The Politics of Loss

FROM ISSUE NUMBER 11 ~ SPRING 2012 GO TO TABLE OF CONTENTS

JAY COST

When political scientist Harold Lasswell, writing in the mid-1930s, defined politics as the decisions society makes about "who gets what, when, and how," he might as well have been describing the debate over taxes and spending in the United States today. But what happens when the focus of the political debate changes from who gets what to who loses what? This concept is unfamiliar to Americans, who have enjoyed more than 100 years of (mostly) uninterrupted economic growth.
The few examples in American history of the politics of loss suggest that the results tend to be explosive. Writing in the aftermath of the 1968 presidential campaign, journalist Theodore White borrowed Lasswell's concept to define the core philosophy of the New Deal Democratic Party as the "share-out," by which he meant "that any Democratic administration would increase or stretch the wealth so that everyone would get his fair share of money, goods and comfort, and thus be content." White observed:

[I]n pursuit of the philosophy of share-out, the Johnson administration had come to consideration of the last group still clamoring for its share — the unfortunate and underprivileged black population of America. Here, however, was a cleavage line that the old philosophy of share-out could not straddle; for what the blacks clamored to share was not only money, jobs and material things but such intangibles as dignity and equality. And the sharing that was demanded in this quest was demanded not from the affluent so much as from white workingmen, who were asked also to share their schools, neighborhoods and places of amusement with the blacks. All through 1968 the working-class base of the Democratic coalition was to be torn almost as if by civil war, as white workingmen questioned the risk and the pace imposed on them in the adventure. The philosophy of the share-out...was to run its course in 1968.

White's concept of the share-out, and his observations about its fragility, capture the essence of not only 1960s Democratic politics but also the greater post-war political equilibrium. For generations after World War II, both parties agreed implicitly upon a great American share-out: The fantastic growth of the American economy gave politicians in both parties the enviable task of deciding how the annual surplus would be divided, meaning that everybody could be a winner. Republicans could cut taxes and dabble in generous social-welfare benefits; Democrats could distribute generous social-welfare benefits and dabble in tax cuts; both parties could push for an overpowering military; and all the while the annual budget deficit stayed more or less within a tolerable range. It was a true win-win, with political disagreements largely fought over which side would win more.
Even as the balance of power in Washington shifted back and forth after World War II, the share-out endured. And this durability helps explain why the domestic policies of presidents from Dwight Eisenhower to George W. Bush have often seemed interchangeable, regardless of party. John Kennedy, Lyndon Johnson, and Bill Clinton all cut taxes; Eisenhower, Richard Nixon, and Bush all expanded the social-welfare state. The purists at the two ends of the ideological spectrum were usually unhappy, but the broad middle of the country — where elections are always won or lost — was pleased. Thus a political equilibrium was reached and preserved, more or less, for 50 years.
In our time, however, this balance has been upset not only by the severity of the most recent recession, but also by the weakness of the recoveries that have followed the downturns of the past decade. Evidence would suggest that the great American growth machine is sputtering, with forecasts auguring middling growth next year (around 2%), essentially continuing the unimpressive trend of the past decade. And this economic torpor strikes at the worst possible moment: The Baby Boomers — an outsized generation that came about because of the post-war era's unparalleled prosperity — are now starting to collect on the generous promises that politicians made when they were just children.
The days when lawmakers could give to some Americans without shortchanging others are over; the politics of deciding who loses what, and when and how, is upon us. Neither party yet fully understands the implications of this shift, which means both parties risk being caught unprepared when the economic slowdown forces profound changes in American politics. The great American share-out is coming to an end — and, with it, the rules and norms of our politics that several generations have taken for granted.

