Saturday, June 2, 2012

The United States and Its Ungrateful Citizens

When one wishes to refer to a "welfare state" in a derogatory fashion, France is usually produced as an example. When one chooses to label a state as "socialist," Sweden is the ready example. It is generally assumed that these countries impose confiscatory levels of taxes on their citizens in order to take from the hard working and give to those who choose to not work hard. The US is thought to be a breed apart from the "soft" European social democracies. This perception is at odds with reality.

This misperception was addressed in The Hidden American Welfare State where this chart was referenced:

The numbers are percentage of GDP.  As it turns out, the US is closest in the fraction of its GDP spent on social programs to Italy and the much-maligned Sweden.

How can this be going on without people being aware? That is the subject of Suzanne Mettler’s new book: The Submerged State: How Invisible Government Policies Undermine American Democracy. Mettler’s work has been discussed previously in Governance in the United States: Confronting the Submerged State. Mettler defines the "submerged state" thusly:

"The submerged state includes a conglomeration of federal policies that function by providing incentives, subsidies, or payments to private organizations or households to encourage or reimburse them for conducting activities deemed to serve a public purpose."

The usual mechanism for funding the submerged state is via tax expenditures, tax deductions, rebates or grants that are aimed at specific groups of individuals or organizations. There are about one trillion dollars in this spending category, about 7% of GDP. This approach to distributing funds allows legislators to spend money on programs while still claiming that they are keeping government small—a silly, but effective deception.

Some of these programs have been around so long that many people see them as a natural right rather than as a government social effort. The mortgage interest deduction was included in the income tax law from the beginning. At the time it was a negligible amount, but now it has grown to almost $100 billion per year in give-backs to taxpayers. If one asks why this deduction continues to exist, one is usually told that it has the noble purpose of encouraging home ownership for those with marginal incomes. What it does, in fact, is distribute most of the $100 billion to upper income households that are least in need of assistance in home buying.

The important point is to note that no one recognizes this $100 billion as a social expenditure that the government provides to its citizens. The government receives credit from no one for its largesse. In fact, as Mettler points out, there is a perverse relationship that has emerged: those who benefit most from the various deductions that the government provides, are least likely to recognize or appreciate the government’s intercession on their part.

"....the greater the number of tax breaks an individual had benefited from, the more likely he or she was to disagree that government had provided opportunities for an improved standard of living."

An even larger invisible program is the health insurance deduction that employers receive for providing healthcare insurance to employees. The beneficiaries, the employees, never see the role of government in supporting their health care needs. One with health insurance believes himself to be in a closed loop with an insurance company, doctors, a hospital, and drug and device providers. Where is the government role?

Few appreciate that the government contributes over $100 billion to employers in the form of a tax deduction. Few realize that the government subsidizes their doctor’s education; that the hospital they go to when they are sick was built partly with a government subsidy; that the drug companies that make the medicines they take when they are ill are subsidized by basic research paid for by the government, and the government subsidizes the profits of these companies by allowing them to charge more to US citizens than they charge to those living in other countries; that half of all dollars spent on healthcare come from the government.

This ignorance is what allows people to claim they want the healthcare reform law—which they will benefit from—to be rescinded.

This result that emerged from the healthcare debates is at the heart of what concerns Mettler. She provides this tabulation of the ignorance generated by the submerged state.

The programs Mettler considers part of the submerged state are in italics. Consider student loans. At the time of the study most student loans were guaranteed by the government but issued through banks. Students received loans and banks received risk-free profits. Most of the student beneficiaries did not realize that they had benefited from a government sponsored effort, so how could they appreciate what had been done for them. Hopefully the government’s role has become more transparent.

What is most astonishing is that about 40% did not recognize their Medicare benefits as consisting of a government social program. In general, the more direct the interaction with the government on a given program, the more likely the government was to be recognized as having provided a benefit. And on the contrary:

"....those who utilize policies of the submerged state—even if they find those provisions to be of value—do not recognize that it is the government that benefits them."

Mettler’s concern is that citizens cannot participate effectively in a government in which the issues are not understood. Based on her studies, she uses healthcare again as an example of what follows from such ignorance. While individuals do not appreciate what government has done for them, the special interests that benefit from government funds are well aware—and they are well organized.

"....efforts to reform such policies, as undertaken by the Obama administration, face uphill battles. Opponents will likely meet reformers quickly, armed and ready for battle, poised to defend the policies that have benefited them so abundantly. By contrast, ordinary citizens are unlikely to realize what is at stake in the efforts or to offer assistance. Rather they will act complacently and remain uninformed. Reform efforts, therefore, even if they are motivated to address the needs of ordinary citizens, quickly devolve into elite battles, engaging political leaders and interest groups but not Americans generally."

She provides this warning to those who might choose to attempt reform.

"Transformation of the submerged state is thus a high-risk endeavor—one that poses many immediate obstacles to proponents, and that may yield the unintended effect of further alienating from the political process the very people it intends to assist."

Sad—but true.

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