Tuesday, July 25, 2017

When Is Government Big Enough?

The welfare statist has a simple answer: never. To him, government is never big enough. In my new book, out in October, I explain in detail why this is so; where the welfare statist ideology comes from, what it has already done to our country and what it will do in the future. (Make sure to be the first to read it - pre-order it today!)

Sadly, the welfare statist ideology - egalitarianism - has conquered so much of America already, that its way of thinking runs deep even in supposedly conservative circles. Therefore, it is not surprising, but troubling of course, that even President Trump falls into statist habitual thinking.

On July 6, I noted that Trump has decided to add his own wing to the egalitarian palace we know as the welfare state. His contribution is a paid family leave program that would allow parents to be home with newborn babies, and working men and women to be home sick, on tax-paid leave. 

This program looks innocently small right next to fiscal behemoths like Social Security, Medicare and Medicaid. However, paid family leave could turn out to become one of the most expensive entitlement programs in our country's history. 

Since the program would be added to the roster of programs that are jointly funded by the federal and state governments, I explained in my July 6 article that even in its minor American format (European programs are far more generous - and far more costly) paid family leave would very likely throw a big fiscal wrench right into the Wyoming state budget:
Let us look at some numbers and see how much it might cost us here in Wyoming. Based on existing state-level paid family leave programs, it is reasonable to expect that the average benefit paid out to a parent would run be about $500 per week. The Trump program would mandate six weeks of leave, putting the total cost to Wyoming taxpayers at $3,000 per parent on paid leave, per year. In 2015 there were some 7,700 children born in our state (adoption parents are also eligible, but for simplicity we only focus on newborns for now). Assuming that number is going to be 7,500 in 2018 due to a shrinking population (and birth rates always decline in bad economic times), and assuming that one parent per child born will take paid leave, the total amount that the state would have to pay out would quickly reach $22.5 million per year. In 2016, the unemployment insurance system in Wyoming collected $59.5 million in taxes. The $22.5 million in benefits would constitute a 37.8-percent cost markup. Even if only half of all parents would use it (a modest assumption) the paid-leave program would quickly create a need for higher taxes. If we are not going to see taxes go up, we would have to severely restrict access to the program. To be blunt, in order to make it fit within a reasonable waste-and-fraud band of savings, our state lawmakers would have to put a cap on the paid-leave program at fewer than 2,000 families with newborns. Alternatively, the state would have to cap the benefit to about $130 per week.
Regardless of whether President Trump's proposal becomes law of the land, some states are forging ahead with their own versions. Just last week, Washington became the fifth state in the country to create its own paid-leave program. According to Seattle-based news station KIRO7, this new entitlement

offers eligible workers 12 weeks of either leave beginning in 2020, or 16 weeks for a combination of both. An additional two weeks may be used if there is a serious health condition with a pregnancy. Under the measure … both employers and employees pay into the system, and weekly benefits are calculated based on a percentage of the employee’s wages and the state’s weekly average wage — which is currently $1,082 — though the weekly amount paid out would be capped at $1,000 a week. Workers who earn less than the state average would get 90 percent of their income.

The state of Washington is actually an interesting case study in the pursuit of an answer to the question "when is government big enough?". It is not only home to this the latest expansion of a fiscally reckless entitlement program, but the city of Seattle is doing its very best to drive productive entrepreneurs and hard-working professionals out of its jurisdiction. 

More on Seattle in a moment. First, let us take a closer look at Washington's paid leave program. We need to do this because, before we know it, this egalitarian idea will show up here in Wyoming - either as a Trump invention or courtesy of spending-happy state legislators. 

A superficial look at the finances of the Evergreen State's paid-leave program seems to confirm that its proponents are correct. For a tax of only 0.4 percent of your wage, you get access to paid leave for at least 12 weeks, at $703 per week for the average employed person.

