Mises Daily: Wednesday, June 05, 2013 The High Cost of Free

by Loyd S. Pettegrew and Carol A. Vance Why does a large portion of the population choose not to work when there are man y jobs available? The answer is simple. If you can receive 2-3 times as much mon ey from unemployment, disability, and/or welfare benefits (subsidized housing, f ood stamps, free cellphones, etc.) as you can from a temporary or part-time job, and live a life of leisure, why work? In 2011, the U.S. government spent over $ 800 billion[1] on this welfare, exceeding expenditures on Social Security or Medic are. In the Denver arena where Mr. Obama gave his DNC 2008 acceptance speech, a woman in the audience became overwhelmed by the speech and said that she no longer ne eded to worry if she could make her car or mortgage payments because he would ta ke care of it for her. In Cleveland, a woman claimed that she was going to vote for President Obama again because he gave her a free cellphone (along with a lit any of other entitlement giveaways). Before you growl, you should know that the free cellphone program was instated by President Bush in 2008 through the FCC s Un iversal Service Fund. Fees for these free cellphones are paid by all telecommunica tions service providers out of the revenue received from their paying customers. Despite the political rhetoric over the past half century, entitlements were ac tually highest during Republican administrations. The political allure of free i s bi-partisan. The political allure of free is so strong that an alarming number of people choo se to become wards of the entitlement/welfare state rather than captain their ow n destiny. Economist Nicholas Eberstadt of the American Enterprise Institute bel ieves that Americans have become a nation of takers, threatening the self-relian ce that has long characterized our national psyche. Eberstadt (2012, p. 4) prese nts data showing that entitlement payments to Americans, since 1960, have risen annually by 9.5 percent. He argues that over the past 50 years the ever-increasi ng array of transfer payments to Americans have risen 727 percent. In 2010 such payments alone totalled $2.3 trillion with Social Security (for old age and disa bility) accounting for 31 percent, Medicare 24 percent, Medicaid 18 percent, Inc ome Maintenance 12 percent, other giveaways (free cell-phones, support for a bro ken education system, housing, the arts, etc.) 8 percent, and Unemployment Insur ance 6 percent (Eberstadt 2012, C1-2). This has resulted in 49 percent of Americ an households receiving one or more government transfer benefits (Eberstadt 2013 ); this amounts to 18 percent of all personal income and a burden of $7,400 for every American. The Balance Sheet on Government Giveaways Our economic analysis shows that retirees who worked for 40 years and then live 20 years past retirement will receive more than twice what they, and their emplo yers, contributed over their lifetime of working. Only retirees who survive a de cade or less after their retirement do not take more out of Social Security than they contributed. Most people will agree that the retirees should receive his/h er Social Security benefits at retirement. But with people living longer, who wi ll pay for all the additional benefits now promised? Most people who have not do ne their homework (including Congress) fail to realize that the numbers for Medi care benefits exceed those for Social Security. Since 1965, Medicare required le ss than a 3 percent contribution from a worker s gross wages, yet most people rece ive over $250,000 in medical benefits before reaching the age of 74, assuming no catastrophic illness. You can do the math on your own wages, assuming a lifetim

