Political Hay

The Conservative Welfare State

Embracing Big Government won't reform conservatism.

By 7.2.08

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Ross Douthat and Reihan Salam argue for restoring the Republican Party through a new activist government agenda focused on addressing the problems and concerns of the working class. The failure to decisively win over the working class is what has prevented Republicans from winning a true governing majority, they argue. The new agenda, they say, should include subsidies and policies to strengthen marriage and the family, and promote having children.

Douthat and Salam have written yet another book advocating the complete revision of conservatism based on embracing rather than rejecting Big Government: Grand New Party: How Republicans Can Win the Working Class and Save the American Dream. But as editors at the Atlantic magazine, they are really part of the newly emerging neoliberalism in various new institutions and projects in Washington. They draw on the ideas and thinking of this neoliberal crowd, the future heart of the Democrat party, rather than the conservative and free market think tanks and institutions that form the intellectual base of the Republican Party.

Yet, as a libertarian and supply-sider, I still accept their basic premise that conservatives and Republicans should focus on policies that would win over the working class (though we have a style problem among the upper classes that needs to be addressed as well). I even accept that we need to adopt policies that strengthen marriage, the family and child bearing. America has barely avoided so far the collapsing demographics of Europe that has already begun phasing out the social culture and heritage of the old continent. We still have the chance to avoid that fate in America.

But, as I will show below, these goals would be promoted far better by reducing Big Government and its burdens, rather than by the bigger than ever conservative welfare state proposed by Douthat and Salam.

The authors propose winning the support of the working class the old-fashioned way: buying it, with taxpayer money, of course. They endorse a proposal by Ramesh Ponnuru of National Review to raise the current $1,000 child tax credit to $5,000 per child. That credit could be taken up to the full amount of each parent's income tax and payroll tax liability. They also support subsidies for child care provided in the home (which would inevitably be extended to child care outside the home). They also advocate pension credits similar to Veterans' Benefits for stay-at-home moms.

They endorse as well a program of Federal wage subsidies for lower-income workers even though, "There's no question that a serious wage subsidy would be expensive...up to $85 billion a year." They also propose increasing the Earned Income Tax Credit (EITC), which does the same thing as a wage subsidy. And the proposals for government subsidies for this and that go on and on.

EVER SINCE THE SOCIAL CONSERVATIVES arose as a powerful force in the Reagan coalition, various intellectuals have come along trying to win their support as another interest group that could be served with welfare state subsidies for their social goals. But the social conservatives I meet at Paul Weyrich's Coalitions for America are as fiercely free market, pro-taxpayer, and anti-Big Government as the taxpayer activists at Grover Norquist's Americans for Tax Reform, and the libertarians at the Cato Institute. All of them meet every Wednesday morning at Grover's weekly coalition meeting, where they are card-carrying members of Grover's "Leave Us Alone" coalition. They don't want government handouts for the family. They want the government to stop trying to restrict their religious liberty, promote family breakup, denigrate and downgrade the family, raise their taxes, spend the nation into ruin, and take their guns.

Since those in the working class pay little or no income taxes (the result of three decades of Republican tax policy), the $5,000 child tax credit would be taken mostly against payroll taxes. One child would just about eliminate the employee's share of payroll taxes for most working class taxpayers, and two children would just about eliminate the tax for most workers overall

As former Treasury Department official Steve Entin pointed out in the Wall Street Journal, for the same amount of revenue loss as would result from this $5,000 tax credit, more could be produced over the long run in higher wages and better jobs by reducing or eliminating the excessive, overwhelming, multiple taxation of capital. Capital income is taxed at least four times through the individual income tax, the corporate income tax, the capital gains tax, and the death tax. Capital investment expense, moreover, can only be deducted over several years under long depreciation schedules rather than immediately as for all other business expenses. Since the child tax credit does not reduce any of these marginal tax burdens, it does nothing to promote economic growth.

