Not quite a travesty.
Matt Yglesias calls Matt Bai's latest short article "a travesty" and "nonsense from top to bottom". I wouldn't go that far; I think Bai makes some good points this time around, but then I'm a sucker for this how-do-we-create-a-humane-approach-to-the-new-economy type of article. Anyone who joins this debate and who might do it better than, say, Joe Klein is welcome so far as I'm concerned. (After 911, Michael Walzer wrote an article for Dissent called "Can There be a Decent Left?" What I want to see is an article of the same calibre called "Can There be a Decent Neoliberalism?").
I think Bai makes a few interesting, and a few obvious, points throughout his piece. But I'm focussing on the negative here. The "travesty" bits are all crammed into this paragraph:
As it happens, G.M.'s inability to adapt offers some perspective on our political process, too. Democrats in particular, architects of the finest legislation of the industrial age, have approached the global economy with the same inflexibility, at least since Bill Clinton left the scene. Just as G.M. has protected its outdated products at the expense of its larger mission, so, too, have Democrats become more attached to their programs than to the principles that made them vibrant in the first place. So what if Social Security and Medicaid functioned best in a world where most workers had company pensions and health insurance and spent their entire careers with one employer? The mere suggestion that these programs might be updated for a new, more consumer-driven economy sends Democratic leaders into fits of apoplexy.
There are two huge problems with this as I see it. The first has to do with recent political history. The second has to do with the conception of a "new economy policy" and what it is that makes New Deal programs incompatible with such a thing.
With regard to politics, I always get annoyed when I encounter this trope about how only Bill Clinton was willing to engage as a liberal with globalization. And it's simply false to suggest that the Democrats have "approached the global economy" with "the same inflexibility" as General Motors since the end of the Clinton era. With regard to Social Security, the decision to fight off private accounts actually made within the Clinton Administration, circa 1998. Here is one account of how it happened from Michael Waldman's 2000 Ciinton retrospective Potus Speaks:
We were finally grappling with the nettlesome question of how to repair Social Security. The Republicans had made clear they wanted to chip away at the program, or eliminate it, in favour in dividual investment accounts. These private accounts, they argued, would offer a higher return than Social Security did...
Some liberals, in turn, also wanted those higher returns but wanted the Social Security trust fund itself to invest in private stocks and bonds, just the way a state pension fund would. This would raise the spectre of substantial government investment in the stock market. Private investment, however designed, looked like a sure bet in 1999, with the helium-powered rise in the stock market...
Gore was emphatic. "Our mission must be to defeat individual accounts," he said heatedly. They would undermine Social Security. He doubted there was a way to make such a scheme work. "It's like the 'progressive' sales tax. It won't be progressive by the time they finish with it."...
At the last planning session in Sperling's office, the pieces finally came together. When Social Security was created in the 1930s, the New Dealers argued that it would be supplemented by individual savings, and also by pensions... Now the Treasury Department presented its plans for pensions in the form of savings accounts subsidized by tax credits -- and to the suprise of everyone in the room, they were able to draw up a plan that was highly progressive, benefitting the poor the most... Bruce Reed, who had girded to argue for some form of individual investment, looked at the proposal and said "wow". The liberals, who had been prepared to blast it, nodded in agreement. Sperling also reported that Gephardt liked it, as long as the individual pensions were clearly not part of Social Security.
In other words, the Clintonites were the ones who worked and/or acquiesced into making the defence of unfunded social security, buttressed with separate supplemental tax-preferred saving accounts, Democratic establishment dogma. In 2000, those subsidized savings accounts made up the lion's share of the tax-cut-that-wasn't-really-a-tax-cut in the Democratic platform. Edwards proposed something very similar in his 2004 "Real Solutions for America" platform. Kerry might have as well were it not for the fact that there was, by then, no more surplus to funnel in the form of "refundable tax credits" into low-income saving accounts.
If it's false that post-Clinton, the Dems have reverted to some kind of abandonned, starry-eyed New Dealism, it's also false that the party leadership is refusing to deal with other aspects of the global economy in the tough-minded way that Clinton did. For one thing, the personel writing the policy planks haven't really changed. Gene Sperling, as well as other neoliberal Clinton alum like Laura Tyson, were among Kerry's chief economic advisors during the presidential campaign. Bruce Reed was an Edwards advisor. Kerry himself was a long-time free-trader. His 1997 book The New War was about what he called "the dark side of globalization" -- in particular, international organized crime and money laundering, and how the international community should counter it. If more Democrats have been voting against the White House's preferred free trade deals, it probably has to do with the fact that such deals haven't turned out to be all that "free", as well as general (and justified) partisan anamosity. But it's not reflexive or even "principled" anti-globalism.
