More Bad Business
Transportation is just one of several industries that the US Government has owned, managed, regulated, or otherwise distorted. While the damages for such intervention are specific in each case, in no instance does the benefit of intervention outweigh the significant costs.
The following extended examples include Social Security, Public Education, and the United States Postal Service.
The Social Security program has been on unstable economic grounds since its inception. Unlike Social Security, privately funded retirement programs invest a portion of a person’s income into financial instruments that will generate a return. This return represents genuine economic creation, wealth that didn’t exist when the funds were originally invested. Once a person retires, these funds (usually enhanced if properly invested) are drawn down as necessary. No additional input is required.
Alternatively, Social Security simply transfers funds from one person to another, at some additional administrative cost, without making any investment:
If the government uses the sums borrowed for investment in those lines in which they best serve the wants of consumers, and if it succeeds in these entrepreneurial activities in free and equal competition with all private entrepreneurs, it is in the same position as any other businessman; it can pay interest because it has made surpluses. But if the government invests funds unsuccessfully and no surplus results, or if it spends the money for current expenditure, the capital borrowed shrinks or disappears entirely, and no source is opened from which interest and principal could be paid.
Ludwig von Mises, Human Action
For all the funds that pass through Social Security, no option for investment exists. It is simply consumed. This direct transfer in Social Security is known by another name:
A Ponzi scheme is a fraudulent investing scam promising high rates of return with little risk to investors. The Ponzi scheme generates returns for older investors by acquiring new investors. This is similar to a pyramid scheme in that both are based on using new investors’ funds to pay the earlier backers. For both Ponzi schemes and pyramid schemes, eventually there isn’t enough money to go around, and the schemes unravel. (my italics)
Social Security fits this definition perfectly (except for the final sentence – that hasn’t quite yet occurred…). An early case demonstrates how original recipients benefited to the detriment of the future ones:
Ida May Fuller worked for three years under the Social Security program. The accumulated taxes on her salary during those three years was a total of $24.75. Her initial monthly check was $22.54. During her lifetime she collected a total of $22,888.92 in Social Security benefits.
Today’s taxpayers continue to fund current beneficiaries. Social Security Administration publication number 05-10024 states:
The money you pay in taxes is not held in a personal account for you to use when you get benefits. Your taxes are being used right now to pay people who now are getting benefits. Any unused money goes to the Social Security trust funds, not a personal account with your name on it. (my italics)
The only difference between typical Ponzi scheme’s and Social Security is that the private fraud always ends, whereas Social Security continues, dependent as it is on increased taxes, lower benefits, or an infusion of funds from other tax sources. The Clinton administration's 2000 budget proposal states that the Social Security Trust Fund does
not consist of real economic assets that can be drawn down in the future to fund benefits. Instead, they are claims on the Treasury that, when redeemed, will have to be financed by raising taxes, borrowing from the public, or reducing benefits or other expenditures. (my italics)
Changes had to be made in 1983 in order to keep the program propped up:
There was nothing more explosive than Social Security reform: everybody knew that no matter how you dressed it up, any solution was in the end going to involve either raising taxes or cutting benefits for a huge and powerful bloc of voters, or both.
The plan signed into law in 1983 involved pain for everyone. Employers had to absorb further increases in the payroll tax; employees faced higher taxes too and in some cases saw the date when they could anticipate receiving benefits pushed further into the future; retirees had to accept postponement of cost-of-living increases, and wealthier retirees began having their benefits taxed. But by doing all this, we succeeded in funding Social Security over the seventy-five-year planning period that is conventional for social insurance programs. Moynihan, with his usual eloquence, declared: “I have the strongest feeling that we all have won. What we have won is a resolution of the terrible fear in this country, that the Social Security system was, like a chain letter, something of a fraud.”
