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How Low Can We Go?

The journalist Joel Mathis asked, in connection with a book I wrote, since conservatives accuse liberals of wanting a government that's always bigger than the one we have, what's the conservative reply to the accusation that we on the Right always want taxes that are smaller than those we currently pay?  My answer is one way to describe the difference between liberals and conservatives is that liberals want government spending to be the independent variable that determines tax levels, and conservatives want government spending to be the dependent variable determined by taxes. I'm a conservative in this regard, not just because I think the government we get by letting our tolerance for taxes determine the size of our welfare state will be smaller than the one we get by telling the government to do all sorts of compassionate things, and then mentioning as an aside some years later that we'll need to raise taxes to pay for all our commitments. I'm a conservative because I think it's democratically healthy to confront the hard question about taxes first and directly, and then let our answer to that question determine the budget perimeter for our welfare state. It is democratically unhealthy to proceed the way liberals have habitually dealt with the problem, by promising generous programs that will "pay for themselves" or even "pay for themselves many times over," and only later, after people have come to expect and depend on the stream of government benefits, fess up about the taxes required to sustain them.

Mathis suggests a fiscal and moral symmetry: For liberals the answer to how much government should spend, especially on social welfare programs is always, "Just a little bit more," while for conservatives the answer about the right level of taxes is always, "Just a little bit less." But there are important asymmetries. Believing that we should have all the government, but only as much government, as we're willing to pay for--as opposed to all the government we need, or think we need, or just plain want--conservatives are happy to discuss the limits of a democratically bounded welfare state. Doing so is sound economics, because we'll never have a structural deficit resulting from a built-in mismatch between the government's spending commitments and its taxing capacities. It's also good politics because it insists that the citizens make their decisions about the scope of the welfare state on the basis of clear, honest assessments of what its programs will provide and cost. Both the politicians and the voters, in other words, are required to be adults.

Medicare's initial cost projections, for example, were based on the assumption that people receiving large government subsidies for hospital stays and doctor visits would avail themselves of those benefits at exactly the same rate as they did when they were paying for those services on their own. This same spirit of candor is reflected in the argument for Obamacare, which insulted our intelligence by claiming that a massive expansion of our entitlement programs was, above all, a way to control costs - although how it would control costs couldn't exactly be specified since the government boards that would come up with all sorts of ingenious solutions to the problem of delivering the same level of health care to all the people now getting it, and additional health care to millions of others, while dramatically reducing per-patient health care outlays, wouldn't issue their initial recommendations until after Barack Obama's presidential memoirs were published.

Moreover, when liberals feel that when we're closing in on alleviating the ancient causes of human misery--people being ill-housed, ill-clad, ill-nourished, etc.--they react by getting to work on coming up with new problems for the welfare state to solve. In 1957 Arthur Schlesinger called for government to address the "problem" of "spiritual unemployment," and, sure enough, by 1965 President Johnson is promising us that the Great Society will banish "boredom and restlessness." This is the madhouse aspect of the political situation I was trying to describe in "Never Enough"--conservatives' feeling that as we put check marks by the items on the top of the list, whether from growing prosperity or the success of welfare state programs, liberals are busy adding new items to the bottom of the list.

There's another way in which the preferred liberal framework for considering the welfare state argues against an open, productive discussion about what the government should and shouldn't do. You point out that federal taxes account for a lower proportion of GDP than they have for 60 years. But not all GDP percentages are created equal. In 1950 the per capita Gross Domestic Product was $12,343, using the OMB's "chained price index" to adjust for inflation by expressing 1950's nominal dollars in terms of the dollar's buying power in 2005. In 2010 per capita GDP, deflated the same way, was $42,190. America was nearly three-and-a-half times more prosperous in 2010 than in 1950.

