Book Review: In Our Hands

Today is the first of a multi-part series dedicated to the review / analysis of Charles Murray's book In Our Hands, which examines government redistribution plans and offers a new approach to social policy. In many ways, entitlement reform is the most important public policy issue facing Americans today and informed, non-partisan, and objective analysis is required. All options should be on the table.

According to the Dallas Federal Reserve, structural deficits inclusive of unfunded liabilities from Social Security and Medicare equates to roughly 700% of GDP (~$104 trilion compared to ~$14 trillion). It is estimated that “for financing future benefits without future tax increases, the United States and major European countries would be required to generate an annual present value surplus in the order of 8–10% of 2005 GDP over the period to 2050.” If those staggering numbers don't have you convinced, considering the following: if the United States freezes relative age-related spending as a % of GDP at projected 2011 levels, in the year 2040 it is estimated that debt/GDP would still be a staggering 200% (blue line). If it does nothing, debt/GDP will be in excess of 400% (red line), and if it reduces funding by 1% for five years starting in 2012 debt/GDP will be 300% (green line). France, Ireland and the UK are the only other countries where freezing age-related benefits will not reduce debt/GDP under any of the three scenarios...

Source: BIS

  

Estimates vary and depending on assumptions can produce fairly different results. However, what is undebatable is the severeity of the crisis and the implications of doing nothing. Murray's book tries to tackle some of these very questions, and unlike most analyses, he presents an alternative.

There are two tenets upon which the social welfare state was founded: (1) resources are scarce; and (2) the government can allocate scarce resources efficiently. As Murray appropriately acknowledges, the first tenet was largely true for the first half of the 20th century, or at least up until the end of World War Two.

The indigent elderly depend on charity, so let the government provide everyone with a guaranteed pension. The unemployed husband and father cannot find a job, so let the government give him some useful work to do and pay him for it. Some people who are sick cannot afford to go to a private physician, so let the government pay for health care. It turned out not to be simple after all. The act of giving pensions increased the probability that people reached old age needing them. Governments had a hard time finding useful work for unemployed people and were ineffectual employers even when they did. The demand for medical care outstripped the supply. But, despite the complications, these were the easy tasks. Scandinavia and the Netherlands—small, ethnically homogeneous societies, with traditions of work, thrift, neighborliness, and social consensus—did them best.

The second tenet, while the outcomes are charitable in theory, has proven to be too rigid to adjust to modernity.

Traditions decay when the reality facing the new generation changes. The habit of thrift decays if there is no penalty for not saving. The work ethic decays if there is no penalty for not working. Neighborliness decays when neighbors are no longer needed. Social consensus decays with immigration. Even the easy tasks became hard as time went on.

The moral hazard carte-blanche entitlement programs have created over multiple decades has only exacerbated the fragile foundations of America’s entitlement society, and by the 1980s it was clear that government failed, resulting in a twisted irony of sorts. As throughout history, the welfare state, particularly in an open society as complex and vast as the United States, results in a multi-front war of negative feedback loops, eventually leading to the destruction of the policy, and potentially the State. The first thing to go is “the traditions of work, thrift, and neighborliness… [which] spawns social and economic problems it is powerless to solve leading to inevitable insolvency.”


In order to combat insolvency, which is already the case even if the political class doesn’t want to acknowledge it, Murray proposes the elimination of entitlement program payments to individuals which are to be replaced by a $10,000 per year cash payment to anyone over the age of 21. The concept draws on Milton Friedman’s “negative income tax” as proposed in the early 1960s to eradicate poverty which essentially gave a cash payment to those under the poverty line equal to the difference between their income and the aforementioned poverty level. The logic followed that the opportunity cost of a direct cash payment would be less over the long-run when compared to administrating a “complicated welfare system”. Simplistically, Murray’s Plan (as we’ll call it) adheres to the same logic.

The Plan has six major components.

1. Each citizen will be given a Passport (the same as used today when traveling) and will ensure program eligibility.


2. The $10,000 payment will be deposited electronically into a previously established bank account, as set-up by the individual.


3. Earned income up to $25,000 will not be taxed, with a 20% surtax levied on earned income between $25,000 - $50,000 (eg, [$30,000 - $25,000] * 20% = $1,000 tax) up to a maximum of $5,000.


4. There is no Marriage Penalty.


5. Payment should be indexed to either median personal income or inflation.


6. The elimination of most “transfer” payment programs (ie, Social Security, Medicare, etc).

This is merely an introduction and an overview of Murray’s first chapter. There are many questions that arise, particularly at first glance. It will be interesting to see how Murray handles the legal and political aspects of such a drastic overhaul. That said, it’s important to appreciate that Murray, rightly or wrongly, is approaching this debate from two perspectives: 1) government’s role is limited and should be focused on equality of opportunity, not equality of outcomes; and 2) “here’s the money. Use it as you see fit. Your life is in your hands”.

Link to PDF of entire book (or you can buy it for $20): http://www.aei.org/book/846