Alan Greenspan, The Age of Turbulence
The crisis was simply put off for another day. The following news item indicates the inevitable state of such a scheme, whether it be interim (you need more money) or terminal (it comes crashing down). The word “permanently” in the last line is inordinately optimistic:
Updated: 6:39 p.m. ET Sept 24, 2007: WASHINGTON - The Bush administration said in a new report Monday that Social Security is facing a $13.6 trillion shortfall and that delaying needed reforms is not fair to younger workers.
A report issued by the Treasury Department said that some combination of benefit cuts and tax increases will need to be considered to permanently fix the funding shortfall.
As of today:
All taxes that have been paid into the Social Security system since its inception have already been (1) spent to pay for benefits, (2) spent to fund the administrative overhead of the program, or (3) loaned to the federal government.
In the early years of Social Security, it was asserted that the program would self-fund indefinitely. At the outset of the Social Security program, the federal government published an informational pamphlet that stated the following about Social Security taxes:
And finally, beginning in 1949, 12 years from now, you and your employer will each pay 3 cents on each dollar you earn, up to $3,000 a year. That is the most you will ever pay.
* Accounting for inflation, this promise equates to a maximum tax collection of $1,802 per person.
* For 2014, the maximum payroll tax collection per person is $14,508 or eight times the promised maximum. (my italics)
As can be seen in the chart below, steady increases in tax rates have regularly occurred:
The program has also been burdened by increasing recipients relative to working taxpayers. In 1955, there were more than 8 workers for each retiree on benefits. In 2015 that was down to 3 to 1, trending towards a 2 to 1 ratio: two workers for each person on benefits.
The recent history of Social Security, and the foreseeable future, indicate the magnitude of the crisis:
The Social Security ‘Trust Fund’” is a misnomer (there is no ‘trust’ and no ‘funds’), as any surpluses in the program are immediately ‘loaned’ to the federal government:
No matter what happens, significant change is inevitable. Some combination of higher payroll taxes, a reduction in benefits, or an increase in the retirement age will be required, ensuring that Social Security will not be the same in the coming decades. Perhaps most likely, the government will simply fund Social Security with newly printed money, after capping COLA (Cost Of Living Allowance) increases. The ensuing inflation will decrease benefits without having to legislate lower dollar amounts, minimizing political repercussions.
Those who believe future benefit levels are safe, that they are owed some kind of guarantee, are sorely mistaken. The website of United States Social Security Administration states:
There has been a temptation throughout the program's history for some people to suppose that their FICA payroll taxes entitle them to a benefit in a legal, contractual sense. … Congress clearly had no such limitation in mind when crafting the law. … Benefits which are granted at one time can be withdrawn….
The only way to get the program on sustainable terms is to privatize it, or better yet, eliminate it altogether.
Many changes that are required to realize a Genuinely Free Society will take time to implement. Transitions may take years, decades even.
When the government institutes a new policy that changes how people live, it’s like they build a dam that restricts the flow of that particular stream. As time goes by, water builds behind that dam and forms a reservoir. Like social security, when people come to depend on monthly checks they never had before. Over time, the dependence grows, as the reservoir does behind the dam.
Given the magnitude of the reservoir, that is, growing dependence on a particular government program, making major changes suddenly may cause much damage, not unlike releasing an entire lake’s worth of water behind a dam all at once, flooding homes, golf courses and shopping malls. Instead, the lake must be drained slowly until very little water is held back by the dam, at which point the artificial impediment can be completely and safely removed.
Social Security serves as a good example. While such a program wouldn’t exist within a Genuinely Free Society, simply shutting down the Social Security Administration and eliminating both the taxes and the payments would have a devastating effect on millions of people. Thousands would lose their jobs without warning, and countless people dependent upon Social Security benefits would be left without adequate resources.
Properly dismantling Social Security may take decades, perhaps two or three generations. Doing so, however, would contribute significantly to the wealth of the nation, the material improvement of virtually every citizen, and particularly our grandchildren.