Looks like a winning concept, does it not? Well, as with everything that egalitarians invent, this program runs into problems as soon as its wheels hit the road:
  • On the one hand, the paid-leave program offers benefits for three types of leave – care for a new child, personal sick leave or care for a sick family member – for which every working Washingtonian is eligible;
  • On the other hand, every eligible person is also obliged to fund the program through the payroll tax.
The total tax that an average worker pays into the system is equal to $224.62 per year. At the same time, the total benefits that the very same person is allowed to take out of the program is worth $8,436 per year. That is a 37-to-one benefit ratio. To be exact: for every dollar a person pays in taxes into the entitlement program, he is eligible to take $37.55 out.

If this program had been in place in 2015, with this grossly irresponsible benefit ratio it could easily have run a deficit of $26 billion. 

Why is this important to us here in Wyoming? Because the Washington program is a model of what will come our way, once President Trump and Congress agree on a paid-leave system. We will be "offered" another federally sponsored entitlement program, the costs of which - as I explained earlier - are likely going to be way bigger than what any of our elected officials realize.

The more we know about how these programs work, the easier it will be to make a consistent argument to our state legislators (assuming our Congressional delegation is irresponsible enough to vote for it) why they should refuse to accept the program in the first place.

See, states can indeed say no to federally sponsored programs. If they want to.

Alas, let us get back to the paid leave program in Washington, the numbers of which are catastrophic from a budgetary viewpoint. Assuming it had been in place in 2015, here is how it would have played out. That year, all employees in Washington state earned a total of $191.8 billion in wages. A 0.4-percent paid-leave tax on that amount would have raised $767 million in tax revenue. Suppose, now, the parents of all newborns in the state had used what they were entitled to. There were 88,990 babies born in the Evergreen State that year. A total of 12 weeks of leave, per newborn child, at $703 per week, would have added up to $751 million.

With $767 million being two percent bigger than $751 million, it looks like the program is fully funded, right?

Not so fast. The fiscal beauty is only skin deep. So far, the numbers account for parents on leave with newborns, but not the two forms of sick leave that the program also pays people for. If every one of these eligible adults took the maximum sick leave they are entitled to, at the average $703 weekly compensation, then in 2015 the total cost to taxpayers would have run just north of $26.5 billion.

Yes, billion. Since $767 million in tax revenue basically went to paying parents of newborns, who is going to pay for the sick-leave part of the entitlement program?

The counter-point from welfare statists is often that people in general are not on sick leave for 12 weeks per year. That is true, but it is also true that when people get 90 percent of their pay covered by government - as is the case in the Washington paid-leave program - instead of having to be on unpaid leave, their incentives change quite a bit.

Even if the 3.1 million working adults in Washington limited their paid sick leave to only two weeks per year – one sixth of what they are eligible for – the cost would exceed $1 billion per year. This is a billion dollars that the paid-leave program cannot pay for.  

As I demonstrated earlier, we can resize this program to Wyoming proportions and see for ourselves how it would impact us. But we also have to keep in mind that once there is a federal paid-leave program in place, the cost over-runs in state programs, as in the example we discussed here, will magnify into the federal budget as well. Trump's paid-leave program will be run and funded jointly between the federal government and the states (that accept the program). 

I will soon put up a paper where I give an in-depth analysis of the paid-leave issue. In that paper I demonstrate that the total cost of paid family leave could run as high as $1 trillion per year. That is almost exactly how big Social Security is today.

Think I am crazy? I must be, because nobody else is talking about this, right? 

Five years ago, nobody talked about the economic stagnation here in Wyoming. Now Governor Mead is frantically trying to come up with ways to attract new businesses in order to break - yes - the economic stagnation in our state.

A year ago, nobody was talking about growing, multi-year budget deficits. I accurately predicted the state's deficit trajectory, and six months later my numbers were almost humble compared to the panic that came out of the mouths of the governor and the legislative leadership.

Wyoming can refuse to accept new entitlement programs. For the sake of our state, and our country, we must do just that. We have enough fiscal problems to deal with. And, at some point, we have to put a foot down and change the answer to that question: "When is government big enough?"

The proper answer is, of course, not "never", but "a long time ago".

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