Given the current state of the country and the world, it is easy to be pessimistic. Unemployment is at a 27 year high, health care continues to become more difficult to attain and afford, Wall Street keeps ripping us off, climate change appears inevitable, and seemingly every day comes news of another natural disaster or mass killing somewhere in the world. The Senate doesn't help either, as it seems to be an almost intractable barrier to the progressive legislation Speaker Pelosi and the Obama administration attempt to pass.
However, in the face of justified pessimism about out future, today I have some positive news for progressives. As a country, we are on the brink of a substantial, long-term increase in social investment that will move our economy much closer to the mixed, and substantially larger public welfare models, of Canada and Western Europe. It is highly likely that this long-term increase will be equal to about 6% of GDP, and that over 80% of the increase will be in the favorite areas of the center-left: pensions, health care, education and general infrastructure. It will prove to be an increase that is so popular that it will not be undone even if a Republican trifecta is able to rear its head again at some point over the next two decades.
If all of this sounds too good to be true, in the extended entry I provide good reasons to think otherwise. My basic argument is that, following an economic principle known as Wagner's law, social investment spending in American has not really ever declined over any extended period in the last 110 years of American history no matter which parties or ideologies were in charge. Further, after a 31-year period of equilibrium where public spending was consistently between 32% and 37% of GDP, we have recently move into the low-40% range even if recent defense and bailout spending increases are removed from the equation. Yet further, as unlikely as is sounds, there actually are popular and politically doable options for new taxes that would allow for a low-40% of GDP public spending range to become stable over the long-term.
In short, no matter what proclamations we hear from Republicans, conservative Democrats, or even anonymous Obama administration officials who talk to David Brooks, the odds are heavily in favor of America entering a new era with a nearly permanent and large increase in progressive social investment. In the extended entry, I explain why.
A new era of increased social investment in America is coming, and here is why:
Mid-thirties equilibrium broken: From fiscal year 1976 through fiscal year 2007, there were only very slight alterations in public spending as a percentage of GDP (32%-37% was the entire range). For thirty years, both public spending and public revenue fluctuated within a very narrow, 5% range. However, as I discussed yesterday, last year this equilibrium was broken, as public spending shot up to nearly 45% of GDP, roughly 7% higher than any year since World War Two:
We have entered a new space. In every previous instance not overwhelmingly related to mass war mobilization, we never returned to normal. The question now is whether we will return to the mid-thirties equilibrium through spending cuts in future years, or have we permanently jumped a level that will be maintained through new sources of revenue (aka, taxes)? Before we can answer this question, we need to first examine where the spending increases came from.
Health Care, Defense and Bailout Caused Spending Increase From 2001-2009, very little of the nearly 11% increase in public spending as a percentage of GDP came from pensions--only 0.5%, to be exact. Most of the increase came from health care (1.7%), defense (2.2%), and the bailout (3.7%, included in the "other" line in the graph below). Here is a chart showing these trends:
As much as we are told that rising public expenditures are cuased by Social Security, the truth is that they are mainly caused by rising health care costs, and the vast increases in defense spending that took place under Bush. And, of course, the bailout.
Bailout spending will be cut: The 3.7% increase in public spending as a percentage of GDP from the Wall Street bailout will be, by far, the easiest and most popular spending to cut. In fact, it is guaranteed that the entire amount will be cut from future fiscal years. The bailout is opposed by large majorities of the country, is not connected to funding for any other programs, and any new aid would have to be approved through Congress largely as a stand-alone bill. As such, this 3.7% increase in public spending as a percentage of GDP will inevitably be only a one-time affair, moving the overall public spending as a percentage of GDP down to 40.9%-41.0%.
Defense spending likely to be reduced easiest: Although the new defense budget is apparently deficit neutral, over the years defense spending has proven far easier to cut than either health care or pensions. Since we entered the 34-35% public spending as a percentage of GDP equilibrium period in the mid-1970's, defense spending has noticeably fluctuated, while health care and pensions spending has never declined:
The easiest way to reduce defense spending will come from the (hopefully) eventual reduction of our overseas military presence in Iraq and Afghanistan. However, since President Obama intends to maintain a large presence in Afghanistan indefinitely, since he also wants to increase the number of military personnel, and since defense spending isn't actually all that easy to cut, it is unlikely that we will return to the sub-4.0% levels of President Clinton's second term. A better estimate is that, in a few years, and barring any new major military conflicts, military spending will decline to about 5.0% of GDP. Thus, public spending as a percentage of GDP will drop to about 40.0%.
