In Chattanooga, Nobel laureate says cut entitlements to fix debt

In Chattanooga, Nobel laureate says cut entitlements to fix debt

October 8th, 2013 by Ellis Smith in Business Around the Region

Amid growing consumer unease at the mounting U.S. deficit, Nobel laureate Robert Lucas told a group of Chattanooga college students on Monday that the best way to fix the country's debt problem is to reform skyrocketing entitlement spending.

Lucas himself receives $2,000 per month from Social Security, he said, even though he has a pension from his days as a a university professor and doesn't need the money.

"I don't need a safety net," he said. "You need it for people who get injured or who are sick."

But fixing the problem will require many students to vote against their own interest for the good of future generations, he said.

Most Americans agree that taxpayers should fund a basic welfare safety net, but expenses have ballooned because few systems exist to stop people from taking advantage of systems like disability insurance, he told students at the University of Tennessee at Chattanooga.

"You're trying to help out the people who are really distressed, and you're spending a fortune on people who in no way are in distress," he said.

It's not that economists don't recognize that there's a problem, he said. Instead, little political will exists to strip benefits from citizens who are already receiving them, regardless of whether they actually deserve taxpayers' largesse.

Lucas, a professor of economics at the University of Chicago and winner of the Nobel prize in economics in 1995, told hundreds of UTC students that the mass transfer of wealth hurts the country's economic health because it creates a large bureaucracy that produces nothing of value, existing purely to move money from the people who earn it into the pockets of others.

"With this increase in transfer payments, you're not building anything, you're taking from somebody and giving to somebody else, that's the whole story," he said. "What we've done since World War II is we've reduced government spending on goods and services, and we've replaced them with transfer payments."

He compared the current entitlement system to homeowners' insurance. Homeowners only receive a check if their house is robbed or burned down, but those whose homes remain intact don't receive payments since they don't need them.

"My house didn't burn down, so I don't say to the insurance company, 'how come I didn't get my share like all these other guys?'"Lucas said.

The first step is to offer taxpayers a voluntary way out of the safety net, he said. Current beneficiaries could continue to get the money they've been promised, but future generations could decide whether to invest money on their own.

"You can't take someone who just turned 65 and planned their whole life around this government income coming in and remove that," Lucas said. "But you can plan your way out by giving people an option in their 30s and 40s to get out of the Social Security system, stop paying in, and not get the benefits later."

The next step is to provide incentives to work, and take away perverse incentives to soak up government benefits because of laziness rather than a true need. For instance, unemployment benefits in some cases are so generous that there is little reason to seek employment, he said. At other times, he acknowledged that workers will shun raises or offers of increased responsibility because they will lose their lavish government benefits.

Economists have suggested structuring some payments as forgivable loans, allowing taxpayers to recoup their payments in some cases. Others have called for so-called means testing, which would cut off benefits from those with the means to help themselves, he said, or who have seemingly accumulated a large amount of savings in preparation for their "disability."

"So what you do by the means test is, you help out the people who are seriously in distress, but you don't help out the people who are planning for it," Lucas said.

Russell Sobel, a visiting scholar in entrepreneurship at The Citadel, said that while Lucas' ideas are admirable, fixing entitlements in practice are fraught with danger for politicians on both sides of the aisle.

In fact, a majority of Americans - especially in southern states like Tennessee - benefit from wealth transfer, with the latest figures showing nearly 53 percent of Americans receiving some sort of benefit from a government program, according to current population survey data collected by Sobel. If government jobs are taken into account, a whopping 62.3 percent of Americans benefit from government programs, he said.

"They're currently having hearings on entitlement reform," he said. "They've been having these hearings for 20 years, but we can't get the political dynamic necessary to move forward with these reforms."

A series of anti-reform ads displayed photos of worried senior citizens and stark warnings about cuts to safety net programs, few of which have actually been proposed by either party, he said. One such ad showed a photo of a worried-looking older woman next to a message warning of coming cuts to entitlements.

"Do you want to hurt her?" Sobel asked.

Opponents of entitlement reform make effective emotional appeals to voters, Sobel said, who are content to allow the federal government push through spending packages that cost an average of $20,000 and $30,000 per person. But by passing the cost onto future generations in the form of permanent deficits, voters allow such spending programs forward, he said.

"We're talking about reforms that would take 80 percent of you off Social Security or Medicare," Sobel said. "The problem is when you put it up for a vote, most people will not vote to cut their benefits."

Contact Ellis Smith at or at 757-6315