One way to explain certain economic realities is to imagine a hypothetical society without money. Suppose we could forget, for a moment, the costs of transacting without money; all exchanges, whether on spot or deferred, would be paid directly in goods and services. In effect, this is a barter economy. In such a society, the scarcity of things with economic value would be more evident; it would be more difficult, for instance, for people to get confused about the consequences that follow (eventually) from government officials promising to give voters more than can realistically be raised in taxes, now or in the future. If in a beach town with a mile of waterfront, the mayor promises to give each of the thousand families living there three yards of waterfront to build a tent on for the summer, it is clear that some promises are going to be broken.

　　Entitlements, in particular the promises to pay pensions and health services by the government, are the most important driver of fiscal deficits and the accumulation of public debts, as shown in a recent study by Dominik Lett. He explains that “by 2036, social security, Medicare, Medicaid, and interest costs will account for 73% of total federal spending, consuming nearly 100 percent of all of federal revenue.”

　　Those debts, in a monetary society, do not change the nature of the disequilibrium by which they are generated: the state collects fewer resources than are necessary to pay for all actual goods and services that the government transfers to the beneficiaries of the entitlements.

　　Working taxpayers are encouraged to think of themselves as “lending” money to the government to finance future benefits, but instead of the government investing those payments to generate the needed resources, those “loans” are simply consumed by today’s retirees. This creates the monetary disequilibrium we experience today.

　　Think now about bondholders. Savers believe that the instruments of public debt they own constitute wealth, even though that wealth has already been consumed and not invested.

　　Distortions in interest and exchange rates follow from this disjunction. Either the wealth exists, or it does not, and at some point in the future, every society that creates false rights will have its day of reckoning. Unless something is done, it will be no different for the United States.

　　Accordingly, one of the most pressing priorities for US policy today ought to be a comprehensive entitlement reset. The current system creates an illusion of wealth, entrenches rent-seeking, and makes piecemeal reform politically impossible.

　　This year, I turn 65, and although I am not planning to retire anytime soon, there is always that irresistible urge to check how much Social Security I will collect when the time comes, and to consider when to apply for Medicare. 

　　The proximity of those events, on the one hand, makes me feel some uneasiness when I read about proposals to reduce the benefits of retirees who have other sources of income. After all, I consider myself “entitled” to those benefits, under the current rules of the game, and regardless of the arguments about the nature of the entitlements, or their original purpose, I simply feel that it is unfair if those “promises” are not honored by society. It seems obvious that most Americans share that perception that a sudden change of that sort would be unjust, and since we still live under a representative government, the political conditions strongly militate against such a default. It would create an unimaginable political uproar.

　　On the other hand, I am not exactly comfortable reading credible reports showing that most Americans, except those with the highest earnings, are not paying into Medicare as much as they will receive from it. That seems to me another kind of unfairness of our current “social contract.”

　　I assume that most Americans will agree with me that it is morally wrong not to receive what is owed to you, and it is similarly wrong to receive more than what you paid for.

　　But is that really the case? With all the inroads that collectivist ideologies have made in the US in recent decades, is it still true that most Americans would see it as wrong for the US Government to use its coercive powers of taxation to take from Paul to give to John?

　　I venture to say that even today, with all the hype about Socialism, the majority of voters would frown on a program whose primary purpose is income redistribution, and whose end is to reduce inequality between people who are already materially comfortable, and not to satisfy an absolute need of someone below the poverty line.

　　Mind you, it is one thing for the community to pool resources to guarantee that people who cannot take care of themselves for no fault of their own have access to basic needs. It is a completely different thing to provide goods and services to some people paid for by others through their taxes, simply because those beneficiaries make less than the payers. In addition, I would guess that most voters, if they think about it, will not support income transfers that do not factor in the reasons why the beneficiaries have failed to provide for themselves. Most Americans would agree that mercy requires them to assist their compatriots who are hard-pressed widows, orphans, or people with serious disabilities. It’s quite another to supply food, shelter, and health care to able-bodied people who choose to play video games all day instead of seeking gainful employment. 