If liberals would participate in a discussion about what the welfare state should do, and the limits to what the welfare state should do, we could grapple with the question of how long-term economic growth would enable us to finance the welfare state's operations with a constant or even diminishing slice of a growing pie. This is certainly the approach we have taken to defense spending. In 1953, at the height of the Korean War, America devoted 14.2% of GDP to national defense. In 2010 we spent 4.4%. By this measure, our defense spending has declined by nearly two thirds. But America today is a much richer country than it was in 1953, even after taking into account the current slow recovery from a severe recession. Using the OMB's "total composite defense deflator," our defense outlays in 2010 were $617 billion, measured in 2005 dollars, while those expenditures in 1953 were $515 billion. Measured in real dollars rather than GDP points, we spent 20% more for defense in 2010 than we did in 1953.

Welfare state spending has grown in relative terms and really grown in absolute terms. In 1950, the last time federal taxes yielded less than 15% of GDP, federal outlays for "human resources" amounted to $44 billion, using OMB's "total composite non-defense deflator" to express every year's outlays in terms of the dollar's value in 2005. ("Human resources" here includes all federal outlays for Social Security; all other income maintenance programs; Medicare; all other health programs; and all programs for education, job training, and social services.) In 2010 human resources outlays, deflated the same way, were $2.06 trillion, 47 times as large. Even if we adjust for population growth, the increase is enormous, from $288 per American in 1950 to $6,547 per capita in 2010, a 23-fold increase. This increase is the result of devoting a much larger slice of a much bigger pie to human resources in 2010, when human resources outlays equaled 15.7% of GDP, than we did in 1950, when they were only 2% of GDP.

So, Mathis asks, how high should do conservatives want our taxes to be? High enough to pay for the things the government needs to do. Which are those? In a democracy, all the things the people feel the government really ought to do. I'm happy to abide by the outcome of the democratic debate over that question, but I think it should be conducted honestly. Honesty requires stipulating that the amount of government we get is no larger than the amount we're willing to pay for, as opposed to the dream-world welfare state we would build if wealth were limitless.

It also means that as our nation becomes more prosperous we should expect the welfare state's budget to require a diminishing portion of our national income rather than, as it has since the New Deal, a growing portion. We should expect this for two reasons. First, a welfare state with a clearly defined mission, as opposed to one where the goal posts are constantly receding as we move down the field toward them, should be one we can finance the way we have financed defense spending over the past half-century--by spending a smaller portion of our growing national economic output. Secondly, a growing economy should mean that more and more Americans can pay for more and more of their own needs and wants through their own economic efforts, rather than through the political efforts it takes to secure more and more generous welfare state benefits for more and more recipients. In other words, one of the reasons to like a growing economy should be that it makes a smaller welfare state possible, rather than because it makes a bigger one possible.

Categories > Politics

Discussions - 19 Comments

I hope Joel responds here. In the meantime, I would remiss if I didn't point NLT readers to the lively discussion Joel and I had with Bill in March: http://blog.infinitemonkeysblog.com/?q=node/7348

Voegeli's argument also makes an extended appearance in our latest discussion with Jacob Hacker, co-author of "Winner-Take-All Politics." You can find that link at the top of Infinite Monkeys' home page.

The second to last paragraph is absolutely spot on. Taxes need to be high enough to pay for the government the electorate wants. If it wants 2 foreign wars, then it should pay for two foreign wars. If it wants Medicare, SS, and/or the ACA, then it should be prepared to pay for them. The only refinement I would add is that we should look at relatively long time periods when matching revenue to expense (e.g. 5-15 years). I don't think it's realistic or even economically healthy to expect the government to have a balanced budget every year. But, in the middle to long run we most definitely should.

"It also means that as our nation becomes more prosperous we should expect the welfare state's budget to require a diminishing portion of our national income"

This statement seems logical on the face of it, but it is ignoring the impact of wealth and income inequality. While per capita GDP has grown, so has income inequality. We could (and probably do) have more people without the means to provide themselves with some bare minimum of services (which is another variable that changes over time) even though as a society we are richer, if the vast majority of that increased wealth is concentrated at the top (which it is).

Marcotte Anderson plays a favorite lefty tune. This decade's left inspired goal post move is based on some percieved inequality in wealth distribution.

