Marketplace - Why government benefits are likely to stick around

Episode Date: May 3, 2024

The U.S. spends about half of its $6 trillion budget on three government entitlements: Social Security, Medicaid and Medicare. When it comes to the national debt, cutting these benefits is often part of the cost-cutting conversation. In this episode, we hear how these entitlements grew to be so costly and why reducing them has been so difficult historically. Plus, the layoff that allowed one woman to focus on her small business, and the economic impact of university divestment.

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the debit card and money app for kids and teens. Greenlight helps kids and teens learn to earn, save, spend wisely, and invest. Get one month free and an extra $10 when you sign up for a Greenlight account at greenlight.com slash million. Look, we told you it was going to be a big week. From American public media, this is Marketplace. Look, we told you it was gonna be a big week. From American Public Media, this is Marketplace. In Los Angeles, I'm Kyle Rizdahl.

It is Friday today. This one is the 3rd of May. Good as always to have you along, everybody. This was, as I believe we promised on Monday that it would be a very dense week economic news-wise. Much happened, much to discuss here. Thankfully, to do all the heavy lifting are Gina Smollick from the New York Times and David Gurra.

He is back at Bloomberg. Hey, you two. Hey, Kai. Mr. Gurra, we start with you. The jobs report this morning, one hundred seventy five thousand new jobs. The jobless rate takes up to three point nine percent. If J.

Powell had designed this, he could not have done it any better. Discuss. Yeah, I think that he's got to be pretty happy with what we saw in that report this morning. Certainly engenders more confidence in the Fed that it's on the right track. You know, good sign that the Fed's actions are successfully and I should say not dramatically Slowing down the economy. We saw wage growth moderating average hourly earnings up, but you know less than forecast

You know the Fed has this dual mandate, of course We've talked an awful lot about inflation in recent months recent years but of course the jobs market is a huge focus of the feds and You know, it's something that the Fed chair did nod to in that press conference earlier this week, the tightness of the labor market. But yes, I made a lot of concern about what the feds future approach is going to be. I think this probably gave him a lot of solace to get the report that he got this morning. Gina, all of that discussion of the labor market, one thing came through pretty loud and clear and that was, I don't want to say how they're emphasizing wages, but they are looking at wages and Powell said in essence, look, wage growth has to slow,

not stop, but slow. And it kind of did in this report. Yeah. Yeah. It was kind of a somewhat confusing or at any rate very nuanced message that Chair Powell gave us about wages this week. He first very clearly said, you know, we don't target wages. And then he said, but in fact, wages are too fast for us to sustainably achieve our inflation goal. So,

you know, clearly we were watching wages. It made it pretty obvious that they are still a little bit nervous about the speed of wage increases. And this report had to be good for them on that, in that regard. You know, it's just one number. It did not align particularly well with what we've been seeing in the employment cost index, which is another wage measure. It's a little bit more dated, and it's one that the Fed pays a lot of attention to. So I don't think that this is like the end of this story by any means. We're still going to have to watch for further confirmation that wages are still coming, wage growth is in fact coming down. But I think this is the cooling they've been looking at. Not because

they're like horrible people who don't want people to get wage gains, but rather because they're worried it will feed into inflation. Right. So David, let me ask you this. So you're back at Bloomberg, you're on the podcast side of the shop now. It's called The Big Take. Everybody should obviously follow or subscribe. You and Kate Davidson and a colleague had a discussion a couple of three-ish, four days ago about

sort of the pivoting that the Fed has been doing, what they did back at the end of last year saying, you know, it looks pretty good and we're thinking about maybe cutting rates a couple of three, four times, and how then the data comes in and sort of smacks them upside the head in January, February, and March. And I guess I wonder now, number one, a sigh of relief coming from the Fed Chair's office, but also is another pivot-ish in the offing, do you think? It's funny. There was this moment at the Fed meeting back in December

