Kuttner, Galston, and the Debate Over the Social Safety Net

Kuttner

I take exception to most of the assumptions and conclusions in William Galston's piece. For starters, the debate about entitlement programs is needs to be located within a larger debate about the mixed economy.

Galston begins by asserting:

I take it we agree that suitably structured and regulated markets generate wealth more effectively than other economic systems but do not reliably produce either a reasonable distribution of prosperity's fruits or an adequate level of security against life's physical and financial vicissitudes. It is for that reason, we agree, that since the 1930s the United States has developed a web of programs to assist the poor and vulnerable, to make work pay and provide protection against unemployment, and to ensure older Americans a decent retirement.

In other words, let the market generate wealth and then redistribute as necessary after the fact. But depending on whether markets are in fact "suitably structured and regulated," the welfare-state part of the system can complement the market part or be destroyed by it.

For two decades, the New Democrat wing of the progressive coalition has been complicit in policies that deregulated capitalism and liberated speculative finance. All of that contributed mightily to the deficits that now become the pretext for weakening the welfare state. All piled more fiscal burdens onto the welfare state than it can reasonably sustain. So shoring up transfer programs begins with rebuilding a more equitable form of regulated capitalism.

The social settlement forged in the Great Depression and refined after World War II regulated labor and capital markets so that the primary (wage and salary) income distribution would be relatively equal. The state redistributed after the fact, with socialized programs of retirement, health care, and special help for the poor.

But if the structure of wages and salaries becomes ever more unequal, the welfare state cannot possible do enough redistribution after the fact to compensate, without destroying itself fiscally and politically. Increased productivity and growth per se, though necessary, are not sufficient-because productivity in fact rose 80 percent between 1973 and 201l, while median wages were almost flat because so much went to the very top.

Galston subscribes to the premise that we need growth and good jobs, but his version emphasizes the concern that:

[I]t is important to structure and finance entitlement programs so as to minimize potential negative impacts on growth and employment. For example, employers compare the marginal cost of adding workers to the gains at the margin that those workers could produce. In making that comparison, they look at total compensation, not just money wages. There are limits, then, as to how high payroll taxes (and health insurance premiums) can rise before they discourage employers from hiring.

There are two problems with this. First, it leaves out all of the other sources of what influences creation of good jobs, such as expansive macro-economic policy, full employment, labor-market regulation, collective bargaining, trade policy, adequate regulation of finance, and public investment. The minor disincentives created by payroll taxes pale compared with these other factors. At periods of full employment, payroll taxes were no obstacle to employers adding good jobs.

Second, his presumption here is that health costs and costs of pensions necessarily must be financed mainly by payroll taxes. In fact they could be financed in part by general revenues, as President Roosevelt originally proposed in 1935 for Social Security once the system was mature.

Galston goes on to argue that the economy needs other social outlays but entitlements are crowding out public investment. The naïve premise that reducing social insurance would free up money for other public spending plays into the hands of the austerity coalition. The same political forces that want to gut Social Security and Medicare also oppose increased public investment generally. The savings would simply be used for deficit reduction.

The fact is that the U.S. has more impoverished programs of social insurance than any other advanced industrial nation. Social Security is about one percentage point of GDP out of long-term actuarial balance. That could easily be remedied with either general revenue or by raising the $117,000 cap income subject to payroll taxes (which would not affect job creation since most workers are well under the cap).

If we are serious about fiscal reform, bringing Social Security into long term balance without benefit cuts is not difficult. Indeed, as Elizabeth Warren has pointed out, with the collapse of private pension systems, we should be increasing Social Security, not cutting it.

Our health system is indeed inefficient, but that is because it is overly commercialized, fragmented, and subject to middleman profiteering and not because Americans are getting coddled. Galston also contends that if we counted the roughly half of health care outlays spent in the U.S. through the private sector, much of the public spending gap between the US and Europe would disappear. We spend a total of about 17 percent of GDP on health care, and leave tens of millions of people uninsured. Europe spends an average of 10 percent, covers everyone, and has better health outcomes.

Surely, that gap makes the case for a more comprehensive public system of health insurance and not for cutting social outlays. To compare Europe's relatively efficient socialized systems with our wasteful and more heavily commercialized one and then argue that America's private health outlays should be counted as de facto public ones is to confuse apples and oranges. The U.S. also spends far more of its GDP on the military, which is not part of the welfare state.

Galston then embraces the most misleading argument of all-generational equity. This mantra, also promoted relentlessly by the austerity lobby, has the cause and effect backwards. If we want the next generation to have decent economic prospects, we need to restore both economic growth and a more equitable distribution of wage and salary income that reflects rising productivity growth. There is no evidence whatever that cutting social insurance programs will do either. In fact, the reduction in public outlay undertaken to date, according to the C.B.O., has reduced, not increased the rate of recovery from recession and has reduced GDP growth.

Galston, in making the case for Social Security cuts, writes:

There is broad agreement across party lines that any changes in Social Security and Medicare should honor the legitimate expectations of individuals at or near retirement and that individuals now ages 55 and over should be held harmless.

Note the sleight of hand. This assertion implies that there is also agreement across party lines that it's okay to cut benefits for people under 55. But there is nothing of the sort. Most Democrats are committed to preserving the system intact, for younger as well as older workers and retirees.

I agree with some of Galston's proposals to increase Social Security's revenues. But he is wrong to endorse backdoor cuts in Social Security benefits disguised as technical adjustments or improvements in the system's progressivity. By all means, let's increase Social Security benefits at the bottom-but not at the expense of the middle class. Social Security benefits are far from lavish but make up a large fraction of total retiree income, well up the income ladder.