e salary of $100,000 per year for all 40 working years, a worker will have paid in only $120,000 into the Medicare system. Congress, after agreeing to take care of everyone after retirement for the rest of their lives, has broken a sacred t rust and used incoming contributions to fund other government expenditures, inst ead of letting the contributions build over the past 50 years. The Political Allure of Free Runs Parallel with Tough Economic Times The U.S. Census data show that in 2000 the percentage of Americans existing at o r below the poverty level was 11.3 percent or 31.1 million people. The 2010 cens us showed a 75 percent increase in reported poverty by Americans rising to 15.1 percent or 46.2 million people from the previous census. As with most government statistics, there is ample room for politicized error. For example, when people get laid off from work, there is reason to believe that many join the undergrou nd economy and do not report their income. Rahn (2009) reports that 26.5 million households are either unbanked or underbanked (from FDIC data) and that while t he economy may be improving slightly, the growth in the underground economy shou ld be decreasing but isn t. Another contributing factor is a measure called labor force participation. It is the total work force that includes people working and those actively looking fo r work as a percent of the noninstitutionalized population. The Reason Foundatio n s Randazzo (2012) points to a circularity problem when the unemployment rate goes down the labor force participation rate should rise. After the recession ended i n 2009, both rates are tracking in the same direction the labor force participatio n rate was 64.9 percent, the lowest since 1981and the unemployment rate was 10 p ercent. In 2012 the labor participation rate had dropped to 63.4 percent and the unemployment rate also dropped to 7.8 percent. Randazzo suggests this is becaus e participation in the labor force has been declining for over a decade. Despite President Obama s recent crowing about jobs, the drop in unemployment has factual ly less to do with the creation of real jobs than with the fact that more Americ ans are dropping out of the workforce for the allure of free things from their g overnment. Randazzo believes lower workforce participation will be the labor nor m of the future. Why work if you can t find a comparable job to what you had before you were laid o ff and the government will give you free living expenses? We have analyzed what a single parent with three children is eligible to receive from the state and fe deral governments in a given year, working a part time job at minimum wage livin g in Florida (a relatively benefit-frugal state). Free and subsidized benefits i nclude: housing, welfare, utilities, telephone, school breakfast and lunches, ch ild care, medical care, food stamps, commissary food, prescription and non-presc ription medications, education, education testing, and refundable tax credits. A ll of these benefits are in excess of $47,000 per year, exceeding the poverty le vel in Florida by 200 percent. Researchers at the National Bureau of Economic Research cite studies suggesting that in difficult economic times approximately 30-40 percent of those applying f or disability would return to the workforce if the economy were better and disab ility were not an available option (Autor and Duggan 2006, p. 19). Choosing Disability over Work Many people add to their free government benefits through working in the undergr ound economy and pay taxes on none of it. Others choose another free government benefit. Since mid-2010 (the date when millions of U.S. citizens exhausted their 99 weeks of unemployment insurance) the number of workers on Social Security Di sability Insurance (SSDI) benefits rose by 22 percent, an increase of 2.2 millio

n people. Workers with disability now get nearly a 20 percent chunk of the total Social Se curity benefits budget and the number has increased (Kowalski 2012). Kowalski re fers to a government study that shows that 99 percent of people who have been gr anted SSDI benefits remain on this entitlement the rest of their lives. Economis ts David Autor and Mark Duggan (2006) argue that the spiral in SSDI claims by th e non-elderly adult population is the result of three main factors: (1) Congress has dropped the threshold for receiving disability benefits (inability to funct ion in a work-like setting); (2) Congress has increased the level of benefits fo r recipients giving people more incentive to apply. (3) Congress increased the n umber of people in the workforce covered by SSDI (Autor and Duggan 2006, p. 8-11 ). The allure of free has made the political class very proud of its accomplishm ents in creating a welfare-dependent state. When government programs are seemingly free, recipients tend to use them more. M edicare is a perfect example, where pharmaceutical and diagnostic tests multiply with the change in new benefits (Pauley 2004). Research shows that even when co ntrolling for age and medical condition, if medical care is a bargain, people on Medicare as opposed to people on private insurance utilize 50 percent more care (Matthews and Littow 2011). They point to the fact that especially when Medicar e patients have supplemental care in the private sector, their out-of-pocket exp ense nears zero, encouraging even more utilization. They conclude: Since private insurers are much better at controlling utilization and reducing fraud, why not turn to the private sector to resolve Medicare s excessive utilization? (p. A16) Mises (1990) analyzed this double-edged sword of government dependency and the c ost to human value. Today, George Gilder (2012) echoes this risk by pointing out that 70 percent of government discretionary spending devalues human life by pay ing people to be disabled, sick, reproduce, be unemployed, unmarried, retired, p oor, homeless, hapless, or drugged. He believes these supposed problem-solving p rograms accomplish nothing beyond expanding themselves by spreading dependence a nd tragic waste and saying: Reforming them [the first rule of bureaucracy (Petteg rew and Vance 2012)] is all upside. Comment on this article. Loyd S. Pettegrew is a tenured full professor of communication at the University of South Florida, where he teaches and studies public influence and also runs h is consulting firm, Decision Strategies Group, Inc., which performs research and training for corporations. Send him mail. See Loyd S. Pettegrew's article archi ves. Carol A. Vance: Carol A. Vance, Esq., CPA is an instructor in Tax & Business Law at the University of South Florida, Sarasota-Manatee. She also is a practicing C PA and tax attorney for high new worth clients, holding licenses for both in Flo rida and California. Send her mail. See Carol A. Vance's article archives. You can subscribe to future articles by Loyd S. Pettegrew via this RSS feed.

