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Taming the Leviathan or Releasing the Kraken

April 7, 2011

For the first time since 1995, the United States is facing the possibility likelihood of a government shutdown over a clash that usually consists of no more than budgetary dick-measuring.  Like the last shutdown, newly empowered Republicans seek to assert their political philosophy concerning the proper extent of government by means of the annual federal budget appropriation.  Using all the leverage they have, Republicans are holding a gun to the metaphorical head of the federal budget until their demands are met.

Considering the actual extent of the federal deficit and debt, and the fact that the Republicans basically campaigned on curtailing the two, I do not fault the Republicans for their philosophical position.  Several aspects of the federal leviathan could use some significant curtailment or restructuring; social security and medicare (which take up over 30% of the federal budget alone) come to mind.  Mostly, the deficit is caused by the ballooning category of spending that is not part of the current budget debate: non-discretionary, non-defense spending (which totals around 20% of the budget, see visualization below).  Of course, defense spending (the second-most expensive item) could be significantly curtailed through normal budget negotiations, but neither Republicans nor Democrats have any interest in “appearing weak on defense.”

The Democrats are proposing some increases in tax to close the deficit, but the Republicans only want cuts: somewhere between $32 and $60 billion, depending on which wing of the GOP you ask.  Just don’t bother asking why they didn’t propose their deficit cuts during the Bush Administration, when they controlled the House, Senate, and the White House.

The usual proposals for scrimping and saving are not long-term solutions.  Instead, these budget-/belt-tightening plans only serve to make the government more ineffectual at acting as the bulwark correcting market failures.  Each executive department has various congressionally determined mandates to implement, and cutting budgets out of a need for fiscal responsibility (rather than departmental reform) usually requires that those departments become less effective, regardless of the question of whether or not that is warranted on a department-by-department basis.  Take, for example, my own department: one might think that reduction of the deficit would be better served by leaving the budget of the Tax Division of the Department of Justice in place and allowing it to continue to ensure that taxes are paid as owed.  But no.  Therein lies the irony.

Where the current Republicans diverge from the Republicans of 1995 is that part of the coalition actually want to squeeze the trigger on the federal government as a whole.  The wealthy and powerful donors fueling the Tea Party bender like the idea of diminished government participation because those actors are already wealthy and powerful enough to get preferential treatment.  A classic example of disparate treatment on the basis of wealth and political representation are the differential punishments for possession of cocaine vs. crack (spoiler: crack carries federally mandated punishments that 100 times worse than the same quantity of cocaine).  And it’s not just limited to disparate treatment of individuals on the basis of wealth.  If an individual sells an ounce of cocaine, they go to jail; Wachovia can launder $378 billion in drug money and pays fines that are less than interest earned on the money.  As Nobel-prize winning economist Joseph Stiglitz has recently suggested, the core ethos of America has shifted from the notion of “equal treatment under the law” to “rewrite the law to serve your specific needs.”

[O]ne big part of the reason we have so much inequality is that the top 1 percent want it that way. The most obvious example involves tax policy. Lowering tax rates on capital gains, which is how the rich receive a large portion of their income, has given the wealthiest Americans close to a free ride. Monopolies and near monopolies have always been a source of economic power—from John D. Rockefeller at the beginning of the last century to Bill Gates at the end. Lax enforcement of anti-trust laws, especially during Republican administrations, has been a godsend to the top 1 percent. Much of today’s inequality is due to manipulation of the financial system, enabled by changes in the rules that have been bought and paid for by the financial industry itself—one of its best investments ever. The government lent money to financial institutions at close to 0 percent interest and provided generous bailouts on favorable terms when all else failed. Regulators turned a blind eye to a lack of transparency and to conflicts of interest.