BOOM TIMES

By 1946, the American people had endured 12 hard years of economic depression followed by another four of world war, yet they were on the verge of a fantastic economic boom. During the 1960s alone — at the very height of the post-war expansion — the inflation- and population-adjusted value of the private economy increased by 36%, and the average worker in the private sector saw his real income increase by some 17%. Though the 1970s were rockier — with a nasty recession in the middle of the decade and runaway inflation at the end — real growth more or less continued through the 1990s, so that, by 2000, the real wages of the average private-sector worker were seven times higher than they had been in 1960. Moreover, during this period, unemployment remained at low levels (with temporary exceptions in the mid-'70s and early '80s), despite the mass entrance of women into the workplace. Inflation was mild and stable, usually coming in at less than 3% per year (with the notable exception of the late '70s).
The result was a federal government left flush with cash. Income-tax revenue increased by 133% in the 1950s, 114% in the '60s, 141% in the '70s, and even 83% in the rate-slashing '80s. This ever-rising tide of money came not from persistently higher tax rates but from the growth of the economy: Income-tax revenue as a share of GDP averaged around 8% during this period, with little deviation from the mean.
And it was this growth-driven windfall that bankrolled the great American share-out of the post-war era. It allowed taxes to be kept low, even as real social-welfare spending per person increased by more than 20% in every decade following the war. Indeed, as the government built the modern bureaucratic state, domestic discretionary spending increased in every decade except the 1980s; in response to the Soviet threat, national-defense spending increased dramatically as well.
In other words, economic growth liberated policymakers from having to make any hard choices. The people could have guns, butter, and low taxes — all thanks to a private economy that seemed to grow regardless of what the government did. Under the circumstances, the two political parties were happy to blur the traditional ideological differences that separated them. The Revenue Act of 1964, for instance, slashed the top marginal tax rate by 21% and the corporate tax rate by 14%. Today, this kind of cut would be anathema to Democrats — but when the House passed it in September 1963, an overwhelming majority of liberals supported it. Similarly, in 1981, Southern Democrats were essential to the passage of Ronald Reagan's landmark tax cuts.
Just as the post-war prosperity allowed Democrats to support income-tax cuts, Republicans found themselves in a position to advocate higher social-welfare spending. Time and again in the 1950s, congressional Republicans strongly supported expansions of Social Security; in 1972, it was the Nixon administration that signed into law the entitlement program's cost-of-living adjustments and created the Supplemental Security Income program. The Republican alternative to Medicare, "Bettercare" — offered by Wisconsin congressman John Byrnes, a conservative by any measure — pledged government support for senior citizens in paying hospital and doctor bills. And in 2003, it was George W. Bush and a conservative House that established Medicare's prescription-drug benefit.
It is not surprising that, during this great share-out, politicians of both parties acted as if the good times would roll forever. It certainly seemed as if they would: According to an analysis by the National Bureau of Economic Research, in the 36 years between the end of the Panic of 1893 and the start of the Great Depression, real per-capita gross domestic product more than doubled. The depression ended this growth streak, of course, but in the 36 years between 1945 and 1981, real per-capita GDP doubled again. For a long time, it seemed to be on pace to double yet again over the next several decades.

