Federal Case

The neoliberal approach to governing ignores a crucial fact: Government is best when it is big. A response to Eric Liu and Nick Hanauer.

Social Security, Franklin Roosevelt’s New Deal retirement program, has far lower costs than any tax-favored, private for-profit alternatives, and has weathered the Great Recession far more successfully than most 401(k)s and IRAs. Reducing government encouragement for gambling with private retirement savings in the stock market should be combined with a gradual increase in the Social Security pay-out as a share of pre-retirement income, a reform that policy expert Steven Hill has proposed in a recent study for the New America Foundation’s Economic Growth Program. Greater replacement of pre-retirement income by Social Security can be paid for with higher payroll tax revenues, an infusion of other taxes, or both.

Medicare, the crown jewel of Lyndon Johnson’s Great Society, is so popular that Republicans have even posed as defenders of the program against Democrats. The problem with Medicare and U.S. health cost inflation in general is too little government, not too much. Countries that do not suffer from American-style health cost inflation use all-payer regulation—that is, medical price controls. The United States must either copy what works everywhere else in the world or adopt rationing that forces all Americans other than the rich to enjoy less medicine from doctors, hospitals, and pharmaceutical companies whose personnel continue to be grossly overpaid by global standards, even as they enjoy subsidies from the public.

In addition to supporting privatization of public services, Liu and Hanauer call on progressives to “radically relocalize the means” of government, while providing “robust funding for those local means,” like public charter schools. Robust federal funding for schools and other state and local agencies is a good idea—but in the interest of historical accuracy I feel compelled to point out that combining national funding with local government discretion is a classic New Deal/Great Society-era policy, favored by Lyndon Johnson and Richard Nixon.

The most efficient government programs in the United States tend to be national and standardized, a fact that undermines Liu and Hanauer’s enthusiasm for decentralization as well as privatization. Purely federal entitlements like Social Security and Medicare are far more equitable and solvent than those like Medicaid and unemployment insurance, in which responsibility is divided between the federal and state levels. For that reason, Greg Anrig of the Century Foundation has proposed federalizing Medicaid in the pages of this journal [“Federalism and Its Discontents,” Issue #15]—a proposal that was part of a grand bargain in the 1980s proposed by President Ronald Reagan! As a former editor of a conservative magazine said to me years ago, “We conservatives will be finished if the American people ever figure out that the local government we’re always praising is much more corrupt and less competent than the federal government.”

Liu and Hanauer appear to suggest that Americans have often turned away from the Democrats to the Republicans because they wanted more localization or privatization of public services, but they present no evidence from public opinion or electoral data. In fact, the American people to this day support big, centralized, universal social insurance programs like Social Security and Medicare.

American voters put an end to Democratic dominance at the federal level in the 1970s and ’80s for two reasons. The first was the perceived failure of Keynesian macroeconomic management to deal with inflation and slowing economic growth. The second was the proliferation in the 1970s of liberal social and environmental engineering, often by federal court order at the expense of political give-and-take. Majorities supported color-blind anti-discrimination laws and the legalization of abortion, but were alienated by manipulative nanny-state policies like busing for racial integration, race-based affirmative action, and hectoring and mostly symbolic campaigns to “save the planet” by recycling or turning down thermostats.

If this analysis is correct, then what Liu and Hanauer call the “mushy amalgam” of midcentury America, in which the federal government did fewer things but did those few things like infrastructure and social insurance well and directly, was in fact quite popular with the American people and ought to be revived rather than rejected.

The biggest of the few things that government needs to do well is the promotion of long-term economic growth. Liu and Hanauer provide little guidance on the government’s role on this front. They write, “Bigness—whether at General Motors or the Postal Service—is not tolerated anymore.” Really? The U.S. government rescued GM, and other industrial democracies have aided their own car manufacturers because the automobile industry is characterized by increasing returns to scale and contributes disproportionately to national productivity growth. The major private alternative to the Postal Service, FedEx, is a colossal, continent-spanning corporation with fleets of jets and trucks.

According to Scott Shane, a leading authority on entrepreneurialism, from 1992 through 2008, the 79 percent of small businesses with fewer than ten employees created merely 15 percent of new jobs, even as the 4 percent of small businesses that had 50 to 499 employees created 30 percent of all net jobs (only by the federal government’s surreal definition is a company with 50 to 499 employees “small”). Large, well-capitalized businesses lead disproportionately in innovation, as well as job creation. Amazon.com created the Kindle, Apple the iPhone and iPad, and Google is among the leaders in developing robotic cars. The most successful economies in the developing world are found in state capitalist countries like China, which partner big government with big business and big science. Nothing like the radical increase in inequality that has taken place in the United States has occurred in similar western democracies where unions—“big labor”—include much or most of the workforce.

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