　　The lessons of history show that societies that do not adjust to the circumstances of new times will eventually break and succumb to inaction or inadequate action.

　　As I have framed the problem so far, the entitlement reform problem is a political one based on ethical considerations.

　　However, the nature of our political arrangements makes reforms to entitlements all but impossible. Political representation is mostly based on the interests of different constituencies. We can expect elected officials on the left and on the right to be as coldly calculating as corporate interests lobbying for subsidies and tariff protections, or as teachers’ unions lobbying for their corporate interests, even if they come at the detriment of students’ education, as evidenced by their most recent initiatives.

　　When all interest groups are combined, this creates a collective action problem. Every group in society will resist any single proposal that seeks to reduce its expected benefits. Most groups have their own advocates and representatives, tasked with ensuring that they don’t lose their particular share. They will ask themselves: Why should we give up our benefits when so many other groups in society receive government transfers?

　　As said by Frederic Bastiat, The state is the great fiction through which everyone endeavours to live at the expense of everyone else.

　　It’s a conundrum. Reform is clearly needed, but piecemeal reform will never fly. However, the American system of government was designed to slow radical reforms and allow only those that enjoy broad consensus.

　　It seems evident to many, me included, that our constitution became too rigid, and the channels for constitutional reform too narrow, if open at all. The lessons of history show that societies that do not adjust to the circumstances of new times will eventually break and succumb to inaction or inadequate action.

　　Theoretical and fanciful as it may initially sound, the only proposal I can conceive that might possibly reach a broad consensus, putting the country back on a path of fiscal discipline and political concord, would be one that is perceived as fair by the citizenry as a whole. That is what may be called an “entitlement reset.”

　　The idea is simple: First, let us replace all transfer programs with a single, means-tested cash transfer that would put those in need above the poverty line.

　　Secondly, regarding all pensions and other entitlements above the minimum, let us recalculate the actual contributions made or expected, and limit the benefits accrued or expected in accordance with actuarial charts.

　　If that is not delirious enough, I think that fairness requires that such a “reset” must involve all transferences at all levels of government, encompassing any benefit provided by state and local governments.

　　Yet another complication is that, within the government bureaucracy, most entitlement programs have powerful constituencies opposed to their termination or even reform. Actually, I venture to say that those are the most powerful vested interests opposing any reform. The disparity in benefits and perquisites between public servants and workers in the private sector tells you all you need to know about the political power of that constituency.

　　It is not the only one, however. The political elites gain most of their power from their position as brokers of public funds. Any measure that would reduce their capacity to decide winners and losers in the rent-seeking game has little chance of gaining their support. Intellectuals and artists instinctively understand that they will have less clout in a society that relies less on political decisions and more on individual ones. Their power is derived, primarily, from their capacity to shape public opinion. In a society in which more important decisions are taken at the individual level rather than at the political level, the power to manipulate public opinion is relatively less valuable. As the study of public choice teaches us, concentrated interests and dispersed costs do much to explain why and how distortions in “political exchanges” are perpetuated, as in the ruinous fiscal path we find ourselves on.

　　Having said all that, there is also something to be said for virtue, and a public-spirited willingness to make sacrifices for the sake of future generations. In many ways, our political system was designed to economize in virtue, but a modicum is still necessary for it to function. After all, many features of our constitution still stand, with limited and representative government, checks and balances, and the rule of law, thanks in no minor part to the moral compass of many voters and other political agents.

　　So, let me conclude this quixotic charge against the windmills of fiscal decadence. Whatever their personal interests, Americans need to recognize their peril. Once the limits of infringements on private property rights are lifted, the Federal government can transfer income from all to the most politically powerful groups in society, and fiscal recklessness becomes the norm. Political polarization accelerates. To put it bluntly, the deterioration of our finances threatens the survival of the polity.

　　The only solution I can see to these problems is to address them all at once; otherwise, the necessary consensus to act will not be achieved.

　　Unless someone comes up with a better idea for breaking the political gridlock that prevents piecemeal reform, the call for an entitlement reset may at least serve as a rallying point to bring together those concerned about the countrys future.