The Agenda

Matt Yglesias, William Voegeli, and How to Think About Inequality and Public Spending

A number of commentator, including Matt Yglesias, are exercised about Mitt Romney’s apparent suggestion that “envy” is fueling concerns about income inequality. Matt Lauer, host of NBC’s Today Show, asked Romney the following question: 

When you said that we already have a leader who divides us with the bitter politics of envy, I’m curious about the word ‘envy.’ Did you suggest that anyone who questions the policies and practices of Wall Street and financial institutions, anyone who has questions about the distribution of wealth and power in this country, is envious? Is it about jealousy, or fairness?

Rommey offered the following reply:

You know, I think it’s about envy. I think it’s about class warfare. When you have a president encouraging the idea of dividing America based on the 99 percent versus one percent — and those people who have been most successful will be in the one percent — you have opened up a whole new wave of approach in this country which is entirely inconsistent with the concept of one nation under God. The American people, I believe in the final analysis, will reject it.

My impression is that Romney was talking about the sentiments the president was encouraging. But of course Lauer’s question was much broader. Romney might have said, “No, not anyone who questions the policies and practices of Wall Street. Rather, I was talking about the president and his political advisors.”

Regardless, that is not how people who are disinclined to give a Republican presidential candidate the benefit of the doubt (and why should we expect them to?) are choosing to interpret Romney’s reply — as focused on the political strategy advanced by the president and his allies.

Matt Yglesias goes on to offer an analysis that captures the views of many Americans:

There’s a sense that a lot of us have that our public policy ought to be aiming to produce large gains for everyone. You often hear that for one reason or another the United States “can’t afford” this or that. We “can’t afford” to pay people Social Security benefits. We “can’t afford” to build high-speed trains. We “can’t afford” to give everyone early childhood education. But why can’t we afford this stuff? Are we a poor country? No, we’re not. We’re one of the richest countries that’s ever existed. Are we a poorer country than we used to be? No, we’re not. But a very large share of the gains we’ve made over the past three decades have gone to a relatively small number of people. If the gains has been broadly shared, then the burden of paying for that basic infrastructure and public services would have to be very broadly shared. But the gains have been very concentrated, and so if we’re going to afford that stuff a large share of the revenue has to come from the people who’ve gotten the money.

That’s not envy, that’s math.

One can see why many find this analysis so compelling. There is, however, another way to look at the trajectory of public spending. That is, there is another way to describe the “math” of the situation with which we’re faced. In the latest issue of City Journal (which isn’t on the web just yet), William Voegeli has a provocative essay defending what he calls “antitax absolutism.” The following is drawn from Voegeli’s essay:

If you look at federal finances from the dawn of the Great Society in 1965 to the beginning of the Great Recession in 2008 [there is a chart that I will try to reproduce], you’ll notice that Gross Domestic Product and federal revenues, both expressed in per capita terms and adjusted for inflation, were about two and half times as large at the end of the period as at the beginning. Federal expenditures were three times as large.

Not only has spending risen faster than GDP or revenues over the years; a particular kind of spending has led the charge. Let’s divide all federal spending into three broad categories. One is national defense. The second, the welfare state, includes Social security; other income-support programs, such as disability insurance and unemployment compensation; Medicare; and other health programs, such as Medicaid and the Children’s Health Insurance Program; and all programs in education, job training, and social services. I call the third “housekeeping,” meaning everything else that the federal government does: federal courts, prisons, prosecutors, and the FBI; Amtrak and air-traffic control; national parks and the EPA; embassies and consulates; veterans’ programs; NASA; and so on.

Here’s the scorecard. Spending on national defense, adjusted for inflation and population, was 45 percent higher in 2008 than in 1965, while housekeeping outlays were 81 percent higher [there’s another chart I hope to get a hold of]. Both, in other words, grew far less rapidly than the economy or federal revenues — both of which, remember, were about 150 percent higher in 2008 than in 1965. But welfare-state expenditures grew 600 percent higher. In fact, the welfare state became the core of the federal government, growing from 26 percent of federal outlays in 1965 to 61 percent in 2008.

Voegeli goes on to argue that this growth rate doesn’t in itself imply that the expansion of the welfare state has been excessive. He does observe, however, that advocates of welfare state expansion have tended to sharply underestimate the cost of expansion.

