Friday, May 16, 2008

The New Deal reconsidered: Reforming the welfare state

A few postings ago, I alluded to the approaching crisis of the welfare state. If it is to survive in some form and not bankrupt the federal government and create the largest economic and political crisis since the Great Depression, we need to start now to negotiate the critical choices. The Republicans had their chance to get the ball rolling in the 1990s, but (welfare reform apart) threw away their opportunity, then headed off in a very different direction after 1998. The result was a strange parody of liberalism, the Republicans' attempt to create their own version of vote-buying on a national scale with two new middle-class entitlements, in education and health care. A latter-day version of Nixonism, it worked for a few years, but has now lost credibility and heightened the federal government's burden.

It's not as if the problem is new. A spate of books published in the 90s (books by Jonathan Rauch, David Frum, Robert Samuelson, and Alice Rivlin) and, more recently, histories (like those of Goldberg and Shlaes) and policy briefs (like Bruce Bartlett, George Shultz, Charles Murray, and Cass Sunstein's) have mapped out the problem from different points of view. Previous crisis points, in the late 30s and late 70s, have periodically reminded Americans of the question: what to do about this behemoth born in the 1930s and periodically threatening to devour us with its ravenous demands for money and authority?

But the political context is different now. The imperial presidency is a greatly shrunken institution. Keynesian theories of inadequate demand, the business cycle, and "fine-tuning" have been discredited and replaced by newer versions of classical, neoclassical, and monetarist theories. We live today with a government that is fat but weak, unable to say no, tied down by an army of pressure groups jockeying to grab a piece of government power and impose narrow agendas at the expense of everyone else, proliferating and inconsistent laws, and politically-driven litigation. We lack powerful parties or executive leaders who can decisively steer or shape it. The last president to try was Reagan, with only modest success. Equilibrium, as in Clinton's second term, is only the accidental product of partisan stalemate.

Too much of the politics of the West, especially in Europe, but here as well, takes this behemoth for granted as an eternal presence that has always been with us. But it is not so. The welfare state in Europe dates from the 1880s; in the US, at the federal level, from the 1930s, although its seeds were planted earlier. From the start, observers could see the contradiction between claiming to represent the public good, while in actuality helping self-serving interest groups at the larger public expense. After the totalitarian era passed, the war ended, and the New Deal coalition broke down, the danger of greedy interest groups became all the stronger. Added to this were new, long-term dangers, especially the demographic danger, as the postwar Baby Boom gave way to bust, of not being able to afford the extravagant promises. Something less all-encompassing, yet still noxious, the fantasy of "fine-tuning" the economy through a mix of taxation, monetary policy, and subsidy led to stagflation - and later, in the 1990s and '00s, to a surge of asset bubbles and exploding public sector costs, especially in health care and education.

Reforming the welfare state to the degree that will be necessary in the next 10 to 15 years will require leaders nearly as powerful as those who originally created it. The once-powerful parties and presidency have lost their authority, but the large, intrusive, and expensive government they created is still with us. Every governmental transfer program creates a class of beneficiaries and intermediaries who immediately become vested interest groups. Without strong political parties or presidents to keep them in check, these groups become the real controllers (or at least veto powers) of politics. And these veto powers in turn have made it almost impossible for liberals to later change the programs or conservatives to later dismantle them. Our politics needs serious reform as well, to free our electoral system from its current nightmare of suppressed free speech and media tyranny.

It's all about you and me. The welfare state is sometimes confused with "helping the poor," but at the federal level, this is not its main role. For that, I'll direct you over here instead. Briefly, the negative income tax for the working and able-bodied poor would be better than the current system. While the 1996 welfare reform was a remarkable success, more could be done in that direction. But the federal spending on the poor is a fraction of federal spending on the middle and working classes. That's what "welfare state" means here.

The middle class welfare state consists of four functions. The first two are mainly "entitlements," meaning that citizens can receive their benefits by meeting certain eligibility requirements and nothing else. The original programs were passed earlier, but their present form (with automatic spending and without discretionary choices by Congress) dates to the Nixon years.

Social insurance - that is, Social Security and Medicare. The former will need reform by the end of the next decade to avoid bankruptcy; the latter is in even more dire shape and will need it sooner. The minimal reforms needed are not drastic: they include a mix of changing eligibility requirements and means testing (concentrating full benefits on beneficiaries with lower incomes). To go beyond that is less a necessity and more ideological preference, but larger redesigns are worth discussing. The main favor we can do for future generations is, to the extent possible, make these programs self-financing through forced saving, rather than transferring from present taxpayers to present retirees, which is what they do now. These programs are an incredibly bad deal for younger workers and immigrants.

