From The Collected Works of Milton Friedman, compiled and edited by Robert Leeson and Charles G. Palm.

Transcription

1 The Political Clout of the Elderly. San Francisco, California: Pacific Research Institute for Public Policy, Luncheon address at the national forum, Social Security 2010: Making the System Work Today for Tomorrow s Retirees, sponsored by the Pacific Research Institute for Public Policy, Hotel Meridien in San Francisco, 29 April I suggested as a topic today the political power of the elderly. I am sure most of you expect me to tell you that the political power of the elderly is going to grow and to dominate. On the contrary, I am going to tell you the opposite. I believe, for reasons that I will go into, that the political power of the elderly is going to decline, not rise. The reason is very simple. There are just too many of us. That really sets the stage for the first comment I want to make on this subject. That has to do with the general principle of what makes a special interest powerful. What gives political clout to special interests? There are many things. I don t mean to say there is any particular one. But certainly one of the most important is that in order for a special interest group to get clout, it has to have relatively few members. There has to be a relatively small number of people who benefit from it. The principle is simple. If 60 percent of the people are going to benefit from a government program that gives a dollar to each of them, a tax of $1.50 must be imposed on each of the remaining 40 percent. And that means each of the remaining 40 percent have a stronger incentive to oppose the program than each of the majority of 60 percent have to favor it. On the other hand, for 10 percent of people, to take a simple example, to benefit from a program that gives a dollar to each of them, it will cost each of the other 90 percent only eleven cents. So each member of the minority has a stronger incentive to favor the program than each member of the majority has to oppose it. The most obvious example of this general principle is in agriculture. Frank Paish, who taught at the London School of Economics many years ago, said that it is very simple to define the difference between an underdeveloped and overdeveloped country.

2 Underdeveloped countries underpay their farmers; overdeveloped countries overpay their farmers. If you look around the world you will see how true that is. Every country in the world in which the agricultural population is the majority imposes heavy taxes on the majority to benefit the minority in the cities. Look at the underdeveloped countries in Africa, look at India, in any of these countries, who are the favored classes? It is not the peasants, not the proprietors. Or look, for that matter, at China or Russia. It has nothing to do with whether the country has a capitalistic or communist system. It simply has to do with the fact that only a small group can benefit substantially from a program that will cost other people so little that they will have no strong incentive to oppose it. The United States provides a marvelous example. Some time ago I looked into the benefits going to farmers. The agricultural population of the United States in the nineteenth century constituted a majority. Farmers were very influential. William Jennings Bryan became the Democratic nominee for president largely because of their support. You will recall the famous line from his 1896 speech, We shall not crucify mankind on a cross of gold. He was propelled to power by something called the populist and greenback movement, predominantly a movement of farmers. But they weren t asking for subsidies or price controls. The major plank of their program was that they wanted a silver instead of a gold standard in order to produce inflation. Since then, what has happened? As the number of farmers has become fewer, government spending on agriculture has gone up and up. Some time ago I published a column in the Washington Post in which I compared the situation in 1950 with the situation in During that thirty-year period the agricultural population declined from something like 6 percent of the total population to less than 2 percent. In the meantime, government spending per farmer rose drastically, even adjusted for inflation. We are currently spending something like $18,000, per year, per person engaged in agriculture, including both proprietors and workers. That is twice what they are earning themselves on the average. They are not benefiting from the massive 2

3 spending. They are using it to waste money on seed they ought not to plant, cows they ought not to raise, etc. I want to apply this general principle to the elderly. When the elderly were very few, relatively few, as they were in the 1930s when Social Security was adopted, they could get tremendous benefits at a very low cost to the majority. That is what all you experts were saying this morning. When Social Security first started, the maximum Social Security tax was $60. Yet the individuals who benefited were able to get substantial benefits. So you had the typical situation of a small minority able to impose a small tax on a large majority. This principle applies to our protectionist measures as well. It explains why we have tariffs. No one in this room would vote against a candidate for Congress because he or she had voted in favor of a tariff on steel (unless maybe you were a big steel-using consumer). How many of you in this room are willing to go to Washington, D.C., to testify against the government quota program on sugar? The domestic price of sugar is five times the world price. You are paying five times as much for the sugar you consume than you would have to pay if we did not have an import quota. In the process we are doing far more harm to the Philippines than any good we are doing by giving them money. As far as the elderly are concerned, they I should say we are becoming too numerous. The more numerous we become the more difficult it will be for us to foist this extraordinary burden onto the rest of the population. The elderly have been getting away with murder. They have been receiving very large subsidies; so now the average per capita income of the elderly is larger than that of the general population. And they have been able to do it because they were few. But now that we re becoming so numerous, we are not going to have anything like the political clout we once enjoyed. I ll come back to some examples. The only way to get around the general principle is by converting what is really a taxand-spend program into what people rightly or wrongly interpret as a program of buying something for their money. That was part of the genius by which Social Security was foisted on 3