A far better alternative for the payroll tax is for those funds to be saved and invested by each worker in personal accounts that finance benefits ultimately replacing all of the benefits financed by payroll taxes now. Those accounts could start at any size and eventually replace the payroll tax entirely. Investing the employee share of the Social Security tax plus the entire 2.9% Medicare payroll tax over their entire careers at standard long-term market returns, average income families would retire with accumulated funds approaching a million dollars. Even career low income workers would reach close to half a million. The rest of the payroll tax could then be phased out altogether.

WHAT A DRAMATIC, revolutionary change for the working class, and the rest of America! The personal accounts would transform the payroll tax from a tax into an engine of family wealth. Working class voters in particular support this because they recognize the idea as their only real chance to accumulate substantial wealth. Every worker, in the working class and otherwise, would own a substantial ownership stake in America's business and industry. Wealth would be owned far more equally throughout society.

The account funds would pay far higher benefits than Social Security even promises, let alone what it can pay. Indeed, in scoring the most comprehensive personal account proposal before Congress, the Chief Actuary of Social Security concluded that the accounts would be such a good deal that all workers would choose them over Social Security. This would be far better than any system of pension credits for stay-at-home moms. Workers would directly own these funds just like in their own IRAs. They could choose to leave some or all of the funds to their families and children. Building this wealth within each family unit would greatly strengthen families, and provide a foundation for future prosperity, financing higher education, or small business startups, or professional practices.

The accounts would eventually take over so much of the financial burdens of Social Security that the program's long term deficits would eventually be eliminated entirely, achieving full solvency. Workers would be supporting themselves in retirement, rather than living in dependency on taxpayers and the government. Self-reliance would consequently be greatly expanded, a key value in the new order envisioned by Douthat and Salam.

The personal accounts would pour hundreds of billions into the capital markets for real savings and investment in the private sector. This would create millions of new jobs for the working class, and increase their wages today. All of the rapidly advancing science and technology of today's modern era requires massive amounts of new capital to be developed and brought to market. The personal accounts and their massive new capital investment would greatly accelerate this process, bringing the wonders and joys of this new science and technology to working people, and everyone else, today.

Such personal accounts are nothing less than a 21st century breakthrough in the personal prosperity of working people. They are the foundation of any political strategy to appeal to the working class. Indeed, polls have consistently shown now for 15 years that such personal accounts are supported by two-thirds of the public, particularly strongly by the working class.

DOUTHAT AND SALAM BLUNDER when they go on to discuss welfare reform. They say, quite rightly,

In the early 1990s, an alliance of conservatives and neoliberals joined forces to reform welfare, ignoring the objections and fearmongering of almost everyone to their left. A decade later, this reform stands as working class conservatism's most impressive domestic policy achievement to date....[T]he renovation of welfare delivered exactly what it promised: reduced welfare rolls and increased employment rates.

But they fail to recognize that this was just the beginning of welfare reform, not its completion. Only the old Aid to Families with Dependent Children (AFDC) program was reformed in the 1990s. The same principles can and should now be extended to the enormous Medicaid program, Food Stamps, housing subsidies, and dozens of other Federal means-tested programs for the poor.

These programs should all be block granted back to the states just as the AFDC program was in 1996. Even more exciting is the new safety net the states could each build under these block grant reforms.

For example, suppose all aid to the able bodied was in the form of an offer to work. Report to your local welfare office before 9 a.m. and you are guaranteed a work assignment somewhere paying the minimum wage for a day's work. A private job assignment would be the top priority. If you need more money, come back tomorrow. If you have children with no one to care for them, bring them with you and they will receive free day care, where they will be medically examined and treated if necessary.

If you work a minimum number of hours each month, you get a Medicaid voucher that will purchase basic private health insurance. If you work for a continued period establishing a regular work history, you would be eligible for new housing assistance focused on help in purchasing your own home.

The new Federal minimum wage will soon be $7.25 an hour, or $15,000 for a full year's work. These workers would continue to receive the EITC and child tax credits. This is an additional $4,000 for one kid, and close to $7,000 for two kids. Then there is the value of the child care and the health insurance.

