world did we let our debts get so unmanageable? We'll explain....

Every year, Washington is spending money that will have to be repaid with interest by our children and grandchildren. In addition, Washington has promised future benefits for which there is no money. Their excess costs (along with other obligations like the national debt) are $184,000 per person today, an amount that is poised to crush younger generations.

We're not simply spending their inheritance. If we don't fix entitlement spending, massive debt and a crippled economy will be their inheritance. This is more like theft.

Members of Congress know about this problem, but the way Congress budgets for its spending makes it easier for them to do nothing about it. Worse, Members of Congress serve their own interests in preserving the arrangement: Entitlement benefits appeal to voters. Much of the cost of the benefits, however, is punted to the future, long after current Members of Congress are gone.

As a result, Congress probably will never agree on real solutions until millions of ordinary Americans see the dangers ahead and demand real action. To do that, we first need to understand how Washington spends your money and how entitlements threaten to steal the nation's future.

The Maynard Family's Creative Accounting

To understand how wrong Washington's approach to budgeting really is, let's consider how a family should budget. You probably prepare a monthly or annual budget to make sure that you're not spending more money than you're bringing in, right? It's basic arithmetic. You add up the cost of your mortgage payments, food, utilities, clothes, insurance, Blockbuster fees, and so forth. You may borrow money for some things, like a home or college tuition, but not so much that you can't pay off your debt or get buried in unaffordable payments over the long run. If you're overspending, a realistic budget gives you advanced warning so that you can adjust your habits.

Unfortunately, not everyone is this responsible. We all know people who don't budget at all or who write out a budget but don't stick to it. Still others exercise such creativity in budgeting that the results are both unrealistic and reckless.

Imagine a family, the Maynards, who develop a budget with two categories: "regular" and "off-budget" spending. They put many of the ordinary things families budget for, like food, utilities, and entertainment, in the visible column. This seems to be a reasonable approach.But the Maynards have another part of their budget that they exempt from the normal budgetary restraints -- they're "off-budget." They include things like cars, house payments, kids' college funds, a second home for use in retirement, and other things that may be added from time to time. Mom and Dad Maynard both have good jobs. Even so, they can't manage to stay within their means because of this off-budget spending. They always spend more than they make, in the process racking up big credit card bills, car loans, mortgages, and the like. And every year, the interest costs keep getting bigger.

The off-budget spending items are important to the Maynards, so they get automatic increases every year. This allows the Maynards to do things like buy a new car every year that's more expensive than the previous one or take money out of the house for a fancy vacation.

They really like the off-budget spending items, so they pay for them before they pay the bills for the rest of the budget. If they run out of money, they simply put the rest on the credit cards. They never compare off-budget spending to other priorities. Still, the policy seems to work for a while, since the Maynards bring home fat paychecks and can pay the minimum payments on the credit cards. Besides, it's really popular with their kids.

There's one problem: Off-budget means out-of-sight and out-of-mind when it comes to budgeting restraint and priority setting. The Maynards don't have a short-term plan to make sure their income covers all their spending. Nor do they have a long-term plan to pay for the ballooning costs from their debt and the interest it's accumulating. Anyone doing a realistic budget would have noticed that the automatic off-budget increases were outpacing the Maynards' annual rises in income. They could also see that those minimum payments would never fully pay off the credit cards either.

Put simply, the Maynards' budget is a lot like a credit card bill that shows the minimum amount due but hides the total balance or the finance charge. In fact, their budget scheme is so bad that if they don't mend their ways, the off-budget costs will eventually consume the Maynards' entire budget, with nothing left over for utilities or food. If the parents do not make major changes in their spending, they will have nothing to pass along to their kids when they are gone.

If you see the problems with the Maynards' reckless finances, you'll soon understand the problems with entitlement spending in the U.S. Congress. Congress, unlike a responsible family, doesn't use commonsense budgeting. Not even close.

Entitlements

Entitlement spending is the most serious fiscal problem that Americans face, but few of us really understand it. In the federal budget, an entitlement is a program that provides guaranteed benefits to eligible recipients, such as retirees. The "big three" entitlements are Social Security, Medicare, and Medicaid.

Like the Maynards, Congress treats entitlements one way and other parts of the federal budget -- called "discretionary" spending -- very differently. Discretionary spending includes the majority of those limited functions outlined by the U.S. Constitution, like national defense and a judicial system, but also numerous other functions.