This phenomenon is called “regulatory capture.”  Such situations are pervasive: like when the only people that understand enough of the technical details necessary to regulate the Internet are employed by the telecommunications industry, who are then asked to propose regulations for themselves or when pharmaceutical executives are asked to run the FDA.  The conundrum is that the only individuals and entities sufficiently knowledgeable in the regulations surrounding a particular field are directly interested in not being regulated.  So it’s not surprising that those interested in not being regulated (read: taxed) by the government in general have incentives to capture the ability to regulate (read: tax) themselves.  And it’s not surprising that they would prefer to leave tax rates at the rate established in the Bush years, cutting the deficit solely by mitigating the ability of the federal government to regulate.

On the other hand, the unlikely-to-pass Ryan Plan (named for the Tea Partying chairman of the House Subcommittee on the Budget) would perform some serious reconstructive surgery on the medical entitlement programs by changing Medicare and Medicaid to block grants, rather than guaranteeing coverage to the elderly (which would, in turn, shift serious risks and costs to the states).  For someone inclined to believe that providing increasingly expensive medical coverage to the increasingly infirmed is not economically viable, this general idea may sound more attractive than cutting razor-thin, deficit-insignificant slices out of the components of the budget.  After all, the budget is necessary to implement congressional mandates, regulate the wealthy and private interests, and protect the general, underpowered public.  But regardless of the ideological appeal of more fundamental reform, instead addressing the proper scope of government or its ballooning entitlement programs on a direct issue-by-issue basis, where a debate can be nuanced, details hashed out, and the public opinion engaged, the Republicans are holding the entire government hostage.

The obstacle that always impedes budgetary negotiations is that no appropriations are passed separately; everything gets lumped into an annual, omnibus, do-or-die bill that must be passed all at once for anything to receive any funding.  This consolidation is deliberate; by lumping everyone’s issues together, opponents are more willing to concede issues in order to attain the majority’s goals.  By having every issue on the table at once, stakes can be conflated, margins can be eroded, and narratives (come election time) can be manipulated at will.  When the government shuts down, many will benefit by its closure.  The public will probably breathe a sigh of relief when government becomes operative again, and overlook the huge cuts to programs that would help the vast majority of America to the economic detriment of a few.  And while the Ryan Plan and others hell-bent on cutting the scope of government are being sold as “The Path to Prosperity,” the question Americans refuse to ask is: for whom?

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4 Comments leave one →
  1. Janet permalink
    April 7, 2011 8:28 am

    Great critique on the current budget crisis and the creeping power of industry over government.

  2. SlickRickSchwartz permalink*
    April 7, 2011 10:28 am

    I promise I didn’t read this article on the interrelation between tax havens and regulatory capture before writing this post.

    Once this process began, it also unleashed a new wave of competition between individual American states to offer the most hospitable, least intrusive regulatory environment for outside companies to work in. Leading the way was little Delaware, which had always tried to compensate for its lack of size by being open for any business. Since the 1980s more and more corporations have moved to Delaware to take advantage of the state’s extreme laissez-faire attitude to the rights of shareholders and employees against company managements. If you took your business to Delaware (and this was often just a question of establishing a shell office and filling in some forms), it would be much harder for anyone to prove anything against you, because the Delaware courts did not think that much of what you did was any of their concern.

    It might have informed this post, but is worth a read on its own.

  3. April 7, 2011 3:48 pm

    Rick, interesting post.

    What is missing from your post is acknowledgement of the fact that we’re in the mess of a continuing resolution right now because Obama, Reid, and Pelosi failed to pass a budget for FY2011 when the Democrats had complete control of the House and Senate.

    -Byron

    • SlickRickSchwartz permalink*
      April 7, 2011 3:54 pm

      Byron, thanks for the comment. You bring up the excellent point that regulatory capture is not confined to one party or position in our government; indeed, it would hardly be a full-on regulatory capture if the strength of the regulated interest did not have control over a regulator of any affiliation. The reason I failed to mention the Democrats’ inability to pass a budget is that the question posed then wasn’t whether or not to dramatically shrink the budget so much as how to justify a budget so large. But your point stands that the Democrats are similarly ineffectual representatives of the broader swath of the polity as opposed to private interests. And believe me, I know firsthand that this continuing resolution is a mess. I’ve just been briefed on what to expect in my furlough.

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