Mark Schmitt references William Voegeli’s Never Enough in a recent column for The New Republic:
Romney, and a new group of conservative thinkers, have aggressively rejected this consensus. Romney attacks our current “entitlement society” as “a fundamental corruption of American society” because it provides benefits to a large swath of society. The “entitlement society,” Romney has said, “makes us all poor,” because it encourages so many of us to rely on the government for services. William Voegeli of the Claremont Institute has made a similar argument in his book, Never Enough: America’s Limitless Welfare State. The extension of benefits and supports to the working poor and beyond, Voegeli argues, knows no natural boundaries and will eventually consume all our resources. This new-ish argument is an extension of the claim made by deficit hawks such as David Walker of the Peter G. Peterson Foundation that an “entitlement crisis” is the cause of long-term budget deficits. But Romney, like Voegeli, takes it much, much further: “The battle we face today is more than a fight over our budget. It is a battle for America’s soul.” Government programs for the non-poor, in other words, are not just expensive, but actually detrimental to the vast majority of their beneficiaries.
Voegeli, like Romney, claims to support a strong safety net—as long as it’s exclusively for the very poor. So does Representative Paul Ryan, who argued in the Wall Street Journal last April that “the safety net for the poor is coming apart at the seams” and promised “a secure safety net” as part of his budget proposal. Like Romney, Ryan’s proposals don’t actually reflect this vision (his proposal to convert Medicaid to a block grant to the states, for example, would destroy that system for the very poor as well as the working poor), but what they claim to be doing is reducing government spending by focusing benefits on the “truly disadvantaged.” Meanwhile, those who aren’t truly disadvantaged are expected to somehow benefit from being left on their own.
In taking up this new conservative line, Romney and others are trashing an important part of Reagan’s legacy and a significant bipartisan innovation over the past few decades.
This strikes me as a fascinating misreading of Voegeli’s book, and also of Ryan.
One of the concerns of Voegeli and Ryan, and here I’m associating myself with what I take to be their views, is that the U.S. public sector isn’t doing a good job of putting taxpayer dollars to good use. Voegeli has put this in sharp terms in his “case for antitax absolutism“:
When they refuse to raise taxes, Republicans force Democrats to make a deeply unpersuasive argument. Major expansions of the welfare state are indispensable, this argument goes; but the $5.08 trillion of federal, state, and local government outlays in 2010 — 35 percent of GDP — is already being spent on its very best uses; therefore, our new government endeavors will require corralling more of the 65 GDP percentage points that now roam contentedly beyond the fence.
To understand what’s going on here, it helps to understand the concept of public sector productivity. McKinsey released a valuable report on this subject in March of last year; it starts with a straightforward definition:
In response to immediate budgetary pressures, many countries have instituted or proposed cuts in government services and increases in taxes. While both measures are necessary if budgets are to be balanced, there is a third that can make a substantial contribution to easing the current crisis, while also helping to preserve essential services such as health care and defense in years to come. This entails providing more public services for less money—in other words, raising productivity.
In “The Failure of Input-Based Schooling Policies,” Eric Hanushek observed that per pupil K-12 spending has increased over three-fold since 1970. Over the same period, however, the high school graduation rate has deteriorated. There are, of course, a number of other variables, e.g., the demographic composition of the K-12 population has changed considerably. Yet the Stanford economist Caroline Hoxby has found that there was indeed a dramatic decline in the productivity of educational expenditures between 1970 and 1999. Part of this decline presumably flows from the dilution of the teacher talent pool, i.e., the decrease in class sizes at the same time that economic opportunities increased for college-educated women, a group that had traditionally been a kind of captive labor force for public education. Given this changing landscape, we needed innovation to maintain the labor quality (to use economist Robert Gordon’s term) of the prime-age workforce over time; the failure to bring productivity-enhancing educational innovation to scale has instead contributed to a deterioration in labor quality that will have serious consequences for long-run productivity growth. For a more positive example of public sector productivity, consider that Massachusetts spends 26% less per pupil than New Jersey, yet educational outcomes are far better in Massachusetts overall and for almost all demographic groups. That is, Massachusetts schools are doing a better job for less money than New Jersey schools.
