Tuesday, May 29, 2012

How Liberalism’s Good Impulses Led to Fiscal Unsustainability

Much of the debate over the role of the federal government devolves into a shouting match over whether the federal role is too large and threatens basic freedoms or whether an expansion of that role is vital for achieving a fairer society and that we should model our society on that of, say, Sweden.
But framing the debate in that way is not only unhelpful (it’s unlikely that either side will suddenly experience an epiphany and become converted to the opposing viewpoint), it lacks historical context and a balanced analysis of how we got to where we are today.

From the beginning of the nation’s history, the federal government has played a vital role, as designed by Alexander Hamilton, among others.  Hamilton’s goal, along with many of his contemporaries, was to increase national power and stature for the benefit of all citizens, but was not to necessarily make some citizens rich or to ensure economic equality.

Hamilton’s objectives, therefore, included the long-term structural development needed to help the nation grow (a strong banking sector, roads and later railroads, etc.), and was not focused on providing more jobs during any economic downturn, or even as an ongoing responsibility of the federal government, and certainly did not contemplate efforts to divide the country between haves and have nots.

Hamilton’s program (and the prevailing philosophy until Franklin Roosevelt) was to emphasize opportunity, rather than specific economic outcomes, equal or otherwise, and the resulting political actions focused on innovation and education, rather than economic security.  As a result, the federal government’s role in the economy historically averaged about 4% of GDP, and even during the Depression was less than 10%.

But this approach has been largely abandoned, often for what seemed like good reasons at the time.

First came the Progressive era, where laws and regulations were properly enacted to protect workers and consumers, but in connection with these fine impulses a philosophy took placed great faith in the government’s ability to effectively use it’s powers to “rationalize” the market and design appropriate outcomes without unintended consequences.

Second was the New Deal, where Roosevelt very wisely reacted to economic distress with pro-active government programs.  What that lead to, unfortunately, was a political system where politicians paid less attention to long-term structural improvements and more to jobs created in any one month. 

Whether or not government can meaningfully create jobs in the long-term, the reality is that politicians of both parties have since become wedded to debt, thereby sacrificing the interests of the next generation, who will be burdened with that debt, all for the sake of politically popular spending (largely on the middle class) and tax cuts.  In effect, public funds were used to buy votes and ensure the triumph of incumbency.

The third step down that road was taken by President Johnson and his Great Society, and the open-ended promises made, particularly in the area of health care, where the combination of those promises and changing (but not unanticipated) demographics made current programs (Social Security, Medicare and Medicaid) unsustainable in their present form.

In each case, a fundamentally good and generous impulse led to unsustainable commitments, as the government attempted to satisfy an expanding constituency’s short-term desires.  Instead of a focus on long-term innovation and infrastructure (both physical and cultural), we largely devote our resources to health care and a comfortable retirement for an aging middle class.

So, the question is not whether the federal government is inherently evil or benign. The relevant questions are instead:

(1) what do we really, really want government to do;

2) what are the appropriate priorities among those desires, understanding that we simply do not have the financial or human resources to do everything we might want; and

(3) how do we best enhance our long-term fiscal situation to enable us, and succeeding generations, to have the resources necessary to answer society’s legitimate needs, while avoiding piling up long-term debt to address short-term desires.

In fact, one could argue that if one is a true liberal, and sincerely wants to have an expanded government role to help those seen as in need, then the first priority should not be increased taxes and an expanded bureaucracy, but an enhanced economy, which is what will eventually pay for any of those government functions.

And, as a bit of a sneak preview regarding fiscal sanity, the answer probably lies somewhere close to the recommendations of the President’s own fiscal commission: a 3 to 1 ratio of spending cuts to tax increases, realizing that much of those tax increases will necessarily fall on the middle class.