It’s Not Entitlement Spending – It’s Survival Spending

I don’t know what Barack Obama will have to say to America during his second inaugural address, but I certainly hope he does not use a phrase popular in Washington during all this discussion about fiscal austerity. The phrase is “entitlement spending”. There was a time when that phrase was meaningful, when retirees could enjoy Social Security because they paid into the Social Security system all their working lives, and when unemployed workers could collect under the insurance system because they paid premiums for that insurance all their working lives. Those days are gone. The amounts being paid out by the federal and state governments in unemployment compensation, Social Security, food stamps, Medicare and Medicaid reimbursements, welfare, disability claims – they are all components of a new category of government expenditure we need to call Survival Spending.

It’s not that people are no longer entitled to these government payments – they certainly are for some of them, especially Social Security. It is that people are in need of these payments for their survival and for the survival of their family. Survival means being able to afford the minimum necessities of life – shelter, food, clothing, transportation to work, and a modicum of health care. If you’re a parent, you have to be able to afford all these things, plus the cost of schooling, for your children.

No one in Washington spends much time thinking about what survival really means in America. The political mindset is very 1990s – America is the greatest and richest nation on earth, it can accomplish any task it sets its mind to, it has the most powerful military, and so on. It’s easy for politicians in Congress or the White House to continue to think and act like its 1995 or even 2000 – every time they look at the federal budget they see $100 billion moving here or there, Department of Defense budgets exceeding $800 billion annually, and the annual deficit topping $1 trillion. It’s so easy for politicians to think anything is possible when they are beneficiaries of Ronald Reagan’s greatest legacy to America – the illusion that government has unlimited borrowing capacity.

For the moment, the US government does enjoy unlimited borrowing capacity, but do the politicians notice that this is because the Federal Reserve is now buying up to 77% of the federal debt every year, and that it is keeping interest rates close to zero so that the interest cost on $16 trillion of debt seems manageable? Back in 2000, when George W. Bush was taking office, the federal debt was $5.7 trillion – a large but manageable number for which there was enough tax revenue to cover the interest cost even at rates of 4%. Those happy days are long gone. George Bush more than doubled the debt in an orgy of tax give-aways and war spending. Barack Obama has added another $5 trillion to the debt, which is far more disciplined that his predecessor ever was, but he has also presided over the transition into the fiscal trap – the point where a country cannot afford its standard of living unless it keeps its interest rates on its debt close to zero.

Most countries don’t have this luxury – see Greece as an example – but the US still enjoys the benefits of reserve currency status and bond market supremacy, wherein Treasuries are considered the safest investment in the world. Barack Obama has taken advantage of this situation for social purposes – most of his $5 trillion in incremental spending has been for expansion of the food stamp, Medicare, Medicaid and unemployment insurance programs. Yet even he still talks of this as entitlement spending. Not once has he given a speech about the transformation that has taken place in the economy that has placed so many Americans into survivalist mode.

This may be because he has the typical Washington mindset: it is 1995, or 2000 perhaps, and the US is going through a rough economic patch, but eventually we will see unemployment back below 5% of the workforce, we will see job growth of 250,000 or more per month, we will see the GDP grow at its long-term rate of 2.5%, we will see banks lend again and consumption resume its upward path. None of these politicians wants to look at the sharp reality of the present. The government has thrown multiple trillions of dollars of “stimulus” at the economy since the 2008 crash, and the best it can claim is that unemployment is slightly under 8%, and GDP growth is slightly over 1.5%. Of course, therein you see the problem. Government thinks all this money is stimulus, when in fact the recipients are using it for survival, and not on cars, jewelry, or vacations.