If one wants to harvest quickly, one must plant carrots and salads; if one has the ambition to plant oaks, one must have the sense to tell oneself: my grandchildren will owe me this shade.
Leon Walras, Quoted by Schumpeter in his History of Economic Analysis
The sooner we plant the Social Security acorn, the sooner our progeny will enjoy the ensuing shade.
An Example of Social Security Alternatives
As a specific example of what a changed retirement program might entail, consider the following:
Under the current system, a 22-year-old who works for the next 45 years earning $50,000/year will contribute $273,000 to Social Security. When she turns 67 years old, it is projected that all of the money she has contributed to the program will be spent. Hence, any old-age benefits she receives will be derived from taxpayers who contribute to Social Security at that time.
If this same person were allowed to save and invest 75% of her payroll taxes in the S&P 500 for the first 30 years and then progressively move all of these assets into intermediate-term government bonds over the last 15 years, and the rates of return and administrative costs varied based upon the facts cited above, she would accumulate the following assets:
There are several advantages to this approach. First of all, the money that funds the program would be made available for investment, boosting production and increasing the nation’s wealth. Secondly, the benefits will be significantly better for the participant. Plus, they can do anything with the retirement funds, including passing them along to their family, an option not available in today’s Social Security:
In general, for Social Security participants who are single and have no children under the age of 20, their benefits (or projected benefits) terminate when they die regardless of how much they have paid in Social Security taxes. There is no heritability in these cases except for a one-time death payment of $255 under certain circumstances.
The Social Security scheme is ripe for collapse, poses a constant burden to the nation’s economy, and maintains a financial trap for the elderly. It’s past time for radical change.
Education is arguably one of the most important industries within a modern society. Literacy rates, and the ability to work within a technological environment, mark the difference between a healthy society and one that struggles. Given that an educated populace is key to economic growth, political stability, and social health, it’s not surprising that the government was initially tasked with providing it. It seemed too important to be left to chance, or the whims of private individuals: the government would ensure that children were educated, and educated to standards set by the politically wise.
Perhaps this argument held at one time, but today, private entities within modern society is perfectly capable of providing education for everyone, at every level. And given the importance of the task, and the proven ineptitude of the state in managing schools, freeing education from the shackles that currently bind schools, teachers and students, and allowing creative and motivated individuals and institutions to take them over, would greatly enhance the quality of education for everybody.
Public schools are administered and staffed with state employees. Teacher’s unions are powerful and ubiquitous. Like any government agency, little incentive exists to improve performance or innovate. Maintaining the status quo is paramount. Efforts for incremental improvement, let alone radical change, are quickly stamped out. Young teachers with ideas quickly get suppressed, and frequently burn out. They either conform or leave.
As a personal example, while living in a small town, my youngest daughter attended the local school as a 7th grader. Within a month, she was asking me to take her out of school and provide homeschooling (she was homeschooled in 3rd grade). Given her special needs, I subsequently met with all of her teachers, one at a time, to discuss what could be done to address those needs. Promises were made, but after three months, only one teacher had fulfilled them. At that point, I met the guidance counselor. He suggested I speak with the principle, which I did. With half the school year left, we devised a plan where my daughter would finish 7th grade, and be given additional material to cover 8th grade material, and then she would start the next year in 9th grade. By the end of the year, only one teacher (a first-year, idealist science teacher) followed through, and provided my daughter 8th grade science every week in one of her study hours. I confirmed with the school that they still intended to enroll my daughter in 9th grade the following August. At this point, my concern was acute: either the content of 8th grade was immaterial to her later academic success, or she would be starting 9th grade far behind, given the lack of effort the school made to bridge the grades. The final decision was made one day when my daughter told me they were going to see a movie titled ‘Ulysses’. When she asked the English teacher why someone would make a movie based on the novel by James Joyce, the teacher didn’t understand the question. At that point I conceded, and took my daughter out of that school, and homeschooled her for the next four years. She obtained her GED, scored in the 99th percentile on the ACT, and graduated near the top of her class from a private University.
