America’s Hidden Government

The Costs of a Submerged State

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Over the course of the past century, the American state -- the sum of all government programs and policies -- has grown dramatically larger and more complex. From a massive standing army to an extensive social safety net to significant taxation, from mortgage guarantees to student loans to environmental protections, the range and scale of government activity taken for granted by American citizens today would have been inconceivable to their great-grandparents.

All this activity has generally improved and become intricately embedded in citizens' lives -- which is why attempts to cut the government back tend to be unpopular and unsuccessful. Yet many also feel that the government has started to overreach and that its costs and burdens are becoming unsustainable -- which is why bemoaning the extent and growth of the American state is also a perennial feature of political debate. This tension between the fact of a large, active state and doubts about its value is a distinctive feature of the American political scene.

One consequence and driver of the contested legitimacy of the American state is the degree to which so much government work has gone underground in recent decades, far more than in other advanced industrial countries, which is the subject of the political scientist Suzanne Mettler's important new book, The Submerged State. Increasingly, Mettler argues, many government policies in the United States are designed to be hidden from view, executed not through direct, highly visible legislation but rather through indirect and passive mechanisms, such as tax breaks, leading citizens to underestimate both the scale of government activity in general and the extent to which it benefits them individually. Thus, by making it seem that Social Security pensions are connected to the taxes citizens themselves pay, or by transferring money to citizens not as outright grants but rather as mortgage interest tax deductions or tax exemptions on employer-provided health and retirement savings accounts, the structure of the submerged state disguises just who is getting what from the government and how.

In regular state programs, there is a great deal of direct interaction between citizens and the government. For example, in welfare programs for the poor, such as Temporary Assistance for Needy Families or food stamps, aid recipients have to meet personally with officials to persuade them of their eligibility. The resulting experience of the state is physical, transparent, and often repetitive. In contrast, almost a quarter of Medicare payments -- covering over 11 million recipients -- are made through private insurance companies, obscuring the role that the federal government is playing. This helps explain the instantly classic episode of the antigovernment Tea Party town hall participant a couple of years ago who angrily warned his representative to "keep your government hands off my Medicare."

The submergence of the state is a significant problem for American society, Mettler claims, because it "obscure[s] the role of the government and exaggerate[s] that of the market." Invisible policies reduce democratic control over the government in two ways: first, because they fly under the public's radar, they are not obvious targets of reform in the first place, and, second, because they create deep structural patterns of social and economic activity, they are difficult to uproot even once they are noticed. 

Take health care. Critics of President Barack Obama's plans in this sector rage that he has tried to have the government take over one-sixth of the economy, as if the system Obama inherited were not already heavily influenced by state activity. In fact, the existing political economy of employer-subsidized health care largely suited many constituencies, including health-care providers and insurance companies. As Mettler notes, this meant that when the Obama administration approached health-care reform, it could not simply ignore or maneuver around political obstacles; it had to "find ways to work through them, by either obliterating them or restructuring them." Health-care reform thus involved not simply the normal challenge of policymaking in a controversial arena filled with vested interests but grappling with the existing deep structures of a submerged state that few voters understood was there in the first place. 

Dropping state activities below the public's radar encourages Americans to think that they do not rely on the government for help, even when they do. Mettler reports that "only 44 percent of Social Security beneficiaries perceive themselves to have benefited from a government social program." Presented with a list of 21 types of federal programs, she notes, 94 percent of people polled who said that they had never benefited from any of them were wrong. People who receive mortgage tax relief, for example, often do not consider themselves to be beneficiaries of government largess and can thus blithely talk about the government as something irrelevant to their lives except as a tax burden.

Underestimating state activism also denies the government public credit for the help it provides and allows people to believe that smaller government is achievable without significant harm. Moreover, submerged-state policies are overwhelmingly regressive, thus reinforcing and expanding social inequality instead of counteracting and reversing it. The combination of visible policies that help the lower orders and invisible ones that help the middle and upper classes leads people to think that the government helps only the undeserving poor, allowing politicians to mobilize and exploit antigovernment rhetoric and values even as they continue to funnel support to their better-off constituents. 

WHAT WE TALK ABOUT WHEN WE TALK ABOUT GOVERNMENT

The submerged state is vast. In 2008, forfeited federal tax revenues -- the bulk of the American submerged state -- came to 7.4 percent of GDP. This was more than two-fifths as large as the costs of the nonsubmerged state, which amounted to 18 percent of GDP. In 2011, tax relief for employer-provided health insurance cost $177 billion, tax relief for employer-provided retirement benefits cost $67.1 billion, and tax relief for home mortgages cost $14.5 billion. Three industries in particular -- finance, real estate, and insurance -- benefit from the system, which they achieve by lobbying heavily and systematically contributing to political campaigns in order to retain and fortify their privileges.

