What Economic Conservatives Don’t Get

America’s Ticking Bankruptcy Bomb:

How the Looming Debt Crisis Threatens the American Dream— and How We Can Turn the Tide Before It’s Too Late

  • Peter Ferrara
  • Broadside Books/Harper Collins, 2011; $25.99, 432 pages

When he wrote The Foes of Our Household in 1917, Theodore Roosevelt noted that “reforms are excellent, but if there is nobody to reform, their value becomes somewhat problematical. In order to make a man into a better citizen, we must first have the man.” TR was concerned that the Progressive reforms of his era, many of which he implemented as president and pushed during the 1912 campaign, might come to naught given the propensity of Americans at the time to shirk the responsibilities of marriage and family and limit average fertility to just one or two children per couple, which he claimed would lead to national suicide. “Unless there are children in sufficient numbers,” the twenty-sixth president warned, reforms of this or that are not worth discussing.

These insights of one of the most popular and successful Republican presidents, a chief executive whose imprint on public policy lasted sixty years and turned America into a social-conservative paradise at mid-twentieth century, ought to be heeded by his party today. His observations would especially benefit libertarians and economic conservatives, who not only run the conservative think tanks but also shape the party’s agenda as broadcast from Capitol Hill, the conservative media, and presidential candidates. For a generation, this faction of the party has successfully transformed the GOP into the party of ideas, of, yes, reform initiatives ranging from Ronald Reagan’s supply-side economics to Paul Ryan’s Path to Prosperity. No longer is the Republican party content with being the minority party or a decaffeinated version of the Democratic party, as it was under Presidents Richard Nixon and Gerald Ford. In fact, with its support among grass-roots tea-party activists and religious conservatives, the twentieth-first-century GOP functions more like the Progressive movement of a century ago than do the Democrats, who defend the status quo and resist all sorts of government reform.

Yet the economic conservatives who have done much for the GOP also share the same shortcoming of the Progressives, whom TR chided for being “utterly blind” to the fact that all the reforms in the world, no matter how well conceived, mean nothing if America continues to decline socially and culturally. This is, in a nutshell, the irony of America’s Ticking Bankruptcy Bomb, an otherwise commendable work by Peter Ferrara, a well-credentialed policy wonk who personifies both the promise and peril of economic conservatism.

Ferrara is the man who hatched the idea of privatizing Social Security as a Harvard law student in the late 1970s, an idea that has almost achieved mythical status in conservative circles. He also served in the policy-development office of the Reagan White House and as an associate deputy attorney general under the first President Bush. Now a senior fellow at the Heartland Institute and the newly established Carleson Center for Public Policy, Ferrara has done his homework like few others, documenting in exhaustive detail the current fiscal crisis and offering a coherent way out. But like most libertarians, he doesn’t consider that the pending bankruptcy of America might be a symptom of the social bankruptcy that has been brewing since the 1970s. Unless that deeper crisis is fully addressed, all the king’s horses and all the king’s men of the conservative kingdom will not be able to put America back together again, even if every one of their policy goals related to taxes, trade, and entitlements are enacted tomorrow. 

The Looming Fiscal Crisis

This is not to say that this book is not worth reading. Far from it. Ferrara is brilliant in the first half of the book, making the case that America, from an accounting perspective, is not far behind Greece. The annual deficits of President Obama, which hit an unprecedented $2.1 trillion for 2010 when measured using generally accepted accounting standards, and the accumulated national debt, which passed the $14.3-trillion mark this year, are just the tip of the iceberg. In terms of unfunded liabilities, which stand above and beyond the national debt, the long-term obligations of federal, state, and local governments are mind-boggling. As Ferrara covers the territory, they include: $15 trillion for Social Security; $100 trillion for Medicare; $5 trillion in military pensions and veterans’ benefits; $2 trillion for federal civil-service retirements; more than $3 trillion in municipal-bond and state-level debt; close to $4 trillion in state and local pensions; and more than $1 trillion in retirement health benefits for state and local workers. These numbers, he notes, do not include the “trillions” in guarantees of the FDIC, the FHA, and the National Flood Insurance Program, as well as the outstanding financial commitments of the Troubled Assets Relief Program, Fannie Mae, Freddie Mac, the Federal Reserve, and the U.S. Department of the Treasury.

