A Nation of Moochers (26 page)

One executive of a landscaping company in Warren, Michigan, said he had had about a dozen job offers refused. “One applicant, who had eight weeks to go until his state unemployment benefits ran out, asked for a deferred start date.”

Surprising? Do the math: In Michigan the average unemployment check was about $255 a week. If an unemployed worker went to work at a landscaping company, he would likely make $225 more than that. But after taxes, the gap between couch and work shrinks to just $95 a week.

So is the additional $95 worth going to work 40 hours a week? In the heat? And the dirt? And the gasoline fumes? For many workers the answer, unsurprisingly, was no. As the
Detroit News
reported, one former landscaper who had been on unemployment for a year said he didn’t plan on returning to work until the benefits ran out. “It’s crazy,” he said. “They keep doing all of these extensions.”

Some workers aren’t content to merely milk the system. The
News
reported that some job applicants asked to be paid in cash “so they can collect unemployment illegally.” One contractor complained that the system was encouraging “more and more people and companies to play the system and get paid or collect cash money so they don’t have to pay taxes.”
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Economists confirm what common sense suggests: When you can pocket 50 to 60 percent or more of your salary for doing absolutely nothing, many workers will prefer sitting on the couch to returning to work. Moreover, extending the benefits tends to extend the time on the couch, while the expiration of the payments (not surprisingly) turns out to be a motivating factor in getting workers back to work.

Even members of the Obama administration have acknowledged as much. In 1995 economic adviser Lawrence Summers coauthored a paper with James Poterba of the Massachusetts Institute of Technology (MIT) that concluded: “Unemployment insurance lengthens unemployment spells.”
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Even though he would later serve in an administration that repeatedly sought to extend unemployment benefits, Summers provided a clear illustration of the ways government provided an incentive not to work. Summers argued that every unemployed worker has what he called a “reservation wage,” by which he meant the minimum wage that workers will have to get before accepting a job. Noted Summers: “Unemployment insurance and other social assistance programs increase that reservation wage, causing an unemployed person to remain unemployed longer.”

Summers broke it down this way: Imagine an unemployed person who had made $15 an hour before losing his or her job. Unemployment insurance, Summers noted, would replace about 55 percent of the lost income, or about $8.25 an hour. Assuming the worker is in the 15 percent tax bracket and pays a 3 percent state tax, “he or she pays $1.49 in taxes per hour not worked and nets $6.76 per hour after taxes as compensation for not working.”
*

What would they net if they actually took a job at their old wage? Summers asked. Again, the workers would pay a combined income tax rate of 18 percent, plus an additional 7.65 percent for payroll taxes. That would leave the newly reemployed worker with a net of $11.15 an hour. The difference then between work and unemployment was $4.39 an hour. The unemployed, wrote Summers, could well decide that “an hour of leisure is worth more than the extra $4.39 the job would pay.” That would also mean that his or her “reservation wage” would be above $15 per hour. “Unemployment, therefore,” Summer concluded, “may not be as costly for the jobless person as previously imagined.
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*

Summer’s analysis was confirmed in 2002 when Assistant Secretary of the Treasury for Economic Policy Alan Krueger and Bruce Meyer of the University of Chicago found that “unemployment insurance and worker’s compensation insurance … tend to increase the length of time employees spend out of work.”
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Professor Meyer has written that “the probability of leaving unemployment rises dramatically just prior to when benefits lapse.”
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In other words, the jobless behave rationally. They will take the benefit as long as they can and only start seriously looking to go back to work when it runs out.
^†

Harvard economist Robert Barro notes that “generous unemployment-insurance programs have been found to raise unemployment in many Western European countries in which unemployment rates have been far higher than the current U.S. rate.” Despite this, the Obama administration continued to extend eligibility to nearly two years from the standard twenty-six weeks. As a result, “We have shifted toward a welfare program that resembles those in many Western European countries.” Noting that the jobless remain on the dole far longer during the current recession, Barro believes that the unprecedented extension of the benefits has contributed to the slowness of the recovery. Barro argues that without the generous stay-at-home benefit, the unemployment rate would have been 6.8 rather than 9.6 percent in the fall of 2010.
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Chapter 17

MOOCHING OFF THE KIDS

TRENTON—Over the last eighteen months, a New Jersey woman ran up six-figure debts in the names of her five children, ages 3 to 17.

According to court records, Carmela Jennings purchased a $1.2 million home in Camden, New Jersey, taking out mortgages in the names of her two youngest children, Lindsay and Tina, aged 3 and 5. Records show that Jennings also purchased a Mercedes CLS class car in the name of her son Jed. Jed is unlikely to drive the $85,000 car, since he is 10 years old.

Jennings also applied for and was issued credit cards in the name of each of the children, using them to pay for landscaping on her house, a $75,000 gazebo in her backyard, and $65,000 in cosmetic surgery, including tummy tucks and breast implants … all charged to her children.

Authorities said that Jennings had told the other children and family members that she was making regular payments into a college fund for the children, but in fact, Jennings drained the inheritances the children had received from their grandparents and used it to pay for the installation of a new indoor swimming pool, outdoor hot tub, a basement home theater system, and paving a 1500-ft. driveway. Jennings also purchased a $35,000 model high-speed train set, also charged to her kids.

Jennings, a social worker, apparently also had a generous side. Records indicate that she purchased recreational vehicles for her three brothers, Eugene, Guido, and Sonny, and apparently fully funded the retirement accounts of four of her cousins. Because they all borrowed against their IRAs, none of the cousins reports any remaining balance. All of the costs were charged to Jennings’s children.

