By JULIA D. MAHONEY
Review of WE ARE BETTER THAN THIS: How Government Should Spend Our Money, by Edward D. Kleinbard, and GOING FOR BROKE: Deficits, Debt, and the Entitlement Crisis, by Michael D. Tanner
Oxford: Oxford University Press, 2015; Washington, DC: Cato Institute, 2015
Is the United States headed for financial calamity? Two new books take a hard look at the federal government’s financial outlook and conclude that absent changes in fiscal policy the nation will face serious trouble. But while the authors of these volumes see largely eye to eye on the basic facts of our predicament, the prescriptions they offer for getting the U.S. back on a sustainable course are diametrically opposed.
In We Are Better Than This: How Government Should Spend Our Money, Edward D. Kleinbard, former Chief of Staff of the U.S. Congress’s Joint Committee on Taxation and Johnson Professor of Law and Business at the University of Southern California’s Gould School of Law, maintains “there is no rational alternative” but to boost tax revenues. Cato Institute senior fellow Michael D. Tanner disagrees, dismissing as fantasy the notion that tax increases can solve our problems. If the goal is “renewed prosperity, increased growth and a brighter future,” argues Tanner in Going for Broke: Deficits, Debt and the Entitlement Crisis, we must severely prune government spending—and that means “fundamental, structural reforms” to major entitlement programs such as Social Security and Medicare.
That the remedies of these two authors diverge is due not to disagreement about where we are but to clashing visions of what sort of nation the United States should aspire to be. Kleinbard and Tanner aim for nothing less than to restore the country to spiritual as well as financial health, and for each author fiscal policy has a strong moral component. Kleinbard believes “we can afford to pay” for more government and that resistance to doing so is rooted in selfishness and cause for shame. To Tanner, an expanded government would be evidence not of good character but of further societal decay, for in his view the size of the U.S. public sector has already undermined core national virtues of hard work and self-reliance.
Debt, Entitlements, and Guarantees
The financial commitments of the United States government are staggering, and both books ably explain the fundamentals of what has been promised and to whom. As Kleinbard and Tanner make clear, the official $18.2 trillion national debt figure—up from $10 trillion in 2008 and projected to reach $20 trillion in 2017—is only part of the problem. Even greater are the amounts promised under various entitlement programs, estimated to exceed $73 trillion. Of particular concern is health care spending, the lion’s share of which goes to Medicare and Medicaid. As Kleinbard notes, healthcare is the “largest fiscal problem the United States faces, because our country’s healthcare spending is so outsized, and so much of the cost is absorbed by the government.”
Kleinbard and Tanner could have supplemented their insightful analyses of the nation’s debt structure and major social insurance schemes with information about other big risks the federal government has explicitly taken on, such as the Federal Deposit Insurance Corporation’s guarantee of trillions of dollars of bank deposits. A more complete picture of the financial state of the union would also include information about the assets of the United States as well as a description of the implicit backstops the federal government may (or may not) provide to systemically important private firms, troubled state and local governments, and other plausible candidates for “bailouts.” These quibbles aside, both books make significant, timely contributions to the debate over the nation’s financial future and deserve wide readerships.
A “Nation of Jerks”? Fiscal Policy as Moral Philosophy
To Kleinbard, “coherent fiscal policy” is nothing less than “an exercise in applied moral philosophy.” For guidance, he turns to Adam Smith—but not to The Wealth of Nations, Smith’s most famous work. Kleinbard’s lodestar is The Theory of Moral Sentiments, first published in 1759 (seventeen years before The Wealth of Nations) and revised five times by Smith before his death in 1790. Kleinbard rightly views these works as complementary, with The Theory of Moral Sentiments focusing on mankind’s inner life and the cultivation of the virtues that undergird the dynamic commercial society celebrated in The Wealth of Nations. Kleinbard believes that failing to read the two in conjunction has led “market triumphalists” to fall into the serious intellectual and moral error of imagining that “political liberty rests on unalloyed market freedoms.” Rescuing Adam Smith from “his Babylonian Captivity as the mascot of libertarian values” is part of Kleinbard’s overall program of saving the U.S. from being “a nation of jerks.”
