Toward a Softer, Kinder Constitutional Moment

I admire all of Michael Greve’s essay and agree with much of it.    Like him, I worry about the long-term solvency of the United States.  Like him, I doubt the capacity of partisan politics as currently structured to address that problem.  And like him, I am a dyed-in-the wool Madisonian institutionalist who views changes of incentives as a more reliable basis for reform than an outburst of civic virtue.

It was not so long ago that I regarded Herbert Stein’s well-known aphorism as an antidote to despair.  Lately I have begun to wonder.  Yes, if something cannot go on forever, it will stop.  But it matters how it stops.  If a car is speeding toward a washed-out bridge, it can come to a halt on dry land . . . or plunge into the river.  The question before us is whether the U.S. political system retains the capacity to hit the brakes before it’s too late—and then move in a different direction.  Greve isn’t sure that it does, and neither am I.  But my diagnosis of our current plight is a bit less dire than his, and my prescription is therefore somewhat less far-reaching.

Someone is “broke” when his expenses exceed his income, he has run through his liquid reserves, and no one will lend him what he needs to cover the shortfall.  By that standard, the government of United States is not yet broke.  Indeed, the rest of the world is throwing money our way at interest rates that would have been unthinkable just a few years ago.  This isn’t just short-term hot money: the Treasury is selling 10-year notes yielding less than 2 percent, and 30-year bonds at under 3 percent.   This may represent a flight to safety.  Still, it wouldn’t be happening unless the market believed that we’re good for the money.

Yes, public debt has risen steeply as a share of our GDP.  But after household debt soared to unsustainable heights and the Great Recession wiped out trillions in household assets, a significant increase in public debt was an unavoidable prophylactic against outright economic collapse.  Greve would agree, I suspect, that the real issue is what we can expect when the economy has returned to whatever “normal” now means.

It’s also worth remembering that our public debt problem–at least at the federal level—is of recent vintage.  Bill Clinton inherited a budget that represented 21.4 percent of GDP and debt held by the public amounting to 44.4 percent of GDP.  When he left office eight years later, federal spending stood at 18.2 percent of GDP and debt held by the public at 27.2 percent.  Adjusted for inflation, outlays rose by less than 12 percent during that period, just slightly more than 1 percent per year (compounded).  While military spending declined as a share of GDP during the Clinton years, so did domestic discretionary spending.  Fiscal prudence is possible under contemporary conditions, not just those of Calvin Coolidge.

Nor is it clear that the United States is doomed to a new normal of 2 percent growth.  Indeed, a respectable case can be made for a more optimistic view.  Once households reduce their debt burden to manageable proportions, consumer spending should pick up.  Housing has bottomed out and should be a net positive over the next five years—less so than in the preceding twenty, but that’s a good thing.  The boom in the energy sector should continue.  And the one upside of wage stagnation is that the United States has become more competitive as a site for manufacturing.

Greve is much taken with the late Samuel Huntington’s thesis that change in America happens convulsively, in moment of creedal passion, or not at all.  I’m less confident of that than he is.  The system also admits of more modest and incremental reforms that can significant alter that nation’s course.  For example, we moved from the sizeable deficits of the late 1980s to the surpluses of the late 1990s in three stages: the 1990 budget accord that may well have torpedoed George H. W. Bush’s chances of reelection; the 1993 Clinton budget, which passed without a single Republican vote; and the 1997 bipartisan accord between Clinton and House Speaker Newt Gingrich.

But—you may object—that was then, and this is now.  The issues are different—and much less politically tractable.  Baby boomers began retiring five years ago, setting in motion upward pressure on Social Security and Medicare that will last for a generation.  Meanwhile, the Affordable Care Act (AKA Obamacare) dramatically expands Medicaid.  Fair enough, but some distinctions are in order.

