Andrew Sullivan is convinced that I’m advocating “streamlining” as a solution to our fiscal imbalance.
Here’s a question for him: How much money does he imagine we can save by making government more efficient? And what percentage of the budget deficit does he think we can close without raising taxes?
I think we can save a tremendous amount, as I suggest here. And I’m working on a larger project on this subject. For starters, I recommend reading Frederick Hess’s new edited volume on Stretching the School Dollar, which gives you a small sense of the savings to be found in resource-intensive public services. I also recommend The Innovator’s Prescription. Baumol’s cost disease can be overcome in sectors that allow for the emergence of disruptive technologies. I understand that this isn’t how people tend to think about the public sector. But that is precisely how we need to think about it if we’re going to escape those false choices that President Obama warned us against in 2008.
I’m also of the view that tax expenditures are a form of spending. As I’ve stated on many occasions, I favor rolling back the 2001 and 2003 tax cuts so that we can start from scratch on a new tax code, ideally one modeled on the Growth and Investment Tax proposal [PDF] outlined by the Tax Reform Panel.
Using CRFB’s Stabilize the Debt, I have hit the target of public debt as a share of GDP by relying on spending cuts and cuts to tax expenditures while making the 2001 and 2003 tax cuts permanent. And I’m pretty sure you can. If the program offered more real-world choices about how to “streamline,” I imagine this would be a far easier process. Alas, we haven’t begun to think seriously about how we can increase the efficiency of most public programs, so I can hardly blame the CRFB.
The issue isn’t “streamlining,” in my view. It is addressing misaligned incentives. James Capretta has written convincingly on this subject. Medicaid is a particularly egregious example of misaligned incentives run amok, but there are many other examples, including public investment in infrastructure.
Revenue increases might have to be part of the picture, as I’ve said again and again, including in the post Andrew identifies:
Once we address these domains, we can turn to revenue. And on the revenue front, I’d gently suggest that we try to find ways to raise revenue that do the least amount of damage to the broader economy. Alan Viard and Doug Elmendorf of the CBO have offered thoughts on this subject, but of course assessments and opinions vary. I’ll just gently suggest that it is not obvious that marginal tax increases on high earners aren’t going to get us where we’d like to go in the absence of deep cuts in expenditures, which are, of course, the harder part.
Fiscal discipline begets organizational discipline. Fiscal discipline does not guarantee organizational discipline. But it creates the necessary conditions. To understand what I mean, I recommend this post from May, which draws heavily on Josh Barro’s work on Massachusetts. This is from Josh’s report:
* In Massachusetts, Proposition 2.5 has been effective in controlling growth in property taxes. Real-dollar property-tax growth from 1980 to 2007 was just 22 percent in Massachusetts. It was 68 percent nationwide and 102 percent in New Jersey.
* Tax collections in Massachusetts from other sources rose faster than the national average over the same period, as did state aid to localities. However, these increases did not fully compensate for the slower growth of property-tax revenues. Overall growth in state and local taxes was 58 percent in Massachusetts, while it was 70 percent nationally and 108 percent in New Jersey. As a result, New Jersey went from being the state with the tenth-highest state and local tax burden to being the state with the highest burden. In the same period, Massachusetts fell from second to twenty-third.
* Since 1980, spending per pupil grew significantly more slowly in Massachusetts than in New Jersey or the country as a whole. In 1980, the two states had nearly equal per-pupil spending; but by 2007, New Jersey was outspending Massachusetts by 26 percent. New Jersey’s spending of $16,163 per student was the highest in the country that year, according to the U.S. Department of Education.
* Massachusetts’s lower spending levels cannot be explained by a lesser need to serve hard-to-teach students. Even school systems in that state with similar percentages of students who were not proficient in English, or who were from low-income families, spent thousands of dollars less than their counterparts in New Jersey.
* Despite their lower spending levels, Massachusetts’s public schools are the country’s clear top performers, as measured by National Assessment of Educational Progress (NAEP) exams administered by the U.S. Department of Education. In 2009, Massachusetts outperformed New Jersey in both reading and math in grades four and eight (though for grade eight, the gap in reading performance is within the margin of error).
* Massachusetts’s stronger NAEP performance is not explained by favorable demographics. Within most demographic groups, students in Massachusetts achieved higher average NAEP scores than their counterparts in New Jersey. Hispanics and Asians/Pacific Islanders were a notable exception. Massachusetts students eligible for subsidized lunch or who were English-language learners also matched or outperformed their counterparts in New Jersey on the NAEP exams, despite lower spending in districts with high concentrations of such students.
Education is a tricky domain, and the difference between Massachusetts and New Jersey is dramatic. But education represents a smaller share of public spending at all levels than spending on medical care. If Medicare and cost growth in medical care is the key driver of spending increases, and I think it is, reforms modeled on Harold Luft’s call for a Major Risk Pool seem like a vitally important step.
But why pursue these politically difficult steps if people believe that marginal tax increases can magically solve the underlying problem?
Andrew concludes:
The prudent course is seeking efficiency, spending less and raising taxes. Our hole is that deep.
Yet he objects to the fact that I think we should focus on seeking efficiency and spending less. I find this puzzling, particularly since I’ve been beating the drum on the need to raise revenue for years. I just don’t think that raising revenue should not be seen as a first resort. My question to Andrew is whether he believes that we’ve scratched the surface when it comes to finding ways of delivering higher-quality public services at lower cost.
PPACA, for example, relied heavily on revenue increases and Medicare reforms that are far less likely to yield results than a simple move to competitive pricing for all Medicare plans. Had revenue increases other than cuts to tax expenditures been off the table, we might have seen something along the lines of the McCain plan and the use of the a mechanism like Luft’s MRP.
So why didn’t the Bush White House advance these objectives during its time in power? (I’m anticipating this objection from some of my readers.) I should note that I opposed President Bush’s reelection in 2004, to give you a sense of where I’m coming from. I was very concerned at the time about the 2001 and 2003 tax cuts, among other things. Yet in the spirit of fairness, I’ll give you a few things to keep in mind.
The Bush White House proposed sweeping Medicaid and tax expenditure reforms that would have made a tremendous difference to the long-term budget picture. Congress, whether under divided, Republican, or Democratic control, wasn’t responsive to these ideas, which definitely reflected a failure on the part of President Bush to make an effective case for these efforts.
Another thing to remember is that deficits were far smaller during the Bush era, and attributable in no small part to massive outlays associated with the armed invasion and occupation of two countries. That’s hardly an excuse. Rather, it is a reminder that we should hold our politicians accountable, regardless of partisan affiliation.
As for me, I intend to walk and chew gum at the same time. I happily acknowledge, as I always have, that revenue increases might have to be part of the mix. I can’t for the life of me see how this is in tension with believing that public sector reform needs to come first, particularly since broad-based tax increases will raise far more revenue far more efficiently than the marginal tax increases that Michael Kinsley advocates.