Federal Case

The neoliberal approach to governing ignores a crucial fact: Government is best when it is big. A response to Eric Liu and Nick Hanauer.

By Michael Lind

Tagged Governmentprogressivism

Eric Liu and Nick Hanauer performed a great service for American progressivism when they sought to rehabilitate American patriotism for the liberal left in their book The True Patriot. Their contribution to Democracy’s “First Principles” symposium, “The ‘More What, Less How’ Government,” [Issue #19] is also provocative and insightful, but they repeat too much of the discredited conventional wisdom of the neoliberal movement of the 1980s and ’90s.

Liu and Hanauer are right to note that, while Tea Party conservatives offer “little more than a reprise of unworkable ideas and worn rhetoric about ‘limited government,’ ” in reality “there is not a single example to be found of a nation that practices ‘limited government’ and is wealthy, secure, and stable.” They are right as well when they complain that progressives are “in a defensive crouch” and there is a need “to articulate, during this time of flux, an affirmative progressive theory of government.”

Their proposed alternative theory of government is the opposite of what they call the “mushy amalgam” of the mid-twentieth century. In their account, the “mushy amalgam” combines the conservative belief that the federal government should concentrate on providing a few basic public goods with the liberal belief that many, if not most, of those goods could be provided most cheaply and efficiently by direct, national government action.

In place of “the New Deal/Great Society template,” they propose a government that does more things—but does them indirectly. The “more” category includes an expansion of the federal government’s role beyond providing basic goods, to projects like peacetime national service. They endorse Cass Sunstein’s proposal that “choice architects” in the government should “nudge” people toward doing the right thing in matters like diet or energy use, rather than relying on direct prohibitions or commands. While their ideal government would pursue a greater variety of social goals than midcentury New Deal government did, it would do so less directly on the national level, by privatizing and contracting out more government services, and by “radical” relocalization of other public functions.

Liu and Hanauer’s argument is thoughtful, but this Rooseveltian liberal is unpersuaded by this talk of allegedly superior alternatives in the tradition of the Clinton-Blair “Third Way.” To begin with, I question their version of history. The New Deal consensus, shared by Republicans like Eisenhower and Nixon with the Democrats Roosevelt, Truman, Kennedy, and Johnson, has not continued to this day, as they claim. In fact, it ended in the 1970s. The present neoliberal era began in the 1970s with Jimmy Carter, who endorsed the dismantling of the New Deal system of transportation and utility regulation, with some good results (telephones, trucking) and some catastrophes (the death of passenger rail, Enron-style manipulation of deregulated electricity, and the warping of the post-regulation airline industry by predatory monopoly and oligopoly). After the Republican interregnum, the neoliberal era continued with Bill Clinton, who promoted the disastrous dismantling of the remnants of New Deal financial regulation and collaborated with the Republicans in destroying the federal entitlement to welfare. These changes had few effects during the bubble years, but have led to devastating repercussions now that many states are in a fiscal crisis. And it continues with Barack Obama, who rejected New Deal approaches to universal health-care coverage for a plan that forces many uninsured Americans to buy private, for-profit insurance—a plan similar to those touted by the conservative Heritage Foundation and Governor Mitt Romney in Massachusetts. Forty years after Wall Street-funded New Democrats took the Democratic Party away from New Deal farmer-labor liberals, and after a generation in which Carter, Clinton, and Obama have destroyed or rejected key elements of New Deal government, it seems odd to suggest, as Liu and Hanauer do, that “we still live in a nation where the New Deal/Great Society template is dominant.”

The authors write, “At every level, we think the progressive imperative should be to shift responsibility for executing what are now government services to private competitive organizations.” This might have seemed plausible two decades ago, when Al Gore and Bill Clinton launched the “reinventing government” campaign. But 20 years of experience have taught us that the privatization of government services—from the use of military contractors to for-profit prisons—usually fails to lower costs, and sometimes increases them, even while it encourages the corruption of elected officials by contractors who donate money in order to secure contracts.

To their credit, Liu and Hanauer recognize that the record of the practice that they seek to expand is unimpressive. “[T]oo much government contracting today merely replicates the non-adaptive, non-competitive dynamics of government agencies,” they concede. They try to salvage the reputation of the policy by blaming government, writing that contracting only succeeds when “the government, like an effective philanthropist or investor, challenges the firms in its operating ecosystem to learn from each other, to improve and exchange practices, to pool resources and leverage learning.” The assertion that American government can learn to succeed by emulating America’s maladroit and venal financiers must have struck many readers as a grim joke. And how likely is it that elected officials will “challenge” contractors who donate to their campaigns?

The worst cost overruns and scandals are found in the areas where public functions are performed by private for-profit or non-profit entities that enjoy tax subsidies, like health care and private higher education. In contrast, cost inflation is not found to the same degree where public providers like the Veterans Administration hospitals and public K-12 schools perform the public service directly.