Notes -------------------------------------------------------------------------------The original title of this article was simply The Allure of Free but as we read th rough Dan Ariely s Predictably Irrational: The Hidden Forces that Shape Our Decisi ons, we discovered two references to the allure of free. To avoid any accusations of plagiarism we have thus added the term political to our title with this recogni

tion of Ariely s earlier use of the phrase.

[1] This excludes Veterans welfare programs that Congress requested be removed fr om the Congressional Research Services study which would bring welfare spending in 2011 to over a trillion dollars. http://budget.senate.gov/republican/public/i ndex.cfm/files/serve/?File_id=0f87b42d-f182-4b3d-8ae2-fa8ac8a8edad References -------------------------------------------------------------------------------Autor, D. H. and Duggan M. G. (2006). The growth in the social security disabilit y rolls: A fiscal crisis unfolding, Journal of Economic Perspectives 20, no. 3 (S ummer), 71-96. Eberstadt, N. (2012). American character is at stake. r 1-2, pp. C 1-2. Wall Street Journal, Septembe

Eberstadt, N. (2013). Yes, Mr. President, We Are a Nation of Takers. ournal, January 25, pp. A 13. Gilder, G. (2012). A real Regan lesson for Romney and Ryan. ugust 31, p. A 15.

Wall Street J

Wall Street Journal, A

Kowalski, A. (2012). Number of US workers claiming Social Security Disability Ins urance climbs 22% in 5 years. Bloomberg News, May 6, 2012. http://bangordailynews .com/2012/05/06/business/number-of-us-workers-claiming-social-security-disabilit y-insurance-climbs-22-in-5-years/

Matthews, M. and Litow, M. (2011). Why Medicare patients see the doctor too much: Relying on unelected bureaucrats, such as Obama Care s independent payment adviso ry board to ratchet down Medicare price controls won t control overutilization. Wal l Street Journal, July 11, p. A16. Pauly, M.V. (2004). . 1, 113 122. Medicare Drug Coverage and Moral Hazard, Health Affairs 23, no

Pettegrew, L. and Vance, C. (2012). arch 12.

The Seven Rules of Bureaucracy.

Mises Daily, M

Randazzo, A. (2102). High unemployment the new normal. reason.org/news/show/1012895.html

Reason.org, May 14. http://

Rhan, R. (2009). The underground or black economy is rising, and the fault is mainl y due to government policies. The Washington Times, December 9. http://www.washin gtontimes.com/news/2009/dec/9/new-underground-economy/?page=all

Mises, L. von (1990). Economic calculation in the socialist commonwealth. In Hayek , F. (Ed.) Collective Economic Planning, Friedrich A. Hayek, ed. Clifton, N.J.: Kelley Publishing, 1975. Reprinted from the original translation by the Ludwig V on Mises Institute.

http://www.mises.org/daily/6446/The-High-Cost-of-Free ----------------------------------------------------Comments RagTagRebel The government does a great job turning basic safety nets into luxurious hammock s, at everyone else's expense of course. David Charles This is a very enlightening article, but I must differ with the conclusion that career working people withdraw far more dollars (in purchasing power) from regul ar Social Security benefits than they ever contribute. The author ignores the fa ct of cumulative dollar depreciation over ones working years (compounded year by year) and also the compounded return that would occur if these contributions wo uld have been invested privately (or even in government bonds) over that same ti me frame. I was tired of hearing this repeated assumption (of taking more than I had ever contributed) , so I did some year by year rough calculations to confir m what I suspected (that I would NEVER get back in purchasing power what I had c ontributed). My calculations led to THIS conclusion: Over the 40 years of my working career almost everything in the way of consumer items being purchased increased by at least a multiple of 10 (10 times as much t oday as in 1960 - examples: loaf of bread- .30 vs $3,00, a basic car - $2,000 vs 20,000, gasoline .30 a gal vs $3.00, a basic house $12,000 vs $120,000 , etc . etc.) You get the picture ! As well as this erosion of purchasing power year by year, my contributions increased year by year as the Social Security Tax (now kn ow by various names as "payroll tax" ) rate also increased to keep the revenue s tream it created growing ahead of the dollar devaluation curve (government calls this "inflation" but I call it what it actually is). Since this System - Social Security was originally "sold" to we working folk as "old age insurance" , the factor of compounding interest on these funds should also come into play, since we COULD have invested this flat tax money OURSELVES for our old age and got som e kind of investment return. Even using an average US Bond return, these year by year compounded amounts coupled with the year by year dollar "inflation" amount ed to over 1 1/2 million value in current dollars (for me) - MORE than enough of a "nest egg" to cover the income payments needed to pay the Social Security ben efits for the rest of my life without even touching the principle in that accumu lated "nest egg" . I'm sure you can do the figures for an "average" worker also. The chief problem(s) with Social Security are NOT with the benefits that career workers (of approximately 40 years) contribute and collect, but of (1) the requi rement of only 10 years in the working force (40 quarters) to be eligible for fu ll benefits (2) the failure to gradually raise the age requirements as life expe ctancy has increased (for both "early" & "full" benefits) , and (3) the systemat ic erosion of these funds for other pure welfare purposes (in addition to the fa ct that they were thrown into the General Fund by LBJ & Democrat legislators in the '60s to fund the Viet Nam War along with the "Great Society " programs. We n ow know that these $$$$$$ are simply debt, and do not & will not exist until the y are needed for payments. Anyway, Do NOT be under the illusion that we "old fol ks" are getting more than "our share". If we had be allowed to buy ACTUAL Insura