when Powell came out, and he said that they'd had a conversation about cutting rates. And we obviously saw the excitement that that caused in the market. And since then, we've reckoned with the stimulative effect that that had on the US economy. And that's what I talked about with Kate Davidson and Anna Wong from Bloomberg Economics as well. And how since then the data have kind of gone against that and we've seen kind of the expectations

for those cuts being pushed back more and more and more. And leading up to the meeting this week, Jay Powell on the sidelines of the IMF meetings in Washington gave this kind of more hawkish comments when he was there with the governor of the Bank of Canada. And there was this expectation that maybe at this last meeting he was going to take a more hawkish tack, that there was going to be this other pivot. And we didn't see that this week. I mean, I'm curious what Gina was in the room. Maybe she has a better sense of sort of the tone from the Fed chair having been there in person. But he didn't make that hawkish pivot as fully as I think

we thought he might or the expectation was that he could in light of the data that we'd gotten. And again, in light of the jobs report that we got today, maybe he's coming out looking pretty good in light of how that played out. Gina, what do you think? Read the room for us, would you? Yeah, I think he worked really hard not to make a hawkish pivot. If anything, he leaned into dovishness in this.

Define some terms, Gina. Define hawkish and dovish. Yeah, absolutely. So hawkish meaning that you have a favor, a bias towards increasing interest rates and dovish meaning that you have a bias towards lowering them. What we heard from Jay Powell at this press conference is really that they don't think that the next move is going to be a rate increase. They do think that the next move is going to be a reduction. And then he laid out a couple of scenarios in which they could cut rates. And I think interestingly, some of those scenarios didn't necessarily involve like realized declines in inflation.

Right. If the job market starts to fall apart, that couldn't get us to cut rates. And I thought that was interesting because I think it sort of wasn't the message that Wall Street was bracing for as David just alluded to. And it was much more sort of the general story hasn't changed. Inflation is coming down. We think inflation is going to keep coming down and we still expect the next move to be down, not up. Yeah. I did love his, he gave like a triple headed multivariate approach to paths and ways this thing could go, which to me was fascinating. David, let me ask you this. There

was some discussion of the balance sheet, the Fed's balance sheet at this meeting and how they're gonna slow the roll off of it. Tell us why it matters and what it means. Yeah, I mean, there's this tricky tension here that the Fed obviously has piled into bonds and mortgage-backed securities over the last number of years, pretty significantly during the pandemic.

And there's been this effort to unwind that portfolio to get rid of them. And the trickiness of the tension is that when it comes to the value of that portfolio, by raising rates the way the Fed has, it's actually that the value of that portfolio has actually come down. I mean, I think what this showcases is just the trickiness of moving away from that period of quantitative easing of the Fed getting so involved in the bond market. And I will say if this is something that you're interested in, there's a book called Limitless that I can recommend. Give ahead, give the plug.

I want Gina to smile like it. I'll give her the plug and she can take it from there. Gina, the balance sheet. Help people understand. The balance sheet. Oh man. Well, so obviously, I think this is a really interesting juncture because the Fed's telling us that they are going to slow down their process of shrinking this balance sheet, which

they have mapped. Because the fed's telling us that they are going to slow down their process of shrinking this balance sheet, which they amass Who this thing during the pandemic because they're buying lots of bonds keep markets from falling apart and then later to Stimulate the economy this week They told us that they've been shrinking if they're gonna shrink it more slowly The point of that is basically twofold a they want to keep shrinking it like they want to be able to get it smaller than It is now, but B, they don't want to do that in a way that completely ruptures financial markets,

which they did in 2019. And so the last time they tried to shrink the balance sheet, things didn't go well. They're trying to let- Well, maybe we just lost Gina. It did not go well. Oh, there she is. She's back. Gina, we lost you for a second, but that's all right. Just in time because we got to go anyway. Gina

Smilich at the New York Times. Limitless is her book about the Fed. David Gura back at Bloomberg. The Big Take is his podcast. You all should subscribe. Thanks you two. Appreciate it. Thanks, Guy. At the corner of Wall Street and Broad on this Friday was one of those slightly disappointing news. less good than you would hope for. Jobs Report is actually very good news. It was one of those days.