Now, education is only one component of the public sector (and most of the spending is at the state and local level, where expenditures as a share of GDP have climbed from (7.7% of GDP in 1950 to 15.5% of GDP in 2009), but its productivity problems flow from Baumol’s cost disease, which we also find in the health sector. And it is medical cost growth that has been the main driver of the dramatic increase in inflation-adjusted per capita public social expenditures at the federal level (which, according to Voegeli, increased by 600% between 1965 and 2008, as opposed to 45% for defense expenditures).
My understanding is that there is a broad consensus that we need to not only contain medical cost growth, but to actually reduce the cost of service delivery. On the left, policy analysts tend to emphasize the importance of leveraging the purchasing power of the public sector to reduce costs and to drive the integration of medical care, which has the potential to drive productivity improvements. On the right, policy analysts tend to emphasize the importance of price signals, competition, and business model innovation. All agree that it is important to do more for less.
The question Voegeli raises about the public sector, and it is an important one, is whether it has sufficiently strong incentives to deploy taxpayer dollars effectively. It is important to understand that Medicaid dollars do not flow directly to poor individuals. Rather, they flow to medical providers who are expected to then provide care for poor individuals. If medical providers use licensing restrictions and political muscle to extract rents — by, for example, backing regulations that stymie business model innovation, i.e., the emergence of disruptive innovations that could eventually destroy the high-cost business models of incumbents — it is not obvious that poor individuals benefit.
The idea behind Medicaid block grants is that they will give states greater flexibility and align incentives in a more coherent way. There are, of course, problems with some of the Republican block grant proposals. Josh Barro has done an excellent job of summarizing the relevant issues: block grants should reflect the business cycle; they should grow at a reasonable rate, etc. But to the extent there is now an incentive to overspend (“When a state decides to spend an extra dollar on Medicaid, it only costs state taxpayers about 43 cents at the margin”), block grants could help mitigate it.
This is the core idea Voegeli, Ryan, and others have been advancing: we need to do a better job of imposing fiscal discipline on the public sector at all levels; but as long as we’re applying this fiscal discipline, we also need to give public sector managers the tools that they need to impose organizational discipline. That is, public sector managers need to have the flexibility to organize the delivery of services in such a way that they can deliver them as cost-effectively as possible. This is why collective bargaining reform at the state and local level is so important to policy analysts on the right: among other things, it allows public sector managers to devise work rules and compensation strategies that can improve performance over time.
Any discussion of public sector productivity is easily caricatured — cue the “Lean Six Sigma” jokes, or references to “waste, fraud, and abuse.” But the issue is much simpler than all of that: some governments in the United States work much better than others (e.g., Massachusetts vs. New Jersey, Utah vs. Arizona, Indiana vs. Illinois, etc.). Raising the level of the below-average performers to that of the average performers would yield significant gains. The health sector, meanwhile, could benefit from better alignment of incentives. There is nothing zany about this line of thinking.
Now let’s address one of Voegeli’s core concerns: where are transfer dollars actually going? If you embrace Schmitt’s interpretation of Voegeli, you’d get the impression that Voegeli objects to the fact that dollars are flowing to the working poor. My impression is that Voegeli objects primarily to the growing emphasis on redistribution to the nonpoor. Ryan’s House Budget Committee staff addressed this question in a recent report:
One underreported conclusion from the CBO study is that shifts in government transfers and federal taxes have contributed to increasing inequality over time. Both taxes and government transfers remain progressive, but the equalizing effect of transfers and taxes on household income was smaller in 2007 than it was in 1979 (see Figure 3).
This is mainly because the distribution of government transfers has moved away from households in the lower part of the income scale. For instance, in 1979, households in the lowest income quintile received 54 percent of all transfer payments. In 2007, those households received just 36 percent of transfers.
This shift reflects a growth in programs that focus on the elderly population and are not for the most part income-adjusted, such as Social Security and Medicare. In other words, the structure of some of the nation’s largest entitlement programs has decreased the share of government transfer payments going to lower-income households and directed an increasing share of government spending to wealthier seniors. According to the CBO’s findings, this trend, accelerated by the retirement of the baby-boom generation, contributes to an increase in inequality.
This strikes me as a legitimate cause for concern, though of course others will disagree.
