Tuesday, April 28, 2015

The Dangers of Privitizing Welfare

Dwight D. Eisenhower warned against the dangers of the Military-Industrial Complex.   An additional danger today exists in the privatization of Welfare.

A disclaimer:  I am a registered Defense Contractor and Government Contractor, and used to nurse at the teat of Uncle Sugar myself.  However, I think that makes me even more qualified to speak on this subject.

Dwight D. Eisenhower, our 34th President, once gave a speech that warned Americans that the alliance between defense contractors and the military could impinge upon our liberties:
"In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military-industrial complex.  The potential for the disastrous rise of misplaced power exists and will persist.  We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted.  Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.  Akin to, and largely responsible for the sweeping changes in our industrial-military posture, has been the technological revolution during recent decades.  In this revolution, research has become central; it also becomes more formalized, complex, and costly.  A steadily increasing share is conducted for, by, or at the direction of, the Federal government."
It is not hard to understand why Eisenhower was alarmed.   Defense spending is about 1/4 to 1/3 of our budget, and much of it goes to esoteric weapons systems of dubious value that cost millions or billions apiece.  We are in the midst of building a next generation "joint strike fighter" (after just spending billions on a "next generation fighter) in an era where cheap and disposable drones seems to be the future of warfare.

And the problem is, the people who are promoting these expensive programs in the Pentagon are often in cahoots with the contractors.  They serve in the military for a few years, and then go through the "revolving door" and work for a defense contractor.   The debacle with the procurement proceedings for the next generation air tanker are a case in point - outright bribery was used by Boeing to influence the Pentagon to steer the contract their way.   Act Shocked.

But another danger lies on the horizon - or is already here - in the form of privatized welfare programs.

What exactly am I talking about?   Well, increasingly, more and more Federal programs are being "farmed out" to government contractors.   And once you farm things like this out, well, the contractor has a vested interest in making sure the program keeps going.   In the defense industry, the name of the game is to make sure that each component of a high-tech weapons system is made in a different State and congressional district.   That way, if any Congressman so much as threatens to cut back on a defense project, you can claim they are not only "weak on defense" but are "losing jobs" for their district.  The result has been, well, the system we have today.   We spend more on defense than the next 10 largest spending countries combined.

Privatization of welfare has the potential to create a similarly entrenched network of government contractors and interlocking relationships with elected officials.   And in addition to contractors administrating traditional welfare programs, we also have some novel benefits today in which the entire ecosystem - from collecting taxes to paying out benefits, is administered privately.
Consider, for example, the so-called "Obamaphone" which has its roots in the Reagan era.   Back then, people were losing their jobs and their phone lines were being cut off for non-payment.   In a few notable instances, some folks actually died because they could not summon 911 help in time.   So a program was created to provide low-cost phone service for the poor - just basic local calls and emergency service.   Each President since has expanded the program, and today, you can qualify for a free phone, 250 minutes a month service, provided you are on some other kind of public assistance, such as food stamps.

So what's the harm?  Well, the cellular telephone industry loves this program.   It is not funded by taxpayer dollars through the government, but by the "universal service access fee" that appears on your cell phone.   So you do pay for it, in a form of a tax, if you have a regular cell phone plan.  It is one of those annoying fees that makes  a "$30 flat-rate plan!" into a $47.95 a month phone bill.  So yes, it is funded by taxpayer dollars, in effect, except the collection of the tax in this instance has been privatized to the wireless companies - collecting this "tax" from your cell phone bill.  And the wireless companies manage the redistribution of the wealth as well - handing out "Obamaphones" over the Internet to anyone who is willing to fill out the form and certify they are entitled to them.   Not a lot of checks and balances there, nor any incentive to provide them.

What's next?  Do we task the oil companies with assessing us with a "universal access fuel charge" with every gallon of gas, and then allow poor folks free gas every month?   If you think about it, it really is the same sort of thing.

Disturbingly, it seems that other forms of government welfare are also being privatized, with administration of some programs being "farmed out" to private contractors, in some instances, defense contractors as noted in the article linked above as well as this article.

But the administration of programs is just scratching the surface.   The programs themselves, while nominally helping the poor, also serve to help major corporations.   For years, food stamps (now called the SNAP program) was always tied to the farm bill.  The GOP, in a rare moment of lucidity, has tried to separate farm subsidies from food stamps - which is one way to insure you won't get elected in both rural and urban areas.   Food stamps, it turns out, are also a subsidy to food producers, as if people have more money to spend on food, this in turn helps food producers.

Think about it.  Suppose the government gave every poor family a subsidy to buy a car, with the amount based on a complex formula based on income or whatever.   Would this help the poor buy cars?   Would it help your local car dealer?   The answer is, of course, yes to both.  And during the recession of 2009, we did have a program called "cash for clunkers" which was a boon to people with older broken-down cars, and also to car dealers and manufacturers, for whom the program was designed.  Any welfare program helps the person to whom you give the money to, and the person who operates the business where they spend it.  Both become constituencies for the program.