The subsidy-loan guarantee state, which has caused growing mischief of all sorts and has few justifications in a society as wealthy as ours. It covers everything from pushing home ownership on people who can't afford it to exploding higher education costs to destructive ethanol subsidies. The federal government's role as lender of last resort and backer of otherwise private-sector loans opens it up to dangerous vulnerabilities, as well as encouraging what economists call "moral hazard" - beneficiaries taking excessive risks because they know someone will bail them out.

The regulatory-litigation state, which was originally more modest and with strong justification, for example, in the financial sector.* This federal function has become more and more twisted over the years by judicial passivity in the face of an aggressive trial bar. Tort reform is one answer here, including requiring judges to take a more active role and not defer to the lawyers. The role of Congress and regulatory agencies has been twisted in a different way, by the formation of the "iron triangle" of interest groups, the media, and politicians. Only stronger political parties and presidents not in thrall to the news media can enable positive change here.

The pork barrel state, perhaps the most characteristic feature of the welfare state in its mature phase. This is the system of special favors, earmarks, and patronage pioneered mainly by Democrats, but recently imitated and taken to new levels by Republicans. This development is often misunderstood as a result of private parties (interest groups, corporations, etc.) "buying" politicians. In fact, it's the politicians who typically take the initiative in creating these relationships in the first place. Remember: each such special favor granted to this group or that, makes a vested interest out of that group. Subsequent politicians are only occasionally able to buck these groups, once they're created.**

The tragedy of modern America is that the ideas and tools needed for this reform are not missing. Voters are in many ways well ahead of the politicians, their obnoxious handlers and advisors, and the news media complex they've enslaved themselves to (our age's equivalent of court scribblers and flunkies). Voters have seen through - very through - the politicians' empty promises. We lack education and wisdom, even as we drown in a torrent of often irrelevant or twisted "information." Real history and real intellectuals are what's needed to bring out Americans' latent skepticism about government and politicians and turn it into real understanding and real change. Not only do we need to abandon false ideals like equality of condition, but even half-truths like equality of opportunity. While it's an improvement, no modern society can guarantee the latter (much less the former) and remain modern. What is reasonable to expect is freedom of opportunity, and it is here that modern liberalism has left a positive mark, in lifting inherited and often arbitrary prejudices about what people in stigmatized groups are capable of. Traditionally, what such people suffered from was not exploitation, but barriers to full participation in society, and we should be grateful for what liberalism, in its heyday, was able to accomplish here. If the much-abused phrase "social justice" means anything, it means that.

Some final thoughts. The federal budget today is largely entitlements (more than two-thirds), which continue to grow in absolute terms and in proportion to the whole. There's still a lot of confusion about this, as well as mythology about the size of the military budget, which is smaller as a proportional of national income than it has been since 1940.

The main damage done by Bush is this: while early on, it was recession and tax cuts that led to renewed deficits, and the deficit situation improved once the economy started to expand again in 2002, the problem has more recently morphed into a structural spending-driven condition and will become steadily worse in the coming decade. Apart from Reagan and the Fed's singular achievement of taming inflation, the most important achievement of the 20-year period from 1979 to 1999 was what did not happen: no major new domestic spending commitments; a large step up in military spending, followed by an even larger drop after 1986; and very favorable conditions from 1994 to 2000, with a conservative Congress and a president unable and ultimately unwilling to push for more. The real disaster after 2000 was the almost total disappearance of influential conservatives at the national level, and partisan lock-step between Congress and the White House on spending. Even now, not many people have really absorbed the enormity of what went wrong under Bush - Republicans often don't get it, and everyone else is still talking about Bush as "right-wing" or "conservative." This mind-set has to end if we are to see clearly what went wrong and why, where we're headed, and what needs to be done.

Politically, it means that, while few conservatives are available, we will have to make do with liberal Republicans and conservative and moderate Democrats. They're the few at the national level who might see what's gone wrong and galvanize the public's skepticism about government. Obama and Clinton have little credibility here. McCain does have some personal credibility - but his party, no longer.
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* A benefit of the New Deal was the creation of a truly national banking and financial regulatory system, as Hamilton foresaw would be needed and Jefferson resisted.

** To get a sense of the pretense and folly of "progressive" politics these days, here's an example of what it really means. And let's not forget Massachusetts, which long ago moved from nuts-and-bolts government to bloated "big thinking" (or "big digging").

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