Saturday, October 30, 2010

ObamaCare: the political-economy of the entitlement

The above video from Reason.TV draws some startling parallels between the Great Depression new deal programs and the current Obama administration social engineering schemes. (1)

A question posed in the video is: do bold persistent experiments [social engineering schemes] solve problems or merely create a wall of uncertainty for firms which are ultimately made up of households? Among many other factors, a closer look at past entitlements and the newly introduced entitlement of ObamaCare are worth a closer discussion regarding "do they solve problems". In fact, New Deal type social engineering schemes have become so enormously expensive that the unfunded future liability of such programs now stands at +$1oo trillion. That is, from FDR'S Social Security, to LBJ's Great Society programs of Medicare and Medicaid, to present day ObamaCare, politicos continue to promote New Deal type programs when in fact we can not afford such programs. Do these programs make the world a better place albeit at some unaffordable price? Or it short term politico fiction?

New Deal type programs, spending, and the constituency building proposition

Frédéric Bastiat (1859):

“There is only one difference between a bad economist and a good one: the bad economist confines himself to the visible effect; the good economist takes into account both the effect that can be seen and those effects that must be foreseen.”(2)

Regarding a federal budget out of control aka out of control spending, mainly do to redistribution schemes known as entitlements, many media articles and talking heads are posing the question: "..then what will you cut [from federal budget]"? Then comes the redistribution scheme questions and who will take the politically unpopular position to cut entitlements. Obama's Deficit Commission, of course, didn't touch redistribution/entitlements with a ten foot pole.

The root cause regarding reform of entitlement/redistribution schemes being such a hot potato topic [politically unpopular] may well be: the entire entitlement process was purposely set up, in the beginning, and further shaped as a hot potato topic. That is to say, New Deal type entitlements become perpetual as they are purposely shaped to be political hot potatoes that burn all that dare raise the issue of reform.

If one examines the proposition that FDR pushed government spending programs and entitlements in particular as schemes purposely designed as political constituency building through dependency, and that politicians that followed in FDR's foot steps pushed the same constituency building through dependency, then the dependency element in fact did build a constituency (an army of government spending dependents).

"Dependency" becomes an accustom environment. The accustom environment has been shaped as an "entitlement". That is, participants in such redistribution schemes have been convinced they are not dependents upon the system, rather, they have been convinced they are in fact entitled to the system.

When it becomes clear that entitlement-dependency/redistribution schemes need reformed, so clear that elementary math can be used to pinpoint the problem, the problem can't be discussed or confronted because: purposely formed constituency groups, who view themselves as the entitled, will act as a constituency and vote against any erosion of their entitlement due to self interest (or greed turned upside down).

The odd thing is that redistribution of income proponents, although patting themselves on the back that they have created a hot potato that can't be touched, do not realize that the redistribution system created as constituency building through dependency, becomes over time, an economic black hole. Hence in the long run the economic black hole (can you say +$100 trillion of unfunded future entitlements?) destroys the productive capacity of the economy and the system caves in under the weight of redistribution of income via constituency building through dependency. Therefore, the aims of redistribution and any final goal perceived by proponents of redistribution, can never be achieved as the purposely created hot potato is self defeating in that it produces a system that self destructs far short of any perceived goal.

Beyond Hot Potatoes

The New Deal and current social engineering "bold experiments" are no more than central planning programs. That a central authority plans the economy. However, the New Deal and current social engineering plans are failing.

Reviewing F.A. Hayek for a moment, once a centrally planned economy fails, the argument for the continued existence of the centrally planned economy becomes “equality of income”. In the planned central economy equality of income becomes an income distribution scheme. Of course this causes further failure of the centrally planned economy as income redistribution schemes cause a twin disincentive (a disincentive for producers within the economy and the built-in disincentive for the dependent recipient class). The redistribution schemes end in disaster, which Thatcher later noted in one sentence, as you end up running out of other people’s money. (3)

Now let us apply F.A. Hayek to the current situation. Obama’s schemes of central planning spending and social engenerringh have failed. New Deal and Great Society programs are in essence bankrupt. That is, on queue, the abundance promised by proponents of central planning have not come to fruition. Hence the next step would be to argue for the continuation of central planning by beating the drum of “equality of income”. That arguments along the class warfare lines and business bashing lines will be for equality of income and equality of outcome (social justice) through redistribution schemes (or one might say through even more redistribution schemes).

Hayek predicted the stages and current entitlement plans, a eighty year legacy of government intrusion into private sector attempting to centrally plan the US economy, and the current Obama administration social engineering, has reached Hayek's stage one where a centrally planned economy has failed. Now we have arrived at a Thomas Sowell favorite expression: "Then what next?". (4)

How do Constituency Building through Entitlements and Central Planning perpetuate?

Harold Demsetz’s book From Economic Man to Economic System and in particular chapter nine The Contrast Between Firms and Political Parties, on page 135 Demsetz writes: “Dollar voters get what they want from the market place. Ballot voters get less of what they want and get more of what political internal constituencies want”. Demsetz goes onto state “Political parties that win office satisfy the wants of larger constituencies than those that do not win office”. Also keep in mind that “constituencies” is used in a general sense by Demsetz to encompass both external (ballot voters) and internal constituencies (party members). (5)

However, at some unknown but certain point the entitlements and central planning fails. When failure arises the ballot voter (external constituency) sees the hidden agenda and feels betrayed and revolts.

Applying Demsetz to the current voter revolt one might point to “…and get more of what political internal constituencies want”. That what is commonly coined as “over-reach” has a sub component where the internal constituencies are perceived as going beyond what they originally presented to their own external constituencies. Hence in the current political environment the internal constituency is perceived to have had a hidden agenda and alienated the external constituency that depended upon the presented agenda.

Going back to Demsetz statement “Dollar voters get what they want from the market place. Ballot voters get less of what they want and get more of what political internal constituencies want”, we might merge this thought with H.L. Mencken's thoughts (paraphrasing): "good" social programs, through enlightened politico speakers, on grand missionary work, lead the ballot voter (external constituencies) to believe that internal constituency agendas will benefit them. All the while the “benefit” is a mirage. -Or- as H.L. Mencken observed: “.....the worship of Jackals by Jackasses.”


The US ballot voter, the vast external constituency, is seeing first hand that the promotion and implementation of central planning and redistribution schemes by internal constituencies are failing. That central planning through redistribution schemes are more apt to be political constituency building strategies by internal constituencies rather than problem solving strategies or making the world a better place for the vast external constituency.


(1)Reason.TV, 10/28/2010,

(2)Library of Economics and Liberty,

(3)Hayek: His Contributions to the Political and Economic Thought of out Time, Butler and Riggenbach

(4)Applied Economics, Thomas Sowell

(5)From Economic Man to Economic System, Harold Demsetz

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