HITTING THE WALL

But then the recession of 2000-2001 intervened. While comparatively mild by historical standards, the downturn marked the end of a long era of robust economic growth. Economic expansion in the middle of the last decade was quite weak compared to the post-recessionary expansions of the mid-1980s and mid-1990s. This anemic period was followed by the recession of 2007-2009, which was the deepest in generations. And from the perspective of most people, the current recovery is essentially negligible: The average American's job prospects remain uncertain, his wages flat, his home value depressed, and his costs for necessities like food, gasoline, health care, and education far too high.
The weak economy has also done enormous damage to the federal Treasury, threatening the fiscal status quo that has more or less obtained since the end of World War II. Put simply, without economic growth coming in at its historically robust levels, federal coffers are not filling up fast enough to meet all of the obligations that politicians took on when it seemed like growth would last forever.
To appreciate the magnitude of the problem, consider the following thought experiment. Suppose that a worker makes one dollar per year, and that over the next 36 years his real earnings will increase at a constant rate, so that by the end of the period he will be making $2 per year. If the government taxes the real value of his income over the course of 36 years at a 20% rate, Uncle Sam will collect $10.60. But if this worker's real income rises to only $1.75 per year, the feds will collect just $9.71, or roughly 10% less than they would have collected had this worker's income risen to $2 per year. Expand and multiply this effect across a vast population of earners, and one can see how profoundly the pace of economic growth influences the amount of revenue collected by the federal government.
If our government had behaved sensibly and prepared a rainy-day fund for such a long-term slowdown, this kind of hit to federal resources would not be catastrophic. Unfortunately, our government does not behave sensibly. Members of Congress predictably maximize benefits and minimize costs in the short term, leaving the hard choices to the next generation of legislators.
To make matters worse, Uncle Sam must fund various income stabilizers — like unemployment-insurance benefits and food stamps — to ensure that most of the public enjoys a roughly constant standard of living when the economy slows. The result of this practice is that, precisely when Washington is collecting less money from taxpayers, it needs to spend considerably more.
Just how bad is the country's current financial situation? The budget deficit for fiscal year 2011 was a staggering $1.3 trillion, or an unsustainable 8.7% of GDP. (As a point of comparison, last year, America's deficit was just a touch smaller than the entire Russian economy.) In its January 2012 Fiscal and Economic Outlook, the Congressional Budget Office assumes that the deficit will decline over the next four years, but to arrive at this assumption, it projects that the real economy will grow at an average rate of 4.1% per year between 2014 and 2017 — higher than any annual level of growth we have seen in a decade. Taking this rosy growth estimate, and assuming that the Bush tax cuts are allowed to expire entirely (a big "if," since even President Obama and congressional Democrats want only the relatively small portion of those cuts affecting the rich to expire), CBO expects the next four years to bring a 65% increase in the amount of income-tax revenue collected. According to CBO, this presumed flood of new revenue, combined with the other fiscal benefits of economic growth, will result in a deficit of just 0.9% of GDP by 2018.
These numbers call to mind the old yarn about what an economist would do if he were stuck on a desert island with an unopened can of baked beans: First, he would assume he has a can opener. The CBO not only naïvely assumes growth that far exceeds anything that the country has seen in the last decade; it also assumes, contrary to historical experience, that there will not be another economic downturn anytime soon. Between the end of World War II and the turn of the century, according to NBER, the United States experienced nine recessions — roughly one every six years. To rely on America's going 12 years without a recession — until 2021 — thus defies credulity.
When we begin to move away from these dubious assumptions and to account for weaker growth, our economic outlook becomes much gloomier. Last year's deficit numbers illustrate the point. Economic growth came in right around the 2000-2010 trend — not recessionary, but barely enough to keep pace with the expansion in population. This has meant stagnant wages and therefore paltry tax receipts, as well as greater demand for social welfare like food stamps, Medicaid benefits, and unemployment insurance. Reduced receipts combined with greater outlays have produced a budget deficit that measures in the trillions.
The longer-term picture is worse. Even assuming 3% growth and an unemployment rate of roughly 5% for the next 50 years, CBO still projects that total federal spending will rise to 34% of GDP, entirely because of spending on health-care entitlements — Medicare, Medicaid, the Children's Health Insurance Program, and Obamacare. This level of federal spending is, quite simply, unsustainable; it will require either massive tax increases or massive reductions in entitlement outlays. In other words, it will destroy the great American share-out once and for all.