Now the policy objection: Bai reintroduces the tired and typical assertion that what was good for the mid-20th Century must, by definition, be bad for the early-21st. He singles out Social Security and Medicaid as examples of inflexible dinosaurs that would go extinct without sentimental Democratic protection. But as Mark Schmidt has pointed out again recently, this isn't true at all with respect to Medicaid. The program has changed enormously over the past 20 years, partly as a way of preventing it from befalling the same fate as the welfare program, by divorcing it from labour-market status. Schmitt explains:
Over the course of twenty years, however, Medicaid was slowly expanded into a program for low-income families, not just welfare recipients: First, families with incomes up to 150% of the poverty line were made eligible, then states were allowed to cover families up to 185% of poverty. Families leaving welfare also got additional protections -- a year or more of "transitional Medicaid" to smooth the path into the workforce. The State Child Health Insurance Program created in 1997 goes up to 200% of the poverty line and some states go higher. The Earned Income Tax Credit was expanded several times over that period, and in 2001, the Additional Child Tax Credit added another small subsidy for working families with children. Child care spending rose massively in this period. All this made the blow from welfare reform much softer than it would have been otherwise.
Then there's Social Security. Given that Bai would prefer to see government assume more responsibility for health care (by, say, making Medicaid universal?), it's very odd for him to simultaneously reject the notion of Social Security as out of step with the times. In fact, given the nearly perfect complement that untenable pension promises make to the untenable health insurance promises in driving "old economy" industries into the ground -- and for basically the same reason: the incentive of the airlines and car makers to offer generous future benefits in return for immediate wage concessions from unions during decade after decade of bargaining -- the public pension is the obvious alternative to the first half of this problem.
In fact, Social Security is even better than that as a "new economy" program. If anything, it should be expanded and linked more directly to wage earnings (by eliminating the cap on taxable income, which would be more politically tenable if maximum benefits also increased to a lesser extent). Even as is, future benefits are linked (if imperfectly) to lifetime wage earnings, providing an extra incentive for individuals both to stay in the labour market and to search for and respond to better matches and advancement opportunities. Better, the funds are taken away from workers and employers immediately and more or less automatically. The more money that goes into a guaranteed social security benefit, the less is funneled into pensions or 401(k) accounts that are subject to benign market risk and less benign Enron-accounting schemes, forced-company stock holding, chronic underfinancing (in the case of pensions) and big Wall Street accounting fees to manage the accounts.
And none of this need preclude the use of a tax-preferred private saving vehicle like an IRA. But does social security reduce saving? Among low-income earners, almost certainly not -- and who cares if it does when the lowest quintile of earners are already living hand to mouth and will stimulate the economy with whatever extra funds they have? For richer people with discretionary income, the question is more serious. But in Canada, we have a much smaller-scale public pension program and a high-contribution-limit tax-exempt saving vehicle (the RRSP) that is both universal and spectacularly easy to use -- unlike the 401(k). Yet our household saving rate as a flow out of total income is currently negative and lower than the comparable US rate of roughly zero. (Granted, we also have stronger welfare protection that could explain some of it, at least for people lower down the income scale). Even if social security does impose a signficant negative effect on saving, in an open economy, where financial markets get more global all the time, domestic saving is not highly correlated with domestic investment (with apoligies to Feldstein and Horioka) anyway, so saving is not hugely important to growth -- just to wealth. And there is already enormous wealth in North America. What we lack, especially in the States, is security and tolerable equality.
Ideally, a "new economy" program would make benefits like health care, child care and retirement savings independent not necessarily of employment but of any specific employment opportunity. With regard to health care, that probably entails a full government takeover of insurance and a right-of-citizenship approach. With regard to retirement saving, though, the ideal middle-ground that encourages work while not hindering movement is possible... through Social Security. There's nothing anti-new economy about Social Security, and nothing fundamentally that introducing private accounts would do to make the program more new economy-friendly. To the extent that private accounts are difficult to manage and introduce more individual risk, they're actually at odds with what government should do if it wants to encourage popular acceptance of a labour market and adult lifecycle offering more risk and less permanence.