As I have noted before, wage subsidies, in the form of housing subsidies, food stamps, medicaid, and the like, not only benefit the wage-earner, but their employer as well.  It is not accident that low-wage employers like Wal-Mart and McDonald's have, on their employee websites, explicit instructions on how to apply for government benefits.  They expect their employees to supplement their income through government subsidies.

For Wal-Mart it is a win-win scenario, as many low-wage employees cash their paycheck at Wal-Mart's service desk (which has kiosks for the unbanked to pay bills).  They then spend their income at Wal-Mart, in addition to any SNAP money they may receive.  Hell, Wal-Mart will even sell them an Obamaphone or give one away for free.  And they certainly want their employees to fill their prescriptions under Obamacare at the Wal-Mart pharmacy, right?   Maybe we don't have a Socialist State just yet, but we have a form of Corporate Socialism - funded in part by the government this time around.

Maybe this is a bad thing.  Maybe it is not.  Perhaps, one could argue, that this is a blending of the best of the Capitalist model with the best of the Socialist.   We still have an employment market, and people are free to find work in the private sector - and indeed, encouraged to do so, as traditional "welfare" as we once knew it, is gone (TANF provides only five years of support for your lifetime).  But once in the employment market, particularly at the lower end, your income is still subsidized by the government, which in turn allows employers to cut their labor costs and hire more people.   One could argue that wage subsidies lower effective wages to employers and they allow low-wage employers to hire more people.

If the SEIU gets it way and raises the minimum wage to $15 an hour, do you think Wal-Mart will keep all those slackers you see there on duty?  Or will they cut back on the number of employees?   Will McDonald's continue to staff the registers or go to an automated kiosk as they do now in Europe?  It is an interesting question.

The downside of this economic model is obvious.   We end up more reliant on the government for our income, and more and more of us (including myself) end up suckling at the government teat for at least some of our wealth.  The problem is, the government has to get money from somewhere, and that means other people - who don't qualify for subsidies - end up shouldering much of this burden.

And I see this as a major problem.   To some extent, we are a pretty classless society, up to a certain point.  Oh, yes, there are those "1%'ers" or the 1% of the 1% who have their own helicopters and several homes and armies of servants and whatnot.    But the bulk of America makes a lot less money than that.   We have the "working poor" who as I noted before, can do all right if they can collect all that government swag.   We also have the "middle class" who doesn't really make a lot more than the working poor.  What distinguishes the middle class from the working poor is that the middle class doesn't make really stupid bonehead decisions like taking out payday loans and whatnot.

And then we have the upper middle class - people who are professionals or quasi-professionals.  They might make twice as much as the middle-class person, maybe three or four times.   But not 100 or 1,000 times as much, like the super-rich.   These upper middle-class "strivers" are the ones who blow all their money on bling, trying to ape the behaviors of the really rich, and going broke one lease payment at a time.  These are the people who really get socked with a lot of taxes, in that they are not far enough above the Social Security cutoff amount ($108,000 or so) for it to make a difference.  And they are smack dab in the middle of the highest marginal rates - while not making enough to afford the really tricky games the ultra-rich use to avoid paying taxes, or pay only a capital gains rates of 15% (which the lower-middle classes pay, ironically).

So, in a way, we have created a fairly egalitarian society - for the most part.   At the low end of the spectrum, you have people who make, either through their own earnings or a combination of that and government subsidy, about the same amount of money - or no more than 2x, 3x, or 4x, this amount.   And then you have a few folks who are just obscenely rich - Billionaires.

And maybe egalitarianism is a good thing.  Maybe not.   One problem with this model is, well, it provides less of an incentive to succeed.   The uber-Billionaires, let's face it, got there by sheer luck.  If you know the real story of Bill Gates, you know that he was in the right place at the right time, and not some computer genius or guru who had a vision for Windows (indeed, he could barely code, having to farm DOS out to a friend!).

But what remains as an incentive for someone to become a Doctor or a Lawyer, or to enter some other profession?  Or start their own business?   Where is the payback?   Why bother if all your are going to make is "a little bit" more than someone on the dole?   With the staggering cost of college these days, does it make sense to seek out a higher paying profession, when our tax system and welfare system end up "leveling out" your income?   Factor in a lifetime of student loan payments, and for many folks, college is a non-starter for many.

A lawyer should make more than a UPS driver.  An Engineer should make more than the guy working on the assembly line.  There should be some reward for hard work, studying hard, and taking the hard courses.  This privatized socialism model - the welfare-industrial complex - raises effective wages for low-wage workers, while taking some of the wage burden off employers.   A side effect, unfortunately, is that it makes higher-paying jobs not all that higher-paying, and thus less attractive.

The sad thing is, I am not sure there is much that can be done about it as this point, any more than we can unwind our defense industry - it is so heavily entrenched politically.   States play games with food stamp rules to make sure more of their citizens qualify (UPDATE:  Maine has announced a new program forcing those receiving assistance to do some form of community service - maybe there is hope).  And with government contractors administering more and more programs, well, now these programs will become really entrenched.   Do you want to be the congressman who shuts down the welfare office and thus "cost us jobs!"?