A popular Government, without popular information, or the means of acquiring it, is but a Prologue to a Farce or a Tragedy; or, perhaps both. Knowledge will forever govern ignorance: And a people who mean to be their own Governors, must arm themselves with the power which knowledge gives.
—James Madison, 18221
America faces a choice. At first glance, it seems like we face a boring, somewhat technical choice between various ways of dealing with budget deficits and the national debt. But how we deal with the long-term debt problem reflects a more fundamental choice of the kind of government that we want to have: what services we want it to provide, what risks we want it to protect us from, and what role we want it to play in our lives. Many people may be tempted to answer “none at all,” but this is hardly a plausible answer. National defense is something that few people would be willing to forgo; more fundamentally, without government enforcement of property rights and contract law, it’s not clear what kind of society could exist in the first place. Countries with minimal governments do exist; most are in the developing world, and they are hardly places of great safety, let alone prosperity.2
Ultimately, our choice of government implies a choice of the kind of society we want to live in. The federal government obviously does not dictate the shape of American society, which depends on the individual actions of more than 300 million people. But the government is the mechanism through which we collectively establish the rules according to which our institutions and markets evolve. Do we think that assistance to the poor should be delivered by charitable organizations rather than by government agencies? Then we should have policies that promote charitable contributions, such as the existing tax deduction. Do we think that people should have equal access to higher education regardless of their financial circumstances? Then we need educational grants and subsidized student loans (or regulations requiring schools to ensure equal opportunity). Do we want people to save more money for old age? Then we need policies that encourage retirement savings, such as tax preferences for pensions and individual retirement accounts. These are all policy choices that we expect to be made by our elected representatives in Washington. Even a decision to drastically restrict the number of choices that the government can make is a choice in favor of a certain kind of society.
We have definite opinions about the type of society that we want our children to grow up in. It should be a society in which innovation, creativity, and hard work are amply rewarded, but where people without the skills currently valued by the job market do not have to suffer hunger and homelessness. It should be a society where success can bring riches, but the opportunity to succeed is not restricted by the fortunes of birth. It should be a society where markets allocate electronic gadgets and designer handbags, but not clean air and clean water. It should be a society where people worry about whether their businesses will succeed or fail, but not about whether they will be able to afford basic health care in old age.
The government plays a crucial role in this type of society. As virtually everyone would agree, it provides the basic structures and guarantees that make a market economy possible: property rights, the rule of law, the money supply, a robust financial system, and so on. It invests in public goods that increase economic prosperity but that a free market does not produce enough of, such as transportation infrastructure, education, and basic research. It provides protection against risks that individuals and businesses cannot protect themselves against, even with the help of insurance markets. These protections take many forms: national security, ranging from the invasion of Afghanistan to the increase in aviation security after September 11, 2001; disaster relief in the wake of hurricanes, earthquakes, floods, and wildfires; monitoring of global epidemics by the Centers for Disease Control; regulations and inspection regimes to protect against toxins in our food, water, and air; the social insurance programs through which Americans protect themselves against unemployment, save for retirement, and pay for health care in old age; and safety net programs that ensure a basic minimum of food and health care for the poor. Protection from the consequences of failure is what gives people the freedom to take risks in the first place; there are so many startups in Silicon Valley because there is no stigma attached to failure. By contrast, if your only way to get decent health insurance is through your current employer, you are far less likely to quit and start a new company.
The federal government’s role as the insurer of last resort was never more on display than during the financial crisis that began in 2007. At its peak, there was a real risk that the global financial system would simply stop working, with unknown but terrifying consequences for all of us. Mohamed El-Erian, chief executive of PIMCO, one of the world’s leading investment firms, asked his wife to withdraw as much cash as she could from the ATM—because he didn’t know if banks would open for business.3 The Treasury Department and the Federal Reserve responded with unprecedented financial force, making trillions of dollars available to keep banks afloat at virtually any cost. In the end, the government succeeded in keeping the banks open, and instead of a second Great Depression we “only” suffered through the worst recession since World War II.
The lesson of the financial crisis should be that in today’s complicated and dangerous world, government protection from extreme risks is more important than ever. Other, less dramatic changes in American society over the past few decades have also left many people more exposed to a wide variety of risks that they are ill equipped to handle on their own. The decline of traditional defined benefit pensions (which assure employees a specific level of income during retirement) has exposed more people to the risks of not saving enough and poor investment performance, making them more dependent on Social Security. The increasing cost of health care has left fifty million people uninsured and made all of us more reliant on Medicare to cover us in old age. The decline of unions has decreased job security, increasing the risk of involuntary job loss and the importance of unemployment insurance. Global competition in manufacturing and some service industries may benefit Americans overall, but makes it more likely that people will suddenly find themselves without marketable skills mid-career. In many ways, the dominance of the free market ideology—open markets and unrestrained competition above all else—has made all of us more vulnerable, as individuals, to the vicissitudes of fortune.
And yet our current large deficits—which are the direct result of a nearly catastrophic financial crisis brought on by a deregulated banking sector—are being used as a reason to dismantle the protections provided by the federal government, from environmental regulation to Medicare. Yes, government costs money. Yes, if we want to have decent social insurance programs and a basic safety net, we must be willing to pay for them. And yes, as of today, we are not paying for them: we have already run deficits for a decade, Social Security faces a moderately sized long-term deficit, and there is no plan on the books to pay for expected increases in health care costs. But the fact that we are not paying for these programs does not mean that we cannot pay for them, or that we should not pay for them. In this age of “free markets” (which are really distorted by all kinds of government guarantees and subsidies), the American middle class needs protection from extreme risks more than ever. It would be perverse to eliminate those protections because a devastating failure of those same markets has drained the government of the money to pay for them.
