Lake Wobegon Economics and the Welfare State

Remnant Review

"Well, that's the news from Lake Wobegon, where all the women are strong, all the men are good looking, and all the children are above average." -- Garrison Keillor

To understand why the welfare state will continue to expand its operations until such time as the Great Default ends it, we must understand Lake Wobegon economics. It is the widespread belief that, with respect to paying the bills run up by the welfare state, everyone will pay less than his fair share.

This was described well in 1974 by James Dale Davidson. I remember the night I saw him on the Johnny Carson show. I still do not know how anyone with so serious a message got on the show. It was probably this show.

Carson asked him to describe how Congress spends money. He said it was like a credit card with no limits. The voters hand this card to all members of Congress. Davidson asked the viewers to imagine what would happen under these repayment conditions? At the end of the year, all of the bills run up by the Congress would be paid equally by each Congressman's district. It didn't matter how much each district received; all of them would pay the same amount. The impulse would be obvious: every Congressman would spend as much as he possibly could in a quest to get more for his district from the federal government than his district paid into the federal government. There would be no restraint on spending. He then said this is close to how Congress operates.

Today, the size of the federal deficit testifies to the accuracy of Davidson's hypothetical scenario.

This is Lake Wobegon economics in action. It is going to bankrupt the West's national governments at some point. They are all going to default. The voters will not call a halt before this day of reckoning because they are true believers in Lake Wobegon economics.

WOMB TO TOMB

The phrase "womb to tomb" has been used all my life to describe the modern welfare state. The phrase is incorrect. The era of the welfare state in the United States is (1) from age six until graduation day at one end of the demographic spectrum, and (2) age 63 to death at the other end.

Womb. Some demographic group has to pay to keep the welfare state going. This is not people under the age of 18. It is obviously not people who have retired. Therefore, by definition, the phrase "womb to tomb" is misleading. It is womb to early adulthood, and then retirement to tomb.

Yet even this is too strong. We do not have universal free daycare in the United States. So, the welfare state begins at approximately the age of six, when most children start going to public schools. It ends when the student takes his final degree in the educational system. For about two-thirds of the students, this will be around age 18. For the rest, it may extend for another five years. About half of all college freshman graduate with a B.A. degree in six years. Then, for a relative handful, comes graduate school.

So, from the point of view of government support of an entire generation, we are talking about a welfare state funding the lives of people from age six to about age 18, and funding another third of that age group until the age of 22 or 23.

At that point, college graduates are supposed to enter into the workforce, and they are supposed to make enough money so that they can support everybody behind them, and everybody over the age of 62. In other nations, the age distribution will be different, but this is pretty close to it.

Winners. The major beneficiaries of the welfare state from age six to graduation are local government employees through high school, and state government employees through college. The educational services that are actually delivered to the students through upper division in college are probably worth less than 10% of total expenditures. If we count Salman Khan's Academy as a legitimate and effective source of education, which is delivered free of charge to over 26 million enrolled students, then the entire public school system above the fourth grade to high school graduation is mostly wasted. This money goes to bureaucrats who are the primary beneficiaries of the wealth transfer. The great beneficiaries are the administrators. Then come the teachers. Then come janitors, school bus drivers, and support personnel.

In other words, with respect to the educational expenses, most of these expenses are not given to the poor; they are given to the middle class. The welfare state system, age six to age 18, is built in the name of the poor, but the great beneficiaries of the entire educational system are middle-class people who have gone through certain bureaucratic hoops. Some of them are upper middle class in terms of income.

The growth of compulsory education after World War II has been the main source of the wealth transfer through high school. Above that, it was the G.I. Bill of Rights, which expanded primarily tax-funded state universities. Again, as we can see with online education, something in the range of 95% of the entire collegiate educational expenditures benefit the tenured bureaucrats who have gained their offices through bureaucratic survival. The benefits are not going to the students or their families. We know that the first two years of college are essentially wasted academically. The students don't learn much of anything. The net returns on the collegiate educational experience is limited to those students who make it into upper division, and who then graduate.

So, with respect to where the money goes, the welfare state prior to graduation is primarily a transfer of wealth from taxpayers to bureaucrats. The net return for the alleged beneficiaries is in the range of 10% of the wealth extracted from the taxpayers.

Today, students can gain access, free of charge, to most of the classroom lectures by the professors at the world's most prestigious universities. They are on YouTube. For almost no extra money, all of the other colleges could post the lectures of their professors within four years.

Parents are paying for grading. Computers can grade most of the exams until the junior year in college. This is what Khan Academy does. In colleges, Scantron machines grade the true/false and multiple-choice exams. That is what the college entrance exams use. So do CLEP, AP, and DSST exams through the first two years of college.

By now, all this information is easily available, but the general public is unaware of it, and the general public does not care.

In the United States, beginning in the late 1830's in Massachusetts, parents have gotten the idea that their families can benefit from wealth extraction from the other age groups. So, they will not turn loose of this supposed benefit. It is clear today that a family's net educational benefits are a complete delusion. It is a wealth transfer from people who are productive, and it goes to people who are inherently unproductive in the economy: employees of the public schools. What they provide can be obtained free of charge on the Khan Academy. These people are on the dole. They go through the motions of performing valuable services, but the services that they perform could be done online essentially for free. The Khan Academy has proven this. This is not hypothetical.