In other words, Clinton was right, but not in the way Bai thinks. Save Social Security First. It's the very best way to cross that bridge to the 21st Century.
I think Bai makes a few interesting, and a few obvious, points throughout his piece. But I'm focussing on the negative here. The "travesty" bits are all crammed into this paragraph:
As it happens, G.M.'s inability to adapt offers some perspective on our political process, too. Democrats in particular, architects of the finest legislation of the industrial age, have approached the global economy with the same inflexibility, at least since Bill Clinton left the scene. Just as G.M. has protected its outdated products at the expense of its larger mission, so, too, have Democrats become more attached to their programs than to the principles that made them vibrant in the first place. So what if Social Security and Medicaid functioned best in a world where most workers had company pensions and health insurance and spent their entire careers with one employer? The mere suggestion that these programs might be updated for a new, more consumer-driven economy sends Democratic leaders into fits of apoplexy.
There are two huge problems with this as I see it. The first has to do with recent political history. The second has to do with the conception of a "new economy policy" and what it is that makes New Deal programs incompatible with such a thing.
With regard to politics, I always get annoyed when I encounter this trope about how only Bill Clinton was willing to engage as a liberal with globalization. And it's simply false to suggest that the Democrats have "approached the global economy" with "the same inflexibility" as General Motors since the end of the Clinton era. With regard to Social Security, the decision to fight off private accounts actually made within the Clinton Administration, circa 1998. Here is one account of how it happened from Michael Waldman's 2000 Ciinton retrospective Potus Speaks:
We were finally grappling with the nettlesome question of how to repair Social Security. The Republicans had made clear they wanted to chip away at the program, or eliminate it, in favour in dividual investment accounts. These private accounts, they argued, would offer a higher return than Social Security did...
Some liberals, in turn, also wanted those higher returns but wanted the Social Security trust fund itself to invest in private stocks and bonds, just the way a state pension fund would. This would raise the spectre of substantial government investment in the stock market. Private investment, however designed, looked like a sure bet in 1999, with the helium-powered rise in the stock market...
Gore was emphatic. "Our mission must be to defeat individual accounts," he said heatedly. They would undermine Social Security. He doubted there was a way to make such a scheme work. "It's like the 'progressive' sales tax. It won't be progressive by the time they finish with it."...
At the last planning session in Sperling's office, the pieces finally came together. When Social Security was created in the 1930s, the New Dealers argued that it would be supplemented by individual savings, and also by pensions... Now the Treasury Department presented its plans for pensions in the form of savings accounts subsidized by tax credits -- and to the suprise of everyone in the room, they were able to draw up a plan that was highly progressive, benefitting the poor the most... Bruce Reed, who had girded to argue for some form of individual investment, looked at the proposal and said "wow". The liberals, who had been prepared to blast it, nodded in agreement. Sperling also reported that Gephardt liked it, as long as the individual pensions were clearly not part of Social Security.
In other words, the Clintonites were the ones who worked and/or acquiesced into making the defence of unfunded social security, buttressed with separate supplemental tax-preferred saving accounts, Democratic establishment dogma. In 2000, those subsidized savings accounts made up the lion's share of the tax-cut-that-wasn't-really-a-tax-cut in the Democratic platform. Edwards proposed something very similar in his 2004 "Real Solutions for America" platform. Kerry might have as well were it not for the fact that there was, by then, no more surplus to funnel in the form of "refundable tax credits" into low-income saving accounts.
If it's false that post-Clinton, the Dems have reverted to some kind of abandonned, starry-eyed New Dealism, it's also false that the party leadership is refusing to deal with other aspects of the global economy in the tough-minded way that Clinton did. For one thing, the personel writing the policy planks haven't really changed. Gene Sperling, as well as other neoliberal Clinton alum like Laura Tyson, were among Kerry's chief economic advisors during the presidential campaign. Bruce Reed was an Edwards advisor. Kerry himself was a long-time free-trader. His 1997 book The New War was about what he called "the dark side of globalization" -- in particular, international organized crime and money laundering, and how the international community should counter it. If more Democrats have been voting against the White House's preferred free trade deals, it probably has to do with the fact that such deals haven't turned out to be all that "free", as well as general (and justified) partisan anamosity. But it's not reflexive or even "principled" anti-globalism.