Marcotte anderson apparently believes that those "without the means" are denied those means because someone else got the money.

I live in da hood. I see the failure of the welfare state first hand each and every day.

The problem for the poor in America today has nothing to do with income inequality and everything to do with being poor in spirit.

If the largest health concern among America's poor today is obesity, they cannot by any rational definition, be considered poor. No, they are not materially poor, they are spiritually poor. All the money confiscated from others and given to them will not change that sad fact.

Blessed are the poor in spirit, for thiers is the kingdom of heaven.

This is an eloquent post, and the points about honestly weighing programs against their true costs, and about the way that liberals tend to move the goal posts (since they're really after a phantom "equality", not just a "safety net"), are well taken and well put.

But Mr. Voegeli should not purport to speak for "conservatives" generally when he says that the government "needs to do...all the things the people feel the government really ought to do". The vast majority of self-identifying conservatives surely do not believe that, and I doubt Mr. Voegeli really believes it either. Rather, most self-identified conservatives, to the extent they've thought about it, probably believe something like one of the following: (i) the (federal) government needs to do only those things specifically contemplated in the Constitution, (ii) the government needs only to solve true collective-action problems, or (iii) the government needs to solve collective-action problems and provide a minimal social safety net. To the extent conservatism was ever purely Burke/Kirk process, rather than ideological substance, that's not what it is today. Today it's moderate libertarianism combined with social traditionalism and American patriotism.

The older I get and the more I read the more I realize that human nature is unchanging. Over two thousand years ago Cicero was addressing these very concerns. The article reminds be of something I read in On the Good Life.

“There has to be a limit, and the determining factor is our means..bounty is a bottomless pit. For how can it not be anything else, when those who have gotten accustomed to being subsidized are bound to want more, and persons who have never been at the receiving end want to get there?”

Why should our standards stay the same as the world changes around us? I don't agree that the state should end boredom and restlessness, nor provide spiritual employment (and I think inclusion of these examples rather detracts from your overall point, coming from over 40 years ago), but I think we should attempt to solve problems as they occur. Providing health care to the elderly wasn't a viable proposal until the technology was invented to prolong the lives of people stricken with cancer &c.

As Marcotte Anderson implied, time would be better spent explaining this to the Republican party. Social Security, Medicare and the PPACA all included taxes to offset the projected costs of those programs. With Medicare Part D and the 2001 and 2003 tax cuts, there was nothing to offset the costs.

But I doubt that talking more about the costs of liberal policies would do anything to gain buy-in from conservatives, as doing anything to help the poor recently became socialism.

one way to describe the difference between liberals and conservatives is that liberals want government spending to be the independent variable that determines tax levels, and conservatives want government spending to be the dependent variable determined by taxes.

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That's a bit glib, no? Even if government spending were the dependent variable determined by taxes, government could still exercise powers beyond those enumerated by the Constitution, while falling short on such constitutional obligations as national defense. When a description of conservatism that leaves room for that, it is an unacceptable description.

Marcotte anderson apparently believes that those "without the means" are denied those means because someone else got the money.

No, I don't. But this is a strawman anyway.

Regardless of why income inequality is higher, it is possible to have a larger economy (as measured by per capita GDP) and yet still have more people earning less than what they need to subsist.

Now, we could debate what that level should be, and whether or not a safety net causes too much disincentives at a particular level that people use it as a first resort, but I don't think that would be a very fruitful discussion (based on the tenor of your post).

The point is, Voegeli's statement begs the question. He is concluding that the welfare budget as a percent of GDP should go down as per capita GDP goes up. That could be true, but it doesn't logically follow from his premise.

For example, if you have per capita GDP of $100, a population of 100, a subsistence level of $50, and 5% of the population earning $25 and the rest $50 or more (implying a fairly flat income distribution), then your welfare budget need only be 1.25% of GDP (.05 * 100 * $25 = $125 / $10,000 = 1.25%).

