Who Needs Government? (The Middle Class does)

Next week, the presidential campaign debates are upon us.  One of Mitt Romney’s staffers, Beth Myers, put out a memo framing the choice as follows:

“The choice [is] between President Obama’s government-centric vision and Mitt Romney’s vision for an opportunity society with more jobs, higher take-home pay, a better-educated workforce, and millions of Americans lifted out of poverty into the middle class.”

This is a remarkable way to put this choice.  I think EVERYONE, including Obama, is in favor of an ‘opportunity society with more jobs, higher take-home pay, a better-educated workforce, and millions of Americans lifted out of poverty into the middle class.’   We ALL share that vision of what Americans need and want.  The question is not whether Mr. Romney’s vision, if described in these terms, is different from President Obama’s vision. It isn’t.  The question is what steps do we follow to achieve that vision.

Historically, the fact is that an opportunity society  and higher take-home pay are not automatically created by the wonders of the free market.  They certainly cannot appear without a market; a free market is still the most efficient way to allocate labor and capital and promotei nnovation  and growth.  But necessary is not sufficient.  America has been a free market society since its birth.  But it recurrently goes through periods when the fortunes of the middle class decline.  Why is that?  Because landlords and manufacturers prefer, if they can, to minimize risks and maximize profits.  And without some government intervention, their tendency is to create oligopoly and monopoly concentrations of market power, and to use that power to break unions and obtain labor at the lowest possible cost.   Since the dawn of the industrial revolution, the growth of the middle class has been based not only on the ability of entrepreneurs to create new industries and add value, but on the ability of labor movements and labor-influenced governments to protect workers, support unions, and to provide key public services that make middle-class life possible.

After all, no one on a truly middle class income  (e.g. a median American household income of about $50,000 per family) can buy the roads they need to get to work; they can’t privately buy the police and fire prevention that makes a middle-class neighborhood safe (as wealthy neighborhoods in American increasingly do); they can’t privately purchase the city parks and national parks and wildlife reserves that allow them to camp and hunt and fish in the vacations that are considered part of middle-class leisure.  All of that is provided by government through taxes.

As far as opportunity goes, it is hard to compete if the current rich have enormous and growing advantages in every phase of competition, and the poor do not have access to decent education, public transport, and medical care.  But how can that happen without government provision of basic education, transport, and emergency and basic medical care for those in need?  And if the rich are allowed to accumulate advantages over time by paying little or no inheritance tax (thus giving huge advanages to younger generations who never earned it by their own effort or accomplishments, creating a hereditary aristocracy of wealth which the U.S. was designed to prevent), or by paying lower taxes on their earnings than ordinary workers who are trying to save money from their wages to start their own business, how can there be equal opportunities for all?

For that matter, how is it possible to have a ‘better educated workforce’ when college is unaffordable without debilitating loans to people in the middle and working class?  When I was growing up in the 1950s in California, it was possible for young people to get a part-time job and work their way through college.  That was because college was essentially free if you got in, so you only needed to pay for rent and food and study.  Today, with even state four-year colleges costing $25,000 or more for tuition, fees, books, room and board, that simply is not an option.

Why have college costs risen so much?  It is common to blame greedy professors, who are paid more and teach less.  There is some truth to that.  But in fact that is NOT the main cause of rising college costs.  There are two much larger factors — rising administrative costs, driven by colleges being asked to do more and respond to more government rules, and a stunning drop in public support for ‘state’ universities.  At my own institution, public support from the state of Virginia used to cover fifty percent of the total budget; now it covers less than a quarter.  The difference has had to be made up largely by increasing tuition.

We live in a society where a hedge-fund manager or wealthy investor pays 15% of income in income taxes, and almost nothing in social security taxes, leaving states with not enough money to keep college costs down.  Meanwhile, an aspiring middle-class family who wants to save money to start a business and to send their kids to college has to pay 25% in income tax and another 6.2% in social security tax, and then borrow or pay what amounts to half their annual income to send just one child to a public university.  Romney is right that this is NOT a situation that leads to a better educated workforce, an opportunity society, or lifting people out of poverty into the middle class.

But the solution that seems to be coming from Romney is to cut taxes and government spending — how will that make this situation better?  More money will flow to the private sector, but if that just makes businesses richer, how does that help educate, provide health care, or capital to the workers, poor, and middle class families trying to rise in the world?

