Thursday, October 22, 2009

Entitlement Junkies

We hate the idea of "entitlement junkies" when it has to do with raising kids. But what happens when it becomes the crux of an economic model? And when we have to borrow like a desperate gambler just to maintain these entitlements? James Capreta, in the inaugural issue of National Affairs, gives us his view, and it's not pretty.
The severe economic contraction of the past year has left many Americans wondering if we are witnessing the end of this age of affluence. Far more than other recent recessions, the present crisis appears to have exposed underlying weaknesses in our economic foundations, and has involved failures of institutions long taken for granted. These failures were not simply the result of the burst housing bubble and credit meltdown; the financial crisis was the straw that broke the backs of ­long-teetering giants. Americans have now been left to ask if our entire economic system might be similarly vulnerable. If General Motors can collapse into a heap, what other pillars of our post-war order may yet fall?
The paradox of our entitlement system is that although it is designed to mitigate risk at the individual level, it is now creating a massive ­economy-wide risk. For years, economists across the political spectrum have been warning that unconstrained federal borrowing will ultimately leave the country unable to issue debt at favorable and affordable rates of interest. When that point is reached, there will be little choice but to embark on a long period of painful fiscal contraction and austerity, with deep and immediate cuts in benefits and steep rises in taxes.
Like any large political undertaking in our democracy, our entitlement system depends on the loyalty and support of the broad middle class. It is, after all, fundamentally an arrangement with middle-class voters. Its benefits accrue largely to them (with the exception of Medicaid, which nonetheless exists only because of their backing). And the consequences of the system's fiscal decline — especially the tax burden required to contend with it — will affect the middle class above all, and through them the larger economic engine they make possible.

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