This is more than adequate as a safety net. There is no need for a significant increase in the EITC or higher child tax credits or a new wage subsidy program. This system would save the Federal and state governments enormous sums, especially as private sector jobs started substituting earned wages for former welfare benefits from all of these programs.

INDEED, THERE ARE absolutely no disincentives to work in this system. The only way to get assistance for the able bodied is to work, in this program or in the private sector. This would all but eliminate long-term welfare dependency and move millions still too dependent on the government into private sector self-support and self-reliance. The government safety net would truly be used only for short-term emergencies.

Moreover, the incentives for illegitimacy under this system are also reduced to ZERO! Someone, either the father or the mother, will have to go to work to support a child in any event (EITC benefits are only available to those who work as well, and no one can live on a child tax credit of $1,000). There is nothing to be gained under this system by avoiding marriage or couples splitting up. So this system does not discourage marriage either.

The government could even reduce administrative costs to a minimum under this system. There would be no need to maintain and investigate eligibility requirements. If Warren Buffett wants to show up for a work assignment before 9 a.m., no big deal. That is unlikely to be a significant long-term issue.

This is far better than simply laying on top of the current system close to $100 billion a year in new wage subsidies. Such a proposal ignores the welfare debates and experiments of the 1970s, which found that expanding assistance into higher income ranges actually resulted in less work and self-support. That is because the subsidies have to be phased out at some income range unless they are to be paid to everyone. And phasing out such subsidies as income increases results in a major tax on work and advancement. So subsidies into higher income ranges pull workers back down into dependency.

THIS SAME TROUBLING tendency to ignore what has come before is shown in the discussion of health care as well. Douthat and Salam just repeat the standard liberal criticism of Health Savings Accounts (HSAs) in saying,

The trouble with the current conservative answer is that it would likely drive down costs for most people but drive them up for the most vulnerable Americans -- the poor and the old, who would be stuck in ever more costly traditional plans while the young and the healthy flooded into HSAs.

The point behind HSAs is that higher deductibles result in enormous savings in health insurance costs, and that savings can be used to fund the HSA with cash to pay for expenses below the deductible. In my own case, I save with my $5,000 deductible far more than $5,000 compared to what I am told standard family coverage costs. With cash in the account to cover the deductible, the HSA is far better for the sick than standard coverage, because they have cash on hand to finance what they choose for their own care at least up until the deductible. It is also far better for the poor, who have cash to finance routine preventive care that health insurers generally do not pay for, and they can make a net profit out of the deal besides.

Would it be too much to ask for the authors to call the acknowledged national expert on HSAs, John Goodman at the National Center for Policy Analysis, who does have a telephone, and ask him about the false criticisms of HSAs that they embrace? This failure to acknowledge and recognize what has come before is a general problem for the conservative movement, and reduces our effectiveness sharply.

Douthat and Salam do have some good ideas. While their health care section is confused, their discussion of education is tremendous, with a focus on school choice among public schools for elementary and secondary education, and a transformation of higher education focused on true benefits for the working class. Conservatives should also embrace their call for government policy to get out of the way and even promote suburban development that would produce highly attractive, affordable housing for the working class. Their ideas for expanding highway, road, airport, and Internet infrastructure throughout flyover America are also valuable to the extent the private sector is not already doing that.

But Big Government is not going to work any better for conservatives than it did for liberals, in terms of achieving public good, rather than just short-term political power.

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About the Author
Peter Ferrara is Director of Entitlement and Budget Policy at the Heartland Institute, General Counsel of the American Civil Rights Union, Senior Fellow at the National Center for Policy Analysis, and Senior Policy Advisor on Entitlements and Budget Policy at the National Tax Limitation Foundation. He served in the White House Office of Policy Development under President Reagan, and as Associate Deputy Attorney General of the United States under President George H.W. Bush.