Moreover, as Matt has observed on numerous occasions, there has been a tendency for center-left politicians to maintain that taxes can be cut for virtually all households, with the exception of the highest-earning 2 percent of households. Matt has argued that this actually undermines the legitimacy of progressive governance, by implicitly suggesting that expanding public investment is not worth even a modest additional cost to middle-class taxpayers — which is close to suggesting that it is not worth much at all. Voegeli makes reference to this tendency:

In 2004, John Kerry ran for president promising to raise taxes on families with incomes about $200,000 per year and to cut taxes for the other 98 percent of the population. Four years later, Barack Obama ran for president promising that the government could meet all its existing obligations and take on many new ones, while confining tax increases to individuals making more than $200,000 and families making more than $250,000.

Do these vows hold water? A 2010 study by the Tax Policy Center, a joint venture of the Brookings Institution and the Urban Institute, found that reducing federal deficits by the second half of this decade to a reasonable 2 percent of GDP, while keeping Obama’s promise, would require increasing the rate in the second-highest federal income-tax bracket from 33 percent to 85.7 percent, the rate in the highest bracket from 35 percent to 90.9 percent, and the capital-gains tax rate from 15 percent to 39 percent. The study, Desperately Seeking Revenue, pointed out that such tax rates would give the prosperous a strong incentive to defer income, shift it to nontaxable forms, or spend it on deductible items, like charitable contributions. The resulting revenue shortfall would necessitate even higher tax rates or might simply make reducing deficits to 2 percent of GDP impossible.

Towards the end of his essay, Voegeli makes the argument I find convincing:

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.

The failure of the political right has been that there hasn’t been nearly enough emphasis on public sector productivity, until relatively recently. The determined effort to curb collective bargaining rights at the state and local level is the most dramatic example, and it has been met with predictably fierce opposition.

One can imagine many rejoinders to Voegeli’s argument, particularly in the context of high income inequality:

(1) The 600 percent increase in federal public social expenditures reflects high income inequality. Had the level of income inequality been lower, the level of federal public social expenditures would have grown much less quickly.

This argument might have some merit, though of course much depends on the sources of this flatter income distribution. If, for example, we had seen more sluggish income growth at the top and a somewhat similar pattern across the rest of the distribution, the implications are not entirely clear. If we are persuaded by the “expenditure cascades” hypothesis, i.e., an increase in disposable income at the top has led to a bidding war for positional goods like access to high-quality school districts, etc., then this may indeed have dampened the hunger for expensive public and private goods. But of course there are other ways to tackle this problem of constrained capacity, e.g., open the education market to suppliers that do a better job of scaling up access to high-quality instruction, lift capacity constraints on housing, etc. 

(2) The 600 percent increase in federal public social expenditures reflects family breakdown, the crime explosion, and related maladies that are not captured in Voegeli’s analysis.

There is almost certainly some truth to this, though it is worth asking to what extent federal public social expenditures have ameliorated this problem and to what extent they have exacerbated the problem. Voegeli and I might disagree on the virtues of mass incarceration. There is no question, however, that the federal government has contributed to a dramatic shift in crime control strategies that may have created a great deal of social “collateral damage.” 

In addition, it seems somewhat plausible that had federal public social expenditures been disbursed in the form of direct transfers, there might have been considerable administrative savings and potentially salutary benefits for family structure, etc. Funds disbursed in the form of a negative income tax payment to all adults over the age of 21 would have dramatically changed the incentives for family formation, etc. This approach might have delivered the same social benefit at vastly lower cost, while also allowing for greater autonomy on the part of beneficiaries. 

(3) The 600 percent increase in federal public social expenditures primarily reflects the highly unusual dynamics of U.S. health expenditures, which we can primarily attribute to fragmented, semi-private care delivery.

This is a subject of a great deal of discussion and disagreement. Some of us believe that programs like Medicare and Medicaid and the proliferation of insurance regulations have actually magnified cost growth across the health system. Others believe that something like a British-style National Health Service would have proven far less expensive while delivering an acceptably high quality of service. This isn’t an issue we can settle here, but it does help illuminate the difference of opinion. 

To return to Matt’s argument, 

You often hear that for one reason or another the United States “can’t afford” this or that. We “can’t afford” to pay people Social Security benefits. We “can’t afford” to build high-speed trains. We “can’t afford” to give everyone early childhood education. But why can’t we afford this stuff? Are we a poor country? No, we’re not. We’re one of the richest countries that’s ever existed. Are we a poorer country than we used to be? No, we’re not. But a very large share of the gains we’ve made over the past three decades have gone to a relatively small number of people. If the gains has been broadly shared, then the burden of paying for that basic infrastructure and public services would have to be very broadly shared. But the gains have been very concentrated, and so if we’re going to afford that stuff a large share of the revenue has to come from the people who’ve gotten the money.

