Notebook, 2 September 2012: On Corruption & Entitlement Spending

Barry Ritholz is always an informative read. This morning, he picks up on a debate published in WSJ, “Are Entitlements Corrupting US?” presenting the pro and con views. (Pro = ‘Yes, entitlements run counter to American individualism’ while Con = ‘No, entitlement spending is an expression of the social contract in the US’)

While William A. Galston gets it right, Eberstadt misses the point entirely in two different ways.

While I could go on and on about the state of affairs before Social Security kicked in, that fully 80% of American elderly lived and died in abject poverty in Amerika the Greatest Nation on Earth, that’s not the point of my reply here today, because the fact of the matter is, it makes good economic sense to redistribute wealth in this manner. I cannot say nobody is getting rich off of Social Security, because the fact is, that money goes immediately back into the economy. If you want to raise food prices, then remove the implicit market support which those millions of retirees spend their Social Security checks on. The same goes for medicine. Our sky-high costs of medical care are largely the result of entitlement spending, but it also derives from a lack of regulation present in every other advanced economy worldwide. Removing government support for things like hospitals and clinics would, I feel certain, drive many of these to close very quickly and I can think of no better way to undermine the quality of medical care in the US than to restrict it to those few who can afford treatment. Neither does it make sense to take people out of the labor force who must, as a result of illness or injury, take on the role of caregiver.

Consumer spending comprises 70% of the US economy, and if entitlement spending is a big chunk of this, then I really do not want to contemplate what would happen to all of us, including Nicholas Eberstadt, who calls us to remember a rugged individualism which never really existed.

Entitlement spending simply makes good business sense. Entitlement spending has been a part of the Great American Business Engine Jamie Dimon likes to trot out and I wonder if the post war economic expansion in America would have been possible without it. At least to the degree that it did. People like Mitt Romney, Eberstadt and Dimon love to present us with a mythological veneer which frankly doesn’t stand up to closer scrutiny, as the just the latest round of financial scandal illustrates.

As for corruption and the American character, let me introduce you to William Duer, signer of the Articles of Confederation and as such one of our illustrious founders. He was also a crook. Taking advantage of insider information gained through his contacts in the newly formed Treasury Department, Duer built a huge position in treasury paper and went long on bank shares (using another’s money). Others began to hop on the Duer bandwagon, and when the market began to slip, an overextended Duer could no longer meet his obligations and this became the proximate cause of the Panic of 1792. They had run afoul of other rich American scoundrels, the Livingston family, who had built a short interest in banks Duer was invested in and nudged the market by withdrawing their considerable deposits in the banks they’d shorted. Alexander Hamilton used the power of the Treasury to stabilize the markets and complete ruin was averted.

Hamilton himself said at the time, “. . . there must be a line of separation between honest Men & knaves, between respectable Stockholders and dealers in the funds, and mere unprincipled Gamblers.”

Sounds awfully familiar. For a long time, I have been saying the American “system” rewards cheaters and crooks and there is more than enough evidence to suggest that wealth’s dishonesty and crooked dealing is the hallmark of the American success story, rather than the pie-in-the-sky dreaming of Eberstadt’s individualism.

One Last Observation

The current crop of 20-somethings I have come into contact with (through my contact with the Occupy movement) is the most entrepreneurial generation I have ever seen. Partly, I feel, due to the diminishing outlooks everyone sees ahead, nonetheless, bright, engaged and articulate self-starters, any these kids are an impressive lot. I have personally met many who would be great hires (some with impressive CV’s already) in any institution they could believe in. I wouldn’t like to bet against them.


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