The Reform Agenda

"If something cannot go on forever, it will stop."
--Herbert Stein

The above quote, from the late economist Herbert Stein (father of comedian Ben Stein) has been applied to many situations.  Here, it seems appropriate to apply the maxim to the current state of America’s economy and its government affairs.

As we try to create a positive, results-oriented agenda to restore prosperity, we need to be clear-headed about what lies in our path.  The biggest obstacles to recovery can be loosely grouped into the categories of resources, the current structure of the social welfare state, the pervasive regulatory state, and our broken educational system.

Dwindling Resources and “Take Away” Politics
Long-time columnist for Newsweek and the Washington Post, Robert Samuelson, argued a year ago that we are moving from an era of "give away politics" to "take away politics," for which our political system is badly equipped.[1]  Raising taxes on the rich will not work.  As Samuelson writes,

Liberals imply (wrongly) that taxing the rich will solve the long-term budget problem.  It won't.  For example, the Forbes 400 richest Americans have a collective wealth of $1.5 trillion.  If the government simply confiscated everything they own, and turned them into paupers, it would barely cover the one-time 2011 deficit of $1.3 trillion.

On the other hand,
Conservatives deplore "spending" in the abstract, ignoring the popularity of much spending, especially Social Security and Medicare.

As Willie Sutton famously answered when asked why he robbed banks—“because that’s where the money is”—to make a real dent in spending, we have to go after the big budget items.  The bulk of Minnesota’s general fund spending[2] falls into three categories.  K-12 education consumes 40.9 percent of total spending, the health and human services line item takes up 31.9 percent, and higher education accounts for another 7.5 percent of the total.  Add these three categories together, and you have covered more than 80 percent of total spending.  In this section, we will address the human services piece.

Social Welfare Structures—Nowadays, All the Poor Are Deserving
Our friends on the other side would have us continue to practice “give away” politics, the heart of what Bard College professor Walter Russell Mead calls the Blue Social Model, with the list of items to be given away, ever growing.

On Christmas Day, 2011, Minneapolis Star Tribune columnist Lori Sturdevant published a piece lamenting the remnants of the Victorian-era concept of the “deserving poor” (“It's rarely a luxury to be in need of charity”).[3]  She quotes a local university professor, Joe Soss, "Our notions about who's deserving of help and who isn't are rooted in the notions about individual effort and individual success or failure."

Sturdevant makes clear that for Minnesotans, those notions are grounded in our pioneer past,

In frontier Minnesota, hard work could rather reliably produce self-sufficiency.  Suspicion of the poor as lazy or profligate arose easily when land was cheap or free, the population was exploding, and harvests of timber, grain and, eventually, iron ore were abundant beyond imagining.
As we cast aside these old-fashioned notions, Sturdevant offers any number of solutions, straight out of the Blue Social Model playbook, specifically “living wage,” child-care subsidies, expanded health-care benefits, to both single mothers and the middle-class, alike.  Quoting the good Professor Soss,

"The problems that we have arise first and foremost because our institutions are not designed to accommodate people's lives.  We haven't adapted," Soss said.
We all share the goal of promoting social mobility, but how can we do so in an era of budget restraints?  What path can we follow to promote mobility in an era of “take-away” politics?
Reynolds’ Law and Social Mobility
One path to avoid is what Glenn Reynolds—a Tennessee law school professor best known for his blog Instapundit[4]—has modestly dubbed as Reynolds' law,
The government decides to try to increase the middle class by subsidizing things that middle class people have: If middle-class people go to college and own homes, then surely if more people go to college and own homes, we’ll have more middle-class people.  But homeownership and college aren’t causes of middle-class status, they’re markers for possessing the kinds of traits—self-discipline, the ability to defer gratification, etc.—that let you enter, and stay, in the middle class.  Subsidizing the markers doesn’t produce the traits; if anything, it undermines them.

As they say, correlation does not necessarily equal causation.  Reynolds makes a good point, a home is a marker of middle-class status, not the cause of the status.