There is another way of looking at this, as Voegeli suggests: we “can’t afford” these things because we’re spending a tremendous amount of money on a lot of other things aren’t actually working very well. (Moreover, it seems reasonable to ask if the cost-benefit for something like high-speed trains would be attractive even if HSR in the U.S. cost as much as it does in countries like Spain or France, which are not plagued by FRA regulations that increase the cost of rolling stock, etc.) Indeed, having a budget constraint might actually be a good and useful thing. People who feel flush often spend in undisciplined ways, and then suddenly they find themselves in dire financial straits because they’ve committed themselves to spending they can’t afford over the long-run. This is why many lottery winners go broke. Having not earned a fortune over a lifetime of hard work and saving, lottery winners often lack the skills they need to spend wisely. In a democracy, every new generation of public officials is in a position analogous to the lottery winner: she or he didn’t “earn” America’s vast wealth. Rather, she or he has powerful incentives to spend some portion of it to secure reelection and prestige that can later be translated into lucrative speaking fees. 

And if we assume that the distribution of nonpecuniary goods and pecuniary goods has at least something to do with heterogeneous underlying preferences, well, that adds another wrinkle to the conversation. Matt made a great observation about this some months back:

[I]t seems to me that I’d rather be a tenured professor at UCLA like Mark Kleiman than be CEO of a Dallas-based dairy company like Gregg Engels. The professor does more interesting work, has less day-to-day stress, lives in a much better city, and has much more opportunity to form meaningful social relationships with colleagues and students. I don’t even slightly envy the idea of membership in multiple golf clubs. I’ll admit that I would love access to a corporate jet, but I’d like the flexible schedule and ample opportunity for travel that academia provides even more. Now of course if you offered me Engels’ job, I’d say yes. But I’d try to do it for a year or two, put millions away in the bank, then quit to become an independently wealthy political blogger who’s working on a book about his fake life as a dairy company CEO. That, however, is just one of the many reasons I’m not qualified to be the CEO of business enterprise. The board needs to hire executives who won’t just take the money and quit, even though quitting is exactly what any sensible person with that much cash would do.

In other words, it seems to me that if you’re a waitress or a cab driver or a security guard or a carpenter or a cashier you’re perfectly entitled to regard “the elites” as encompassing the CEO and the professor and the blogger too. Whose life you’d prefer really has to do with your tastes and preferences. The diminishing marginal utility of money means there’s a strong case for redistributing funds from people who have a lot of it to people who’ll get more use from it. But that very same diminishing marginal utility of money means that there’s little reason to believe that inequality in real living standards among the elite is nearly as big as the inequality in income.

In the massively multiplayer real-time strategy game that is a dynamic market economy, steeply graduated taxes tend to give rise to a situation in which high human capital individuals choose more leisure or non-market production over taxable market production. Inequality of life satisfaction could still increase under this scenario, only it is concealed. 

So what we seem to be dealing with is an intra-elite culture war, not basic questions about how the public sector can be made more effective and more fiscally sustainable.

P.S. To elaborate further on Objection 3, Yuval Levin observes the following:

Here’s a statistic from my crunching ofthe historical figures in the latest CBO outlook document: In 1971, federal health spending accounted for 1% of GDP, and all other federal spending combined (excluding interest) accounted for 17.1% of GDP. Forty years later, in 2011, health spending accounted for 5.6% of GDP and all other spending combined accounted for … 17.1% of GDP — exactly the same portion of the economy as it did four decades earlier. That figure for all non-health spending has gone up and down some in that time, of course, but as it happens it was precisely the same last year (the latest year for which figures are available) as it had been 40 years earlier, while health spending was more than five times greater. In essence, the net growth in government as a percentage of the economy in these 40 years has been entirely a function of federal health spending

I should note that Voegeli discusses Medicare’s extraordinary growth in his essay, which I recommend. One way of looking at this issue is that the left has a coherent story for how to reduce health expenditures — this isn’t about slowing cost growth a bit, as U.S. cost growth is, post-1980s, basically in line with other market democracies — which is to centralize the system and create a more democratic, more rational way of distributing care. The right, in contrast, has generally emphasized a more market-oriented approach, yet it is only recently that the right has been coalescing around a coherent set of alternatives. Given that federal health spending is “where the action is,” this is extremely important. And it’s not clear to me that Republicans understand the scale of the challenge or the need to unite around a coherent and compelling approach to tackling health costs.

Reihan Salam — Reihan Salam is executive editor of National Review and a National Review Institute policy fellow.

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