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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The Political Economy of Fiscal Trade-offs



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Ross Douthat’s latest Campaign Stops column raises a number of important points. His concluding paragraphs convincingly make the case that the advantages of incumbency are increasing:

[W]ith the pace of digital change so swift, and the get-out-the-vote toolkits so complex and cutting edge, the advantages of incumbency may be steadily increasing. Especially in campaigns that come down to turnout in a few key states, having four full years to hire, recruit, innovate and organize – and, of course, to carpet the swing states with field offices – can make all the difference in world.

But I’d like to address Ross’s thoughts on the politics of reforming the “blue social model”:

In many blue states, what makes the current fiscal picture unsustainable are mostly the promises that legislators have made to public-sector unions — a powerful and influential constituency, to be sure, but ultimately just oneconstituency, which can be successfully isolated and cast as an enemy of the common good.

At the national level, by contrast, our fiscal problems are almost all bound up in entitlement spending — and while there are specific interest groups that benefit from that spending, the ultimate beneficiaries are, well, all of us. This makes the conservative pitch on reforming Medicare and Social Security a harder sell to voters than the pitch that Republican governors have been making on union benefits and pensions. And it helps explain why, conservative optimism about the state’s tilt notwithstanding, the same Wisconsin electorate that kept Walker in office last year delivered the state to the Democratic ticket pretty easily last week.

This passage struck me as particularly interesting because it raises interesting questions about the deep strategy of the political left. Late last month, Bhaskar Sunkara and Peter Frase published an essay in In These Times, “The Welfare State of America,” which offered a new approach to expanding government’s reach and influence. Sunkara and Frase observe the following:

Despite fear-mongering about the effects of budget deficits, the government is still able to borrow money virtually interest-free.

In essence, they propose using deficit-financing at the federal level to shield taxpayers from the cost of public social expenditures:

We propose a new anti-austerity coalition united by the immediate demand that certain social spending burdens, currently borne by states and municipalities, be federalized. Almost all states are legally required to keep balanced budgets, making it unfeasible for them to employ deficit spending to address to a cyclical economic downturn. Even if these laws were changed, states would still face far more difficulties in this arena than the federal government. States could never borrow money on as favorable terms as the United States can, and they haven’t been printing their own currencies since the Articles of Confederation.

Simply put, without centralization, true social democracy in America is impossible. Once achieved, progressives could pursue policies that not only immediately improve working-class lives, but also lay the groundwork for more radical reforms in the future. [Emphasis added]

Recall Ross’s observation that fiscal politics at the state and local level are governed by trade-offs. The state of Rhode Island was forced to reform its public pensions, and Democrats and Republicans came together to do so, because spending on public pensions threatened to crowd out other public services and public investments. This introduced an element of fiscal discipline that in turn spurred the advocates of reform. 

The chief virtue of the approach outlined by Sunkara and Frase, from the perspective of the left, is that it effectively masks the costs of public social expenditures, including the cost of delivering public services. Deficit-financing means that future taxpayers, not current taxpayers, will be left to pay for social spending. This in turn will reduce the scrutiny of public sector compensation practices and work rules that might reduce the cost-effectiveness of service delivery. Given that public employees are an important constituency for the left, this will yield significant political dividends: deficit-financing will allow public employees to secure more attractive, and increasingly more attractive, terms of employment, including wage increases that can be channeled, in part, to political activism aimed at electing candidates who are strongly inclined to make further concessions. I should stress that an advocate of this left approach might argue that social spending will be deployed effectively, and so it will improve our growth prospects by, for example, increasing the quality of our collective human capital endowment, thus making the debt burden more manageable. I tend to disagree that a sharp increase in social spending is likely to be productivity-enhancing, though of course much depends on the kind of spending in question. 

The 2009 fiscal stimulus did not formally federalize social spending programs at the state and local level, yet it effectively federalized a share of their costs. Some federal relief was probably necessary, given the severity of the downturn, though one could argue that it should have come with more strings attached, e.g., that it should have been offered in exchange for asking state and local governments to adhere to more stringent reporting standards for public pensions and other measures designed to encourage more efficient social spending. 

This is one of many reasons why I tend to think we had the wrong debate over the 2009 fiscal stimulus. The problem wasn’t deficit spending as such. Rather, it was the nature of the spending. 

Regardless, Sunkara and Frase and Douthat have given us much to think about. One of the key left-right battles in the decade to come will be over the nature of U.S. federalism. Will it continue evolving in a “cooperative” or, to use Michael Greve’s term, “cartel“-like direction, in which the proliferation of joint federal-state programs and federal regulations increase the power of government at all levels? Or will we shift to a more competitive model of federalism?



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