Applying The Theory of Moral Sentiments to the United States in the twenty-first century leads Kleinbard to stake out an unabashedly pro-government position. The “path forward to a better economic environment for all of us lies through more government involvement, not less,” he declares. Calls for a more minimalist state are dismissed as “economic noise and fog designed to generate superficially plausible rationales” for boorish behavior.
Although Kleinbard takes pains to stress that the “progressive values” he embraces include a “strong commitment to private enterprise,” it is in the material on the public sector’s scope and role that We Are Better Than This comes alive. Kleinbard spins a narrative of sin and redemption that starts with the admonition that through our errors and omissions we have lost “our fiscal soul.” Our transgressions include an obsession with GDP as a measure of societal well-being at the expense of better, more subtle indicators; the toleration of increasing disparities in wealth and income; and a childish belief in a “Growth Fairy” that “subsists entirely on a diet of low taxes.” Even to those agnostic about the book’s central claims—or, for that matter, even to the supporters of minimal government Kleinbard identifies as the “villains” of his story—the in depth exploration of these issues should prove an invaluable resource, for seldom does an author draw on such a wide range of serious academic work to shed light on important contemporary debates.
Kleinbard does not limit himself to a description of ills. He goes on to hold out the promise of salvation if we will just tax and spend more. In Kleinbard’s account, the capacity of government to improve individual lives is little short of miraculous. Of particular promise are expansions in social insurance programs and ramped up public investments in infrastructure and education. Together with a shift in focus from a progressive tax system to a progressive fiscal system, these initiatives will go a long way toward “reclaiming our fiscal soul.”
Yet for all Kleinbard’s praise of government involvement, he has little to say about how to know when to stop. In Kleinbard’s world, a growing social insurance system is a sign of “common sense” and carries no serious risk of fomenting idleness or stifling initiative. Indeed, Kleinbard suggests that far from inhibiting the entrepreneurial zest that fuels economic development, “the collective purchase of reasonable levels of social insurance promotes socially useful risk-taking.” To be sure, Kleinbard admits the existence of free-loading slackers such as “Jason the Surfer”—a Fox News profile subject, and beneficiary of the Supplemental Nutrition Assistance Program, who leads a “relaxed lifestyle” and shows no inclination to pursue gainful employment. But he dismisses the Jasons of the world as anomalies and thus irrelevant to policy formulation.
Kleinbard’s take on government investment is similarly cheery. Where more cynical observers might detect vehicles for politicians to funnel cash to cronies under the pretext of increasing the energy supply or schooling the young, Kleinbard sees efforts to build a better society. Yes, there are a few clunker projects here and there, like expensive bridges to remote, sparsely populated Alaskan fishing villages. And Kleinbard cautions that “we cannot embrace every generous impulse, because in many cases the return on investment, in the broadest sense, is too low, relative to its social and economic costs.” But Kleinbard stands firm in his claim that we are nowhere close to realizing the full social returns available from more public investment.
Such a high level of confidence in government’s capacity to do good means that Kleinbard’s specific proposals—although well explicated and carefully weighed—come as an anticlimax. Stripped to their essence, they add up to federal government spending levels and tax revenues roughly on par with those of the final years of the Clinton administration. That is not to say that the ideas Kleinbard advances are trivial. On the contrary, anyone with even a passing interest in fiscal policy will find a great deal to chew on in Kleinbard’s proposals for taxing capital income and in his explication of how regressive taxes can figure in progressive fiscal systems.
Kleinbard himself seems to recognize the mismatch between his book’s clarion rhetoric and its actual policy recommendations, admitting that some of his readers may be “disappointed” by his lack of ambition. What he fails to acknowledge is that his middle-of-the-road prescriptions leave him vulnerable on his left flank to the very criticisms he directs toward those on his right. Advocates of an even bigger boost in government involvement might feel justified in calling Kleinbard selfish for his unwillingness to venture beyond (Bill) Clintonian center-leftism. At a time when avowed socialist candidates are attracting significant support in many developed democracies, including the United States, this omission is a curious one.