In the end, the local school didn’t have the resources, the incentive, or the creativity to attend to my daughter’s needs.
Exceptions exist. Pockets of excellence reside with individual institutions, and occasionally encompass an entire school. For example, as a local employer, I met several young graduates from the small-town school who went on to obtain advanced degrees, so it was possible to acquire a good education from the school I removed my daughter from.
As an industry, education should be measured by cost and quality: how much does it cost to educate a student in a particular program? What level of knowledge and skills does the person gain after completing the program? How well are they socialized?
By all accounts, public graduates in the US rank very low among Western countries. By any standard, the levels of literacy, math skills and social knowledge for a large percentage of American teens are embarrassingly low. At the collegiate level, State Universities accept large numbers of students unprepared for advanced study. Open enrollment programs don’t discriminate. A large percentage never graduate:
Only 52.9% of students who enrolled in U.S. colleges and universities in the fall of 2009 completed school within six years according to the National Student Clearing House.
Given the artificially low cost of state owned universities, and the low entry standards, far too many people are incented to attend college. Instead of working and contributing to society, students must be supported during their studies, either by family, or the state. For those who leverage their education to contribute at higher levels later in life (engineers, business, science, teaching) the investment, for both themselves and society, justifies the investment. For those who never finish school, or are unable to find work commensurate with their degree, the years in college count as a pure waste. This situation is exacerbated by the graduation of too many people in any given year, creating a supply of over-educated people greater than the demand for their services. This allows companies to require a college degree for entry-level positions, even if advanced education is not necessary. As it stands, owning and operating public universities, subsidizing student costs through low tuition and student loans, creates a surplus of over-educated people. Balance doesn’t exist between the value of obtaining higher education, and the cost to get it. The explicit cost is borne by the taxpayer, the opportunity cost by society as a whole.
State universities are supported by state taxes. As such, there is no correlation between potential student’s demand (how many wish to attend), and capacity (class rooms, staffing). Too much capacity means waste. Too little capacity means a budget crisis.
This happened to me eldest daughter. After attending university for two years in New York, she moved back to California, intending to transfer to a state university. Unfortunately, due to budget constraints, the local state universities were not accepting out-of-state transfer students, no matter how well qualified. After two years doing clerical work, she was accepted as a rare transfer student at a local private university after her sister (the one homeschooled through high school) was accepted as a freshman. This was ironic, because the older sister began 9th grade at a public high school in a very well-regarded school district (I had the means to buy into the neighborhood) and the youngest in the local public grade school. We had attempted to get both daughters into the local charter school, but the wait list was too long. Both daughters had been homeschooled the year before (3rd grade and 8th) in California, and given the turmoil I created for them, vowed that they would begin and end the school year at the same place. During routine testing, the oldest tested in the gifted range, but failed the state history test. After two weeks of school, the oldest daughter was expelled, put back down to 8th grade (even though she passed English, math, and history). Family crisis ensued. We returned to the local charter school, and based on the circumstances, my daughter’s test scores, and the custom design of the school, she was accepted. At the mid-year break, my youngest daughter, still in the public grade school, decided she wanted to attend the charter school, so we applied. Based on their having accepted the older daughter, she was accepted, and transferred after the Christmas break. So neither daughter began and finished the same school that year.
Primary and secondary public schools are usually supported by property taxes. Students are required to attend the schools in their district, resulting in poor neighborhoods with poor schools, and better schools in wealthier districts. Everybody who has children, cares about their education, and moves to a new city, knows this. For those kinds of parents, the quality of local schools is a realtor’s best selling point. In general, parents don’t have any choice about where their children attend school, unless they opt out of the public system altogether. This leaves parents who can’t afford to purchase in better neighborhoods no choice but to send their children to mediocre (or worse) public schools, no matter how much they care. While vouchers offer some form of choice (where parents can use their educational vouchers at any accredited school), this still leaves the traditional infrastructure in place, one highly resistant to change or innovation.