Contrast that with an economy with a per capita GDP of $200, pop of 100, subsistence level of $50, but 40% of the population earning $25 (i.e. a relatively unequal income distribution), then the welfare budget would need to be 5% of GDP (.4 * 100 * $25 = $1,000 / $20,000 = 5%)

It is, of course, possible to construct scenarios where Voegeli's conclusion is correct. But he says, "a growing economy should mean that more and more Americans can pay for more and more of their own needs" and this is not true if income inequality grows faster than the economy.

It would be interesting to see someone run the numbers for the the G-8 countries and some others like BRIC. I have the inclination, but sadly not the time.

Marcotte Anderson's quibble with Voegeli is technically correct, but not really relevant to the contemporary United States. Assuming a constant judgment about the nature of a subsistence level of income, and that the welfare state at all times only attempts to bring people below this subsistence level up to it, the only scenario in which per-capita GDP rises but welfare-state spending fails to decline as a share of GDP is a scenario in which the percentage of people with below-subsistence income actually rises as per-capita GDP rises. That's theoretically possible, but it's pretty much never happened over any appreciable timeframe in the history of the United States.

In order for that to happen, MORE than 100% of the per-capita GDP growth would have to be captured by people earning at subsistence or above; i.e., the poor would actually have to get poorer, in absolute terms, during a period of per-capita income growth. That simply doesn't happen in the real world. Even in an extreme scenario where every cent of the GDP growth is captured by subsistence-or-above earners, welfare-state spending still declines as a percentage of GDP, despite the fact that inequality is rising (and is rising faster than per-capita GDP), so long as the below-subsistence earners are at least holding steady in absolute terms.

Assuming a constant judgment about the nature of a subsistence level of income, and that the welfare state at all times only attempts to bring people below this subsistence level up to it,

The second assumption seems reasonable, but of course we have avoided defining what we mean by "subsistence". One person may think the Federal Poverty Line is a good definition. Another might think the number should be somewhat higher. I actually think, to maximize societal health, we shouldn't strive to bring people up to some minimum level of income, but rather provide a basic set of services for free. I think all people should have shelter, food and access to preventative and catastrophic health care. For some people (e.g. healthy people in low cost areas) this might be the equivalent of $5,000 per year. For someone with diabetes living in NYC, it might be quite higher. One of the problems with the Federal Welfare programs is they treat everyone equally from an economic perspective, while we all face different economic realities based on where we live. The USA is very large and varied.

But I don't think your first assumption is correct. In 1900, societies definition of "subsistence" was much different than it is today. Perhaps these differences can be completely attributed to inflationary changes - I'm not sure. I'll have to think on this some more.

the percentage of people with below-subsistence income actually rises as per-capita GDP rises. That's theoretically possible, but it's pretty much never happened over any appreciable timeframe in the history of the United States.

It's true that since 1959, the % of the population living under the poverty line has decreased, but there are periods (e.g. 1973-1983, 89-93 and 2007 to present) where the poverty rate increased. See this Census Bureau pdf p. 14. With the exception of 2007 to 2009, per capita GDP rose consistently since 1959.

Overall, Mike, you make excellent points. I agree that there has probably been a bit of the "moving of the goal posts." If I had my druthers, I would do away with much of the current welfare systems and replace them with simpler policies with the express purpose of providing that everyone has food, shelter and health care. (I know, easier said than done.)

Marcotte:

My dictionary defines "subsistence" as "the barest means in terms of food, clothing, and shelter needed to sustain life". But the particular level to which we want to bring people isn't the point at the moment. The point is that, whatever level you choose as the minimum, as long as it's not being ratcheted up over time (e.g., in terms of calories per day, or square feet of housing per person), Voegeli's basic point holds: in almost all circumstances, and invariably when we start counting by decades, the proportion of GDP represented by welfare-state spending should fall, even if all or nearly all GDP growth represents increases in production by (and therefore increases in the income of) the "rich", or the above-minimum.

Where I agree with you wholeheartedly is with respect to moving aware from a forced-savings/Ponzi/middle-class welfare model, and towards a means-tested, true "safety net".