Social Security, Franklin Roosevelt’s New Deal retirement program, has far lower costs than any tax-favored, private for-profit alternatives, and has weathered the Great Recession far more successfully than most 401(k)s and IRAs. Reducing government encouragement for gambling with private retirement savings in the stock market should be combined with a gradual increase in the Social Security pay-out as a share of pre-retirement income, a reform that policy expert Steven Hill has proposed in a recent study for the New America Foundation’s Economic Growth Program. Greater replacement of pre-retirement income by Social Security can be paid for with higher payroll tax revenues, an infusion of other taxes, or both.

Medicare, the crown jewel of Lyndon Johnson’s Great Society, is so popular that Republicans have even posed as defenders of the program against Democrats. The problem with Medicare and U.S. health cost inflation in general is too little government, not too much. Countries that do not suffer from American-style health cost inflation use all-payer regulation—that is, medical price controls. The United States must either copy what works everywhere else in the world or adopt rationing that forces all Americans other than the rich to enjoy less medicine from doctors, hospitals, and pharmaceutical companies whose personnel continue to be grossly overpaid by global standards, even as they enjoy subsidies from the public.

In addition to supporting privatization of public services, Liu and Hanauer call on progressives to “radically relocalize the means” of government, while providing “robust funding for those local means,” like public charter schools. Robust federal funding for schools and other state and local agencies is a good idea—but in the interest of historical accuracy I feel compelled to point out that combining national funding with local government discretion is a classic New Deal/Great Society-era policy, favored by Lyndon Johnson and Richard Nixon.

The most efficient government programs in the United States tend to be national and standardized, a fact that undermines Liu and Hanauer’s enthusiasm for decentralization as well as privatization. Purely federal entitlements like Social Security and Medicare are far more equitable and solvent than those like Medicaid and unemployment insurance, in which responsibility is divided between the federal and state levels. For that reason, Greg Anrig of the Century Foundation has proposed federalizing Medicaid in the pages of this journal [“Federalism and Its Discontents,” Issue #15]—a proposal that was part of a grand bargain in the 1980s proposed by President Ronald Reagan! As a former editor of a conservative magazine said to me years ago, “We conservatives will be finished if the American people ever figure out that the local government we’re always praising is much more corrupt and less competent than the federal government.”

Liu and Hanauer appear to suggest that Americans have often turned away from the Democrats to the Republicans because they wanted more localization or privatization of public services, but they present no evidence from public opinion or electoral data. In fact, the American people to this day support big, centralized, universal social insurance programs like Social Security and Medicare.

American voters put an end to Democratic dominance at the federal level in the 1970s and ’80s for two reasons. The first was the perceived failure of Keynesian macroeconomic management to deal with inflation and slowing economic growth. The second was the proliferation in the 1970s of liberal social and environmental engineering, often by federal court order at the expense of political give-and-take. Majorities supported color-blind anti-discrimination laws and the legalization of abortion, but were alienated by manipulative nanny-state policies like busing for racial integration, race-based affirmative action, and hectoring and mostly symbolic campaigns to “save the planet” by recycling or turning down thermostats.

If this analysis is correct, then what Liu and Hanauer call the “mushy amalgam” of midcentury America, in which the federal government did fewer things but did those few things like infrastructure and social insurance well and directly, was in fact quite popular with the American people and ought to be revived rather than rejected.

The biggest of the few things that government needs to do well is the promotion of long-term economic growth. Liu and Hanauer provide little guidance on the government’s role on this front. They write, “Bigness—whether at General Motors or the Postal Service—is not tolerated anymore.” Really? The U.S. government rescued GM, and other industrial democracies have aided their own car manufacturers because the automobile industry is characterized by increasing returns to scale and contributes disproportionately to national productivity growth. The major private alternative to the Postal Service, FedEx, is a colossal, continent-spanning corporation with fleets of jets and trucks.

According to Scott Shane, a leading authority on entrepreneurialism, from 1992 through 2008, the 79 percent of small businesses with fewer than ten employees created merely 15 percent of new jobs, even as the 4 percent of small businesses that had 50 to 499 employees created 30 percent of all net jobs (only by the federal government’s surreal definition is a company with 50 to 499 employees “small”). Large, well-capitalized businesses lead disproportionately in innovation, as well as job creation. created the Kindle, Apple the iPhone and iPad, and Google is among the leaders in developing robotic cars. The most successful economies in the developing world are found in state capitalist countries like China, which partner big government with big business and big science. Nothing like the radical increase in inequality that has taken place in the United States has occurred in similar western democracies where unions—“big labor”—include much or most of the workforce.

Liu and Hanauer are right to reject Tea Party anti-statism, and some of their proposals, like federal funding for charter schools, deserve consideration. But they do not provide a compelling explanation of why living “in a nation where the New Deal/Great Society template is dominant,” in which “big government is meant to counter big business,” and in which we “expect government to provide a cushion against all manner of risk and misfortune” is such a bad thing. I doubt that many progressives will agree that their proposed amalgam of contracted-out public services and “nudge”-based personal behavioral engineering is an improvement on the simpler, more straightforward liberalism of the New Deal and Great Society. Instead of supervising a multiplicity of projects to be carried out by rent-seeking corporate contractors, government should do a few big things, and to do them efficiently and well it should often do them directly at the scale of the nation.

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Michael Lind is co-founder of New America and the author of Land of Promise: An Economic History of the United States.

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