Romney is right that giving government handouts to people is wrong and not helpful — if ‘handouts’ mean cash payments to people who have never worked (a European-style dole).  But in America, government spending has not meant that.  Do ‘handouts’ include vaccines and doctor visits for poor children so that they can grow up healthy and go to school and learn?  Do ‘handouts’ include state support for colleges so that poor and middle-class families can send their children to become better educated workers?  Do ‘handouts’ include social security payments to people who have paid into social security with their taxes for all their working lives?  Do ‘handouts’ include unemployment insurance for people who have worked for decades and paid for that insurance so that if their company goes under or cuts back and they lose their jobs, they do not suddenly lose the ability to keep their kids healthy or in school and thus wipe out a generation’s opportunities?

My worry about Governor Romney, at least in his public statements, is that he does not seem to understand that government spending plays an essential role in creating exactly what he touts as his vision.  My parents had to flee Nazi Germany, so I know all too well the horror of having an all-powerful state take over society.  But before that my parents also had to grow up in the Depression, which was the opposite horror produced by government abdicating all responsibility for overseeing a financial system that produced a global crash and a decade of stagnation that destroyed opportunity and plunged the middle class into poverty.

An all-powerful state is a dire threat to freedom and prosperity.  But so too is a weak and impoverished state that cannot protect and provide services and avenues for advancement for the poor and middle class.  The trick is always to find the right middle ground.

Obama may lean a bit in the direction of more government, but so far he has used government mainly to support the private sector.  The bailout was aimed at saving private companies and banks, not at handing out goodies to the 8-10% of Americans who are not working (just ask them!).  His healthcare plan is designed to steer millions into privately provided health insurance and privately-owned health practices and facilities, and get them out of the emergency rooms of government provided (county or state-run) hospitals and clinics.

Romney, on the other hand, doesn’t seem to get it, in the sense of having any idea how vital the role of government is to helping poor people start and maintain a business.  It shows most clearly in Romney’s advice to young people — don’t complain, ask your parents for a loan to start a business!   How about this instead, for the hundreds of millions of Americans whose parents are not CEOs of major corporations: don’t complain, go to a public college or university, study hard, get a job, save some money, come up with an idea, get a small-business loan and advice on exports (subsidized by government through the Small Business Administration), and start a business!   Except that Romney’s budget plan would slash funds available to help people attend public colleges and universities, make it harder for ordinary workers to save money by cutting deductions that working and middle class families use, and eliminate much government discretionary spending (like the budget for the Small Business Administration and its staff).

So I worry that Romney may, without even realizing it, move us toward a world where borrowing money to start a business from your parents is the only way to seek opportunity.

I like Romney’s vision, as Myers set it out.  But the debates will have to convince me that he has a realistic plan to realize it for the rest of us, not just for folks who grew up like him.

About jackgoldstone

Hazel Professor of Public Policy at George Mason University
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2 Responses to Who Needs Government? (The Middle Class does)

  1. Jim Dew says:

    Very thoughtful, but it seems to me that there are two issues Romney is trying to address. The first is that government is spending borrowed money. When interest rates rise (and they will), more government spending will go to paying creditors and less to the good things government does. We must learn to live within our means in order to do the good things on a sustained basis. We can’t afford everything we want. The second is that Romney wants to lower tax rates, not taxes. In the past, lowering tax rates has usually meant increasing tax revenues, while raising tax rates (Obama’s proposal) has usually meant decreasing tax revenues. It’s revenues, not rates, that support spending. This relationship is counter-intuitive, but nevertheless true. Romney, in my opinion, has done a poor job of communicating this. There are yahoos on the right who think all government spending is bad and yahoos on the left who think that debt doesn’t matter, but they shouldn’t be confused with more thoughtful folks. BTW – always enjoy your blog.

    • Thanks for your sharp comment. You are right, lowering rates can mean increasing tax revenues if exemptions are reduced. For example, lowering the top income tax rate to 30% but making that rate apply to capital gains and investment income would likely raise revenues. Lowing the top rate to 25% but making that apply to capital gains and investment income would be close to revenue neutral, but might raise revenues by leading to more efficient allocation of effort and less distortion by people trying to reshape earned income as capital gains. I would like to see those changes happen! But Romney’s plan doesn’t seem to head in that direction; at the very least I would like him to say that he plans to lower rates AND end the preferential treatment of capital gains income. Or if he plans to end the home mortgage deduction or lower child-allowance deductions (steps that outside reviews of his plan say are necessary to avoid increases in deficits) he should say so. I hope you keep enjoying the blog.

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