These discretionary programs are budgeted annually and have to be balanced against each other to stay within the budget limit. A dollar spent on defense can't also be spent on education. That reality helps to restrain discretionary spending, since the federal government rightly brings in only so much money from taxpayers every year.

The Problem with Entitlements

Unlike discretionary spending, entitlements are mandatory spending. They run on autopilot, getting first crack at whatever revenues the government collects. They even have mandatory increases every year. In fact, they're often described as if they were "rights."[1]

Individual rights are one of the foundations of American society. As the Declaration of Independence puts it, we are endowed by our Creator "with certain unalienable rights, that among these are life, liberty, and the pursuit of happiness." You are a being with intrinsic dignity, and that dignity gives you rights that limit what the government and other people can do to you.

But using rights language where it doesn't apply dilutes our real rights. That's the problem with claiming a right that other people have to pay for, regardless of the consequences. It's a major distortion of the Founders' view of "unalienable rights" to say that I have a right for you to pay for my retirement -- regardless of how much money I make and regardless of whether future taxpayers can actually sustain the benefits I'm claiming.

Unfortunately, when policymakers treat entitlements as if they were rights, many of us start to believe it, and that wrong idea about rights has dramatically harmful long-term consequences. Entitlement spending grows auto-matically each year without ever going through the regular budget process.

With such irresponsible budgeting, is it any wonder we're facing a fiscal crisis in entitlement spending? Congress doesn't have to debate this swelling chunk of the annual budget. Nor do Members of Congress have to account for the long-term costs of Social Security, Medicare, or Medicaid when they put together the federal budget to ensure that these programs are affordable and sustainable.

Remember the credit card bill that shows the minimum amount due but never shows the total balance or the finance charge? Could you plan the rest of your finances correctly if you got a bill like that? Of course not, and neither can Congress. And the reality is worse than this: Congress gets the short-term benefits from funding these programs, but the generations who follow will have to pay off these huge costs.

How Bad Is It?

Because entitlement programs are on autopilot, their spending is about to explode as the baby boomers retire and health care costs continue to rise. Economists say that spending will go from 8.4 percent of the economy to 18.6 percent over the next two generations. While most of us do not think in these terms, one crucial benchmark is that this level of spending for these three programs alone is higher than the historical level of taxes.

Looking at the problem from a different angle, Social Security will soon run massive deficits when spending exceeds taxes collected, and Medicare is already in deficit. Over the long term, they owe over $45 trillion more in benefits than they collect in taxes. That's on top of other liabilities such as the federal debt of $5.3 trillion. Together, this adds up to a financial burden of $184,000 for every American.

And remember: That's just the unfunded part. Every year that we fail to reform these programs, our children and grandchildren will be out another $1 trillion or more. Delay only makes the necessary reforms more painful.

This all sounds so bad that it can be hard to grasp the size of these ever-expanding programs. So consider this: Together, they already equal the entire Canadian economy.

That's bad enough, but in the future, it gets worse -- a lot worse. In 1965, these three were about one-seventh of the federal budget. Today, they're more than half of it. If we don't fix them, in less than two generations they will take 100 percent of all federal revenues, leaving no money for national defense, education, the judiciary, homeland security, or anything else.

You might think that we could simply raise taxes to cover these ballooning costs, but the unprecedented tax levels needed to accomplish this would devastate us economically. Borrowing to pay for the programs, on the other hand, would lead to unsustainable deficits -- in other words, national bankruptcy.

Unless we do something fast, we will leave our children and grandchildren to deal with a disaster that we created.

Social Security

Let's start with what Social Security does. Social Security's retirement program provides a monthly income for qualified retired workers, spouses, and surviving children.

Two questions immediately come to mind: Don't we have a right to Social Security payments? Aren't we funding them with our payroll taxes? These are reasonable questions.

First, workers have no rights to their benefits. Two Supreme Court cases dealing with Social Security confirm this lack of property rights. The decisions in both cases explicitly state that workers have no ownership of their Social Security benefits.

Second, you might think of your Social Security benefits as coming from an actual account, in your name, that contains cash or investments -- like a government-run pension fund. Social Security and Medicare are taxed separately from ordinary income tax on our paychecks, after all. But that would be wrong.

Many believe that the amount we receive upon retirement is somehow related to how much we put in. So it's only fair that we get back what we paid in, right?