nce, we would be "sitting pretty" today and NOT have to be "dependent " on the g overnment to at least get our "contributions" (taxes) back. The original Social Security System IS NOT and should never be considered as part of the Welfare Sta te. Welfare is when you only TAKE without ever having been forcibly taxed to GIV E. The original idea of "Old Age Insurance" should have been privatized from the start , then these "baby boomers" would not be government dependent now, and in to the distant future, but the federal government NEEDED this type of flat tax t o (guess what) finance a war (WWII) and its "jobs works" programs of the last Gr eat Depression (this was a way of "selling" an across-the-board tax increase for both workers and businesses ) You are completely right in stating that true "welfare" programs ultimately do m ore damage than good because "free" does not exist - someone must be "forced" to pay for goods & services for someone else. Educating and mandating employment a re the ultimate solutions to most of these social problems. Generous welfare onl y breeds more on the dole/ (Same goes for immigration - without getting benefits , the illegals won't come here.) Report Reply 1 reply active 31 minutes ago +1 Vote up Vote down Bogart Good points except 1: The chief problem with Social Security or any government p rogram for that matter is that it is funded by force. People to keep their emplo yment must fund this idiotic system and the product of this is that economic pla nning by the populace has become completely distorted to where the median amount of savings in the fifty plus year old populace is shockingly low, I heard as li ttle as $10000. Like most government programs, Social Security and Medicare were created to address problems that did not exist, the middle and upper class peop le who receive the bulk of transfers from these programs had the best health car e in the WORLD at the time of creation. Report Reply 0 Vote up Vote down Gamble 1 hour ago And then there are those of us who scale back our business because we know our p roductivity will only increase the freeloaders mentioned in the article and feed the bureaucrats. So now, not only do you have free loaders, you have coasters s uch as myself. I only do just enough business every year to survive. Mike From the article: "Since private insurers are much better at controlling utiliza tion and reducing fraud, why not turn to the private sector to resolve Medicare s excessive utilization? This is something I do not understand. Private insurance h as not helped control medical costs. Medical costs continue to skyrocket, as wel l as medical insurance rates (pre-obamacare). Why hasn't the private insurers be en able to control the costs? What's odd is Workers Compensation insurance, whic h also pays for medical bills, has decreased in cost (until recently) over the p ast 10-15 years, yet medical insurance has skyrocketed. There is a huge disconne ct there. How are P&C insurers able to hold down the costs of medical, but healt h insurers not? That's the issue with Obamacare, the issue with uninsured, the issue with medica re, etc. If the cost of healthcare remained inline with most other costs, none o f this would have ever been an issue, but it hasn't. Report Reply 0 replies active 26 minutes ago +1 Vote up Vote down Bogart 24 minutes ago The article points out that large numbers of people are moving from the increasi ngly fascist economy in the USA to the undocumented gray or even black markets. THIS IS A POSITIVE HAPPENSTANCE. The central planners of the USA economy: The Fe d and the US Government Regulatory Agencies are crushing the overt economy. This is all headed for a crash. Fortunately people are dropping out of the overt eco nomy and working in the background. During the crash people will depend on these black and gray economies for their very lives.

Is the central planning in the USA better than that of Argentina, Cyprus, Greece ? No, it is actually more incompetent as the size and diversity of the US econom y give these people a lot more wealth to destroy than in these other places. Rep ort Reply Mike Actually the article points out that more people are on disability insurance thr ough the SSA than ever before. Report Reply 0 Vote up Vote down RPLong 6