Cradles and Safety Nets

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Rock a bye
baby in the treetop,
When the wind blows the cradle will rock,
When the bough breaks the cradle will fall,
And down will come baby, cradle and all.

I have never
understood the setting of this nursery rhyme. What is a cradle doing
in a treetop? Why is a baby in it?

This nursery
rhyme is more appropriate today than ever before in Western history.
Politicians around the world have passed laws that offer free cradles.
“Put your child in a government-funded cradle high in a tree at
no risk. Your child can enjoy the rocking of the cradle for hours.
Put wind power to work for you free of charge! This frees up time
for you.”

Politicians
know that the hand that rocks the cradle rules the world. They want
to get mothers away from the cradles as early as possible. Mothers,
who think they have better things to do than rock cradles, agree.
They hand over their children to a series of strangers whom the
government has certified as professional cradle-rockers.

All over the
world, governments pay for these cradles. Most governments have
laws against private cradles. Those few cradles that are allowed
are heavily regulated. As for cradles at home, in Europe this is
illegal. In the United States, it is regulated.

The cradles
are placed in government-funded trees. Each year, the growing children
are placed in larger cradles higher up in the trees. The boughs
droop. Caretakers put up wires to keep boughs from breaking. But
anyone with eyes can see that the boughs are sagging badly in most
trees. There are too many cradles and not enough boughs.

Critics complain
that the trees don’t look as healthy as they did 50 years ago. Critics
of trees 50 years ago offered the same complaint.

What is the
government’s solution? Another field of trees. Keep the kids in
the cradles for another round of rocking. In the United States,
higher education is a $400 billion a year industry, and most of
this is tax-funded.

Parents are
told to pay for part of these costs of higher education. It takes
five or six years to graduate, and close to half who enter as freshmen
do not graduate. The average student has $20,000 in debt when he
graduates. Those who don’t graduate have a little less debt.

The boughs
have now visibly broken in the social sciences and humanities. The
entry-level job market is rotten for college graduates. They have
lost five or six years, and they are only marginally more qualified
for entry-level jobs than a high school graduate who is 18.

The nearly
two-decade system of cradles, boughs, and trees is failing to deliver
the goods: qualified candidates for high-output, high-income entry-level
jobs. The system rolls on, because politicians know that the content
of education remains under state control. The cradles produce voters
who have faith in the existing political order.

The trouble
with cradles is that they are designed for young children. Parents
move their infants out of cradles and into beds at a young age.
The state doesn’t.

People who
have spent almost two decades in cradles perched high in treetops
look for safety nets. The state offers lots of safety nets.

Here is a great
irony. In 1890, about 200,000 American students attended high school:
7% of the population, ages 14–17. This rose to 1,000,000 in
1910 and about 2,000,000 in 1920: one-third. In 2010, most students
graduated from high school and about a third started college. After
a decade more of tax-funded education than most students had in
1890, voters clamor for more safety nets, more comfortable safety
nets, and more compulsion to pull more taxpayers into funding safety
nets.

What the state
has provided is an education system that imparts fear of risk. A
system of tenured teachers with secure salaries creates students
in its own image.

SAFETY
NETS FOR ALL

Western governments
ever since the late nineteenth century have steadily adopted a series
of economic safety nets for citizens. This process accelerated after
the introduction of the income tax: 1911 in Great Britain, 1913
in the United States. Voters have demanded this. They do not like
the risk-distribution associated with the free market, where individuals
reap the rewards of successful risk-taking but suffer losses when
they fail. People are generally more afraid of losses than they
are eager to make gains. There is always a risk of failure. People
are afraid of failure. So, they want to avoid these risks of personal
failure at zero cost or at least at a below-market cost.

Beginning in
late medieval Europe, the development of statistics has enabled
people to protect themselves against certain kinds of failures through
insurance. These failures are set-backs that happen on a predictable
basis in large populations. The famous law of large numbers allows
risk-averse people to pool their assets in a way that their joint
venture pays money to victims of individually unpredictable events.
Insurance is one of the greatest discoveries in the history of the
West. The political problem arises when people go looking for participants
in the pool of risk-sharers who pay more than their statistically
fair share of the premiums. Sick people want entry into the pool
at rates charged to healthy people. But what company will offer
this opportunity to all sick people? None, unless they are compelled
by law to enroll them. The state can make this compulsory.