4 the country, by making people believe, as the Social Security propaganda said for so many years, that they were paying money in their youth that would come back to them as benefits in their old age. They were told that they were not paying a tax; they were making a contribution to buy a benefit. That was really a very effective way of getting across a program that Phillip Longman correctly described this morning as reverse Robin Hood, as are all the other subsidy programs. That is what the agricultural program is. We give subsidies to the urban poor to buy milk while we follow a dairy policy that makes the price of milk twice what it otherwise would be. If anybody benefits, it is farmers, who are in the upper income groups, relative to the country as a whole. If you really want to get a program across, you should present it as if people are paying something for their own benefit. That was the way that the Social Security system was originally sold. A major reason it has been so popular a program is that it is so complicated and difficult that nobody can figure out who benefits and who loses. So, you can persuade everybody that everybody is benefiting. Of course, as some people have said, there is no such thing as a free lunch. I want to go to my second major theme. The first was about the optimum size of a minority. The second is something else, something that comes out of a talk given twenty-five years ago by Allen Wallis, formerly chancellor of the University of Rochester, and now Under Secretary of State for Economic Affairs. He titled his talk, Political Entrepreneurship. He said that we tend to apply the concept of entrepreneurship to the economic world and not the political world. We tend to think of people in the political world as people who are striving for the public good. But of course people in politics, as well as people in commerce, are seeking to promote their own interests. Just as there are people in the commercial world who promote their interests by being economic entrepreneurs, there are political entrepreneurs. What are the characteristics of people who are successful political entrepreneurs? There is a major difference between what brings success in the economic world and what brings success in the political world. 4

5 In the economic world the entrepreneur has to figure out what people will want to buy if he can make it available. People do not even have to know that such a product exists, they do not have to be in favor of it in advance. The key is to conjecture what they would buy if it were available and then produce it. In the political world, it is the other way around. An entrepreneur cannot try to conceive of a new product that nobody is getting and that they do not know about, because the only way you can be successful in selling a product in politics is by getting a lot of votes for it. So an entrepreneur in the political world must find something that people are already buying, that they are already paying for, but that for one reason or another is becoming increasingly popular and costly. And then the entrepreneur says, Well, this is a terrible burden on you, it should be borne by the public, we are going to make it a government program. Take some examples. Public education, or rather public schooling (it is called education; it is not, it is schooling) was not adopted because nobody was going to school. On the contrary, at the time public schooling was introduced, in New York state in the 1850s or 1860s, 80 to 90 percent of children were already going to school. Indeed, the major drive for public schooling came from teachers, not from parents. The teachers were not satisfied that they were being paid well enough. Public schooling was adopted when a majority of children were already in school and when the cost of schooling was going up. A political entrepreneur could offer to take it off the people s backs and transfer the costs to the anonymous taxpayers backs that was politically possible. Similarly, consider the case of government involvement in medical care. The government did not get involved in medical care when there were no physicians, when there were no hospitals. On the contrary, government became involved when medicine was improving, when the costs of medicine were going up, and when a political entrepreneur could get votes by saying that government is going to take the burden over. That is why Medicare was highly popular. The older were getting more numerous, their health care costs were going up. Universal medical care in Great Britain, for example, came into being after World War II in the same way. Something 5