State authorities say that each child now apparently owes between $275,000 and $700,000 in debts run up by their mother.

Jennings could not be reached for comment.

This story is fictitious.

But how is it different from what we are actually doing to the next generation: spending trillions of dollars on infrastructure, health care, education, transportation, retirement, and “stimulative” pork, and charging it to the kids? Instead of being an act of fraud, however, the looting of the young has become bipartisan public policy. In 2011, 40 cents of every dollar the federal government spent was borrowed.

Even in an age of massive corporate bailouts, income transfers, and cash handouts, our ongoing intergenerational transfer of wealth is virtually unparalleled in history, inverting the normal relationship between generations. The Greatest Generation, quips former Wyoming senator Alan Simpson, has been replaced by the greediest generation, and we are leaving behind a legacy of generation-crushing, economy-wrecking debt.
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By 2020, the national debt will be more than the entire value of the national economy; interest payments on the debt alone will cost $1.1 trillion and will consume nearly half of all income tax revenue. But this is just the beginning: By 2050 the debt will be three times the Gross Domestic Product. In the next seventy years, the cost of interest alone will explode from 1.4 percent of GDP to more than 41 percent.
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The numbers are gravity bending: The unfunded obligations of Social Security are pegged at $7.7 trillion, but even this is dwarfed by Medicare’s $37.9 trillion in unfunded liabilities. Entitlements (excluding net interest) account for 56 percent of all federal spending; by 2052 those entitlements (Medicare, Medicaid, and Social Security) will consume every last dollar of tax revenue.
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Unless there is massive and politically painful reform, policymakers face the choice of eliminating every federal program except for the entitlements; raising taxes to confiscatory levels; or further increasing the debt to levels usually associated with the Third World.
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It’s hard to imagine what America will look like by then. Citing numbers from the nonpartisan Congressional Budget Office, Congressmen Jeb Hensarling and Paul Ryan warn that when the national debt reaches 90 percent of GDP, “the needle is in the red zone and economic growth will begin to slow about one percent per year” or by about a third of the nation’s projected economic growth. “The numbers are very, very clear,” they write. “The publicly held debt exceeds the size of our economy in 2023. The CBO model that measures the economy basically crashes and breaks down in 2027 because it can’t estimate what would actually happen to the economy if our debt levels get as high as they’re projected to get.”
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A Generation’s Story

Because the numbers are so large and abstract, it helps to put them in more personal terms. Using Congressional Budget Office (CBO) projections we can get a picture of what life will be like for a child born in 2010.
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At birth, the child emerges from the womb owing about $29,178 as his or her share of the accumulated federal public debt.

By age 10, without spending a dime, every child’s share of the nation’s public debt will have risen by 70 percent to $49,694 per child.

In 2023, when they turn 13, their parents’ generation will have stuck them with a bill for $58,971—double the debt they inherited at birth. According to the CBO, in 2023, for the first time, the per capita share of the debt will exceed the per capita Gross Domestic Product.

When the children turn 18 in 2028, their share of the national debt responsibility will have risen to $80,650.

Even if they have somehow managed to get through college debt-free, members of the class of 2032 will enter the workforce carrying a debt that has tripled in the last twenty-two years. They will attempt to launch their adult lives carrying a debt load of more than $103,800. As entitlement spending accelerates, so does their share of the debt.

By the time children born in 2010 turn 30, no matter how prudently they have managed their own finances, they will be saddled with a public debt of around $166,500, a burden that has risen 471 percent in three decades. The debt shadows their lives, choking out economic growth and stunting opportunity during what should be their most productive years.

At age 40, they will find themselves confronted with a public debt that will have grown from $9.1 trillion in 2010 to $122.8 trillion in 2050, an increase of 859 percent. In that year, each person’s share of the national public debt will be $279,738. A family of four’s share of the debt: $1.119 million.

Spend More, Borrow More, Worry Less

Even amidst the protestations of belated concern over the size of the debt, there have been influential voices on the left proclaiming:
Nothing to see here! No problem! All is well!

Leading the charge for even more spending and borrowing was Nobel laureate Paul Krugman, who used his
New York Times
column to pooh-pooh concerns over rising deficits and to cheerlead for even more intergenerational transfers. Not only should the rising deficits not be seen as worrisome, Krugman insisted, “running big deficits in the face of the worst economic slump since the 1930s is actually the right thing to do.” Leading a small band of progressives, Krugman urged President Obama and Congress to spend even more, faster, and damn the red ink: “If anything, deficits should be bigger than they are because the government should be doing more than it is to create jobs.”

Krugman saved his greatest disdain for those who fretted about the trillion-dollar deficits. “Many economists,” he wrote self-referentially, “take a much calmer view of budget deficits than anything you’ll see on TV.… The long-run budget outlook is problematic, but short-term deficits aren’t—and even the long-term outlook is much less frightening than the public is being led to believe.” So upset was Krugman by the “deficit scare stories” and the “drumbeat of dire fiscal warnings” that the laureate resorted to a painfully strained analogy:

To me—and I’m not alone in this—the sudden outbreak of deficit hysteria brings back memories of the groupthink that took hold during the run-up to the Iraq war.…

Now, as then, those who challenge the prevailing narrative, no matter how strong their case and no matter how solid their background, are being marginalized.