The Secret to Happiness—Earned Success
Merely supplying people with the accoutrement of a middle-class life does not guarantee they will become a member or maintain that status.  It will not even guarantee that they will be happy.  Sociologist Arthur Brooks of the American Enterprise Institute wrote a three-part series in the Washington Examiner in 2010 arguing “The secret to human happiness is earned success.”  In part 3, Brooks wrote,

People flourish when they earn their own success.  It's not the money per se, which is merely a measure--not a source--of this earned success.  More than any other system, free enterprise enables people to earn success and thereby achieve happiness.  For that reason, it is not just an economic alternative but a moral imperative.
People think that they will be happier if they have more money, but quickly find out that they're mistaken.  When people are asked what income they require for a satisfying life, they consistently respond--regardless of their income--that they would need an income about 40 percent higher than whatever they're earning at the time.
Benjamin Franklin (a pretty rich man for his time) grasped the truth about money's inability to deliver life satisfaction.  "Money never made a man happy yet, nor will it," he declared.  "The more a man has, the more he wants.  Instead of filling a vacuum, it makes one."
If money without earned success does not bring happiness, then redistributing money won't make for a happier America.  Knowing as we do that earning success is the key to happiness, rather than simply getting more money, the goal of our political system should be this: to give all Americans the greatest opportunities possible to succeed based on their hard work and merit.
This is the liberty our founders wrote about, the liberty that enables the true pursuit of happiness.  (Emphases in the original).[5]
Social Welfare Structures—Disincentives to Economic Mobility
No, government cannot merely grant middle-class status.  It must be done the old-fashioned way.

One writer thinking hard about the obstacles to economic mobility is Megan McArdle, who writes on business and economic issues for the magazine and on her blog.[6]  She makes the obvious by seldom articulated point about what makes poor people poor,

I'd say the same thing about people who are poor.  They could be middle class if they made a series of hard choices.  But those choices are really hard--much harder than they are for the people who are already there.  Chances are, you would also have a hard time making those choices.[7]

Public policy cannot make those choices for people.  But for those individuals willing to make the hard choices, public policy must work to make those choices a little easier and the trade offs more favorable.

McArdle lists sixteen obstacles faced by those trying to climb the economic ladder.  Many of those she lists are not the sort of thing upon which government can have a meaningful impact.  Others are absolutely within government’s purview or are actually caused by government.

The most prominent government-caused obstacle is the effective marginal tax rates faced by those at the bottom of the income ladder.  As someone enters the workforce and begins to make money, they may be subject to losing some government benefits and as they start paying taxes, they may face effective marginal rates higher than that paid by any billionaire.  McArdle gives the following example,

A woman called me out of the blue last week and told me her self-sufficiency counselor had suggested she get in touch with me.  She had moved from a $25,000 a year job to a $35,000 a year job, and suddenly she couldn't make ends meet any more…She showed me all her pay stubs etc.  She really did come out behind by several hundred dollars a month.  She lost free health insurance and instead had to pay $230 a month for her employer-provided health insurance.   Her rent associated with her section 8 voucher went up by 30% of the income gain (which is the rule).  She lost the ($280 a month) subsidized child care voucher she had for after-school care for her child.[8]

This phenomenon—making work pay—is something policymakers have struggled with for decades.  The late Nobel-prize-winning economist Milton Friedman long advocated the solution of the “negative income tax.”  Simply put:  as the recipient of government benefits enters the workforce, the amount of the benefit is cut back as the recipient begins to earn income, in effect, paying “negative” income tax.  In the above example, the woman moving from a $25,000 to a $35,000 job would still lose some government benefits, but not enough to make her worse off from having climbed another rung on the ladder.

The negative income tax was implemented in both Minnesota and at the national level in the form of the Earned Income Tax Credit.  But a broader and better coordinated program needs to be developed to account for the phasing out of benefits.

Fix or Scrap or Rebuild?
New York Times’ columnist Ross Douthat has written about the need to bridge the divide between, say, libertarians who would drastically reduce the welfare state and progressives who long for major, new entitlements.  In analyzing Charles Murray's important new book Coming Apart, Douthat writes,

The crisis in working-class life Murray describes is arguably our most pressing domestic problem.  But we are not going to address it by gut-renovating our welfare state to fit a libertarian ideal, or by dramatically expanding the same state in pursuit of an unattainable social democratic dream.  What we can do instead is take modest steps, in areas where culture and economics intersect, to make it easier for working-class Americans to cultivate the virtues that foster resilience and self-sufficiency.[9]

Douthat goes on to offer ideas on how to "make work pay," help families, fix immigration policies (think more high-skilled immigrants and more enforcement), and rethink crime and punishment policies.

So far, we have come up with a few useful principles to guide policy making such as provide incentives to work (making work pay) and regulate for results.  We have also identified a few useful tools, such as the Earned Income Tax Credit.

As for a broader program, British-born, Harvard history professor Niall Ferguson provides this thumbnail program for addressing the divide,[10]

"Scrap the failing welfare programs of the ’30s and ’60s before they bankrupt America.  Ensure that everyone has a basic income.  Then simplify the tax code to restore the incentives that used to exist for everyone to work hard.  Finally, end the state monopolies in public education to launch a new era of school choice and competition."

We will examine additional ideas for reforming government in upcoming posts.

--Private Citizen

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