We'll have the details when we do the numbers. The protests that we have been seeing on college campuses last three, four weeks are not the first time that divestment has been at the heart of students' demands. And since we are the show that we are, we're going to talk about the economics of the policy debate that has been happening. Alison Taylor teaches at the Stern School of Business at New York University. Thanks for coming on the program. Yeah, thanks for having me. Could you do a little compare and contrast just to start with? The case study of divestment and student protests is South Africa in the 1970s and 1980s.

How is that similar to or dissimilar to what is happening now on college campuses? Well, I mean, the first point to make is that many of the protesters are framing this as very, very similar to apartheid. So there are many people trying to draw direct comparisons. There is also a history in the anti-apartheid movement, which is important to flag up front. It took several decades to succeed, but a lot of elements of that movement focused on divestment and focused on college endowment. That said, there was a lot of consensus that apartheid needed to end and just questions about how much divestment would work or not work in driving that goal.

Here we've got a much, much more contentious and divisive situation. I wonder if you could also comment on just the nature of the global economy 40 or 50 years ago versus today. Well, I mean, yeah, it's much harder, I think, to target particular companies. Many investments are in big index funds. There are also wider questions about the degree to which you target companies directly and many of the protesters are saying target Boeing, target Airbnb versus targeting the banks and other entities that fund these corporations. Right. You mentioned endowments. Let's discuss for a moment because based on the information we have,

and we should say that endowments are notoriously not transparent, it does seem that the companies and the endowments in question, the percentages are decimal points worth of single digit percentages of these endowments that we're talking about. Yeah, absolutely. And so there's, you know, again, a real question of whether the students are trying to achieve just, I do not want my university to be associated with this entity, or whether they're actually trying to get something concrete done with money or political decision making. And I think depending on what your goal is, you would take a very different approach to these endowments. Right. So it's using the economic threat to leverage policy.

That's what they're trying to do anyway. Yeah. I think they're also trying to shift hearts and minds. So that the other point here is that there is a debate about whether divestment works. Over the short term, there is not a lot of evidence, for example, that divestment campaigns hit stock prices. But the evidence that divestment does work is more about shifting hearts and minds and social norms. And so if you can, over time, make a particular sort of investment or a particular sort of business decision morally

unacceptable, then you can move the needle and money will move. but this is a very, very long-term goal and it requires, you know, there to be a fair amount of societal consensus around whatever the issue is over time. So as the scholar of this in this conversation and that long duration that you're talking about, do you think this moment sustains? Apartheid, as you said, was a fairly clear-cut issue. This is on virtually every level, not clear-cut. Well, I think that's right. And so I think it is a difficult argument to make that what we're going to see is a widespread shift in how Americans or how American universities see this issue.

I think there's also certainly a scenario where these protests actually have the opposite effect than the protesters intend. Darrell Bock Discuss that. Keep going. Kate Harkness Well, because I think the way that the protests are being seen and treated by the media is certainly having the impact of convincing people that this is just, you know, this is a position that the students are taking that is not productive, you know, why this issue, why now, why this country,

why not the other human rights violations going on, what exactly are we trying to achieve and how? And so you've got both the conversation about where the divestment works and then the conversation about what the ultimate goals are. Right. Alison Taylor at the Stern School of Business at NYU. Ms. Taylor, thanks for your time, Emma.

I appreciate it. Thanks so much for having me. Coming up. We're starting to find our people. We're finding our community and it's been really magical. That's what it's all about, right? First though, let's do the numbers. Yeah, the really happy music. Here we go.