In a comparison of social welfare expenditures in the United States and in Scandinavia, the University of Arizona economist Price Fishback makes a number of salient observations:
During the modern era, the most commonly cited OECD statistics on public gross social expenditures as a share of GDP show large differences between the Nordic countries and the U.S. However, the commonly reported statistics are misleading in several ways. First, they do not take into account the striking differences in taxation of public benefits and tax breaks and tax subsidies for low-income people. Adjustments for tax structure lower the social welfare share of GDP in the Nordic countries and raise it in the United States. Second, the share of GDP only tells part of the story because per capita GDP in the United States is higher than in the Nordic countries. Comparisons of publicly mandated social welfare spending adjusted for purchasing power parity in both 1995 and 2003 show that the amount the U.S. spends ranks in the midst of the Nordic countries. Third, the U.S. system relies much more heavily on private provision of health and disability insurance, retirement pensions, and charitable distributions to the poor than do the Nordic countries. After accounting for this voluntary private social expenditure, the U.S. in 2003 had higher net social expenditures as a share of GDP than all of the Nordic countries except Sweden. Since the U.S. GDP per capita is higher, U.S. net social expenditures per capita in 2003 were more than $1000 higher than Sweden, which was the highest among the Nordic countries.
The problem with America’s “invisible welfare state” of tax expenditures and tax subsidies is that it tends to redistribute resources towards the relatively affluent. In a recent Washington Monthly essay, Suzanne Mettler noted the size and scope of this “submerged state”:
Over the past few decades, while many standard social benefits have atrophied in real value, those packaged as “tax expenditures”—the formal name in federal budgeting parlance for subsidies provided through the tax code—have flourished, growing rapidly in value and number. These tax expenditures for individuals and families represented 7.4 percent of GDP in 2008, up from 4.2 percent in 1976. (Tax expenditures for business, such as those for the oil and gas industry, made up another 1 percent.) By way of comparison, Social Security amounted to 4.3 percent of GDP in 2008; Medicare and Medicaid, 4.1 percent.
These social tax expenditures comprise a major part of what I call the “submerged state.” By that I mean that they are public policies designed in a manner that channels resources to citizens indirectly, through subsidies for private activities, rather than directly through payments or services from government. As a result, they are largely hidden from the public: through them, government benefits people, providing them with opportunities and relieving their financial burdens, often without them even knowing it. Appearing to emanate from the private sector, such policies obscure the role of the government and exaggerate that of the market.
What’s more, the vast majority of Americans garner only modest assistance, if any, from the submerged state. In the case of social tax expenditures, that’s because the most expensive of these subsidies shower their largest benefits on the most affluent Americans.
Mettler makes her case for curbing tax expenditures from the left:
For too long, progressives have accepted the conservative playbook, creating and expanding tax expenditures on the assumption that they can tilt some of their benefits to low- and middle-income Americans. As long as this cornerstone of the submerged state is left intact, it fosters the delusion that governance is generally ineffective and unhelpful to most Americans, and it prompts people to attribute to markets more credit than they are due.
Fortunately, and rather ironically, the coming showdown over raising the debt ceiling presents a golden opportunity to substantially scale back the submerged state—and to advance progressive goals in the process. Republican lawmakers, obliged by their base to cut federal spending but fearing an electoral backlash if popular social programs like Medicare are decimated, are increasingly open to the suggestion of the Democratic deficit hawks in the administration and Congress that if the budget ax must fall, it ought to fall most heavily on tax expenditures. It is a negotiating strategy that liberals would be wise to encourage. For those who care about reducing inequality, making American governance more transparent, and reinvigorating democratic citizenship, this is a chance that should not be missed.
Yet on this set of issues, she has allies in Voegeli, Ryan, and other conservatives, who aim to make the safety net more transparent and sustainable. Ryan, for example, has emphasized the importance of “broadening the tax base,” which of course means eliminating various tax expenditures. While I imagine Mettler would disagree strongly with Ryan regarding what is the most appropriate long-run level of taxation, there is at least some common ground here. (Schmitt and Mettler share a different, less charitable interpretation of conservative goals in this space.)
Again, the issue is not attacking benefits for the working poor. Rather, it is about making our system of social transfers more coherent and cost-effective. This necessitates a wide range of reforms, the most important of which are changes to how we pay for medical care. For a good discussion of this issue in particular, I strongly recommend Yuval Levin and Ramesh Ponnuru’s article on “Romneycare vs. Obamacare.”