Ferrara is equally skillful in capturing the utter bloat of the “means-tested” welfare system, whose 185 overlapping programs cost taxpayers $900 billion in 2010, enough to have awarded every three-person household living under the poverty level an income of $50,000. For the years 2009 through 2018, he warns, the welfare burden will exceed $10 trillion. Across several categories of welfare programs, Ferrara’s description of redundant initiatives would be humorous were he not talking about hundreds of billions of dollars. For example, his enumeration of the $77 billion of programs that focus just on housing, is revealing:

This includes expenditures for over 1 million public housing units owned by the government. It includes Section 8 rental assistance for nearly another 4 million private housing units. Then there is Rural Rental Assistance, Rural Housing Loans, and Rural Rental Housing Loans. Also included is Home Investment Partnerships (HOME), Community Development Block Grants (CDBG), Housing for Special Populations (Elderly and Disabled), Housing Opportunities for Persons with AIDS (HOPWA), Emergency Shelter Grants, the Supportive Housing program, the Single Room Occupancy Program, the Shelter Plus Care program, and Home Ownership and Opportunity for People Everywhere (HOPE) program, among others.

If all these endless programs and commitments, found in every nook and cranny of the welfare system, weren’t enough to break the bank, Ferrara rightly takes President Obama to task for pushing federal spending to 25 percent of GDP, expanding eligibility for Medicaid and, most importantly, ramming through Congress the Patient Protection and Affordable Care Act of 2010, which commits Uncle Sam to spending another $4 to $6 trillion over the next twenty years. In perhaps his best chapter, Ferrara enumerates a cornucopia of reasons—including its cuts to Medicare, its predisposition to rationing, its advocacy of “comparative effectiveness research,” and its disincentives for investment in medical research, innovation, and development—for fully repealing ObamaCare, even if we could somehow accept its staggering price tag. Making the case that Affordable Care Act saddles the country “with Potemkin Village health care,” Ferrara notes:

At the heart of Obamacare is a cruel perversion. The Act labors mightily to expand insurance coverage to everyone (though it actually fails, with over 23 million, and likely more, still to be uninsured). But then it empowers bureaucracy and institutes incentives to deprive you of the very health care that you may need to save your life, or the life of a loved one, or to cure you of disease or ease your pain.

Ferrara does not just pick on President Obama, an easy target. An underlying theme of the book is how the abandonment of “the four planks of Reaganomics” by both political parties—including two Bush administrations—not only brought on the financial crisis of 2008 but also is responsible for America’s economic woes in general. Indeed, he blames the Bushes and the GOP Congress under George W. Bush for trading the Reagan birthright for a mess of big-government pottage. That squandering of principle, he believes, greased the skids for the election of a Democratic president in 2008, a president whose policies were “thoroughly and carefully structured to follow exactly the opposite of every one of the planks of Reaganomics.” Given Ferrara’s association with the Carleson Center, which seeks to preserve the Reagan domestic policy legacy, it is not surprising that Ferrara maintains that only a recovery of the four economic principles of the fortieth president can avert the country from bankruptcy and restore the promise of the American Dream. Ferrara identifies those planks as reductions in taxes and tax rates, genuine reductions in government spending, a stable dollar, and lowering regulatory barriers for business.

Overstating Reagan’s Achievements

This is all well and good, and most of Ferrara prescriptions for creating sound monetary policy, streamlining the federal government and consolidating departments, block-granting all means-tested welfare programs to the states, and lifting restrictions to allow America to become an energy powerhouse are not only reasonable but also prudent. But Ferrara is less persuasive on tax and social-insurance matters, where he calls for all sorts of cuts in corporate, income, and capital-gains tax rates—but curiously not the payroll tax. The latter is saved from his tax-cutting axe because he advocates replacing Social Security and Medicare with forced savings through “voluntary personal accounts” that would deliver “all the benefit currently financed by the payroll tax” at “a fraction of the cost.” Like the economists at the Cato Institute and the Heritage Foundation, he believes the libertarian playbook that he helped to write will deliver “more than a Reagan-like boom—a new economic Golden Age.” This is pure fantasy for two reasons.