Dow Industrial has gained 450 points today on that jobs report, almost 1.2%, 38,675. NASDAQ up 315, that's 2%, 16,156. The S&P 500 found itself 63 points to the good, 1.2%, 51 and 27. For the five days gone by, the Dow up 1.1%, the NASDAQ advanced 1.4%, S&P 500 added about a half percent today. Live Nation surged 7.2%. It reported better than expected first quarter revenue.

The company said it expects continued growth in concert attendance. The Berkshire Hathaway annual shareholder meeting always seems to be kind of newsworthy so here are some numbers for you as capitalist idol Warren Buffett prepares to address the faithful in Omaha, Nebraska tomorrow. This is Buffett's 60th meeting since taking the helm at Berkshire in the mid-1960s. Buffett, by the way, is 93. He's going to answer shareholder questions for about five hours. This is the first shareholder meeting since Buffett's business partner Charlie Munger died at 99. Berkshire Hathaway, by the way,

sits on more than $167 billion in cash and owns more than $300 billion in stock. Look up their A shares. It's like six figures plus. Bond prices rose, yield on the 10-year T-note down to 4.5%, you're listening to Marketplace. This is Marketplace, I'm Kai Rizdal. The government of the United States spends, give or take, $6 trillion every year. About half of all of those trillions goes to just three programs, Social Security, Medicaid, and Medicare. They're the biggest of what are often called government entitlement programs.

And as the debate over the national debt circles around yet again, talk is turning, yet again, to cutting those entitlements. But as Marketplace's special correspondent, Stacy Vanik-Smith reports, doing that, cutting them, is historically pretty tough. Government entitlements are nothing new in the U.S. Actually, almost nothing is older. Go back to the very, very beginning, 1789. John Cogan is an economist at Stanford's Hoover Institution, specializing in fiscal

policy. He says entitlements go back to one of the very first meetings of the very first U.S. Congress. Like, John Adams was there. So entitlements are as old as the republic. The U.S. was barely a country. We didn't have our own money yet. There wasn't even a national anthem.

People used to sing this song called Hail Columbia to celebrate the new republic. Columbia was an early nickname for the U.S. because of Christopher Columbus. Also, there was no Washington, D.C. In fact, the vote for the first entitlement took place in New York City. It's where Congress passed the act to benefit Revolutionary War veterans. The program provided pensions to soldiers disabled as a result of injuries suffered during the Revolutionary War and pensions to widows of soldiers that had been killed in battle.

It was not a big program. Roughly $5 a month went out to about 1,500 veterans, and the benefits would only last for one year. That year got extended, and the program got expanded to include more former soldiers. Then it got expanded again. And finally, in 1832, 50 years after the entitlement was created, Congress expanded it to include all Revolutionary War veterans, not just those who'd been injured.

Well, all of a sudden, the application started pouring in. And within a year, the number of people on the rolls tripled. Revolutionary war pensions became 25% of the U.S. budget. Kogan says this is a pretty common trajectory for government benefits. They start small, targeting a very specific group of people. Then individuals that are just outside of the eligibility rules. They're close to qualifying but don't qualify. They fight to get their share of those benefits.

And then Congress eventually expands the program to cover them. And you get expansion after expansion after expansion. Case in point, social security. It started during the Depression as a way to get money to elderly people, many of whom were living in poverty. It is now the biggest thing the U.S. government does. By far. Tens of millions of people get checks every month, totaling nearly $1.5 trillion a year. But that huge tab? It's not because the program has been expanded so much, says Louise Schaener, an economist

at the Brookings Institution. Louise Schaener, economist, Brookings Institution The reason the entitlements are growing is because people are living longer. Which is partially thanks to entitlements themselves. Schaener says research finds again and again that entitlements help people, often the most vulnerable people, live longer, healthier, more productive lives. Sheiner says those very real, measurable economic benefits are a big part of why entitlements

tend to stick around. When you do programs that are actually like good ideas, then you're like, let's not undo it. And we don't have to, says Sheiner. The U.S US is the biggest economy in the world. We're not hurting for cash. The debt fight, she says, is not economic. That is about the politics. We can figure this out, but like only when people are ready to to give up something. But giving up an entitlement is just not like any other kind of compromise, says economist

John Kogan. Entitlement cuts feel personal. An entitlement program gives individuals a legal right to benefits. And in the sense then, you're taking away a legal right. And I think that's what makes it so tough. Kogan says major entitlement cuts have only happened a handful of times in the country's history. Usually, the programs get bigger.

