The Welfare-State Reality Americans Aren’t Debating
(Bloomberg Opinion) -- It may be in 2022 that we transform the U.S. economy, but not for the better. House Democrats passed a $3.5 trillion budget resolution for its Build Back Better Agenda — a step in the budget reconciliation process that would make the bill law without Republican support. There are trade-offs to doing something so large and fiscally risky, and Americans are getting distracted from a critical debate we should be having.
What’s getting most of the attention is the politics: how moderate holdouts in the Senate will vote, and whether the $1 trillion plan, which got bi-partisan support, will be passed first. Getting far less attention is how the legislation will alter the role of government in American’s lives. The budget takes a big step toward transforming the American welfare state to resemble Europe’s, while somehow promising Americans they won’t have to pay European-level taxes.
The Fiscal Year 2022 budget sponsored by Senator Bernie Sanders doesn’t just include infrastructure investments as it advertised, it’s a major expansion of our entitlement state. Some pundits and law makers argue that investing in people is “infrastructure” too. But from a spending perspective it’s different. Repairing a bridge or building an airport has fairly limited scope, it takes a few years to complete and most of the costs are a fixed amount of money.
Adding a new benefit for citizens is an open-ended commitment to spending every year, and one that — once people become accustomed to it — is very difficult to take away. Even if the benefits are deemed temporary in the initial bill, they tend to become permanent. The budget already extends the life of Biden’s child tax credit that was only supposed to last one year. Paying benefits also has bigger implications for the economy because it impacts behavior, how people decide to work, educate themselves, and how they spend. A new road or canal has some impact on behavior, but not nearly to the same degree.
The time may be right to reassess our welfare state. The economy is always changing, creating new winners and losers. And big shocks like the pandemic expose weaknesses and holes in the safety net. We realized our unemployment insurance program didn’t reach as many people as it should, and that it was very difficult to disburse rent relief.
But it’s not clear that the Democrats’ budget addresses any of these weaknesses, or if it’s a good use of tax-payer money. More entitlements aren’t necessarily better; the details matter. The budget creates a larger cradle-to-grave welfare state, where everyone, even the middle and upper middle class, receive substantial benefits. To name just a few, the budget includes universal pre-kindergarten for three and four year-olds, free community college, a jobs corps, lowering Medicare’s eligibility age to 60 and adding dental, vision, and hearing benefits, and long-term care.
Many of these programs sound great, but our resources are finite, and there’s valid questions that should be asked, such as whether we could get more bang for our buck by offering benefits only to people who need them instead of more broadly. Other programs could be structured more effectively to help Americans succeed in the modern economy and escape poverty. For example, the evidence that universal pre-k improves educational or emotional outcomes is mixed — it helps some students more than others and can even leave some children worse off. Community college does not have a great track record when it comes to building skills and making people more employable. The child tax credit goes to families earning nearly twice the median income who don’t need it. The evidence on guaranteed infrastructure jobs is that they keep people from earning more than in the private sector and forgo important skill training. Medicare is already underwater and can’t afford its current obligations, let alone new ones. Adding dental care is expensive and unnecessary.
Reasonable people can disagree on the size and scope of the entitlement state. But it’s ludicrous to think that we can expand it to this level while no one earning less than $400,000 will pay for it. The budget even lowers taxes by expanding subsidies and offering upper middle class tax cuts. The proposal is that very high capital gains taxes on high earners and corporate taxes will pay for most of it. This assumes no one will take evasive measures when faced with higher taxes. Workers also tend to bear the brunt of corporate taxes in the form of higher prices and lower wages.
But even assuming tax increases bring in the promised revenue, they won’t cover the cost. The Committee for a Responsible Budget estimate the plan will cost at least $1.5 trillion more than the projected $3.5 trillion. And that’s just over the next 10 years — entitlements tend to last much longer and grow over time. That would leave America committed to running enormous deficits each and every year.
That might be fine when interest rates are low, but who can guarantee that will be the case 20 or 50 years from now? If rates go up even 1 percentage point more than predicted it add will $30 trillion to our debt over the next 30 years, and that’s based on our current budget and entitlement programs. It’s one thing to deficit finance one-off spending on infrastructure when interest rates are low, but adding entitlements is especially risky. If rates ever increase it leaves very little room for any discretionary spending, let alone bailing out the whole population from the next pandemic — or whatever kind of crisis — as we did last year.
Our politicians need to level with the public that if we want a European-style welfare state we’ll need to pay European style taxes, including higher income taxes for all and double-digit consumption taxes. Again, there is an argument to be made for more welfare or even a bigger government role in our lives. But doing so changes our relationship with government, the risks we take, and what our future spending can be. That is the debate we should be having now, instead of focusing on the Washington Sturm und Drang of how the budget gets passed.
This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.
Allison Schrager is a Bloomberg Opinion columnist. She is a senior fellow at the Manhattan Institute and author of "An Economist Walks Into a Brothel: And Other Unexpected Places to Understand Risk."
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