First, the Reagan boom was not everything that Ferrara makes it out to be. No doubt, the twenty-five years between 1982 and 2007 were an unprecedented period of wealth and job creation. But unlike the expansion of the 1950s and 1960s, its dividends were dramatically skewed to the upper 40 percent of the income distribution, a point made by William Voegeli in Never Enough. The one-time great working-middle class, made up of Americans with only a high-school education, has almost disappeared, as Charles Murray has documented. Nor was the boom particularly family friendly, as the median income of married-parent families, especially those with full-time mothers, remained dormat relative to the galloping GDP. Other social costs of the boom—from flat fertility rates to increased family breakdown and unwed childbearing—represent aspects of the Reagan economy that aren’t so salutatory.

Aside from the social baggage, the economic harvest that President Reagan sowed may have been a one-time fluke. According to Robert Stein in National Affairs and David Goldman in this journal, the economic achievements of the Reagan era were historical in nature and cannot be easily duplicated. Both economists argue that tax-rate cuts of the magnitude of Reagan’s would not have the same power to influence economic behavior as they did a generation ago. Among the reasons Goldman and Stein are skeptical: the country is much older today than it was in the early 1980s, when the Baby Boomers were in their 20s and 30s. The country likewise lacks the same social capital; the American family, they note, is alarmingly weaker.

The Problem of Private Accounts

Most important, Ferrara’s construct depends heavily on the idea he conceived at Harvard: moving from “pay-as-you-go” Social Security and Medicare to what he calls a “fully funded, savings and investment system” composed of personal and privately owned retirement, disability, and health-care accounts that are funded by the payroll tax. This is where Ferrara veers off the Reagan reservation, as the former president never considered the legacy of the New Deal in conflict with his economic vision. Reagan was a former Democrat who voted for FDR. His election to the presidency would not have been possible without the support of “Reagan Democrats.” Moreover, an entry in his diary corrects any misunderstanding of Reagan’s often-quoted phrase from his First Inaugural Address, “government is the problem” (from which his qualifier, “in the present crisis” is often omitted): “The press is trying to paint me as trying to undo the New Deal. . . . I’m trying to undo the Great Society.”

Like most conservatives, Ferrara doesn’t get Reagan’s important distinction: self-financing programs like Social Security actually reinforce the social and economic order, whereas the parasitic War on Poverty does the opposite. He thinks dumping Social Security for his “prosperity system” is the trump card that will save America, leaving working-class Americans, whose interests clearly concern him, with substantial assets at retirement while providing the needed capital to maximize economic growth. Although he concedes the transition is no free lunch, he claims the costs can be minimized—without negative effects on the economy, interest rates, taxes, or existing Social Security commitments—through reductions in federal spending and short-term borrowing that is fundamentally “just borrowing back some of the trillions in increased savings flowing into the personal accounts” (italics in original).

This may sound like smoke and mirrors, and it may well be. But the bigger weakness is that, by providing no relief from the tax that burdens families the most, Ferrara’s system offers no promise of spurring overdue investments in human capital so that Americans would be more inclined to marry and to bear and raise a sufficient number of children that would grow the size, creativity, and productivity of the labor force, which accounts for two-thirds of the country’s economic output. At a time when the social sector stands at greater risk than the private sector, and when legal abortion has reduced the labor force by 25 percent, the transition to Ferrara’s system of personal “savings, investment, and insurance” accounts would likely crowd out the most important economic resource: children.

This is the track record of Chile, a country that Ferrara lifts up as a “proven success” of the personal-account system, even though its transition costs are significantly higher than anticipated (now at 8 percent of GDP), a reality that Ferrara does not mention. When the South American country privatized Social Security in 1981, Chile had a relatively robust total fertility rate (TFR) of about 2.7 births per woman. Today its TFR is 1.9 children. If the United States were to adopt a similar system, economic forecaster John Mueller estimates that our TFR would likewise drop during the transition period, from 2.1 children to 1.6 children, far faster than under unreformed current law.

This is no way to bring America back from the brink. As Theodore Roosevelt predicted in The Foes of Our Household, the nation “will die out unless the average family contains at least three children.” Ferrara has written an important book, but his tax, budget, and entitlement reforms ignore America’s most serious deficit: our anemic birthrates and depressed home economy. As TR would warn, unless we find a way to encourage more young Americans to marry early and invest in what really matters, a coveted new age of American prosperity will never see the light of day. 

Mr. Patterson is editor of The Family in America.