As for parents who wish to opt out of the public school system, they are faced with two principle options: private institutions or homeschooling. Out of the ~54 million school aged children (PK-12) some 5.4 million attend private schools. Another 1.77 million children are homeschooled, for a total of 7.17 million children, or 13.4%, currently being educated outside the public system. In each case, their parents are paying twice to educate their children: first, in the taxes they pay to support public education, and secondly, bearing the full financial burden by sending their children to private school or keeping them home and educating them themselves.
Parents take their children out of the public system for various reasons. Most of the private schools are parochial, with some 80% of privately educated students in attending such schools. (Both my daughters graduated from the University of San Diego, a Catholic institution.) In most cases, these schools provide their students with an excellent academic experience, providing an additional incentive for parents who care about the quality of their children’s education. In other cases, parents may choose private schools more culturally suitable for their children, or ones that offer special programs (in the arts, say). Finally, some parents feel their children would be better off schooled at home, despite the challenge of providing a broad range of topics and skills necessary to complete their education.
All of this speaks to the shortcomings of the public school system. Despite having an option to educate their children for nothing (their taxes compulsory) many parents are willing to forsake the public school system and opt for an alternative.
Additionally, the prominence of these options demonstrates the ability of a free society to provide educational services without intervention of the government. Some people think education too important to leave to chance, that is, the freely made decisions within communities across the nation. But the same people don’t worry about finding bread in the markets: seemingly miraculous (the government doesn’t own wheat fields and processing plants and supermarkets), it’s always there, in many forms from which people can choose, freshly made just about every day. And bread (food in general) is certainly a more foundational need than education. Freely acting individuals ensure that farms produce the grains, vegetables and meat that we need; processing companies package and ship to local grocery stores, where consumers select and leave with the items they want. The same would happen if education were freed from government ownership and control, but at much lower cost, and much higher quality than we experience today.
The public education system is designed to inculcate societal values within the mass, to shape and mold each student into a good, obedient, abiding citizen. Most people submit mindlessly to this process, and little harm comes to them. For those who stand out, though, or don’t fit into the basic molds, school can be a painful, denigrating experience, as they feel the stress that comes with being the square peg pounded relentlessly into a round hole. Sometimes the process works, and their edges become suitably rounded until they resemble everybody else. Other times they break altogether and simply drop out:
It is important that the artist should be highly educated in his own art; but his education is none that is hindered rather than helped by the ordinary processes of society which constitute education for the ordinary man. For these processes consist largely in the acquisition of impersonal ideas which obscure what we really are and feel, what we really want, and what really excites our interest. It is of course not the actual information acquired, but the conformity which the accumulation of knowledge is apt to impose, that is harmful.
T.S. Eliot, Selected Essays
One of the ways that public education teaches conformance is through state-approved textbooks. These textbooks must conform to sanitized versions of American History, and treat potentially controversial subjects like evolution in specifically approved ways. Test standards are also quite specific, to the point where teachers are strongly encouraged to focus on getting their students to score well. This is referred to as ‘teaching the test.’
The public education system is mired in mediocrity, or worse. Teachers that can’t be fired, curricula that is conservative and outdated, infrastructure in poor districts in dire need, and classroom disruptions that prevent learning, all contribute to disturbing results: poor average test scores, low literacy levels, some 20% of students failing to graduate high school, and too many college-bound students unprepared for higher education.
Aside from the dismal record and the high cost of public education, what is more difficult to discern is what the alternative would be. If the education industry was unshackled from government ownership, what innovations would come about? What myriad of educational options would emerge? And at what cost? With the size of the demand, and the state of technology, it’s impossible to predict what would evolve. Except to note with assurance that an education industry free of government intervention would be dynamic, creative, cost-effective, and diverse. Parents and students would have choices. Those choices would manifest into various options that simply don’t exist today. Some would work better than others. Over time, the superior alternatives would gain prominence, given the ubiquity of online feedback so prevalent today. Who purchase anything significant without finding out what others think of it?