Then there
are lots of healthy people who would like taxpayers to cover a portion
of their premiums. That can be arranged. It is called Medicare.
The typical payment per Medicare beneficiary is approaching $11,000
a year. Medicare runs a deficit. This deficit will grow.

A safety net
is a wonderful thing when it is available on a voluntary basis.
But when it is imposed by law on people who are unwilling or unable
to buy one, a series of questions arises:

  1. Who holds
    up the net?
  2. Who repairs
    the net?
  3. For how
    long?
  4. At what
    price?
  5. For how
    many people?

There is no
such thing as a free safety net. If anyone gains access to a safety
net at a below-market price, this increases the likelihood that
the net will break if more people are pushed into it than the design
of the net will bear.

WIDE
NETS, CHEAP ROPE

As the number
of nets has increased over the years as a result of political intervention
into the market, the cost of funding these nets has increased. Taxpayers
do not want to bear this expense. So, they seek to pass on a portion
of these expenses to others. Well-organized small groups that receive
a subsidy vote in blocs and are more successful than larger groups
that are dispersed. The larger groups pay for benefits received
by the smaller groups. Democracy produces a system of rule by well-
organized minorities.

Medicare and
Social Security are the big ones. The political success of the present
recipients is based on these factors:

  1. Better political
    organization: “Vote for money.”
  2. Guilt manipulation:
    “Pity the aged.”
  3. Hope: “You’ll
    get yours someday.”
  4. Larceny:
    “Get taxpayers to pay for your granny.”
  5. Ignorance:
    “Free lunches are possible.”
  6. Navet:
    “Debts do not come due.”

As the population
ages, more people fall into the safety nets. The government must
borrow more money in order to pay for these new arrivals. The lenders
assume that they will be repaid, even though it is clear from the
statistics that this is not possible in the long run. The investors
think: “I’ll get out in time. I will pass to someone else the old
maid card.” As with love in the case of a man who marries a woman
with six ex-husbands, desire is stronger than probability statistics.

The crisis
will hit when there are few lenders at low rates. That will come
sometime in the next decade, and perhaps in the Administration of
the President elected in 2012. At that point, politicians will have
to find ways of paying for the repair of the nets or else reduce
the level of protection. Some government budgets will have to be
cut in order to continue the funding the safety nets.

The other major
area of frayed nets is the state and local pension system. The crisis
is even more obvious. There are legions of retirees who have fallen
into the retirement safety net. They are dependent on this net for
their lifestyle. They are out of the labor force. Their skills have
become rusty. They no longer have the emotional will to go back
into the classroom. In any case, the jobs are not there. The teacher
glut is enormous and will not be reduced, given the continuing flow
of certified teachers from the colleges. Police forces are not hiring
70-year-old men. Fire departments are not hiring retirees.

The nets are
going to break. Yet people who are resting in a net do not want
to look at the quality of the rope, the strength of the support
bars, and the distance to the ground. They prefer to believe that
a government promise is as good as gold.

BACK-UP
NETS

State and local
politicians are hoping that Congress will intervene and come up
with money to fund their safety nets. But Congress can see that
this will be a permanent demand. The size of the population of people
resting comfortably in state and local safety nets will get larger.
The demands by local politicians will be perpetual. If local politicians
are unable to solve the long-term pension problem this year, they
will be unable to solve it next year, either.

The safety
nets associated with old age are not only continuing, they are expanding.
The age distribution of the population works against the net system.
A lot of the baby boomers are already on Social Security. They took
early retirement at age 62. Medicare kicks in by law this year for
the first year’s cohort: at age 65 for people born in 1946. This
will continue at an escalating pace until 2025. The peak for American
births per woman was in 1957: almost four children.

The safety
nets constitute most retired Americans’ source of revenue. They
have no private pensions. They do not want help from their children.
Their income has fallen. Social Security or a municipal pension
is all the institutional safety they possess.