ALLOCATING LOSS

As Congress and the president finally begin to deal seriously with the impending fiscal crisis, we will see a remarkable transformation not only in the federal budget but also in our political order. Assuming that CBO's economic forecasts are indeed overly optimistic and that economic growth continues to disappoint, we should see three significant changes in our politics: first in the divisions between the two parties, second in their relative popularity among the electorate, and third in the republican character of our regime.
First, the partisan divide will grow markedly. No longer will the parties be able to balance their differing policy goals; low taxes, a strong military, generous social-welfare benefits, and a small deficit will become incompatible. Congressional Republicans will no longer be able to vote again and again to increase Social Security payments; no longer will Democratic presidents cut taxes for capital owners. Something will have to give.
Sooner or later, America's bondholders are going to demand a serious deficit-reduction plan. When that day comes, Democrats will demand higher taxes to keep social-welfare benefits constant, and Republicans will insist on reforming social-welfare programs to keep taxes low. There will also be sharp disagreements over the level of military spending (with Democrats calling for substantially deeper cuts than the GOP will ever allow), as well as disputes about domestic discretionary spending (with the GOP similarly demanding greater cuts than the Democrats will ever accept). As each fiscal proposal attacks some sacred cow of the left or the right, Democrats and Republicans will eschew grand compromises and ratchet up the partisan rhetoric.
Indeed, the gridlock of the current Congress over budgeting is a preview of what is to come. Quite simply, the two sides have not reached a grand bargain because no such bargain between them is possible. It should therefore come as no surprise that President Obama and Speaker Boehner have all but stopped speaking to each other, both having resolved instead to take the question to the voters at the end of the year.
This points to the second implication of the end of the share-out — one that should worry conservative Republicans, as they are likely to suffer more than Democrats from a prolonged economic slowdown. In the short term, of course, President Obama — having set expectations for a normal economic recovery that has not materialized — would appear to have the most to lose. The long-term picture, however, is quite different.
For all of the hustle and bustle of the modern political campaign, not much has changed in the 225 years since our Constitution was ratified. In fact, the core disagreement separating Republicans from Democrats today is essentially the same as the one that split Alexander Hamilton and Thomas Jefferson in the 1790s over the issue of the Bank of the United States. Hamilton saw the bank as a way to promote capital investment, which in time would encompass all Americans under a broad umbrella of prosperity. Jefferson, on the other hand, viewed it as a tool of the elite to enhance their wealth and power at the expense of Virginia farmers.
In a sense, both were correct. The central banking system benefited the whole country over time, though Northeastern financiers enjoyed the greatest immediate benefits. The same is true, for instance, of Microsoft: The whole country is better off thanks to the ubiquity of the personal computer, but Bill Gates has benefited the most. This is the inherent tradeoff to be made when embracing a dynamic, free-market economy; over time, all people will be better off, though some will do better than most.
Historically, conservatives have tended to hold their own in this argument: Starting with the election of 1896, Republican candidates have averaged 48% of the vote and won 16 presidential elections, while the Democrats have averaged 46% of the vote and won 13 victories. Popular support for a right-leaning economic agenda depends upon the belief that the free market generates broad prosperity in the long term. In other words, when the average person believes that he is better off in an unfettered market, he will support conservatives — even if a few of his fellow citizens are enjoying unequal shares of the national surplus.
Consider the smashing re-election victory in 1900 of conservative William McKinley, who had promised four years earlier to be the "advance agent of prosperity" by pursuing conservative economic policies. Consider also the 1920s: Despite the scandal-plagued administration of Warren Harding, Republicans controlled the White House and the Congress for ten years with Andrew Mellon, that icon of American business, serving as Secretary of the Treasury the entire time. Finally, consider the 1980s: Democrats howled for more than a decade about how the Reagan administration had severely undermined the social contract, leaving the "rich richer and the poor poorer." Yet Reagan's victory in 1980 was the start of a move toward conservative government, as the GOP would win four of the next seven presidential elections and, in 1994, finally return to majority status in the Congress.
When prosperity is lacking, however, liberal Democrats have the upper hand. For instance, in examining the presidential election of 1948, the typical political-science model attributes Harry Truman's victory over Thomas Dewey to the strength of the post-war economy. But the real story is much more complicated. In fact, the farm economy was struggling in 1948; farm wages had flattened and net farm income had actually declined. But though their lot had worsened under Truman, Midwestern farmers — despite historic ties to the GOP that traced back to the 1850s — actually supported the incumbent. Why? The president seized upon the efforts of congressional Republicans to cut federal farm subsidies, and traveled all over the Midwest warning that, when the next recession hit, farmers would need the heirs of F.D.R. to protect them from vicious, Hooveresque Republicans. The strategy worked: Truman did markedly better in the Midwest than F.D.R. had four years earlier, winning Colorado, Iowa, Ohio, Wisconsin, and Wyoming — all of which Roosevelt had lost in 1944.
There is a lesson here for conservatives. The GOP's emphasis on free markets inevitably tilts fiscal policy toward capital owners, at least in the short term. This is not because the Republicans have always been "the party of special interests," as the fiery Truman once put it, but because Republicans believe that the private sector's allocation of capital is the most progressive force in the world — and that it will produce broad prosperity if given enough time. If that widespread prosperity is not forthcoming, however, the political appeal of the conservative argument collapses, and Republicans suddenly appear to be a party of plutocrats, robbing the poor to pay the rich.
If sluggish economic growth does turn out to favor liberal Democrats, the third consequence of the federal government's new fiscal situation may be a decline in the republican character of our regime. While progressives have long fancied themselves the true republicans in our politics, they tend in practice to govern in a deeply anti-republican fashion. For instance, Herbert Croly — one of the founders of the original Progressive movement — cheered the power of big government to equalize the distribution of national wealth among all classes. Implied in this suggestion is the belief that the people cannot be relied upon, through republican institutions, to enact a progressive agenda on their own; true progressivism would require a powerful, centralized state administered by experts. In pursuit of ostensibly republican ends, progressives are thus content to embrace means that actually undermine the practice of republican government.
The problem, however, is that those ends are rarely achieved. While progressives might sound like Jacksonian Democrats or Bryanesque populists on the campaign stump, once in office they are hardly radical; progressives have, time and again, declined to destroy the established order, choosing instead to co-opt it. For instance, while Teddy Roosevelt may have railed against the "malefactors of great wealth," his Bull Moosers supported high tariffs — a boon for big business — so long as those laws included pro-labor provisions. Their idea was to bring labor and capital to the table, with progressives, of course, at the head.
Similarly, in the First New Deal, Franklin Roosevelt sought to bring various interests together — through programs like the National Recovery Administration and the Agricultural Adjustment Agency — for a "fair" management of the economy, with the proceedings naturally chaired by F.D.R. himself. But "fair" was always a relative term for the New Dealers: The Southern gentry enjoyed a bonanza because of the AAA, and the Roosevelt administration unceremoniously sacked the left-wingers in the Department of Agriculture who had the temerity to suggest that poor, mostly black sharecroppers had been left out in the cold. And while F.D.R. was quick to take down machine governments that opposed him — such as William Vare's operation in Philadelphia and Tammany Hall in New York City — he had no problem lending his support to friendly operations like the burgeoning Chicago Democratic machine.
An examination of the manner in which the Democrats passed their health-care bill in 2010 suggests that very little has changed in the progressive modus operandi. Democrats were prepared to cut a deal with every special interest that was willing to deal back, creating "managed" competition that accomplished the party's policy goals while enhancing the positions of the established players. Little wonder that nearly all of the big interest groups endorsed the plan before its enactment. The same is true of the Dodd-Frank financial-reform bill passed later in 2010: It ultimately won the support of the mega-banks because the bankers were willing to trade more regulation for the enshrinement of "too big to fail."
The losers in such arrangements are those who do not get a seat at the table when the grand bargains are drawn up. Big business buys itself a seat with campaign contributions, and the various interests within the Democratic constellation are always invited to participate. But many average citizens — most of whom vote Republican — are left on the outside looking in. More often than not, they are asked to pay higher taxes to subsidize the Democrats' grand policy schemes.
Government that caters to the interests of one faction over those of another — even if the advantaged group amounts to a numerical majority — is not republican government, which seeks always and everywhere to promote the truly public interest. This is why the most ardent republicans of the early 19th century favored a lean, decentralized state, as they understood that a big government invariably caters to the interests of a favored few at the expense of the less influential. Even Andrew Jackson, hailed as the founder of the Democratic Party, once bemoaned the habit of governments "to grant titles, gratuities, and exclusive privileges."
Of course, the party of Jackson has borne scant resemblance to Jackson himself for more than 100 years, and if the Democrats do in fact gain an electoral advantage because of the weak economy, it will not be long before they try to strike more bargains to manage other facets of American society. They see themselves much as historian William Leuchtenburg characterized F.D.R.: as a "mediator of interests" whose job was to balance "a parallelogram of pressures." A liberal Democratic majority in government will, if given enough time, transform the country into a kind of national political machine that balances various interests in a just manner, with progressives sitting atop the pyramid and determining what is just and what is not.

