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Book review for "The High Cost of Good Intentions".

John Cogan, a fellow at the Hoover Institution and faculty member at Stanford University's Public Policy Program, has written "The High Cost of Good Intentions," which provides a detailed history of U.S. entitlement programs. The book's coverage spans the beginnings of U.S. entitlements with the pension benefits provided to Revolutionary War veterans through the present, with the Affordable Care Act's Medicaid benefits expansion. It will surely be of interest to academics, policymakers, and the members of the public with concern for the consequences of entitlements in the United States.

The book's introduction draws the reader in by describing the current scope of U.S. entitlements. First, acknowledging that these programs have had important positive impacts, including helping veterans, greatly reducing poverty among retirees, and giving needed assistance to countless Americans in economic distress, the introduction also details the fiscal enormity of these programs as a whole. Cogan writes that entitlements "now transfer hundreds of billions of dollars each month from one group in society to another."

The facts presented are remarkable. For example, among all households with heads under 65, over 40 percent receive entitlement benefits. The poor receive only about one-half of entitlements. Nearly all of the increased federal spending as a share of output since the World War II era down to the present, 15-21% of GDP, has been due to entitlements.

With this compelling introduction in hand, Cogan dives into the history of entitlements, program by program. One recurring theme of the book, delivered via historical examples, is a set of common threads relating to how various entitlement programs have been established and grown over the past 230 years. Developing these common threads is one of the book's real strengths. I will discuss three of these common threads next.

First, Cogan explains how the "equally worthy claim" often justifies the expansion of an already-established entitlement program to larger and larger populations. The equally worthy argument states that, once a program has been established, interest groups are capable of convincing politicians and the public that fairness requires the expansion of the program to cover a wider and wider group of recipients. This includes the elimination of a means test on Revolutionary War pensioners in 1832. Proponents of the elimination of the means test argued that claimants were worthy of pensions on the grounds that those who gave their service in defense of liberty should not be humiliated by having to publically proclaim their poverty. The equally worthy claim was also part of President Truman's push to extent Social Security coverage to millions of uncovered Americans in the early 1950s.

Second, the book presents multiple examples of how the introduction of in-kind entitlements can generate a new lobby for an entitlement program: the service providers of the in-kind benefits. The GI Bill, for example, provided in-kind benefits such as education and home loans, which led to the creation of service-provider lobbying organizations. This added to the already powerful lobbying done by groups representing the entitlements' recipients. The rise of service-provider lobbying organizations at that time, Cogan argues, foreshadowed a similar trend for the industry lobbyists that provided many types of in-kind benefits in the 1960s and 1970s to the elderly, poor and disabled.

Third, the author compellingly describes how times of federal fiscal surplus and/or ballooning entitlement trust funds lead to calls for expanded entitlements. Then, once these inevitable expansions are enacted, they are almost impossible to reverse once the nation's fiscal fortunes deteriorate. In the 1930s, a ballooning Social Security trust fund--meant to buffer against future demographic changes--led to an eventual liberalization of benefits. In discussing the 1939 Social Security liberalization, Cogan writes "The pressure from within and outside Congress to spend surplus funds would grow once the surpluses emerged, inevitably leading to a liberalization that would soak up the excess revenues." This pressure, also, arose and won out in the 1820s and 1830s with retirement pensions for Revolutionary War officers.

Although not always explicitly stated, the book sometimes reads as if these are poor justifications for entitlement growth. For readers that are economists, like myself, evaluating the quality of the above justifications for a particular entitlement requires delving into ill-defined concepts like fairness. For example, a proponent of a particular entitlement claim's expansion may find the equally worthy claim to be an entirely satisfactory rationale based on fairness. As a second example, another reader might find the development of service-provider lobbying groups to be motivated largely by benevolent concerns of frontline providers for the well-being of a needy group rather than simply self-interest.

Cogan approaches entitlements from several dimensions, including history, politics, fiscal considerations, and legal issues. From a legal perspective, Cogan discusses the Supreme Court's decision regarding the constitutionality of New Deal entitlements under the "general welfare" clause. The book delves into federal court decisions in the 1960s that, the author states, found that entitlements were sufficiently similar to property that they fell under due process guaranteed by the Constitution.

From a fiscal perspective, it provides a wealth of statistics in discussing each of the programs; however, these appear almost exclusively in text rather than organized as tables or charts. Readers that prefer more structure in the presentation of statistics may be disappointed that the book contains only four charts and no tables.

The book is at times very funny. Cogan shares a telling story about the Social Security surpluses existing alongside many years of budget deficits for the rest of the federal government over the past few decades. As the author states, the trust fund itself owns no outside financial assets and exists merely as a distinct entry on the Treasury department's accounting ledger. To provide a firewall between the federal government issuing debt on one hand and maintaining a surplus on the other, Congress passed legislation for the Treasury to engage in what Cogan describes as a "purely cosmetic exercise" that:
   set aside a portion of a newly refurbished public debt
   building to house the trust fund [...] The building
   provided space for a government-issue, metallic filing
   cabinet, complete with combination locks into which
   newly minted nonnegotiable U.S. Securities were,
   and are currently being, placed.


The book goes into great detail on the various historical budgetary costs of various entitlement programs. By budgetary costs, I mean those that have direct fiscal impact on the government: requiring it to collect taxes or issue new debt. Of course, a second distinct cost relates to the behavioral adjustments individuals make in response to those incentives that might distort the otherwise efficient decisions that they would make. A canonical example is that an unemployed person receiving UI entitlements may reduce their effort to find a job. (1)

Assessing the behavioral response of individuals and evaluating the size of these distortionary costs is certainly important for calculating the total cost of entitlements, but this receives much less attention in the book. The author footnotes an academic article here and there, usually in support of large behavioral responses and large distortions, but overall the discussion is limited. I am not an expert on the area, but my impression is that there remain more disagreements among researchers about the size of these distortionary costs for a large number of entitlement programs.

The scant discussion of the existing research would not be an issue for the author if he limited the scope of his analysis to the history and budgetary impact of U.S. entitlements; however, the author often takes a strong stand that these costs are high without a sufficient or sufficiently nuanced discussion of existing work in this area.

Even with these caveats in mind, this is an easy book to recommend. Cogan's deep dive into a single aspect of U.S. federal policy may, in the long run, make it as important as a similarly remarkable treatise, "A Monetary History of the United States" by a fellow Hoover Fellow, the late Milton Friedman.

(1) Some economists have even argued that particular entitlement programs can generate benefits by correcting distortions present in a laissez-faire economy. According to one argument, UI benefits put more income in the hands of individuals, during recession, which helps boost "aggregate demand" caused by some type of distortionary shock.

Bill Dupor is an Assistant Vice President of Research at the Federal Reserve Bank of St Louis.

https://doi.org/10.1057/s11369-018-0087-z

Bill Dupor [1]

Published online: 27 June 2018

[mail] Bill Dupor

william.d.dupor@stls.frb.org

[1] Federal Reserve Bank of St Louis, St Louis, MO, USA
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Comment:Book review for "The High Cost of Good Intentions".
Author:Dupor, Bill
Publication:Business Economics
Article Type:Book review
Date:Jan 1, 2019
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