Yes, jobs are coming back, but at a rate of 100,000 a month – hardly enough to keep up with natural labor force growth. But that’s not the worst part by any means. Politicians don’t like to confront the fact that the jobs being created do not pay a living wage. Job growth has been largely in low-wage industries like retail, food service, nursing care, and clerical labor. These jobs don’t pay $40,000 a year – a worker is lucky to make even $20,000 a year in one of these jobs. In fact, the largest employer in America – Wal-Mart – pays its average worker $17,000 a year. This is a poverty wage – no one can support a family on such a wage, and it is difficult to support oneself on $17,000 a year. It is no surprise, then, that Wal-Mart workers are the largest users of food stamps in the country, and the largest recipients of Medicaid, which is health care for those in poverty. And it is worth repeating – these are people (2,000,000 of them at least) who have full time jobs.

Wal-Mart is hardly alone in its treatment of its workers. Every major retail outlet and food chain follows the same model of low hourly wages, no overtime, and limited access to benefits. You can call this wage compression or global arbitrage or any number of things, but it has been going on for a very long time, dating back to the start of the Reagan presidency in 1982. The results show up in all manner of government statistics, from a flat-lining of per capita real income since the 1980s, to the extreme discrepancy of wealth that exists in the US, to the soaring cost of health care and education, and ultimately to the fact that 20% of Americans are now on food stamps, which is the nation’s new version of welfare.

Again, the mindset of Washington politicians is that all this is temporary. No one, however, has any plan to turn back the tide of wage compression. President Obama’s attempt to increase taxes on the wealthy turned into a farce when he couldn’t even hold the line on the $250,000 wage level as the base for tax increases on the wealthy. No one has any real plan to bring back jobs that pay a living wage, and how can this happen when large corporations own the Congress? It is so much easier for the politicians to tinker on the edges and ignore the most critical fact of all – there doesn’t exist any capacity for the US to create decent jobs. Government can’t force corporations to double or triple salaries and benefits, and you cannot undo overnight the wage compression that has existed for 30 years.

The brutal fact is that there has been a structural change in the US economy and it is going to be with us for more than just a decade. A sizeable minority of the population is not going to be able ever to support itself or a family. Secondly, this percentage of the population, now one in five Americans, has been growing and shows no sign of stabilizing or shrinking. Thirdly, this percentage of the population represents Third World America, which may seem illogical because many are employed and making around $20,000 a year. This, however, has to be put into the context of the cost of living in “the richest country in the world”. A few politicians have tried to live on such a salary for a week, or even a month, and have found it impossible. Most curiously, they have noted what nutritionists have pointed out for years – at such low wages a worker resorts to junk food, which saps the body of energy even to think much less act. Poverty creates a vicious cycle that makes it almost impossible to overcome, which is exactly the characteristic of poverty in Third World countries.

What is needed in Washington is the recognition that America is, in part, a Third World country, and that such countries in order to obtain any political stability must provide their population with Survival Spending, either through direct payments to workers, or through subsidies on services. Mexico, Brazil, China, India – they all understand the importance of Survival Spending as a moral as well as a political imperative, since the alternative is mass starvation and homelessness.

This realization in Washington is entirely missing – that it is morally, politically, and socially essential that government continue, for as long as necessary, to fund Survival Spending. It is a great tragedy that America’s first president from the inner city ghetto doesn’t understand this fact, and it is a greater tragedy still that he seems willing to inflict homelessness, malnutrition, starvation, and even death on millions of Americans because he thinks “entitlement spending” is optional.

6 comments to It’s Not Entitlement Spending – It’s Survival Spending

  • Don Henry Ford Jr.

    A sizable portion of expense for anyone falling into Third World America comes in the form of excessive rent, as a result of the housing bubble.

    Bailing out large banks prevented an inevitable and necessary reset needed to heal our economy.

    Not only poor individuals, but also businesses paying excessive rent on commercial real estate suffer the steady drain of wealth to the rentier class.

    This is not just a US problem, but extends throughout the world, particularly in so-called “developed” nations.

    It was time for a debt jublilee, and the people were denied.

    So we get collapse instead.

    PS. Answer this question: To whom is interterest on national debt owed?