This story is easy to believe, but it's also an illusion. There is no such right and no such fund. Social Security has no individ-ual accounts at all, other than a bookkeeping record of an individual's yearly earnings and pay-roll taxes paid.

Sure, Social Security has a "trust fund," but in name only. Ordinary trust funds are assets invested to give sustained support to recipients over a period of years. A father, for example, may set up trust funds for his children, from which they will receive regular payments after he has died.

But the Social Security "trust fund" isn't like that. It doesn't have cash or assets that could be sold like the assets of a normal trust fund. It represents only the amount of Social Security taxes col-lected beyond what the program needs to pay current benefits. These tax revenues are then spent on other government programs, leaving just IOUs that have no value beyond a promise to impose higher taxes or more debt on future workers.

In reality, the system taxes current workers to pay current retirees. This worked out pretty well when people didn't live as long as they do now and were having lots of kids. When Franklin Delano Roosevelt created Social Security as part of his New Deal in 1935, the average life expectancy at birth was a bit less than 62. Now it's almost 78, which means that Social Security payments go on much longer today than they did in the past.

Also, early on, there were almost 42 workers for every retiree. but over time, the ratio of workers to retirees has shrunk. Now, as baby boomers are starting to retire in droves -- eventually at a rate of about 10,000 a day -- we're nearing only two workers for every retiree.

You could think of the Social Security system as resembling a pyramid scheme -- a comparison that explains why pyramid schemes have been outlawed and why the need to reform Social Security is so serious. Let's say a guy from the gym offers to let you in on a new investment. He promises you a $500 return in two weeks for an initial "investment" of $100. All you have to do is recruit ten more people to pay into the program, which is easy to do since you promise each of them $500 for the same $100 investment. The scheme can work forever -- as long as you keep adding more participants. But that can happen only if you have an infinite number of them. Otherwise, the whole thing will collapse.

Guess what happens in the real world?

Social Security in its current form suffers from the same basic flaw: More and more people are getting benefit payments while fewer people are paying. To make this problem worse, people are living longer, which means they are getting paid longer too. You don't need a Ph.D. in accounting or economics to see that Social Security will crumble in the long run -- or the not-so-long run.

The Social Security system operates like a pyramid scheme: We have more and more people getting paid for longer and longer periods of time with fewer and fewer people paying into the system.

Medicare

Medicare was created in 1965 to help America's seniors pay for the costs of hospital and health insurance. Congress added a drug benefit in 2004.

Seniors pay a small portion of Medicare's total costs through their pre-miums, workers pay a portion of Medicare's costs through the payroll tax, and a large and growing subsidy is drawn from the pool of all other taxes paid. Many people mistakenly think that their payroll tax contributions go to a general Medicare fund and that they are thus entitled to all of its benefits. But the payroll tax that workers pay funds only one small part of Medicare -- hospital insurance (Medicare Part A). Payroll taxes do not fund supplemental medical insurance (Part B) or the drug benefit (Part D). Instead, these programs are funded through general tax revenues and retiree premiums.

Medicare's problems are even bigger than Social Security's. There are two reasons for this: Fewer people are paying in while more people are drawing out for longer periods of time (like Social Security), and health care costs have been rising faster than the economy for decades. Medicare is now the third largest federal program after defense spending and Social Security. It will soon become the largest program, absorbing an ever-increasing share of the budget.

Medicare's problems are even bigger than Social Security's.

Over the years, Congress, like the Maynards, has added benefits without adding long-term plans to pay for them. When it created the Medicare drug entitlement in 2003-2004, for instance, Congress had no plan to pay for it. In fact, Members didn't know the full price tag of the plan until after they voted on it! Congress approved the plan based on a short-term budget outlook without having the full picture of what it would actually cost future generations. Over the next 75 years, just this one part of Medicare commits taxpayers (that is, our children and grandchildren) to an unfunded liability of $9.4 trillion.

Medicare's main funding problem is the large and growing subsidy given to America's seniors through Medicare benefits. This subsidy is available to seniors at all income levels, not just the poor, and is financed by general revenues and government debt, which imposes further costs on future generations.

This has serious long-term consequences: Either working Americans will face much higher taxes, or less tax revenue will be available to finance other spending priorities. Calling them "rights" does nothing to solve this problem. In fact, it perpetuates it.