There is no
real sense of concern yet. There is a vague gnawing away at people’s
confidence in the reliability of the nets in general. There is no
clear indicator that Congress will allow the actual default of a
large state, such as California. Always, lenders have come to the
rescue in the past. Meredith Whitney has said that there will be
defaults this year by dozens of state and local governments. This
prediction has been universally dismissed as extreme. The experts
insist that this is not going to happen. Someday, yes, if things
don’t change, there will be a default by this or that small city,
but not soon and not many. The capital markets do not send an indication
of trouble. But they did not in late 2007, either.

It will happen,
and the dominoes will begin to topple. It will happen in this decade,
maybe in this half decade. The Federal government’s existing nets
are so full and so frayed that it is not likely that Congress will
cave in to the requests of state governments to rescue them from
a default on their bonds. If it does, there will be no effort made
by other local governments to escape the problem by radical cost-cutting
and higher taxes. If Uncle Sam says to one state, “Nets repaired
here, free of charge,” there will be a lot more nets to repair.

The easy way
out for a fiscally busted city will be a declaration of bankruptcy.
When this finally happens, and nothing serious happens to local
services, the way of escape will be clear to all: let the safety
nets break. Let the pensioners sue in court. Let the lawyers argue.
The courts can declare anything they like. How can they enforce
their rulings? Will a governor send in state troopers? To do what?
To freeze local bank city accounts? Then what happens? The schools
will close. Then a state court will declare that the state must
take over the funding of the closed schools. After all, there are
state compulsory attendance laws on the books. The governor now
has the tiger in his lap. He will have to come up with the money
out of his budget. The next fiscally hard-pressed city council sees
the light. “Cut the nets.” The governors will figure out fairly
soon that replacing local nets at state expense is bad politics.

Local voters
in a defaulted city are not going to see local services cut drastically
for the sake of the retirees who thought their futures were secure
because politicians in the 1980s promised. Those who bought municipal
bonds are rich people trying to escape Federal income taxation.
They have no politicians openly in their corner.

NO SAFETY
NETS IN ASIA

Asia has only
one net: central bank inflation. The central bank keeps the national
economy running. If it stops inflating, the recession will hit.
There are no safety nets. There are tanks to deal with rioters.

The competitive
position of Asia is obvious. The employers pay no Social Security
taxes, no unemployment insurance taxes, no retirement programs.
They can price their exports accordingly, and do.

American manufacturing
is declining. The large firms see the future: plants in Asia. Why
pay taxes here for workers who want promises? Better to hire workers
who are glad to get jobs without pensions.

The safety
nets have become straight jackets. They were set up by politicians
to protect voters from the failures in life, and foreign workers
now make American businesses an offer they don’t refuse: “Don’t
pay for expensive safety nets. We will walk life’s tightropes without
them.”

Politicians
assumed that if they passed laws constructing safety nets, they
would make life less risky. They ignored international competition.
Foreigners can sell goods to Americans at prices below domestic
goods’ prices. Costs are lower in Asia, and they will remain lower
for as long as Asians walk the tightrope of economic life without
government-funded safety nets.

It is now more
risky to be an American worker in manufacturing than it would have
been without the nets. The politicians promised workers greater
safety. The result: less safety. This is one more example of Ludwig
von Mises’s warning: the outcome of government intervention is the
opposite of whatever the intervention was officially declared to
achieve.

CONCLUSION

The governments’
various safety nets will not hold. To the extent that you are planning
your future in terms of any of these nets, you will be disappointed.
To the extent that you rely on such safety nets to produce safety,
you will find yourself less safe.

In review:

Rock
a bye baby in the treetop,
When the wind blows the cradle will rock,
When the bough breaks the cradle will fall,
And down will come baby, cradle and all.

Under this
system, cradle-to-grave security is more risky than politicians
and educators have told us. If you are in a government-funded safety
net, get out and climb down the tree. Don’t stand around under it,
either.

January
8, 2011

Gary
North [send him mail]
is the author of Mises
on Money
. Visit http://www.garynorth.com.
He is also the author of a free 20-volume series, An
Economic Commentary on the Bible
.

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Best of Gary North

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