Should Kleinbard decide to follow the example Smith set with The Theory of Moral Sentiments and revise We Are Better Than This, he might respond to arguments that healing our “fiscal soul” will require far more public insurance and investment than he endorses. Kleinbard might also address the question of if and under what conditions increased government endangers freedom. For all the irritation Kleinbard shows toward “market triumphalists,” he never argues that there is nothing to the connection they draw between free markets and free peoples—just that their fears are unfounded because at present “our political liberties generally are secure and unthreatened.” We Are Better Than This would be a richer, more thoughtful work—and closer in spirit to the masterpiece that inspired it—if Kleinbard could muster enough sympathy (in the sense of “fellow-feeling with any passion whatsoever,” as Smith puts it in The Theory of Moral Sentiments) to engage constructively with his ideological opponents.
Government Gone Wild: Threats to Liberty, Prosperity and “Our Way of Life”
Going For Broke advances many of the very arguments that rankle Kleinfeld. Like Kleinfeld, Tanner repeatedly declares that the peril the United States faces is moral as well as financial. But unlike Kleinfeld, Tanner thinks that what threatens our collective soul is not too little government involvement in American life but too much. According to Tanner, we confront more than the danger that investors might lose confidence in the United States and turn off the spigot of credit we have come to rely on. Our national indebtedness is a “symptom” of the “larger disease” of a growing government already so vast that we are vulnerable to loss of “liberty and our way of life.” To Tanner, economic liberties and political freedoms are so intertwined that a highly active public sector is a clear and present danger.
This point bears emphasis, for it drives Tanner’s analysis of what our options are. Tanner believes that even if the federal government’s budget were in balance, the sheer size of “a rapidly growing government that is consuming an ever-larger share of our national economy” would be a menace. The public involvement that, to Kleinbard, is the mark of an advanced civilization is to Tanner a harbinger of its destruction. Why? First, Tanner believes big government is inimical to economic flourishing because the resources it “extracts from the private sector to pay for itself” would do far more good if left in private hands. Second, in Tanner’s view the government programs justified as measures to smooth out life’s vicissitudes are anything but benign. A foreseeable result of protecting individuals from the consequences of their “nonvirtuous behavior” is more of the same. Third, the river of government money that runs through U.S. society encourages businesses and individuals to direct their energies toward lobbying for government dollars (or for reducing their share of the costs of government) and away from honest competition in the marketplace. To Tanner the equation is simple. Reduced rewards for innovation, industry and stable family life lead to economic stagnation and a fraying social fabric.
So what should we do? According to Tanner, we cannot and should not even try to tax our way out of this mess. Instead, we must cut spending across the board. That means more than ferreting out and eliminating “fraud, waste and abuse,” which while a worthy pursuit will not materially change the nation’s financial trajectory. To shift course requires reductions in defense expenditures and finding ways to save money in law enforcement, education and other basic government functions. Most important, it means changes to major entitlement programs that go far beyond “mere tinkering.”
Like what? Going for Broke contains fewer specific proposals than We Are Better Than This. The ones it does provide are intelligent, well-considered variations on familiar themes. While Tanner’s ideas merit study and reflection, they do not provide a workable blueprint for the big changes he argues are needed to avert “disaster.” Tanner’s focus is on replacing Social Security with a system of personal accounts, transforming Medicare into a “backup catastrophic insurance program” by (among other things) raising deductible levels and reforming Medicaid to give individual states incentives to control health care costs. These measures, if implemented with skill, could over the long term put a dent in federal spending. But to go down this path will require politicians with the courage to spearhead measures that to date have failed to win favor with voters. In short, the most important missing part of Tanner’s prescription is political. For all his ideas about how to overhaul the entitlement programs that are fast eroding the nation’s financial stability, Tanner is silent on how to build an electoral coalition to bring about change.
Going For Broke ends on an elegiac note. Convinced that the U.S. is hurtling toward financial chaos and social dislocation akin to what Greece now suffers, Tanner holds out scant hope of financial and moral renewal. By his own account we can save ourselves only by taking the “rocky” path “less traveled by” of “saying no to powerful interest groups” and effecting radical entitlement reform. Given the absence of any sign that the country is ready for such strong medicine, the obvious lesson to draw is that we might as well give up on America as we know it. This downbeat close will likely disappoint some readers, who having ploughed through over 200 pages of detail on the nation’s financial outlook may well wonder why they bothered.
Expanding the Menu?
