October 11, 2015

The Liberal’s Dilemma

Daniel Henninger wrote a significant an Op-Ed piece in The Wall Street Journal on July 22 entitled “The Liberal’s Dilemma.” The “dilemma” of which Henninger speaks is the conflict between the broad agenda many liberals, virtually all Democrats, have in place to improve the well-being of broad swaths of the U.S. population and the narrow, but disproportionate demands of public sector employees’ unions, active and powerful private sector unions like SEIU and the narrow, but powerful and well-organized political classes that contribute a sizable chunk of campaign financing for the Democratic party.

The problem those who want to produce broad societal change face is that, to the extent they honor and defend the retirement benefit obligations and other huge financial benefits demanded by the unions and the political classes, the funds available for the much broader agenda drop well below critical mass. In fact, it is fair to say that, absent a major pullback from these long-term retirement benefit obligations, almost no money will be available for the or below broader agenda.

While liberals like to believe that tax increases on wealthy people will provide a pool of funds for their broad agenda, most economists across the entire political spectrum would agree that there simply is not enough money to carry out this agenda. There are not enough wealthy people, and the tax rates could not be raised high enough, to enable transportation infrastructure to be rebuilt, educational funding to be raised, climate change investment to be effected, welfare payments to be increased, and workforce readiness programs to be enlarged.

The reason for this is quite simple: the retirement benefits are so large that they crowd out almost any other spending opportunity. For example, there was a news item in the last few weeks about the City Manager of a small, relatively impoverished town, Bell, California, (2009 population 36,664) Robert Rizzo, who drew an $800,000 salary before he retired, and who will collect over $30 million in pension benefits if he should leave a normal life span. The town has about 25% of its population living at or below the federal poverty level, but the government officials clearly milked the taxpayers to an extortionate degree and have secured a commitment that either the town, the state, or the Federal Pension Benefit Guaranty Corporation will have to meet.

Clearly, when one looks at broader societal needs, the rebuilding of the nation’s infrastructure, the need to upgrade our educational system, the need to invest in more energy-efficient and sustainable technology, and the need to expand workforce readiness programs, the funds needed are certainly in the hundreds of billions of dollar, if not the trillions. Tax rate increases will not bridge the gap, nor will discretionary spending cuts.

There are only two solutions:

  • Reduce the absolute levels of spending on retiree medical programs by improving the health of the elderly population and by reducing the cost, inefficiency, and intensity of health care; and
  • Reduce pension obligations by getting people to work longer or to create new laws and regulations that allow for more phased-in pension benefits.

Both of these solutions are win-win situations:

  • Healthier elderly people are more productive and happier.
  • Better health care quality at lower cost is better for most of society.
  • Someone who can work on a reduced salary and draw a partial pension can actually do better than either a full-time employee or full-time retiree, at a lower cost to the pension system.

Who loses if we adopt these solutions?

  • Healthier people who use the health care system less often and less intensively use fewer hospital beds and other hospital resources. Hospitals are major job and revenue providers for communities. Communities will need to develop better alternatives for economic development than large, marginally profitable, or even unprofitable, hospitals. Fewer and shorter hospital stays mean fewer jobs, which increases unemployment.
  • The volume of business available for insurance companies, pharmacies, test equipment and other medical device manufacturers and operators, outpatient centers, and other parts of the health care system in which revenues are volume-dependent will be adversely affected.
  • With respect to pensions, delayed retirement means that younger people who might have had those jobs will be delayed in getting them, although the ratio of younger to older workers has declined over time.

The hardest problem to address, by far, is the problem of improving the health of the older population, followed by the population of reducing the volume and intensity of care for that population. The elderly population has been schooled in the idea that unlimited care from an unlimited selection of providers available whenever the elderly want that care is the best possible situation for them. Getting them weaned from the notion that more care is not always better for them will be very difficult.

However, we have no choice, except to implement solutions like these.