Now the policy objection: Bai reintroduces the tired and typical assertion that what was good for the mid-20th Century must, by definition, be bad for the early-21st. He singles out Social Security and Medicaid as examples of inflexible dinosaurs that would go extinct without sentimental Democratic protection. But as Mark Schmidt has pointed out again recently, this isn't true at all with respect to Medicaid. The program has changed enormously over the past 20 years, partly as a way of preventing it from befalling the same fate as the welfare program, by divorcing it from labour-market status. Schmitt explains:
Over the course of twenty years, however, Medicaid was slowly expanded into a program for low-income families, not just welfare recipients: First, families with incomes up to 150% of the poverty line were made eligible, then states were allowed to cover families up to 185% of poverty. Families leaving welfare also got additional protections -- a year or more of "transitional Medicaid" to smooth the path into the workforce. The State Child Health Insurance Program created in 1997 goes up to 200% of the poverty line and some states go higher. The Earned Income Tax Credit was expanded several times over that period, and in 2001, the Additional Child Tax Credit added another small subsidy for working families with children. Child care spending rose massively in this period. All this made the blow from welfare reform much softer than it would have been otherwise.
Then there's Social Security. Given that Bai would prefer to see government assume more responsibility for health care (by, say, making Medicaid universal?), it's very odd for him to simultaneously reject the notion of Social Security as out of step with the times. In fact, given the nearly perfect complement that untenable pension promises make to the untenable health insurance promises in driving "old economy" industries into the ground -- and for basically the same reason: the incentive of the airlines and car makers to offer generous future benefits in return for immediate wage concessions from unions during decade after decade of bargaining -- the public pension is the obvious alternative to the first half of this problem.
In fact, Social Security is even better than that as a "new economy" program. If anything, it should be expanded and linked more directly to wage earnings (by eliminating the cap on taxable income, which would be more politically tenable if maximum benefits also increased to a lesser extent). Even as is, future benefits are linked (if imperfectly) to lifetime wage earnings, providing an extra incentive for individuals both to stay in the labour market and to search for and respond to better matches and advancement opportunities. Better, the funds are taken away from workers and employers immediately and more or less automatically. The more money that goes into a guaranteed social security benefit, the less is funneled into pensions or 401(k) accounts that are subject to benign market risk and less benign Enron-accounting schemes, forced-company stock holding, chronic underfinancing (in the case of pensions) and big Wall Street accounting fees to manage the accounts.
And none of this need preclude the use of a tax-preferred private saving vehicle like an IRA. But does social security reduce saving? Among low-income earners, almost certainly not -- and who cares if it does when the lowest quintile of earners are already living hand to mouth and will stimulate the economy with whatever extra funds they have? For richer people with discretionary income, the question is more serious. But in Canada, we have a much smaller-scale public pension program and a high-contribution-limit tax-exempt saving vehicle (the RRSP) that is both universal and spectacularly easy to use -- unlike the 401(k). Yet our household saving rate as a flow out of total income is currently negative and lower than the comparable US rate of roughly zero. (Granted, we also have stronger welfare protection that could explain some of it, at least for people lower down the income scale). Even if social security does impose a signficant negative effect on saving, in an open economy, where financial markets get more global all the time, domestic saving is not highly correlated with domestic investment (with apoligies to Feldstein and Horioka) anyway, so saving is not hugely important to growth -- just to wealth. And there is already enormous wealth in North America. What we lack, especially in the States, is security and tolerable equality.
Ideally, a "new economy" program would make benefits like health care, child care and retirement savings independent not necessarily of employment but of any specific employment opportunity. With regard to health care, that probably entails a full government takeover of insurance and a right-of-citizenship approach. With regard to retirement saving, though, the ideal middle-ground that encourages work while not hindering movement is possible... through Social Security. There's nothing anti-new economy about Social Security, and nothing fundamentally that introducing private accounts would do to make the program more new economy-friendly. To the extent that private accounts are difficult to manage and introduce more individual risk, they're actually at odds with what government should do if it wants to encourage popular acceptance of a labour market and adult lifecycle offering more risk and less permanence.
In other words, Clinton was right, but not in the way Bai thinks. Save Social Security First. It's the very best way to cross that bridge to the 21st Century.
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