Grinding Down the Middle Class

In all the budget brouhaha emanating from Washington, one fact has been overlooked: the effect of cutting Washington’s budgets on family budgets around the nation. The plans currently on the table to cut the federal deficit will not make the deficit go away; rather, the budget plans transfer hundreds of billions of dollars in red ink from the public to the private sector. Washington’s budgets may balance if these plans go through. But the family budgets of millions of people in the American middle class won’t.

Think about it. If the federal government didn’t pay for grandma’s health care, who would bail grandma out?

Hint: It isn’t Steve Forbes. Medicare and Social Security were designed not just to keep old folks from destitution; they were designed to enable working families to build assets for the future--to buy homes, educate the kids, even take a vacation--without the financial burden of caring for aged parents.

Medicaid, which most people think ofas a program for welfare recipients, works for the middle class, too. In the old days, older people who needed nursing- home care had to sell their houses and everything else to pay the nursing-home bills. Once their own money had run out, their adult children had to pay.

Medicaid created a way out. Older people sign their assets over to their families and, after a waiting period, the government picks up their nursing costs.

It’s expensive; it’s a boondoggle--and it has been the financial salvation of many middle-class families.

Deficit hawks, armed with alarming charts and statistics, talk about the consequences of today’s deficits on future generations. Interest on the national debt will crush our grandchildren.

This isn’t so. Contrary to widespread belief, the deficit isn’t impoverishing future generations--it is enriching them, especially the middle class. The federal budget deficit, and the entitlement programs that drive the federal government into the red, have made the American middle class the envy of the world.

This concept--of building a strong and prosperous middle class by transferring public wealth to American families--isn’t new. It is part of the pioneer spirit. The Homestead Act of 1862 was the great entitlement program of the 19th century. It allowed--entitled--any American citizen to claim 163 acres of public land just by living on it.

It was a colossal boondoggle. “Vote yourself a farm!” was the slogan proponents of the Homestead Act used in elections--and it worked. Americans voted themselves farms, and the pioneers moved west, settling on their free homesteads from the Midwest to the Pacific.

Most deficit hawks thought this was crazy, and said the public lands should be sold at auction to reduce budget deficits and pay off the national debt. The Homestead Act, conservatives warned at the time, was a crazy giveaway that would impoverish America.

But in the end, the Homestead Act made America richer. The transfer of wealth from the public sector into private hands gave families the opportunity to build assets and a future--just as the entitlement programs do today.

With the end of the frontier, the Homestead Act could no longer serve as a mass transfer of wealth. In the 20th century, America found other ways to use the power of government to make families better off. Housing policy made mortgages artificially cheap, enabling millions of families to own their homes. Government grants to colleges and universities kept tuition low enough so that more and more Americans could get degrees. Government stayed relatively poor--and the people grew richer.

Today, the entitlement programs play this role. They are vast, wealth-creating subsidies for the middle class, the most productive group in our society and, culturally and politically, the key to our common future.

The theory is simple, and hasn’t changed since the Homestead Act: Give Americans a chance, and they will create wealth--enough wealth to offset the costs of helping them get a start. The Homestead Act cost the Treasury plenty--but it settled the West and created so much wealth that the cost didn’t matter. The GI Bill worked the same way: With more education, workers were so much more productive that the United States got richer even as the government gave billions away.

Despite the moans of the doomsayers, that theory still applies. Sure, the national debt is up to $5 trillion--but the public and private assets of the American people are up to more than $30 trillion.

The federal subsidies and entitlement programs are responsible for bringing the American dream of home ownership within reach of the middle class. Almost two-thirds of American households own the home they live in, and our national house equity alone amounts to more than $7 trillion--$4 trillion after netting out the mortgage.

Generation Xers are right to worry about the long-term financial health of the federal entitlement programs--but wrong to see them as transfers of income from the young to the old. Without Medicare, Medicaid and Social Security, American families would be so bowed down paying bills for the aged that they wouldn’t have money to send the Xers to college, much less buy homes for the kids to inherit.

If the deficit hawks actually manage to balance the budget by 2002--a big “if” for all those who remember the Gramm-Rudman promise to balance the budget in 1991, and Ronald Reagan’s promise to balance the budget by 1983--they will do it by transferring massive costs now borne by government to middle-class families across the United States. Ironically, the result will be the opposite of what many deficit hawks intend. Instead of shrinking government and enriching the private sector, eliminating the federal deficit will effectively transfer hundreds of billions, ultimately trillions, of dollars in wealth from the private sector into the public coffers.

When moaning about the deficit that our kids will inherit, we should also look at the assets they will get: $4 trillion in house equity, another $5 trillion in government assets, such as highways and public lands, trillions more in financial assets. The next generation of Americans may have problems, but they will be financially better off than almost anyone on the planet. And the generous transfer of wealth from the federal government to private households is one of the main forces keeping it that way.

Entitlement programs need to be reformed so they can be sustained, but as the budget debate waxes and wanes, Americans must remember that, like the Homestead Act and the GI Bill, entitlements are part of what makes America great. The federal government is the goose whose golden eggs have made us rich; if we want more eggs--and surely we do--we can’t starve and abuse it.