  • Numerian

    I was going to add a paragraph about this so I am glad you brought it up Don. The entire focus of the Fed and the government through its bank bailouts has been to avoid deflation. Deflation is the enemy of the rentier class – those who charge rents for access to credit (and I am not talking about interest – I am talking about excessive fees). The trillions of dollars that have been spent by the Fed propping up the big banks allows these banks to rebuild their capital at the expense of 150 million or more Americans. Especially badly hurt are the poor and middle class who pay for it in higher fees on checking accounts, money transfers, overdraft penalties, etc. Savers are badly hurt as well in a zero interest rate environment – their savings are transferred indirectly to the banks and other rentiers.

    On your interesting question of interest due on the national debt, the biggest recipients are American fiduciaries and savers like retired people – who are now really suffering from ZIRP and are forced to eat into their capital. Next come the Chinese and Japanese governments, who have given up on the US and have ceased buying large amounts of Treasuries (which is why the Fed has stepped up to replace them, since there are no other big buyers). Finally, the banks are anxious for Treasuries to use as collateral in the game of re-hypothecation that keeps the shadow banking system alive.

    While there won’t be a debt jubilee on US Treasuries, it seems only a matter of time before businesses and consumers laden with excessive amounts of debt call it quits, especially those with student loan debt. It is happening already, with default rates running around 11% for student debt. This brings about deflation, which if allowed to run its course, will devastate creditors and in the long run benefit debtors. The general price level in the economy will fall, though many things, including essentials will remain relatively expensive compared to collapsing income. But this is ultimately the only way the system can reset itself. Living standards are already collapsing and will collapse even more under deflation, but there comes a point where goods and services are priced to match up with income so that the two can stabilize. Let’s call this the Icelandic model, or the Greek model, which is pretty brutal because the Greeks are not allowed to devalue their currency. Iceland got it particularly right – everyone suffered in the deflation, but the bankers did too, and quite a few of the biggest fish found themselves in jail.

    • nihil obstet

      deflation, which if allowed to run its course, will devastate creditors and in the long run benefit debtors.

      I thought deflation benefited creditors, whose money buys more and devastated debtors who have to pay back more valuable money. What am I not understanding?

      • Numerian

        The general theory is that inflation benefits debtors who can pay off their debts with cheaper money. Vice versa, deflation should benefit creditors as debt repayments become more valuable. So you are right in that sense, but the classical theory doesn’t work well when you take the effect of government intervention into account. What we have seen since 2008 is deflation combined with a collapse of credit, and we would have seen devastating bankruptcies among creditors (AIG, Bear Stearns, Merrill Lynch, Goldman Sachs, Citibank, Bank of America, Fannie Mae, Freddie Mac) if the federal government hadn’t intervened with massive bailouts, takeovers, and arranged marriages. Without this intervention, creditors would have been punished for their bad judgments. There would also have been a significant economic collapse, on a global scale, that would have hurt everyone, but the government could have mitigated that pain if it channeled bailouts and resources to the poor and middle class. Instead it chose to bailout the creditors rather than the debtors, and in a sense it enforced the classical definition of deflation/inflation. It forced the pain of deflation on the debtors, which suggests the classic theory works when the government sides with creditors.

        My point is that if deflation is allowed to run its course, the credit collapse will suck in creditors first and foremost if the government allows the market to discipline bad decisions.

  • Paul Krugman says today that Obama’s progress toward reducing inequality with taxation is a “big deal” because it increased taxes on the rich by 6%, even though it does not affect the middle class. If that’s what Krugman calls a “big deal” I’d hate to see what he thinks is trivial. A big deal would mean reducing incomes for the rich by 50% or more, plus creating jobs and increasing incomes for the middle class. Start by taking $76 million of the CEO’s $80 million salary and putting it toward overdue raises for the blu collar workers. That would be a “big deal” toward reducing inequality.

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