Good luck cutting anything else: After these cuts slowly take shape, it is a pretty safe bet that the remaining spending increases are permanent. Despite continuing talk of cutting Social Security benefits both inside and outside the Obama administration, spending on pensions as a percentage of GDP simply is not going to drop long-term. Attempting to cut Social Security was the beginning of the end for the Republican trifecta in D.C., and even the Orzag plan for Social Security wouldn't really reduce costs long-term even if they might slightly reduce benefits. The same goes for health care, which not only has never shown an ability to decline, but all political momentum is pushing toward increased health care spending.
Throughout the last 110 years, whenever there has been a large increase in public spending as a percentage of GDP not directly related to mass war mobilization, it has never been reversed over the long-term. This is probably directly related to Wagner's law:
In his new book, "The Tyranny of Dead Ideas," Matt Miller nicely lays out the history of American taxes. He begins the story with Adolf Wagner, a 19th-century German economist who predicted that taxes would rise as societies became wealthier. The idea became known as Wagner's Law.
"As people grew more affluent," writes Mr. Miller, a journalist and a consultant for McKinsey & Company, "they'd want more of what only government could provide - a strong military, public order, good schools and assorted welfare benefits, services that private citizens would have trouble arranging for on their own."
The last 110 years of American public spending bears out Wagner's thesis very well. While there have been at least four major upswings, there simply has never been a long-term decline in public spending as a percentage of GDP. Generally speaking, people end up liking the services more than they dislike the taxes. As such, it is a solid bet that the mid-thirties equilibrium is gone for good, and we have reached a new, low-forties plateau for a long-time to come.
There are popular sources for new revenue If public spending as a percentage of GDP really has permanently increased by about 6% from the mid-thirties to the low-forties, we are going to need more tax revenue to pay for it all. As Matthew Yglesias rightly notes today, this will mean going beyond a return to the Clinton-era status quo, which only increased total public revenue by about 2%. Given that we need another 4%, the next question is where will the remaining revenue come from? Believe it or not, there are popular, politically doable options available.
Beyond removing all Bush-era tax cuts, the easiest new source of revenue would be to raise, and ultimately eliminate, the income cap on Social Security taxes. Raising the income cap is a very popular, consensus idea, supported by 63% of the country and opposed by only 30%. In and of itself, eliminating the cap would provide a significant percentage of the needed revenue increase, as it would increase taxes on those making more than $90,000 a year by 6%.
Putting a price on carbon usage, either through a carbon tax or a cap and trade system, is also coming down the road. While it is highly unlikely that we will secure a 100% auction system this year, it is actually very likely that there will be at least a 58.75% auctioning system in place by 2013, given that those are the totals mandated by the Boxer-Lieberman-Warner climate act that nearly passed the Senate before Democrats picked up eight new members. Official estimates for how much revenue 60% auction would generate rises to about $180 billion in 2020, which will represent between 0.5% and 0.75% for total GDP by 2020. So, new revenue from putting a price on carbon, which is inevitable, will push us part of the way there as well.
New taxes targeted at health care are actually reasonably popular. In a CBS poll released yesterday, by a 57%-38% margin, the country indicated they would be willing to pay more in taxes in order to reduce the costs of health care and provide coverage to more Americans. This could come in the form of some sort of consumption tax that would encourage people to consume fewer products which are damaging to their health. This would probably be a fairly easy tax to pass, given that such taxes are already passed on a regular basis for cigarettes.
Second, tax capital gains the same as income. That's what they are anyway, income from capital market investments.(...)
I also agree with previous suggestions on corporate and individual taxation, and I'll add increases in the top marginal tax rates, expansion of the number of upper-income tax brackets, increase in estate taxation, and a financial transactions tax. What is great about these ideas is not just that they generate more badly-needed revenue, they also have secondary impacts on the broader economy as outlined above.
While it is unlikely that all of these will be enacted, it is likely that if the previous tax measures don't make up the entire 6% increase in public revenue that is necessary, some of them will be enacted. All told, these new sources of revenue--reversing all Bush-era tax cuts, eliminating the Social Security income tax cap, putting a price on carbon usage, a health-care targeted consumption tax, and various means to increase taxes on the wealthy--should make up the entire needed revenue.
To close, I want to state that while I believe what I have described here is the most likely long-term political outcome in America, it isn't, of course, a 100% guarantee. Just because every previous large jump in social investment spending has never really been reversed doesn't mean that every such jump is permanent. After all, in this country, we only have a sample size of about four or five to demonstrate Wanger's law. We will, of course, have to keep pushing as hard as possible to make this large increase in social investment long-term.
However, I do hope that this article at least provides progressive activists with a strong dose of optimism about our ability to win these economic fights over the long-term. It really is very likely that we can hold onto the increased social investment spending from the February stimulus plan and the upcoming budget. History shows us that it is much easier for politicians to find new sources of revenue than it is to cut social investment spending. The odds are on our side, and this is a fight we are very likely to win.
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