Social Security expands only modestly over the next quarter century, and it can be brought into long-term actuarial balance through a well-understood combination of benefit cuts for upper-income beneficiaries and slow increases in the share of earned income subject to the payroll tax to restore the historic norm of 90 percent of wages and salaries.  As for structural changes in the program, there was nothing like majority support for private accounts when George W. Bush pushed for them to no avail in 2005, and if anything they are less popular today.  (The intervening gyrations of the stock market increased the public’s appetite for stability and security over the prospect of gain accompanied by the risk of loss.)

The nub of the matter is publicly funded health care.  In the not too distant future, we’ll have no choice but to endure a frank and painful public discussion of who gets what and who pays for it.  The outcome of that discussion will determine both the size of 21st century government in the United States and the terms of long-term fiscal stability.  If Americans opt for publicly guaranteed health insurance security, they will also have chosen a substantially larger public sector than we have today.  That would substantially narrow the gap between the United States and Europe, an outcome that many liberals would welcome and nearly all conservatives would loathe.

Turning to the states, the facts support Greve’s gloomy assessment of current conditions.  Massive unfunded obligations for public employees’ retirement and health benefits jeopardize the fiscal stability of all but the best-managed states.  But here, as with the federal government, the prospects for reform may be brighter than Greve acknowledges.  In deep-blue Rhode Island, for example, a young treasurer defied the odds by pushing through reforms that cut the state’s unfunded liability in half.  The legislature agreed to push back the retirement age for public employees, suspend cost-of-living increases, and shift some of the risk from taxpayers to beneficiaries.  Unlike even Scott Walker’s Wisconsin, which exempted police officers and firefighters, the changes applied to all categories of employees.  Most amazing of all, they affected current employees, not just new hires.  (Not even Paul Ryan had the audacity to recommend anything like that.)

Not every state will reform as quickly and as well as Rhode Island, and down the road some may experience difficulty refinancing their debt.  Like Greve and the markets, I do not expect direct federal action to share their burden or lighten their load.  Unlike Greve, I do not expect what he terms “undercover bailouts” to continue, for the simple reason that the federal government cannot afford them.  There is no reason to expect a repetition of the 2009 stimulus, and the long-term growth of federal contributions to the existing Medicaid program will be limited, one way or another.  The wild card is the Affordable Care Act, which (Greve predicts) will allow the states to “dump” large numbers of employees and retirees into federally funded programs.  That is not what most health policy experts expect, but if Greve turns out to be right, it would compel major structural modifications of the ACA—assuming that it survives the 2012 election.

What about the future?  As I said at the outset, I agree with Greve: we must think institutionally, and we should think big.  Phasing out the housing-specific GSEs makes sense and enjoys substantial bipartisan support.  Federal experts such as Brookings’ Alice Rivlin have long argued for a sorting-out of responsibilities between the federal government and the states to reduce complexity, enhance efficiency, and better align funding responsibilities with programmatic control.  As for entitlements, some years ago a bipartisan group proposed a new strategy, modeled on the successful Swedish reforms of the 1990s, that would take these programs off auto-pilot and put them on five-year budgets, with legislated trigger mechanisms that would force the Congress to eliminate any gap that may develop between budgetary assumptions and fiscal reality.

A reform of fiscal governance is overdue.  For example, backdoor spending through the tax code should be curbed.  (Maya MacGuineas and I have proposed a ten-year phase-out of all the preferences and loopholes that currently honeycomb the federal system of taxation.)  And the president should receive enhanced rescission authority—a constitutional version of the line-item veto—that would force Congress to take direct responsibility for the thousands of targeted spending programs that it now slips into veto-proof omnibus legislation in the dark of night.

It is a matter of semantics whether one regards these kinds of institutional changes as “constitutional.”  What does matter is that they represent a significant change of course.  Enacting them—or their functional equivalent—into law would require an exercise of political capacity that the federal government hasn’t displayed for quite some time.  Still, in dark moments I console myself with Winston Churchill’s much-quoted aphorism , that you can always rely on America to do the right thing–once it has exhausted the alternatives.  The good news is that at long last, we have.