Medicaid

Medicaid is a publicly funded health care program that is targeted at the poor and funded jointly by the states and the federal government. The biggest part of Medicaid's budget comes from rapidly growing costs for seniors, especially long-term care of the sort provided in nursing homes, which is not covered by Medicare. Because it is jointly funded, Medicaid coverage varies from state to state, although the federal government mandates certain kinds of coverage.

Like those of Social Security and Medicare, if left to pursue their present course, Medicaid costs will spiral out of control. Increasing costs have already led to shrinking services and rationing of health care. By 2050, federal Medicaid spending is also projected to more than double. Most of this spending growth will come from senior citizens.

If left to pursue their present course, Medicaid costs will spiral out of control.

How Not to Fix the Entitlements Problem

Almost everyone familiar with entitlements admits that they need to be fixed, but too many offer phony "solutions." They claim that the problems will fix themselves with a little tweak here and a little one there. When examined, however, these easy "solutions" turn out to be little more than myths -- excuses for delaying real action.

MYTH #1: Economic growth will generate enough revenue to pay for entitlement programs without changing any policies.

FACT: While economic growth may delay the disaster slightly, it won't solve the problem.

The Government Accountability Office, the federal government's chief accountant, calculates that we'd need decades of double-digit growth to pay for entitlements, but history says that this is not going to happen. Over the past 20 years, the U.S. economy has grown by an average of only 2.8 percent annually, and we're expected to stay at that rate for the next decade: hardly double-digit growth. Growing our way out of the problem isn't a realistic solution. It's a myth.

MYTH #2: If we just eliminate pork-barrel spending and waste, we can pay for the out-of-control entitlements problem.

FACT: We should get rid of pork and waste, but compared to the cost of entitlements, pork is peanuts.

In 2008, government spent about $19 billion on pork-barrel projects but more than $1 trillion on entitlements. That's 60 times more for just three programs than Congress spent on all pork projects.

Even if we eliminated all of the waste along with programs like NASA and foreign aid, it wouldn't balance the budget. Even eliminating a vital constitutional function like the Department of Defense couldn't pay for the problems of Social Security, Medicare, and Medicaid.

MYTH #3: We can tax our way out of the runaway entitlement spending problem.

FACT: This isn't a revenue problem. It's a spending problem. Raising taxes on families and businesses to pay for entitlements can only make matters worse.

To pay for this runaway entitlement spending through taxes, tax rates would need to be raised to shocking levels. According to the Congressional Budget Office, Congress's nonpartisan official "scorekeeper":

[The] tax rate for the lowest bracket would have to be increased from 10 per-cent to 25 percent; the tax rate on incomes in the current 25 percent bracket would have to be increased to 63 percent; and the tax rate of the highest bracket would have to be raised from 35 percent to 88 percent. The top corporate income tax rate would also increase from 35 percent to 88 percent.[2]

In addition to raising individual taxes, corporate tax rates would have to be hiked from 35 percent to 88 percent, but America already has one of the world's highest corporate tax rates. Double it, and our companies wouldn't be able to compete in a globalized economy, and jobs, wages, and opportunity would all suffer.

Besides, who says that Congress would actually use the revenue from the new taxes to pay for entitlements? Unless Congress first reforms how it treats entitlements in the federal budget, it would almost surely do what it has done with the Social Security "trust fund": Spend it.

How to Fix the Problem: Targeted Benefits and Personal Responsibility

At their best, these federal entitlement programs provide a safety net of last resort for those who cannot afford private insurance. At their worst, they replace traditional sources of support like family, charity, and private insurance while creating an unquenchable thirst for ever more entitlements and generational theft.

Probably the greatest improvement in federal entitlements would involve individuals assuming more personal responsibility for their retirement needs. That will require some sweeping changes, which means that we need to build more consensus among Americans about the magnitude of the problem and the solutions that can actually fix it.

In the meantime, we can take steps right now to make these programs work better for the neediest Americans without ultimately consuming the whole federal budget and racking up huge levels of debt. It may take time to move toward an ideal policy, but we can take steps right now for a smarter policy.

The good news is that a growing number of experts across the political spectrum agree that we need serious reform to keep entitlement programs affordable without shackling future generations with our bills. While Congress and the President should consider the details of reform along with the American people, there are some basic steps that they can and should take now.

STEP #1: Raise the retirement age for receiving Social Security and Medicare payments.

