Tuesday, October 2, 2012

It's the Entitlements Stupid

We have heard that the culprit in our rising debt and deficit crisis is the cost of recent wars.  Yet the numbers simply don't support that notion.  It is a popular, but uninformed, myth.  

This week's Barron's features an analysis completed by Martin Murenbeeld, chief economist of Dundee Wealth.  His research is based on numbers reported by the U.S. Bureau of Economic Analysis (BEA).  Since 1970 entitlement spending has grown from approximately 40% of federal spending to over 60%;  defense spending, on the other hand, has shrunk from just under 40% of spending to under 20% of current spending.  Defense isn't the culprit, entitlements are.

The smokescreen argument launched when anyone brings up the notion of cutting entitlements is that we have a moral obligation to help the poor.  Obviously.  It is our responsibility as fellow citizens.  The question in my  mind is not if but who should do it:  the public or the private sector.  My vote is for private sector charities all day long.

Allow me:  the government takes money from Citizen A to fund entitlement programs confiscating money that Citizen A would otherwise use to buy shoes for his kids, a new car maybe, an energy efficient washer or a weekend at Disneyland.  That spending increases sales and potentially creates jobs at the car company or Disneyland whose employees will in turn consume and create growth in other industries.

Poof!  Suddenly the money has been sucked out of the private sector into the vast bureaucratic wasteland.  And it must be factored into our equation that it costs the government money to collect those funds.  According to Jim Payne in his 1991 The Culture of Spending "for each dollar the federal government recycles through the taxation-subsidy system it wastes more than one additional dollar" (51).  He cites detailed government studies that estimate it costs the government 65 cents to collect a dollar and another 50 cents to spend that same dollar.  Dubbed the "bureaucratic rule of two" the conclusion is that "governmental production of the typical good or service costs twice as much as the same thing produced privately"(208).

Now, some twenty plus years later,  the average government worker earns more than the average private sector worker--a dramatic shift since 1991--so it is not difficult to conclude that the governmental cost of collecting $1.00 no longer creates a mere deficit of 15 cents per dollar but some number greater than that.  For sake of argument though we will leave the number where it was in 1991.

If it costs the government $1.15 to collect $1.00 you tell me how long that business model will survive.  Overhead of 115% is not just unsustainable it demonstrates a willful lack of compassion toward those who depend on the aid.

Most of the charities I have worked with and support operate with overhead well under 10%, a far cry from 115%.

It's a simple as that.