Republicans have used the submerged state to reward certain groups of beneficiaries without risking charges of hypocrisy for increasing the size of the government. But Democrats have done the same, mindful of the antistate rhetoric that has dominated the public discourse over the last generation. This bipartisan backing is reflected in lobbyists' strategies: they contribute to prominent politicians on both sides of the aisle. 

Obama's stimulus package, the American Recovery and Reinvestment Act of 2009, included tax breaks worth $288 billion, representing over a third of the act's total cost. These included raises in the annual tax-credit threshold for individuals and households (the Making Work Pay Tax Credit), new college tuition credits (the American Opportunity Tax Credit), increases in the Earned Income Tax Credit and child tax credits, and new credits for first-time homebuyers. As Mettler writes, "the stimulus bill achieved Obama's goals of channeling funds toward low-to-moderate-income Americans, but it did so by further expanding the submerged state." Such measures are easier to pass, but they are also a far less visible legacy of government policy than major infrastructure projects or celebrated policies such as the GI Bill.

Submerged-state policies, moreover, are extremely hard to reform. When it comes to health care, for example, the insurance industry, the pharmaceutical industry, and the medical profession are well mobilized and understand the complexity of the system far better than the public at large, making them powerful obstacles to change.

To explore the link between the submergence of the state and voters' civic engagement, Mettler conducted some fascinating experiments. For example, dividing respondents into two groups with comparable knowledge and ideologies, she gave the groups different amounts of information about how certain policies work and which income groups benefit most from them. She found that the more information people got about such policies as mortgage relief, retirement savings relief, and the Earned Income Tax Credit, the more they supported them. But the more they learned about who benefited, the more they tended to favor programs that help the poor rather than those that help the rich. She concludes that with better information, "opposition to those [policies] favoring the affluent would grow" and "support for those [programs] aiding the less well-off would increase." A more general point is that explaining the workings of the submerged state clearly and transparently allowed people to develop and express informed views about it. 

Many submerged-state policies have developed haphazardly, as casual afterthoughts to other major legislation. Mortgage tax relief is a classic instance. It was tacked onto the 1913 bill creating individual income taxes; the provision received little discussion at the time and was never foreseen as a major policy initiative. These days, however, as politicians have recognized the advantages of pushing initiatives through in this way, they have used this tactic more deliberately and craftily. Thus, Mettler shows how the Obama administration chose to expand federal funding for higher education by slipping new tuition tax credits into a reform of the student loan system. Getting legislation establishing new grants passed by Congress would have been difficult, if not impossible; increasing student loans through tax credits was much easier. So in the end, the administration was able to achieve some of its policy goals -- but it had to do so in a way that skewed rewards away from low-income families (who would have benefited more from grants) and increased student debt.

One fascinating part of Mettler's book deals with the details of student loans, showing how the "government-sponsored enterprise" Sallie Mae and other intermediary lender organizations have jealously guarded their lucrative but unnecessary role in channeling money from the federal government to banks. The Obama administration sensibly wanted to move to a flatter system of more direct lending, thus saving the significant funds skimmed off by the middlemen in the process. It was ultimately able to do so, getting its tweaks enacted through a budget reconciliation measure along with health-care reform. But Mettler makes clear just how difficult it was to make the change, thanks to the entrenched position and vigorous lobbying of the beneficiaries of the old order. Even when "the corrupt practices of the student loan industry had been well exposed," she writes, and when the old system would have required a major bailout to be maintained, "nonetheless the shift to direct lending . . . barely succeeded."

One subject Mettler does not engage fully is race. The policies that currently make up the submerged state give disproportionately fewer benefits to African Americans, since they have fewer mortgages or tax-exempt retirement accounts than the population at large. She focuses on class, noting that "the policies of the submerged state have aided and abetted the upward distribution of riches, with more and more of the largesse accrued to those at the very top." This is absolutely true -- but in this case class and race reinforce each other, with increasing inequality hurting African American workers and households even more than others because of their already lower position in the income distribution.

It is no exaggeration to say that a debate about the proper size, structure, and purpose of the American state will lie at the heart of the presidential election this coming November. The incumbent supports the existing state and wants to use it even more aggressively as a democratically guided tool for providing broad public goods. His potential challengers claim to fundamentally disagree; they oppose tax increases, demand budgetary cutbacks, and pillory government activity in general (apart from the military). Thanks to the increasing submergence of the state, however, much of this debate is beside the point, taking no notice of the true costs and benefits of the mass of government activity going on under the table. One can only hope this important book brings all that more fully into public view.

 

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