RESTORING GROWTH

There is some consolation to be found in the fact that these gloomy predictions are not yet certainties. Insofar as they are premised on economic stagnation, they may not come to pass if the economy begins to grow robustly again. The conservative movement — in particular its political vehicle, the Republican Party — must therefore do everything it can to jumpstart the engine of American prosperity.
This will require a relentless, unapologetic growth agenda, promoted on the campaign trail and adopted in Washington should Republicans win in 2012. This agenda must be explicit, because if the Republican nominee is to have any hope of successfully enacting it as president, he must have clearly earned a public mandate for such policies before entering the White House.
Winning this mandate will require a great deal of focus, for in attacking President Obama, there are a great many angles to pursue. And while some of them would certainly satisfy the conservative base — which is furious with Obama over his tenure — they may not advance the growth agenda needed for 2013 and beyond. For instance, Republicans were rightly appalled over Obama's recess appointment of Richard Cordray to the Consumer Financial Protection Bureau, and they might be tempted to attack Obama in the fall for his abuse of the Constitution. But does such a line of argument facilitate the growth agenda, or does it simply draw attention away from, say, Obama's decision to block the Keystone pipeline, a policy matter that relates directly to economic growth?
If Republicans do succeed in retaking the government in 2012, they must tread very carefully, because they cannot afford to be seen as merely the party of budget cuts. As noted above, this same failure contributed to the undoing of the Republican campaign in 1948, as it produced an easy opening for Truman to rail against Republican plutocracy. In today's environment, proposed cuts to the budget must instead be placed alongside concrete, effective policies to generate economic growth. This approach will allow the GOP to rebut the argument that it is simply destroying the welfare state, and to show that Republicans are instead replacing the welfare state with something immeasurably better: a growing and dynamic economy that will benefit all citizens.
Such growth is essential to more than the health of our economy. If it fails to materialize, not only public finances but also free enterprise and the republican character of our regime will be imperiled. In this year's elections, Republicans would do well to remember what is at stake — and to advance an economic agenda that rises to the challenge.