The sad fact is that globalization and free trade are decimating our employment base. While we can still provide plenty of well-paid jobs for highly-educated people, there are fewer and fewer "plum" jobs for high school graduates (and drop-outs). The liberals run off the track when they think that government spending can fix this -- it obviously can't, given that government is essentially parasitical. Ultimately, all massive government spending will do is provide short term employment stimulus at the cost of damaging our truly competitive private sector.

Protectionism didn't used to be a dirty word, and we need to rediscover it for the sake of our people and our democracy. We need to find a way to employ millions of not-so-bright-but-potentially-dangerous people. Time to get real about this situation, but I don't hold out much hope of that. Whenever we allow ideology do our thinking for us we become vulnerable to natural selection. Wake up and look around, dammit.

"...what's the conservative reply to the accusation that we on the Right always want taxes that are smaller than those we currently pay?"

Simple. Money collected and spent by the governement is by definition a replacement of the vast knowledge and decision making ability of the many, where the effects of error are extremely localized and self-correcting, with the microscopic knowledge and decision making ability of the few, where the effects of error are broad and there is little corrective mechanism.

The former leads to prosperity, the latter to poverty.

This is why lower taxes are always better, unless you are starting a new country, have no taxes, and need miliatry and police.

Sorry, Redwald, but this argument is no more convincing now than it was when you were posting as Dain. True, manufacturing constitutes a smaller percentage of overall GDP than it did 40 years ago (just under 13%, as opposed to just under 25% in 1970), but globalization isn't the culprit. It's mainly the result of 1) a massive increase in per worker productivity, and 2) steeply rising demand for services as opposed to consumer products. Indeed, the relative decline (with extra emphasis on relative) of manufacturing is a global phenomenon; whereas just over 27% of the world's GDP came from manufacturing in 1970, today it's down to 16.6%.

Agreed. A box with one side open is as useless as having no box.

Who the hell is Dain? Next you'll be accusing me of being Scanlon.

Anyway, Nobel Laureate Michael Spence says you are wrong in the most recent issue of Foreign Affairs. You might want to read it, you libertarian you.

I'm humbled that Dr. Voegeli would take time to respond to me. I've written my own reply, which is lengthier than proper cutting and pasting will permit. Please feel free to follow the link for my comments: http://joelmathis.blogspot.com/2011/06/how-low-should-taxes-go-reply-to-bill.html

Marcotte Anderson is absolutely right on one point: the government should take a long-term view of its accounts and commitments, not expect to balance the budget on a cash basis every single year.

In fact, the government should stop doing cash accounting and should instead do accrual accounting - just as is required of every pension fund in the US except Social Security, every fund for long-term medical care in the US except Medicare, and every major corporation in the US.

The problem with that, of course, is that it would force the government to add the unfunded commitments of Medicare and Social Security (and other things) to the liabilities side of the register, and the annual increase of those unfunded commitments to the expenditures. In other words, achieving a balanced budget on an accrual basis would probably be much harder, and require much deeper cuts, than achieving one on a cash basis.

But if it's good enough (and important enough) for the government to require of everyone else, why isn't it good enough (and important enough) for the government to require of itself?

I think Mr. Voegeli (who I like and respect and read in the Clarimont Review of Books) fundamentally misses the point, does not answer the question, and in fact completely undermines the correct answer. ( In the comments above, both Mike F. and Michele point out some of the problems with his post.)

While it is clear that Mr. Voegeli prefers lower taxes and smaller government, he suggests that the process is the problem - if only people had to pay for what they wanted, all would be well. Indeed, he says: "I am happy to abide by the outcome of the domcratic debate" over the size of government and taxes. Well I am certainly not. We got Obamacare after a democratic debate and I am not happy with that. And sure enough, Joel Mathis , in his response on his on blog, is only too happy to agree with Mr. Voegeli.

You have to answer to this question from the Austrian economic school point of view, which I attempted to do above. You have to explain the economic principles. You have to explain the moral principles. It has nothing to do with democracy. All of the people can vote for 100% government, and will be impoverished as the result. They will get 100% of nothing.

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