Monday, March 14, 2011

Atlas Twitches: Is America Becoming A Welfare Nation?

(Editor's Note: Considering the previous post, and the liberal knee-jerk reaction of most of the commenters, I thought the two editorials below — one from the well-respected business news media, Investors Business Daily, and other, from the business publication, Fast Money, were very telling. Read and decide for yourself.)
Investor's Business Daily Editorial
Posted March 9, 2011

Entitled: More than one-third of all wages and salaries in this country are actually government handouts. We should be alarmed that we've become a nation of dependents.

Using data mined from the Bureau of Economic Analysis, TrimTabs Investment Research has found that 35% of wages and salaries this year will be in the form of a government payment.

That's up sharply from 2000, when it was 21%, which is more than double the rate — 10% — of 1960.
The payouts are primarily Social Security and Medicare benefits, and unemployment checks. But they are not limited to those programs.

In any case, we're seeing before us a disturbing trend. A society can't survive moving in this direction.
The ratio of producers — those whose wages and salaries aren't drawn from the public trough — to non-producers, who consume wealth, needs to be much higher.

One way to do this: spread the tax burden more equitably across incomes.

Today, more than 97% of federal income tax receipts are paid by the top 50% of income earners.
The bottom 50%? They pay less than 3% of the taxes, making it a truly privileged class because many of its members get to live at the expense of others.

The bottom half of earners pay less of the federal income tax burden each year while the top half pays more. How long can such a ruinous set of affairs continue? When will the truly productive grow weary of the burden of holding up others and go on strike, as they did in Ayn Rand's "Atlas Shrugged?"

We know, thanks to TrimTabs, that in Britain 44% of wages and salaries are from the public fisc. So, yes, it can get worse. But that'll be of little consolation if America follows Britain over the cliff.

To avoid the inevitable decline, Washington has to change the policies that have gotten us where we are — and soon. Tax rates need to be lower and flatter.

Punishing the rich with higher rates and rewarding the bottom half with lower or no rates violates the constitutional guarantee of equal treatment under the law.

It also creates unnecessary tensions between classes, which itself goes against the American grain; establishes a set of perverse incentives that hurt wealth creation; and offends the streak of independence from government that helps define our exceptionalism.

Policymakers will have to fix the entitlement problem, too. Americans have paid into Social Security and Medicare and deserve to get a return on their "investments." But entitlements will break the federal government and the private economy if they continue as is.

Let the private sector solve this problem. It can do it.

Decades of daft policies can't be turned around in a single session of Congress, of course. But the repair has to start soon. The longer lawmakers wait, the closer we get to the edge.

Welfare State: Handouts Make Up One-Third of U.S. Wages
By: John Melloy Executive Producer, Fast Money
Published: March 8, 2011
Government payouts — including Social Security, Medicare and unemployment insurance — make up more than a third of total wages and salaries of the U.S. population, a record figure that will only increase if action isn't taken before the majority of Baby Boomers enter retirement.

Even as the economy has recovered, social welfare benefits make up 35 percent of wages and salaries this year, up from 21 percent in 2000 and 10 percent in 1960, according to TrimTabs Investment Research using Bureau of Economic Analysis data..

"The U.S. economy has become alarmingly dependent on government stimulus," said Madeline Schnapp, director of Macroeconomic Research at TrimTabs, in a note to clients. "Consumption supported by wages and salaries is a much stronger foundation for economic growth than consumption based on social welfare benefits."

The economist gives the country two stark choices. In order to get welfare back to its pre-recession ratio of 26 percent of pay, "either wages and salaries would have to increase $2.3 trillion, or 35 percent, to $8.8 trillion, or social welfare benefits would have to decline $500 billion, or 23 percent, to $1.7 trillion," she said.

Last month, the Republican-led House of Representatives passed a $61 billion federal spending cut, but Senate Democratic leaders and the White House made it clear that had no chance of becoming law. Short-term resolutions passed have averted a government shutdown that could have occurred this month, as Vice President Biden leads negotiations with Republican leaders on some sort of long-term compromise.

"You've got to cut back government spending and the Republicans will run on this platform leading up to next year's election," said Joe Terranova, Chief Market Strategist for Virtus Investment Partners and a "Fast Money" trader.

Terranova noted some sort of opt out for social security or even raising the retirement age.
But the country may not be ready for these tough choices, even though economists like Schnapp say something will have to be done to avoid a significant economic crisis.

A Wall Street Journal/NBC News poll released last week showed that less than a quarter of Americans supported making cuts to Social Security or Medicare in order to reign in the mounting budget deficit.

Those poll numbers may be skewed by a demographic shift the likes of which the nation has never seen. Only this year has the first round of baby boomers begun collecting Medicare benefits —a nd here comes 78 million more.

Social welfare benefits have increased by $514 billion over the last two years, according to TrimTabs figures, in part because of measures implemented to fight the financial crisis. Government spending normally takes on a larger part of the spending pie during economic calamities but how can the country change this make-up with the root of the crisis (housing) still on shaky ground, benchmark interest rates already cut to zero, and a demographic shift that calls for an increase in subsidies?

At the very least, we can take solace in the fact that we're not quite at the state welfare levels of Europe. In the U.K., social welfare benefits make up 44 percent of wages and salaries, according to TrimTabs' Schnapp.

"No matter how bad the situation is in the US, we stand far better on these issues (debt, demographics, entrepreneurship) than other countries," said Steve Cortes of Veracruz Research. "On a relative basis, America remains the world leader and, as such, will also remain the world's reserve currency."


  1. Bruce Anderson12:05 PM

    When my parents fully retired and started receiving SS checks I asked them what it was like to be on the government dole - they didn't react positively to my question.

    I am unimpressed with arguments that parse our collection of taxes into different categories to make a point, nor using the argument that the top income earners pay way more taxes than the lowest income earners.

    Of course they do.

    First, include SS payments when we talk Federal tax collections. Then, look at the amount of money the top folks receive in income each year compared to the the lowest folks.

    I am sure that someone like Bill Gates, for example, pays an amount of taxes that would represent hundreds, if not thousands, of lower income folks taxes.

    Our "progressive tax" rates are a factor for sure, but if instead we simply set a flat rate, including SS, for everyone the points these folks make would not change appreciably.

    There are four solutions then to solve this "problem":

    1. Reduce or eliminate SS payments dramatically.
    2. Reduce or eliminate unemployment payments dramatically.
    3. Combine federal tax and SS taxes and set a simple flat rate.
    4. Reduce government spending, particularly entitlements, dramatically.

    What is Congress doing right now, republicans and democrats alike? Fiddling around the edges.

  2. Bruce,

    Perhaps your parents didn't take kindly to the suggestion they are on the "government dole" because they had spent their entire working lives paying into SS, and viewed it more as a withdrawal on a savings account they had worked a lifetime to accumulate. And since most people rarely draw out, anything near what they pay in, I can sure see how that comment might irritate them.

    But we do agree on one "solution" you presented — Alternative #4.

  3. Bruce Anderson2:30 PM

    Actually, since I manage their accounts - I know what they paid in compared to what they're receiving - which is frankly a tremendous return on investment.

    You and I know it isn't a savings account. Ultimately I told my dad to call me when he'd burned through his money and was using "mine". Many years later he did in fact call me.