This is a commonsense reform. A federally funded retirement age with medical benefits isn't an inalienable right carved into the fabric of the universe. We now live much longer on average than Americans did when Social Security was created.

Currently, the retirement age is set to rise to 67 by 2030. If the retirement age were raised two months each year until it reached 70, it would help to preserve the solvency of these programs. This would still allow future seniors an average retirement of 17 years.

STEP #2: Target Medicare and Social Security to the neediest Americans.

Much of the runaway cost results from the nature of Medicare and Social Security as entitlements: Both are universal by design. That is, nearly all American retirees collect benefits. This makes these benefits popular, but it also means that resources are directed to the affluent and middle class, leaving less than adequate support for those in need. Bill Gates will qualify for subsidized benefits under Medicare, while other future retirees won't be able to afford the program's deductibles and copayments.

This is crazy. Even if Medicare were not devouring an ever-larger share of the federal budget, it's foolish to tax workers and families to subsidize the health insurance of higher-income seniors. Instead of being maintained as a universal right for everyone, these programs need to be redesigned to provide a stable but limited safety net -- like a real insurance policy -- for lower-income seniors.

To start with, reform should target the massive outpatient care and drug benefit (Part B and Part D) subsidies for upper-income families. These programs are not insurance. Enrollees did not "earn" their benefits with payroll taxes. Rather, they are large subsidies for medical insurance and drugs that are funded by taxpayers. They also have unintended consequences. Because they go to seniors of all incomes, they "crowd out" competition from private insurance: Taxpayer dollars are simply substituted for private dollars.

Phasing out these subsidies to upper-income seniors should be one of the first steps in reforming Medicare.

STEP #3: Encourage savings for retirement and private insurance.

Americans have come to expect a certain level of health care and income in retirement as if it were a right without giving much thought to how the bill is going to be paid and who is going to pay it. This entitlement mentality is eroding the American commitment to personal responsibility, and we can't afford it.

Even if we could afford it, this isn't just a fiscal issue. It's a moral issue. It's simply wrong to spend money on ourselves today that others must repay tomorrow -- which is exactly what many of us are doing even though we can afford to pay for it ourselves.

We should expect individuals to take greater responsibility for their basic, routine health care costs and to save for retirement rather than assuming that these are inalienable rights with the costs to be paid out regardless of the consequences to others. The federal government could still provide insurance for the needy -- but as a last resort for catastrophic events rather than as the first resort for routine health care.

STEP #4: Give block grants to states for Medicaid.

Medicaid funding to states should be reformed so that states are not encouraged to overspend. Instead of matching state dollars spent with federal dollars, the federal government should give block grants to states. That would fix this problem.

Also, giving states more wiggle room to craft different Medic-aid packages for different people based on their unique circumstances could save money while improving service. State incentives to help individuals purchase long-term care insur-ance would also greatly reduce Medicaid's fiscal burden.

STEP #5: Change entitlements into 30-year budgeted programs, balanced against other needs.

No reform is more important than this one. For entitlements to be fair, affordable, and transparent, they should not preempt other budget items.

Social Security, Medicare, and Medicaid must be taken off of budgetary autopilot. Instead, they should get rigorous budgetary treatment alongside programs such as defense and education. This would require Congress and the President to measure them against competing priorities, many of which have at least as great a claim on our tax dollars.

Retirement programs need to offer some level of certainty because individuals are planning their futures around them. That's where the need for 30-year budgeting comes in. Congress and the President should have to review the long-term budgets of these programs every five years. Instead of automatic increases, Congress would have to take action to keep the costs within the budget. If it did not do this, automatic adjustments would kick in.

STEP #6: Show the long-term costs of the programs.

The long-run costs of the big three entitlements should be made visible in the budget at all times.

Congress and the President should see the full costs of these programs in the annual budget, not just one year's minimum payment, just as a credit card statement shows the minimum payment and the total balance owed. Likewise, any legislation adding benefits or creating a new program should also reflect the long-term costs. If Congress wants to increase the current $184,000-per-person burden on younger generations, it should be forced to vote on it and tell the American people what it will cost them.

Conclusion: Do Something

If you didn't know about the looming entitlement crisis, you might be alarmed right now, but there's good news: We still have time to reform these programs. It won't happen, however, unless millions of us put pressure on Congress to act in the long-term interests of the American people rather than promising limitless benefits now that have to be paid for with interest by our children and grandchildren.

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