Take Civil War pensions. Payouts began in 1862 to veterans and their families. That program became nearly half the budget at one point. And those payments went out for a long time. The last recipient of a Civil War pension died in 2020. That recipient was Irene Triplett, the daughter of a Civil War veteran. She received a check for $73.13 every month until she passed away at age 90, more than 150 years after the end of the war. In New York, I'm Stacey Vanik Smith for Marketplace. It's the end of the week for most of us and there is a decent chance you've been cooped up inside all day, so we wanted to get you some fresh air and some time in the great

outdoors. So we got Dylan Demery back on the phone. She's the owner of She's Fly. That's a fly fishing business focused on providing gear and events for women. It's in Fort Collins, Colorado. A couple of things have happened since the last time we talked and I got laid off just a couple of weeks ago. It's the fourth time in my professional career that that's happened. The first time I got laid off, we all knew it was coming. It wasn't so shocking. The second time I got laid off was the year that my husband died. That was a rough year. But I don't know, in my experience since Tony died, my life became less about

my career defining me and more about, you know, what are the other things that make me up, right? It's more than that. Now I feel like I'm being directed to focus all my energy on She's Fly. And it's funny when I told friends and family about my recent layoff, none of them, not one of them was worried when I said, I think I'm going to do She's Fly full time for a little bit and see what happens. I mean, even my mother, usually she'd be like, Oh my God, what are you going to do? She was just like, Oh, well,

if you're not worried, I'm not worried. That sounds great. So it just feels right. And I think that's why it's exciting. Some other things have happened. We really wanted to beef up our retreats and this year we're almost sold out on all four of them. So that hasn't happened before and our retail is coming up. So we went to expand onto Etsy and Amazon with some of our She's Flying merchandise. So I'm looking into these different ways to expand our marketing. And I made it a goal going into this year. I was like, well, let's triple last year sales. Why not?

And I think by the end of Q1, we were at 48% of 2023 sales already. So I think it's possible now, and now I'm just pushing and seeing where we can get to. The vision is still the same. We still want to be the source for women, for fly fishing, for gear and experiences for women. But I'm personally looking for the pathway to healing with fly fishing. And so I'm not quite sure how that fits into the vision yet.

I think that's something that's very brand new. I actually have a woman who heard about us and reached out and she had just lost her husband and was in tears telling me, I think that I need to go to your retreat. I think I need to do this. And she's coming in September. And I'm just, we cried on the phone together because it was just this amazing connection

that we had. And then I think we're seeing more of that. We're starting to find our people. We're finding our community and it's been really magical. Dylan Demery, they're turning that side hustle full time with She's Flying. It's in Fort Collins, Colorado. This final note on the way out today haven't made mention of this in a while, and that's on me.

We talked about the overall unemployment rate up at the top of the program. It went up in April to 3.9%. It went up, in fact, for all racial groups except black Americans, for whom it fell from 6.4% to 5.8%. That said, black Americans still do have by far the highest jobless rate in this economy. Our theme music was composed by BJ Liederman, Marketplace's executive producer is Nancy Fargalli. Donna Tam is the executive editor,

Neal Scarborough is the vice president and general manager. And I'm Kai Rizal. Have yourselves a great weekend, everybody. We will see you again on Monday, all right? MUSIC This is APM. All over the country, schools are changing the way they teach reading. And it's happening because of a podcast. I think your podcast has changed my life. And I'm going to share this podcast with everyone I meet.

Sold a Story investigates how teaching kids to read went wrong. New episodes of Sold a Story are available now.