Red Ink: Varney on Entitlements

by S. Lord

Debate has been intensifying about entitlement spending as the fallout from the financial crisis has crimped state and municipal budgets to the breaking point precisely when their tax bases have been decimated.

For many, the issue of entitlements — how large, for whom, and the fact they exist at all — has become one of the defining political questions of the time. Fox Business Network anchor Stuart Varney has been looking closely at entitlement spending, the political debate in the United States, and the overall impact on long-term economic performance, interest rates, income, etc.

Trader Daily caught up with Varney recently and asked him a few questions about what may ultimately be the most important strategic issue facing U.S. financial markets.

Trader Daily: There is an unprecedented focus on state and municipal spending right now, even to the point of firing teachers. Is this focus ultimately anti-union? Will there continue to be a backlash against what is perceived as cushy deals?

Varney: There is an anti-union backlash. It is almost inevitable. When Milwaukee fires 560 teachers in order to pay the medical bills of retired teachers, people are unhappy.

Trader Daily: Many people indirectly benefit from government entitlements but don’t know it. How much distance is between the average middle-class American and the government spending that so many of them profess to dislike?

Varney: Good point… everybody wants less government spending, but nobody wants their entitlements cut.

Trader Daily: The math on entitlements makes it pretty clear that spending has to fall and revenue has to rise. When viewed like a business, the solutions are not hard to see. Yet the political process makes progress impossible. Has the aftermath of the financial crisis made the tough decisions any easier to make?

Varney: The financial crisis makes sound policy decisions much more difficult. The panic left people angry… angry at bankers, bonuses and  bail-outs. It is very difficult to cut the safety net, while bailing out Wall Street.

Trader Daily: There are distinct shifts underway within both major political parties regarding entitlements – some more extreme than others. How is this issue changing the traditional positions of both parties?

Varney: I don’t believe there has been a significant shift in either party on entitlements. The Democrats are still the party of government and social services, and the Republicans are still the party of growth and private enterprise. There may be some fudging around the edges, but fundamental principles have not changed.

Trader Daily: Some states are more generous than others when it comes to handouts. Is there a correlation between states with more comprehensive entitlement policies and the yields they must pay on debt?

Varney: Yes, there is a difference in borrowing costs… witness Illinois right now. It refuses to make spending cuts and instead raises taxes. Result: massive borrowing requirements that will be much more expensive than, say, Texas.

Trader Daily: Looking at Treasury yields, Wall Street has not yet priced a budget breakdown to any degree. What happens when investors sense we do not have the stomach to address entitlements head on? How far are we from that point?

Varney: Wall Street has not priced in a budget break-down because it doesn’t expect it to happen. Plus, America is taking in all the hot money that is running away from Europe’s debt problem. That’s why the 10-year Treasury currently yields [under] 3%.

Trader Daily: Can the dollar remain the reserve currency if we do not get entitlement spending under control?

Varney: There is no alternative to the dollar as the world’s reserve currency, certainly not in the short term.

Trader Daily: Has the European “social economy” model been irrevocably damaged by the debt crisis there? Or can Europe find a way to keep their social net traditions while also restructuring their finances. If so, can we learn anything from the process?

Varney: Yes, as a refugee from the European “Social Model” i.e. Socialism, I can assure you that that model is broken. You just can’t afford cradle to grave security with an aging population and a very low birth rate. And I haven’t even gotten into the moral issues that Socialism poses. And yes, there is a lesson for America: don’t follow the European road!

Trader Daily: Is privatization of social spending programs a realistic alternative given the financial Armageddon that just happened? Can social security, Medicare etc. become valid candidates for some degree of private sector management?

Varney: Privatization is the ONLY way out of the mess. Only the competition of free markets and market forces can keep costs under control.

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