David Leonhardt has kindly and enthusiastically welcomed me into Club Wagner, but my sense is that my views don’t really reflect the Club Wagner consensus, which Leonhardt outlined in a post written last summer.
At their current levels, taxes are too low to cover the kind of government that Americans have made clear they want — a government that includes Medicare, Social Security, a strong military and numerous other programs.
David might have a better sense of what Americans want than I do. The survey data doesn’t strike me as unambiguous. Would Americans object to transforming Medicare into a system of limited defined contributions toward the purchase of health insurance if the reformed program delivered better results at lower cost than the status quo? I’m not sure they would. Would they object to a Social Security program that includes more public sector workers, that uses more years to calculate benefits, that reforms spousal benefits, and that creates a system of notional defined contributions if it made the program more reliable and fiscally sustainable? Again, it’s not obvious to me that this would be a non-starter, particularly if the alternative were a higher payroll tax. And can we have a strong military while trimming the cost of providing health and retirement benefits to military personnel, or while paring back the scale and ambition of our military commitments? I think we can, and I’m guessing many Americans would agree.
So yes, much depends on what’s really clear. Like David, I think we need to make it clear that there are trade-offs involved in decisions about taxing and spending. But I also think that we often obfuscate the extent of the waste in public sector budgets, much of it stemming from the political power of public sector workers and their allies.
Our club is named after Adolph Wagner, a 19th-century German economist who predicted that taxes would rise as societies became wealthier. “As people grew more affluent,” as the writer Matt Miller has explained Wagner’s Law, “they’d want more of what only government could provide — a strong military, public order, good schools and assorted welfare benefits, services that private citizens would have trouble arranging for on their own.”
This strikes me as a reasonable proposition. But what Wagner couldn’t anticipate is the fact that Baumol’s cost disease isn’t everywhere and always an inescapable, vise-like trap, particularly in a world in which education and services like it are open to disruption from student-centric education technology. The 1990s era revolution in the U.S. retail sector was a powerful example of how technological innovation can drive productivity growth in sectors previously seen a hopelessly orchestra-like.
Will spending also need to be cut? Yes, especially health care spending. But spending cuts won’t be enough. Taxes will also need to account for a larger part of tomorrow’s gross domestic product — just as they account for a much larger share of G.D.P. now than they did a century ago. Done right, tax increases do not have to stifle economic growth.
I agree that in the short to medium term spending cuts won’t be enough — the reforms I’ve hinted at will take time to take root. It’s also worth noting, however, that shifting functions across levels of government can do a lot of good here. For example, federalizing Medicaid would mean that state and local tax burdens could shrink while the federal tax burden picks up the slack during a transitional period. But the point of federalizing Medicaid is to align incentives in a more constructive way, a reform that would lower the overall spending burden.
My concern is that the Club Wagner approach is dangerously fatalistic, and that it underestimates the not inconsiderable human costs of a heavy tax burden.






Comments