Rather than fragmenting these core programs, if we want to shore up their finances and make them more progressive in their incidence, I commend the progressive income tax. The Los Angeles Times's Michael Hiltzig has calculated that only about $1 billion a year of Social Security benefits go to millionaires. It's not hard to tax that money back via progressive income taxation.

Fixing Medicare is indeed harder. But the cure for Medicare's imbalances is much broader reform of the health system. Except for the very well off, Medicare is a life-saver. It is a huge programmatic and political mistake to further fragment Medicare by income-testing it for the affluent and creating different ground rules for them, as Galston suggests. That remedy undermines Medicare's necessary political coalition.

Galston is also mistaken to characterize Medicare as the poor subsidizing the rich. It is nothing of the sort. Like all health insurance, it is the (temporarily) well subsidizing the sick. Because Medicare taxes have no income cap, they are progressively financed, and the rich pay in substantially more than the poor.

Voucher proposals are particular mischief, since they would leave people who couldn't afford to supplement the voucher with private means with vastly inferior health insurance that failed to cover many medical needs. The cost crisis of Medicare is leading to a fork in the road, where we either move to true universal public health insurance or fiscal pressures will force us into vouchers.

Let's return to the politics of all this. Social Security is justifiably the most popular of all social insurance programs. It is widely seen as an earned benefit, even though it is also a hugely important anti-poverty program. Social Security is practical reinforcement of the premise of the core philosophy of the modern Democratic Party-that we need government to counterbalance the inefficiencies and injustices of a pure laissez-faire economy. It is practical evidence that government can work to serve regular people.

For eighty years, a core defining difference between Republicans and Democrats has been that Democrats can be counted on to defend your Social Security and Republicans can't. Galston's proposed cut in benefits for people under 55 would blur this key distinction. Both parties would become agents of reducing Social Security, at a time when seniors are already skeptical of President Obama's defense of Medicare.

It's distressing to see centrist policy intellectuals, ostensibly in defense of social insurance, echoing many of the same spurious arguments of foes of regulated capitalism such as the Concord Coalition, Fix the Debt, the Peterson Foundation, the Bipartisan Policy Center, and the conservatives on the Bowles-Simpson Commission. In truth, cutting social insurance will have no positive impact on growth, good jobs, public outlay, or the life prospects of future generations. I take Galston at this word that his goal is to preserve social insurance for the next generation, but his proposals would undermine its political logic and vital essence.

Galston

It would be neither edifying nor productive to respond in kind to Bob Kuttner's critique. Instead, I'd like to identify some of the key analytical points that divide us, in the hope that focusing on them will elevate the debate.

But let me begin with where we agree. Kuttner points that that between 1973 and 2011, productivity soared while wages stagnated. It may surprise him and others to learn that this development is the focus of my most recent weekly column in the Wall Street Journal. I cite and discuss an OECD study showing that this trend has been pervasive throughout the developed world in recent decades. I advocate a new American social compact to close the gap between compensation and productivity, which I call the central economic challenge of our time.

Kuttner points out, again rightly, that beginning during the Great Depression and continuing after World War II, we forged a social settlement that restrained inequalities of wage and salary income. But here's the problem: that settlement could be sustained only in the special circumstances that prevailed for the quarter century following the war. The U.S. economy was completely dominant, and almost as completely closed. U.S. firms depended on purchasing power in the domestic market, and they faced almost no international competition. In these circumstances, firms could raise wages and pass on the increased costs to consumers. And because our market was closed, increased household incomes raised demand for US products. Within a wide range, this system of negotiated wages and take-it-or-leave-it prices was not zero-sum but rather mutually beneficial.

Those days are gone, and they are not coming back. The arrangements that served us well in the post-war period are no longer workable. The challenge (which we have not yet begun to meet, intellectually or politically) is replacing them with new arrangements consistent with new realities, which include global markets and a post-industrial technological revolution that shows no signs of abating. ATMs have largely replaced bank tellers; automated counters are in the process of replacing supermarket checkout clerks; computerization makes it possible to produce steel with only a fraction of the labor input required a generation ago. We have a range of possible responses to these new facts. What we cannot do is ignore them or pretend that they are transient.

Another crucial issue is the relationship between spending on social insurance programs and on public investment. I pointed out the obvious: right now, the correlation of political forces has spared social insurance at the expense of basic research, education, job training, and infrastructure. When you get right down to it, Republicans won't push to reduce Social Security and Medicare, and Democrats won't fight very hard to preserve public investments. If President Obama's 2013 budget had been adopted with no changes, we would be on track to the lowest level of domestic discretionary spending-out of which public investments are financed-since at least 1947. The recent budget agreement, which loosens restraints on discretionary spending for the next two years, does nothing to change the longer-term trajectory. I'm not alone in thinking that this path endangers our future.

Kuttner thinks I'm naïve for suggesting that changes in social insurance programs consistent with the principle of progressivity would free up needed resources for public investments. I'm not in favor of leaving this to chance; it would have to be negotiated. And if it couldn't be, I'd walk away from the table. I'll leave it to readers to decide whether Kuttner's alternative-do more of everything and finance it with huge tax increases-is more or less realistic than mine.

In the end, Kuttner and I agree (I think) on a core proposition I articulated: In the absence of much more vigorous economic growth the fruits of which are widely shared, the United States will find it increasingly difficult to sustain the arrangements that assist the poor and vulnerable and secure a decent retirement for elderly Americans. Nearly five years after the official end of the Great Recession, unemployment remains elevated, long-term unemployment is shockingly high, workers' compensation is stagnant, and household incomes languish below the level of the late 1990s. If we can't figure out how to do better than this, the debate that Kuttner and I are having will remain moot. That's why serious discussion of social insurance and public investment must start by addressing the challenge of growth. Within this framework of shared ends, let's argue about means. I'm confident that a discussion along these lines is more likely to lead to productive results.