6 like two thirds of all the beds in British hospitals now, are in hospitals that were built before Allen Wallis also noted that, supposing once a political entrepreneur s program has become successful, little further political advantage can be reaped by expanding it. He has to find something new to do, something to attract new voters. He predicted at that time, partly from the existing evidence in Great Britain, that if the government nationalizes something, takes over something that was expanding privately, government expenditures on it will initially go up, but then some time after will reach a maximum and then start to come down. He also predicted that the expenditure will end up less than would have been spent if the activity had been left in private hands. The reason is simple. If people want something and if they get what they pay for, they will be willing to spend more to get more. On the other hand, everyone might feel that the government is not providing enough medical care, but everyone knows that if he pays more taxes, he is not individually going to benefit, so everyone wants to be in a position whereby medical care is expanded by somebody else paying taxes. That is not likely to lead to a large increase. Allen produced statistics showing that spending on medical care in Britain, by every estimate, was less than it would have been if medical care had remained private. Recent studies show this happening to an even greater extent. Of course, what happens ultimately under these circumstances is that the system starts to break down. In Great Britain, many people have started using private physicians, buying private insurance and using private hospitals. And so you now have a very rapidly growing private sector of hospitals and medical care in Britain that is enabling those opting for private care to spend what they d like instead of what they are forced to spend. Consider the United States and the Social Security and old age system. There are many early signs of the development I have been talking about. Last night I dug out a new statistical abstract and looked at some numbers. I thought I could demonstrate that you had already passed the peak. Well, I can t. But from , total spending on programs for the elderly, divided 6

7 by the number of recipients, and corrected for inflation, went up 7 percent per year. Since then, the rate of increase is much lower. In , the rate of increase was 3.3 percent per year; in , 2.6 percent; in , for some reason,.02 percent; in , 1.75 percent; and in , 1.88 percent. As you can see, these rates are coming down. I predict that this trend will continue and that pretty soon spending per elderly person will decline, for the reasons I have already cited. Let us look at some other examples. I did not allow, although I should have, for the fact that half of the benefits (again, that is the wrong word), half of the subsidies from Social Security have become subject to income tax. In figuring expenditures per aged persons I should have subtracted the income taxes they paid from what they received. (The government gives with one hand and takes with the other.) In addition, the Social Security tax has risen substantially over the past two years and strong objections have arisen. And there has been a continuous fight to keep Medicare expenses down. Medicare came in much later than Social Security, and again it came in for a small group at the expense of a large group. It was sold to the participants, incidentally, on the same false premise that they were buying something for themselves. We all know that is not true. I say we all; I mean those who are benefiting from the subsidy that the rest of you are giving us. Medicare was sold on the same basis that this nonsense about long-term or catastrophic care is being sold that each person is going to pay for his own old age. There has been a great deal of pressure surrounding the Medicare program. Those of you who are so unfortunate to be in my age group know that Medicare has been getting increasingly stringent about what they will allow: the fraction of total payment approved, the extension of regulation over what physicians may do, the approved pysicians, and so on. No doubt, over the years Medicare has become increasingly restrictive. Even the proposal to fund catastrophic insurance calls for it to be funded through taxes on Medicare recipients. I do not know what the end story will be. I wish someone would try to do what I did last night more systematically. Try to get a time series for what has happened to the expenditure per elderly person: correct for 7

8 inflation, subtract income taxes paid on benefits, fees that Medicare recipients have paid, and so on. I venture to predict that a negative rate of growth will appear some time in the not too distant future, if it has not already done so. All you hear now is exactly the opposite. The American Association of Retired Persons (AARP) is a very effective lobbying group, but it is not particularly a lobby group for the elderly. It is a lobbying group for the people who run AARP and a lobbying group for the drug industry (which wants the government to pay for prescriptions). AARP is an economic venture that runs its own very big drug-selling operation. The question is, what are they going to be able to get, as a lobby. They will be effective in getting things only insofar as they promote benefits for small groups that impose small costs on the rest of the population. That is the fundamental principle with which I started. We talk about ours being a government of the majority. It is a majority government, but the majority is composed of a collection of all these little special interest minorities. If you want to get elected to Congress you do not want to find something that 55 percent of the people favor, you want to be in favor of something that 5 percent of the people favor so much that they will contribute to your cause, and another 5 percent, and another 2 percent, and so on down the line. And that is the way in which you collect enough campaign funds. Once you are in office, you stay in office by collecting campaign funds from the lobbyists. It is a very special sense of majority rule. I do not intend to propose any cure. There is a very good cure which is a decent constitution that prohibits government from doing all sorts of things, that says not only that government shall make no laws prohibiting freedom of speech, but that government shall make no laws prohibiting free trade, etc. But we are not going to get that. We have to live with the kind of system we have. Fortunately, it is better than any other I know of around the world. So, I am not trying to give you a downbeat message. On the contrary, I am giving you an upbeat message. I am saying that one of the things that we have been worrying about is going to be less 8

9 worrisome. I am sure many other things that we are worrying about are going to become more worrisome. 9