You promised!

A Liberal friend had an epiphany of sorts, recently.

She recounted to me how she saw a townhall meeting of senior citizens furiously protesting plans to cut back on their (state) health care insurance benefits. One speaker tried to point out to these senior citizens that they had pretty much collected everything that they themselves had put into the system within a few years of participation…the rest was pure gravy. They (the senior citizens) didn’t care. “You promised us that if we paid so much into the system, we would receive these benefits,” said one. End of discussion.

“I couldn’t believe the sense of entitlement that I was hearing,” said my friend. Well, yeah, duh! Welcome aboard. I ┬ámentioned Margaret Thatcher’s favorite quip about eventually running out of other peoples’ money. My friend got it!

But it made me realize a big part of the problem was that when governments make promises to deliver benefits to people, they only promise to deliver benefits, not to pay for them. They omit to mention that what they are really promising is to force other people to pay for those benefits, presuming that those “payers” will always be there. And those payers are going, going and will soon to be gone.

There have been many such promises against the future made over the years, whether it is by government on Social Security, Medicare and Medicaid, insurance companies on their annuity plans or private sector companies on their company pension plans. However, all such promises rested on an underlying assumption that other people will, directly or indirectly, pay for those benefits and that such payers would always be there. In the case of private industry, the assumption is that stock and bond markets will always generate necessary returns

However, politicians, government bureaucrats and private pension plan managers never guaranteed an ability to pay, because they couldn’t. What people overlooked is that nobody can guarantee the future. Now that other peoples’ money is running out to pay for retirement benefits, there is hell to pay. What to do?

One side of me is rather ruthless…I say to those seniors and pensioners, “you deserve it…you were quite OK with forcing other people to pay for your benefits and you let politicians give you empty promises in exchange for your votes.” They’ll just have to get jobs, except that, in the case of most retirees, they can’t.

The fact remains that a huge portion (majority?) of our citizenry has allowed itself to be suckered into becoming dependent on government promises of largesse and casting them adrift is not a politically feasible solution.

One solution, of course, is for the government to inflate the currency, so that the value of benefits paid simply dilutes away. That way, the government (and private pension plans) can meet its “promises” in nominal dollar terms, it’s just that those promised benefits will be worth so much less.

According to Robert Samuelson, that may just be what is going to happen, and he strongly counsels against taking such a step.

Where I disagree with Samuelson is in thinking that inflation is an option under consideration. Inflation is a train that has already left the station. If you shop for groceries or buy gas, you know that inflation is already here. In addition, the Federal Reserve has been printing oodles of money that must eventually enter the marketplace (look way to the right of the following graph for a proper perspective on what is happening):
In other words, we haven’t see anything yet with respect to inflation. I know that there is talk about whether we are entering a period of inflation or deflation, but sources in the financial industry in whom I have great faith predict that the real inflationary surge will start toward the end of 2012. To them, inflation is not a choice but an inevitability. The likelihood is that we will revisit the stagflation of the Carter era. Inflation will happen because government has no other choice.
The government will likely keep its promises in nominal terms. It’s just that those promises won’t be worth very much in terms of real benefits and many people will be in a world of hurt. They will be angry and vindictive, but the people who made those promises will likely be gone by then. The Republicans won’t.
So they will blame the Republicans.