As to transitioning to private ownership of schools, one possibility would be to identify school assets, or school district assets (buildings, property, vehicles, cash, debt, goodwill) and create a corporation of some kind. Issue shares in the new corporation, and divide the shares among permanent administration and teaching staff (perhaps proportionally to their salaries). Shareowners would vote for board members, and then decide how to run the school, or sell off assets. All shares would be tradable, and the new school corporation could manage the school as they desire, with authority over tuition, staffing, curricula, and scholarships.
United States Postal Service
Without exception, the government holds a distinct disadvantage when owning and managing commercial entities. They simply cannot duplicate the information, the incentives, the motivation and the sense of urgency necessary to maintain operational effectiveness. Government-owned institutions routinely fail to introduce innovations, improve processes, or deploy the latest industry practices.
In contrast, every dynamic and successful private company features effective leadership and creative efforts to continuously improve. Improvement can take the form of new technologies, more efficient processes, internal investment in employees (training, communication, motivation), and/or innovative products.
In the end, businesses succeed when they deliver high quality products and services cost effectively. Organizations consistently deliver high quality products and services cost effectively when the members of that organization routinely contribute productively and creatively in a focused and coordinated manner. This drive for excellence, continuous improvement, and customer approval is largely lacking in government institutions, resulting in product stagnation, rising costs, lower productivity, and bloated payrolls. The United States Post Office is no exception:
The U.S. Postal Service (USPS) is a major business enterprise operated by the federal government. Revenues from the sale of USPS products are supposed to cover the company's costs. But with the rise of electronic communications, mail volume has plunged, and the 600,000-worker USPS has been losing billions of dollars a year.
Chris Edwards, Privatizing the U.S. Postal Service, April 4, 2016
The USPS remains in business for one reason: the legal and financial support of the government:
The USPS has a legal monopoly over various types of mail. Thus entrepreneurs are prevented from competing in the postal industry to improve quality and reduce costs for the benefit of consumers.
Chris Edwards, Privatizing the U.S. Postal Service, April 4, 2016
Additional support from the government includes:
As a result, USPS had been a financial disaster for American taxpayers:
Despite those advantages, the USPS has lost more than $50 billion since 2007, and will likely continue losing money unless there are major reforms.
Defenders of USPS point out that Congress has prevented them from making changes that would improve the financial health of the institution (closing rural offices, say, and blocking consolidation of mail-processing centers), the kinds of adjustments routinely made by free corporations when facing market changes. In addition to the political shackles, a powerful union, with substantially higher compensation, also burdens them. Finally, they are losing business, having seen a 40% decline in volume between 2001 and 2015.
The purpose of business (and USPS is a business) is to create new wealth in the world. New wealth is generally represented as profit. Profit is defined as the difference between how much is sold (revenue) less how much resources (time, capital, labor, material) that it took to produce the goods and services that were sold. The difference between revenue and cost (profit) equals additional new wealth, a greater amount of net value that didn’t exist before. When the opposite takes place (costs consistently exceeding revenue) wealth is consumed, and the world becomes incrementally poorer.
Consistently creating profits in a free market is a daunting task, and one that requires sustained effort. In a free market, every business competes daily for the good will of its customers. In a government-owned institution, the information necessary to consistently please its customers generally doesn’t exist. Due to the lack of alternatives, the motivation to improve processes and customer experience is very low, as the organization doesn’t face any consequences if they fail. It is impossible, no matter how bright, energetic, or righteous their management team, for a government institution to outperform, by any measure (financial, quality, customer satisfaction, product selection) a free-market counterpart.
The sooner USPS is privatized and removed from government ownership, the better off tax payers will be. Until that time, the institution will continue to drain wealth from the nation.
Humble Executive. Literary Artist. Altruistic Libertarian.