As we have tried to show in the previous chapter, it is possible to stabilize the national debt, preserve the fiscal space necessary to deal with future crises, and maintain our social insurance programs while also removing economic distortions and helping tackle some of our most urgent challenges. Other people will prefer different combinations of tax increases and spending cuts to bring the national debt under control, with different implications for the role of government and the way risks are spread across society. But most importantly, our long-term debt problem can be solved—without the need for drastic remedies like eliminating Medicare as an insurance program or raising tax rates to 1950s levels. With our large and growing economy and the dollar’s status as the primary global reserve currency, we are unlikely anytime soon to turn into Greece, unable to find anyone willing to lend us money. Despite our massive housing bubble, we are not living through an economic contraction as severe as Ireland’s. The national debt is not some monster of unfathomable proportions and appetite that will devour the U.S. economy unless we sacrifice our firstborn children to it. It is a policy problem that requires a clear vision of what kind of government we are willing to pay for and the willingness to make the choices necessary to get to that outcome.
The federal government collects tax revenue from almost all of us (when we are working) and uses that money to provide services that benefit almost all of us. So while debates about deficits and the national debt are often framed in abstract terms—what is the “right” level of taxes, for example—they are really about distributional issues: what we will do with the resources that we produce as a society. But the question is not simply about whether money should be transferred from the rich to the poor today. The most important question is how much money we should pool today to insure all of us against outcomes that we cannot foresee tomorrow. In early modern Europe, one major function of the emerging nation-state was to protect people against foreign invasion. Today, we rely on the government to protect us from a much longer list of risks, including unemployment, disability, poor health, and insufficient retirement savings.
The great deficit debate is about how much risk people should bear themselves and how much they should pool with each other via the government. We believe that we should maintain our current levels of government social insurance and risk management—especially now that the risks faced by ordinary families are only increasing because of global competition, rising health care costs, the decline of traditional pensions, and the increasing inequality generated by a winner-take-all economy. For one thing, sharing the risk of unforeseeable outcomes is only fair. Disability, unemployment, medical emergency, or a stock market crash can happen to anyone, often through no fault of her own. Is it fair for people to be forced into poverty or denied health care because of random chance?
Ours is a democratic political system, however, where public policy depends not on moral considerations, but on the decisions of elected officials who are ultimately accountable to ordinary voters. The current dysfunction of our political system, clearly visible in the 2011 debt ceiling standoff and the failure of the resulting “supercommittee,” is possible in part because many Americans are confused about the federal budget, the causes of deficits, and the connection between the federal government and their own lives. These are abstract, boring topics that few people want to study in their scarce leisure time. But the stakes are particularly high. How we deal with our long-term deficits will have a fundamental impact on the nature of the social contract in America. Yet many people do not understand where their taxes go, what the government does, how it distributes resources and pools risks, and what the resulting deficits mean to them. When it comes to budgetary issues, both ordinary people and politicians in Washington are susceptible to magical thinking. This takes many forms: recipients of handouts who do not realize their benefits are provided by government social programs; tax-break beneficiaries who think the government does not help them; opinion-survey respondents who want Congress to cut spending but not to cut any actual spending programs; the persistent belief that tax cuts will pay for themselves, eliminating the need for hard choices; and the faith that since the United States has not suffered a fiscal crisis in a long time, we will be immune to such crises in the future.
Magical thinking enables politicians to avoid seriously addressing deficits and the national debt—and to punish those who try to do so. President Reagan, who made balancing the budget a central theme of his 1980 election campaign, presided over what were then the largest peacetime deficits in U.S. history. When his successor, President George H. W. Bush, agreed to raise taxes to reduce the deficit in 1990, he was widely attacked by conservatives in his own party, which contributed to his defeat two years later. President Clinton’s similar decision in 1993 was one factor in his party’s crushing losses in the 1994 elections. A decade later, when Vice President Dick Cheney said, “Reagan proved deficits don’t matter,” it probably wasn’t economics he had in mind: it was politics.4 In this political climate, there are ample rewards for talking about deficits, but not for doing much about them.
In 1812, the Democratic-Republican majority in Congress pushed for war with Great Britain yet was unwilling to raise taxes enough to pay for it. The result was a deep fiscal crisis that threatened the country’s ability to defend its borders. Today, we know that an aging society and increasingly expensive health care will require higher spending by the federal government, especially given many families’ meager retirement savings. So far, however, Congress has refused either to raise taxes or to scale back popular spending programs.
But at the end of the day, how we deal with our national debt will affect you, and you have the right to tell your representatives what to do about it. So the question for you is: how much risk do you want to take on? Certainly there are people—Bill Gates, Warren Buffett, the Waltons, and the Koch brothers come to mind—who can bear any amount of financial risk themselves. If you are not so lucky, are you prepared for your retirement income to depend solely on your ability to save, your investment choices, and the vicissitudes of the market? Are you ready to pay for your own health insurance in old age, no matter how much it may cost by then? Are you sure that you have the marketable skills necessary to find a new job quickly if your employer goes out of business? What would you do if you became unable to work at all? And could you pay for years of long-term care in a nursing home, either for you or for your parents?
If you are like most Americans, we suspect the answer to these questions is no, especially after a decade of stagnant median real wages was punctuated by the worst recession since the 1930s. Most Americans, we think, are made better off by programs that require insurance contributions today but provide protection against unforeseeable and unavoidable risks in the long term. The question we leave you with is this: Are you and your family willing to face these risks alone, not knowing what will happen in the future, or do you want to live in a society that will protect you from misfortunes that lie beyond your control? For this is what the debate over the national debt boils down to, and its outcome depends on you.