Politics & Policy

The Fallacy of Divided Government

Gridlock will not free markets.

Comparing a 35.8-percent increase in total discretionary spending during the first five years of the Bush administration to a 8.2-percent decline during the first five years of the Clinton administration, a growing number of conservatives and libertarians have argued that divided government, and a Democratic Congress, would be the best way to constrain further growth in public spending. With the president openly spurning the idea of minimalist government and the Congress willing to lavish spending on constituents, the suggestion is that, when it comes to legislation, less is more.

Yet while seductive, the appeal of legislative gridlock is superficial. While it may suspend the bleeding (and demand less in time and effort from pro-market activists), it does nothing to heal the wounds which leave the public to depend on the state.

In 1975, David Stockman complained of a “pork-barrel approach to social welfare,” where “we now spend $25 billion, for example, on the direct financing of health care for the aged, the poor, and the disabled, but the suspicion is that a good portion of the total serves merely to exacerbate the deficiencies of our current inflationary, inefficient, badly unbalanced health-care delivery system.” Thirty years later, with a system no less inflationary, inefficient, or badly unbalanced, it costs taxpayers $850 billion to pick up the pieces. While the more honest politicians may oppose bridges to nowhere, they have been unable to deflate the bloating public infrastructure.

Barry Goldwater, the most principled budget hawk to run for president in the modern era (he even campaigned against the T.V.A. in Tennessee), made the Great Society possible by handing an overwhelming victory to Lyndon Johnson’s Democrats. Similarly, Ronald Reagan, for all his eloquent skepticism of government, failed to even dent the welfare state–confirming his own observation that “a government bureaucracy is the nearest thing to eternal life we’ll ever see on this earth.”

And so, rather than attempting to starve the state (a counterproductive and unrealistic strategy, as Goldwater and Reagan proved respectively), George W. Bush pledged to improve its diet. Recognizing that natural voter desires for health, education, and prosperity outweigh abstract concerns for the color of the government balance sheet, the president proposed an agenda of big-government conservatism, offering alternative institutions rather than a noisy campaign of welfare-bashing.

With a prescription-drug benefit being added to Medicare, the 2003 Medicare Modernization Act constituted a significant expansion of the welfare state. Acknowledging that voters seek practical solutions to their needs, before considering clever libertarian theories, the administration accepted passage while establishing a parallel system for consumer-based health care through Health Savings Accounts (HSAs). Such institutions represent the only way to shift demand away from big government, and therefore are essential to ensure that competitive accountability and entrepreneurial innovation remain integral to the health-care system.

By allowing patients to pay for out-of-pocket healt-care expenses with the same tax advantages they use for insurance, HSAs allow health-care packages to be unbundled while subjecting their component elements to price transparency, consumer sovereignty, and competitive discipline. It suddenly becomes far harder for health-care providers, interest groups, and compliant legislators to hide inferior and unnecessary (but profitable) services (and costs) from patient scrutiny. Indeed, the Deloitte Center for Health Solutions found that while traditional health-plan costs rose by 7.3 percent in 2005 (well above average wage growth), costs in consumer-driven plans such as HSAs rose by only 2.8 percent.

From the perspective of downsizing government, HSAs represent a vital practical alternative to ballooning entitlements, by increasing the pools of money that individuals have set aside for expensive health-care needs. With health-care expenditures being invested in individual accounts, rather than spent unquestioningly, year-on-year contributions will build up and compound. Whereas $300 billion is currently trickled down through Medicare to cover elderly beneficiaries, individuals investing only $1,000 annually in an HSA with an interest rate of 4 percent would build up a war chest of over $45,000 to deal with healthcare expenses within 25 years. If Medicare entitlements provoke an eventual crisis, conservatives should ensure that the public identifies consumer-based health, rather than single-payer price controls, as best serving its interests. As the 1995 government shutdown showed, there is no standing athwart public opinion yelling “Stop!” when such a crisis occurs.

Like Social Security private accounts, which did not find sufficient Congressional support, the president’s health-care proposals were fiercely resisted by the Democrats. But they constitute the core of any battle to shift responsibility to transparent private-sector accountability. Only when the public builds up savings in HSAs will it become sympathetic to the idea that Medicare is a costly burden, rather than a necessity.

As Peter Huber recently argued in Commentary magazine, we should bear in mind that, as pharmaceutical developments increasingly replace manual labor and “one person laying hands over another,” we are moving beyond the age of homogenous health care toward an era where institutions geared towards “universal” health-care insurance will not only be unwieldy and inhibitive, but progressively divorced from actual needs. Moves to hinder the financing of pharmaceutical development through price discrimination and incremental roll-outs of availability will only serve to replace a system where some get innovative drugs before others with one where nobody ever gets such drugs at all. For competition to eventually lead firms like Wal-Mart to offer 291 generics of previously-developed drugs for $4 per month, it is essential for a legislative coalition to craft institutions so that the nascent biotech revolution is not strangled in its cradle. Competitive efforts to provide for HSA-style consumer health care must not be overwhelmed by wholesale government plans and the concomitant regulations that are both inhibitive and corrupt.

Similarly, with public education often shutting those locked into failing schools out of social mobility, and with teachers unions dug in at state capitols to prevent reform, small-government advocates who oppose concerted federal action to repair the escalator to the middle class now will find themselves paying a lot more to deal with the pile-up at the bottom later. Although recent education legislation such as the No Child Left Behind Act contained a few school-choice provisions, these have not yet reached to the heart of the system’s problems. As Caroline Hoxby of Harvard University has argued, effective quality improvements will follow only when good schools are allowed to expand their successful methods in response to increased demand. This will happen when failing schools have closed after failing to meet customer satisfaction, and when establishments have explored and employed improved systems of pedagogy, curriculum, teacher pay, management, budget allocation, and organization. Students and their parents should not be treated as bargaining chips in unionized contract negotiations, but as customers to be won over.

Without further school-choice legislation, the education system will not be set on a sustainable independent track that allows for parents’ natural aspirations for their children’s education to be decoupled from a need for increased government spending and taxes. With Democrats threatening to filibuster even the rudimentary school-choice provisions of NCLB, it yields no solution to augment their obstructionist forces. A more thorough generational effort to reform education needs activism, not gridlock.

The same is true for much of the rest of the economy. A Democratic-controlled House of Congress would inhibit important tax reforms and bring a slew of legislative proposals threatening the fluidity of Americans markets and the dynamism of its business culture–particularly given the steadfast unwillingness of the president to veto popular legislation supported by congressional majorities, such as the McCain-Feingold campaign-finance reform and the Sarbanes-Oxley accounting regulations.

And so fiscal conservatives, nostalgic for the 1990s, should remember that the spending restraint of the era was the temporary consequence of post–Cold War military cutbacks, favorable demographics, and Newt Gingrich’s budget-muzzling toil, rather than the offspring of divided government. While the cost of legislative bargains will continue to rise under divided government, as a result of growing dependence on state-supported services, we can be sure of one thing: A society that entrenches the virtues of entrepreneurial vitality and individual responsibility is not best achieved by increasing the numbers of legislators explicitly opposed to market-minded reform.

— Chris Pope is program manager of the National Research Initiative at the American Enterprise Institute.