On the size of guv’mint, perception is reality.

This excellent article by Suzanne Mettler on the disconnect between Americans who benefit the most from regressive government aid programs and their perceptions of government just shows how absolutely the entire game of politics in the US is played on the small guv’mint / conservative / crony capitalist playing field today.

Here are just a few of the enlightening things the author’s studies showed:

1) The US govt gives benefits equaling more than 3X the value of spending on food stamps, unemployment, housing vouchers and traditional welfare combined to those households well-off enough to afford a home,  a retirement plan or health insurance. These figures come in at approximately $110 billion per year for the above welfare programs, compared to $350 billion per year for the three biggest “tax expenditure” programs.

2)  Of those respondents who took advantage of Coverdell or 529 Educational Savings Accounts for college, fully 64% believed that they “had not used a government social program.” The response was the same for 60% of homeowners who claimed a home mortgage interest deduction.

3) For 2008, forgone tax revenue for these programs was equal to 7.4% of GDP versus costs of 4.3% of GDP for Social Security and 4.1% for Medicare/Medicaid, the 2 favorite whipping boys of deficit hawks.

However, the most important conclusion the article makes (and it’s a perfect nexus between behavioral and normative economics) is that such “submerged” government programs (which are, for obvious reasons, MUCH favored by conservative legislators) allow citizens to feel completely disconnected from the government regarding the subsidies that they receive; this has a HUGE affect on the overall debate about the “proper” size of government. While recipients of direct government aid (from the GI Bill to Social Security to EVEN food stamp recipients) tend overwhelmingly to allow that such aid strongly influences their view of government and their record in both voting and political donations, those receiving submerged aid assume a largely passive stance regarding political alignments based on their benefits and leave the agitating to the HUGE vested interests of those who receive the money the the government forgoes. Namely, these are health insurers, mortgage banking and homebuilder interests, colleges/universities and charitable foundations among others. These interests mobilize aggressively against even modest attempts to scale back the regressive, upwardly-skewing nature of any of these benefits (and their spending on donations and lobbying has mirrored their increasing capture of total government largesse). Meanwhile a sleeping public remains unengaged in the debate. From the article:

Beneficiaries of visible programs like Social Security and Medicare reported high rates of action to influence the policies they rely on—far more than beneficiaries of tax expenditures. Certainly part of the problem is that, whereas seniors are mobilized by the AARP and the political parties, no broad-based citizens’ groups advocate on behalf of the public’s interest in tax expenditures, leaving the vested interests’ power unchecked. But even beneficiaries of the food stamps program, who lack a group to mobilize them, targeted their political activity at higher rates than the tax break beneficiaries: among those who had voted, 21 percent reported taking the policy into account when doing so, compared to only 14 percent of Home Mortgage Interest Deduction beneficiaries; the rates for campaign contributing among those same groups were 17.7 percent and 8.1 percent, respectively. In short, while the policies of the submerged state engender activism among the powerful groups that benefit most from their existence, they inculcate only passivity among ordinary citizens. This means not only that their interests are routinely circumvented through these upwardly distributive policies, but also that democracy itself is undermined by their existence.

Indeed, one commenter very plausibly posits that schools manage their tuition charges to maximize the capture of these largely invisible subsidies, an assertion borne out in papers such as this (PDF download link). Furthermore, one of the big parts of the stimulus bill, the first-time home buyer tax credit was derided by many economists as a defacto giveaway to home sellers, who would be able to raise their asking prices by the amount of the credit, doing little or nothing to lower the costs of home ownership for the actual purchasers.

Sadly, this is yet another genie that progressive forces in Congress and civil society are unlikely to be able to get back in the bottle (particularly in such days as these when routine tasks such as confirming a federal judge or a Fed Reserve board governor appt. are the subject of political deadlock). These policies have been typically crafted by a coalition of conservative Democrats and Republicans knowing full well that money not collected doesn’t look like a government program. If you delve even a few inches into the comments below Mettler’s article, a sampling of the visceral outbursts to the effect that it’s NOT the government’s money is enough to show how effective this strategy has been. This effect, however was understood from the beginning by many of the progenitors of such programs. As Mettler tells us, Russell Long (D-LA), former chairman of the Senate finance committee and father of the Earned Income Tax Credit (one of the few progressive tax expenditure programs) said, on the subject of the term “tax expenditures” and the way such programs operate “That label don’t bother me.… I’ve never been confused about it. I’ve always known that what we’re doing was giving government money away.”

More than 1/3rd of the recent stimulus package was in this form as is the ongoing payroll tax holiday and other attempts to leave money (that would hopefully be spent on consumption, leading to job creation post the financial crisis) in the hands of citizens/consumers. While conservatives make no distinction between tax expenditures and formal government expenditures when they are discussing the overall size of such terrible programs (i.e. the wasteful $700 billion stimulus program), when it comes to ending such programs (witness the current debt ceiling “debate”), that which was formerly an ineffective stimulus program becomes a tax hike. What would GREATLY benefit anyone who believes that government has a positive role to play in regulating the economy and society would be to ASSURE that any govt benefit programs are received in the form of a check from the U.S. Treasury. I think a good many self-styled Horatio Algers might at least have to think for just a moment when their home mortgage interest deduction arrives in the form of a $5000 US Treasury check rather than a box filled in by their accountant. Sadly, this is another opportunity that is probably long gone (at least for the foreseeable future) in the US.

The culture of “government IS the problem” is a deeply self-fulfilling prophecy and is crippling to any hopes that our nation can address the giant and profound market failures that define the current era, from exploding income inequality to the need for massive infrastructure renewal. It’s no coincidence that the US lies outside the top 20 (and falling) in Transparency International’s “Corruption Perception Index.” The most common features of the top 20 countries (i.e. the lowest perceived corruption) is a much larger overt role for the state in the lives of citizens in areas such as progressive tax codes (helping to counteract tendencies toward income inequality), universal health care, direct government funding of higher education, visible and efficient mass transit systems, generous unemployment and retirement systems, etc. etc. When it comes to the role and size of government, perception is reality; progressives would do well to see the critical nature of seemingly semantic distinctions on the way government benefits are delivered.


About theunlikelyeconomist

theunlikelyeconomist is in the midst of the long slog to attain a PhD in economics.
This entry was posted in higher education, income inequality, Uncategorized and tagged , , . Bookmark the permalink.

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