So, the welfare state, ages six through graduation, is maintained, not on the basis of actual net welfare received by the deserving poor, but in terms of the political power, ideological power, and above all religious power of America's only established church, the public schools.

This is a deeply religious issue. Priests have always demanded control over the content of education. Only the family-funded tutorial system challenged this up until the mid-19th century in the United States. This is a battle for the minds and souls of men. It is not primarily a battle over wealth transfers. It is a battle for state control over the content of the thinking of the next generation of voters.

The illusion of net family economic benefits is a delusion. The beneficiaries wind up paying vastly too much in local property taxes throughout their working-age careers, and the benefits their children receive educationally are minimal. Yet they will not change. Today, at least 85% of all Americans have their children in the public school system, kindergarten through 12th grade.

Tomb. So, let's look at the other major welfare expenditures, retirement income and subsidized medical care. Here, the most numerous beneficiaries are the middle class. That's because there are so many of them. They have the votes. The middle class pays into the system, hoping that it will receive more in payments than it puts in. It's Lake Wobegon economics. Everybody hopes to take out more than he put into it.

Yet at the same time, they insist that they have paid for all of the benefits they take out. The beneficiaries do not admit to themselves or anybody else that they are on the dole. They do not admit that this is welfare. They say that it is their entitlement. They have paid into the system, they insist. Franklin Roosevelt set up Social Security this way in 1935. He knew from the beginning that the workers' token payments into the system would undermine all resistance to the system, because people would never acknowledge that it really is a welfare state program. The public will not admit that they are indulging in a compulsory wealth transfer system.

There is something else to consider. People really do think they are going to live longer than is statistically possible. It really is Lake Wobegon economics. They also believe that they are entitled to the medical payments to keep them alive for an extra three years, or five years, or whatever. They expect to take out of Social Security their maximum possible payments, and they want Medicare to subsidize this life-extension program.

The state therefore is seen as a healing institution. It takes on one of the characteristic features long attributed to God. Historically, people have prayed to God when they are out of money, out of health, or out of time. Today, they don't feel that they need to pray to God for these, because the imitation God of the state offers relief from the problems of life for those in the retirement years.

Who winds up with the money? These days, the great beneficiaries are the health care professionals who have been certified by the state to receive the money. Hospital administrators, HMO administrators, and physicians get most of the money, and support staff also get their share of the takings.

All of this is done initially in the name of the poor. Then, once the systems are in place, it is done in the name of the middle class. The voters believe that the state has the power of healing, so the welfare state in the United States is primarily a religious affirmation, once somebody retires. The main subsidy is Medicare, which is in the range of $1,000 a month per retiree. This is what is going to bankrupt the modern welfare state.

PRIESTLY FUNCTIONS

So, analytically speaking, the main functions of the American welfare state are religious in nature. They are religious in nature in the years of education, because the money goes to support what is functionally a priesthood. It is a state-certified priesthood. Education has been a traditional area of service provided by priests. Families have always been the primary educators, but the support group that was brought to provide educational services outside the family has always been the priesthood. This has not changed. The main difference is this: the state provides the priests today, not the church. The state used to rely on priests, but now it has eliminated the middleman: the church. In the case of Massachusetts, it is obvious. The state of Massachusetts quit supporting the Congregational churches in 1833, and by 1837, it had set up a state Board of Education. This could not be any clearer.

From retirement age until death, the federal government is seen as a substitute family. The family was always present at the death of some elderly person. The family supported the elderly person up until the point of death. Today, the state supports the elderly person up until the point of death, thereby taking over the primary functions of the family.

Thus, in the United States, there has been a transfer of authority from the family to the state at both ends of the demographic spectrum.

There has been a transfer of authority from the church to the state with respect to advanced education.

CONCLUSIONS

The significant fact is this: families have voted for this wealth transfer at both ends of the demographic spectrum. The motivation is obvious: individuals look at the financial burden of education and retirement, and they adopt Lake Wobegon economics. They think that they will escape the burdens, net, by allowing the state to enter the scene and tax everybody, college graduation to retirement, in order to fund the educational program and the healing program. They have never sat down to estimate what the total tax burden is going to be on them personally. They just assume that they will beat the system. Again, this is Lake Wobegon economics. Individually, people think they're going to escape the burden, net, when in fact they are caught by the net.

This is why people go to Las Vegas. This is why people bet on sports events. This is why people buy lottery tickets. It is Lake Wobegon economics.

Bottom line: people think they're going to beat the odds. They vote accordingly. They vote to transfer authority away from the family primarily, and away from the churches secondarily, because they have adopted Lake Wobegon economics.

Once they start paying into the system, they demand full benefits. This is why they will not abandon the modern welfare state. They look at their situation, and they see that they are now trapped by the tax system from graduation until retirement. They have to pay into the system. So, their goal is simply to maximize their take out of the system. They want to take more out of it than they put into it.

Think of Congress with the credit card.

At some point, Congress will default.