For over a decade experts have cautioned that catastrophe looms if the U.S. fails to better align federal government expenditures and revenues. Policy wonks, business leaders and statesmen from both major political parties have taken these warnings seriously, resulting in a slew of sophisticated plans to put the U.S. back on a responsible financial track through spending adjustments and/or tax hikes. We Are Better Than This and Going For Broke both fall squarely within this tradition. But whatever their virtues, all these plans have one thing in common: they have not been adopted. The repeated failures of these reform measures—even ones designed to attract more bipartisan support than what Kleinbard and Tanner offer—suggest it may be fruitful to expand the menu of options under consideration.
One possible approach is to increase the role of altruism in the health care sector. Most discussions of health care take as a starting point that to the extent costs are borne by some individuals on behalf of others, government will act as the intermediary through Medicare, Medicaid and other programs. Whether to expand or contract these government programs is, of course, one of the main points of contention between Kleinbard and Tanner. But government is not the only possible intermediary, and making more effective use of the nonprofit sector should appeal to Americans across the ideological spectrum. Using the “third sector” avoids the problems of big government flagged by Tanner while enabling Americans to practice some of the charitable virtues Kleinbard believes them to be deficient in.
A second possibility—one with substantial precedent in U.S. history—is to sell off some of the nation’s assets. The federal government owns slightly less than one-third of the land in the United States as well as extensive natural resources in oil, coal and natural gas. It also has a valuable portfolio of financial assets and large reserves of precious metals. There is no obvious reason the federal government could not reduce its holdings and still function. Asset sales should be structured with care, of course, to maximize proceeds while minimizing detrimental effects on the nation’s governance. That is all the more reason, however, to start thinking hard about this option sooner rather than later.
Turning to more radical measures, it may be time to consider restructuring the $13.2 trillion of the total $18.2 trillion United States debt that is held by the public. (The other $5 trillion consists of “intragovernmental obligations” held by, among others, the Social Security and Medicare “trust funds.”) Interestingly, Kleinbard and Tanner both dismiss out of hand the idea of not making good on these formal debt obligations. Tanner puts the matter simply: “All money borrowed today must be repaid eventually—with interest.” Kleinbard’s prose is more florid. He notes that a government can “amaze the world” by borrowing and then defaulting but asserts that only a “modern Nero” would consider an action “so cataclysmic.”
There is no question that failing to pay our debts in full would be a very serious step, one that could reduce U.S. access to world capital markets and destabilize our system of financial regulation. But to take it off the table completely without analysis—as both Kleinbard and Tanner do—is to ignore a course of action that has worked (after a fashion) for numerous nations and sovereigns throughout history. Indeed, as my colleague Ed Kitch and I discuss in a current working paper, one can characterize the United States as having already twice “defaulted” by failing to satisfy its pledges in full: first in the early 1790’s with Alexander Hamilton’s debt restructuring plan and again at the start of the New Deal with the abrogation of the gold clauses in U.S. debt instruments. (This “twice defaulted” figure does not count “technical” defaults, such as a 1979 failure to redeem treasury bills on time or briefly delayed payments to creditors in November 1814.)
These three suggestions for expanding the menu are but that—suggestions. There are many other possibilities worth examining. My objective in discussing these three is to show that we have not come close to exhausting our options. I also aim to persuade those who assess the risk of U.S. financial failure as high to divert some of their energies from battering away at the “more taxes/less spending” logjam of American politics and toward thinking of ways to sidestep it.
Conclusion: The Future of America’s “Fiscal Soul”
We Are Better Than This and Going For Broke peer deep into our collective “fiscal soul” and are unsettled by what they find, albeit for different reasons. The Americans of We Are Better Than This are prosperous and capable but have been rendered ungenerous by specious equations of taxation with tyranny, while Going For Broke depicts a dysfunctional society that cannot control government growth and so hurtles toward insolvency and loss of freedom. Yet for all their differences, the authors of these books agree on two key points. First, the financial trajectory of the United States is not sustainable. Second, for solutions to this quandary we should look to the standard fare of “inside the beltway” fiscal policy proposals. What neither seems prepared to consider are more creative, “outside the box” measures. The seriousness of the problems these books address, however, together with the ongoing stalemate of United States fiscal politics, suggest that the time has come to do exactly that.
Posted on 4 January 2016
JULIA D. MAHONEY is the John S. Battle Professor of Law at the University of Virginia, where she teaches courses in property, government finance, constitutional law, business organizations and nonprofit institutions.
