Sunday, October 17, 2010

Where Have All the Flowers Gone? To Paris

     Yesterday was the fifth day of demonstrations in France against cost-saving measures under consideration by the government.  According to the BBC, the French Senate has endorsed the major provisions of the plan, which would raise the retirement age from 60 to 62 and the full state pension age from 65 to 67.  The demonstrations have involved masses of people marching in protest.  The police estimate for yesterday’s activity was 825,000, while the unions put the figure as high as three million.  The union estimates are revealing, given the role of the unions in calling for public- and private-sector union members to march.  They have also ordered widespread strikes, which have partially immobilized petroleum refineries and caused fuel shortages.  Nor have these protests all been orderly, with some so-called anarchists breaking café windows and setting fires.  So, it appears even the gentle, epicurean French are still capable of vigorous action.  What does it take to stir them?  A threat to their entitlements.  Americans should view these events as a cautionary tale for our own looming iceberg awaiting our own Titanic entitlement programs. 

     It is an open secret that the American entitlement programs, Medicare, Medicaid, and Social Security, will eventually wreck the ship of state.  As the Baby Boom generation swells the numbers who are entitled to draw from the national treasury, the national treasury is not swelling enough to keep ahead of the bow wave.  Since the Boomers have not kept up with their parents in having children, the succeeding generational cohorts will provide too little tax base to support the geriatric flower children.  This is a fact of demography and economics.  It also reminds us of a universal moral failing.  For once implemented, entitlement programs become perverse incentives, government-sanctioned hazards to self-reliance and liberty.

     The news from France, and news of similar demonstrations in Greece and Spain in the face of similar austerity measures, shows what people anywhere will do when they are threatened with even a slight diminution in government support.  The attitude is stark in its selfish simplicity:  “I am entitled to x, and someone must provide it no matter what.”  But for all its unlovely selfishness, the attitude of those who cling to their benefits regardless of the cost to others takes some time to crystallize.  What the first generation receives with gratitude, the second generation will receive as a matter of fact.  After three generations of government payments, the beneficiaries will generally react with sacred indignation to any proposal to disturb their entitlement.  In Europe, there has been plenty of time for the expectation of generous pension support to become crystallized.  The same may be true in the U.S. regarding the legacy entitlement programs, but the new entitlements instituted during the past two years have not yet had a chance to become fixed in the national psyche.  There is some hope that the country can be spared these latest moral hazards.

     The classic moral hazard occurs when one person shifts the risks of his own behavior onto someone else.  Another form of the phenomenon arises when one person receives a guaranteed benefit to be paid for by another.  Since the beneficiary need not pay for the benefit, there is no natural constraint on the beneficiary’s demand for the benefit in question.  For benefits that have been around long enough for a sense of entitlement to coalesce among beneficiaries, the natural lack of constraint on demand combines with the feeling of entitlement to create a fiscal implosion.  Such demand cannot be satisfied indefinitely, not by France or Greece or Spain.  Nor can it be satisfied by the United States, where unions are already preparing their own opposition to any adjustment in entitlement spending.

     Last February, the president commissioned a bipartisan panel to study the deficit problem and recommend solutions.  The panel obviously has had to consider what to do about the major American entitlement programs.  Predictably, when some panel members floated the possibility of curtailing Social Security benefits by raising the retirement age, American unions instantly protested the very idea.  In doing so, they have taken a page from the script of their French counterparts and proven that the problems of France are universal.  It remains to be seen whether the French government will stand up to the unions after all.  In this country, the more likely course is what has been done in the past:  eyewash reform that will allow another decade or so of pretending there is no problem.

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