Not Just Another Recession
Why the Global Economy May Never Be the Same
During his campaign for the U.S. presidency, Donald Trump promised to protect the foundations of the United States’ public insurance system. “I was the first & only potential GOP candidate to state there will be no cuts to Social Security, Medicare & Medicaid,” he tweeted in May 2015. “The Republicans who want to cut SS & Medicaid are wrong,” he added two months later.
Trump’s commitments to the safety net set him apart from his Republican competitors during the campaign. But since taking office, the president has fallen in line with Republican leaders in Congress who seek to roll back the social programs he pledged to preserve. Last year, with Trump’s support, Republican lawmakers tried and narrowly failed to slash Medicaid, which helps pay for health services for low-income Americans, as well as government subsidies for private purchases of health insurance. Speaker of the House Paul Ryan of Wisconsin and Senator Orrin Hatch of Utah, the chair of the Senate Finance Committee, have said they will seek to scale back Medicare this year. The partial privatization of Social Security could be on the table, and food stamps, disability benefits, and housing assistance are also likely targets.
Such proposals seem to threaten the progress the United States has made toward social democratic capitalism—a system that features modestly regulated markets, a big welfare state, and public services meant to boost employment, such as childcare and job-placement assistance. The evidence suggests that social democratic policies improve economic security and well-being without sacrificing liberty, economic growth, health, or happiness. Contrary to conventional wisdom, the country has gradually come to embrace this model over the last century. The federal government has built public insurance programs that help Americans manage old age, unemployment, illnesses, and more. Since 2000, California, Massachusetts, New York, Oregon, and Washington State, which are home to around one-quarter of all Americans, have gone further, introducing such policies as paid parental and sick leave and a $15 minimum wage. Although the United States has not reached the level of social democratic protections that exists in countries such as Denmark and Sweden, it has been moving steadily, if slowly, in that direction.
Republican control of the presidency and Congress has put that march on hold. But the United States’ social democratic future is not over. The structure of the U.S. government and popular support for public services will be formidable obstacles to the small-government vision of the current Republican majority, as well as to the vision of future ones. The United States has weathered a number of challenges in its progress toward social democracy, and the trials of the present era will likely prove a brief detour rather than a dead end.
Those who support shrinking the safety net tend to believe that cutting taxes and government spending would produce faster economic growth. Even if much of that growth accrued to the rich, over the long run it would also boost the living standards of the poor. As the state stepped back, private firms would provide services such as health care and education via markets, with competition driving quality up and prices down. People in need could turn to their families and communities, and government transfers to the desperate would fill the remaining gaps.
That may sound plausible in theory, but it has proved less attractive in practice. At a certain point, high taxes and public spending can indeed do economic harm by weakening incentives for investment and work. But the United States is still far from that point: the record of the affluent democracies suggests that such governments can tax and spend up to 55 percent of their GDPs before holding back economic growth. That is around 20 percentage points higher than the share of GDP the United States spends today. And even if the United States were to achieve faster economic growth, that might not do much to boost the incomes of ordinary Americans, whose real wages have not risen much since the late 1970s.
Another problem with the laissez-faire fantasy concerns the abilities of families and communities to care for children, tend to the elderly, and protect the disadvantaged—roles now played partly by the state. Civic groups such as churches and charities help those they can, but some people inevitably fall through the cracks. And not all parents are blessed with an abundance of money, time, and skills. To make matters worse, family and civic ties have frayed in recent decades. Nearly nine in ten Americans born between 1925 and 1934 were married by the time they were between the ages of 35 and 44, but only about six in ten born between 1965 and 1974 were. Since the 1960s, the political scientist Robert Putnam has found, Americans’ participation in voluntary associations has fallen, too. Lest one contend that the rise of the nanny state is to blame, remember that family ties and civic organizations were strongest in the 1940s, 1950s, and 1960s, when the U.S. government was expanding the fastest.
The United States' social democratic future is not dead.
In the conservative vision of limited government, the final backstops to poverty are targeted public insurance programs. In principle, these can help the neediest at little cost to taxpayers. Compared with those of its rich peers, the United States’ welfare programs are already small and targeted. Yet under the current system, the poorest 20 percent of Americans have lower incomes and living standards than their counterparts in many other affluent democracies, from Denmark and Sweden to Canada and France. Meanwhile, tens of millions of low-income Americans are not poor enough to qualify for Medicaid or old enough to access Medicare, yet they cannot afford to buy private health insurance, even with government subsidies.
For some, the individual liberty that limited government provides makes the accompanying shortcomings irrelevant. But there is evidence that social democratic states are at least as good as countries with smaller governments at safeguarding their citizens’ freedoms. On an index of personal freedom compiled by the Cato Institute each year since 2008, Denmark, Finland, Norway, and Sweden have scored higher than the United States. And according to annual surveys conducted by the Gallup World Poll since 2005, citizens in the Nordic countries are more likely than Americans to say that they are satisfied with their freedom to do what they want with their lives. That is partly because these countries’ more robust safety nets broaden individual choice by ensuring that if people start new businesses, move in search of better jobs, or take time off for training, they won’t become destitute if things don’t pan out. And when it comes to ensuring affordable education, access to health care, decent living standards in old age, and much more, public services tend to be more reliable than the private alternatives available to many people—especially the least advantaged.
When polled, more than half of Americans nevertheless tend to say they prefer “a smaller government providing fewer services” over “a bigger government providing more services,” according to the Pew Research Center. This dislike of the idea of big government is another common rationale for shrinking the state. But Americans favor a lot of the things that the government does in practice, including most of its public insurance programs. Big majorities consistently say that the government spends either the right amount or too little on Social Security, assistance to the poor, education, and health care. The health-care reform proposed by Republicans in 2017, which would have caused around 25 million Americans to lose health insurance, was the least popular major legislative proposal since 1990, according to analyses of public opinion data by the political scientist Christopher Warshaw. And a poll conducted by The Washington Post and the Kaiser Family Foundation earlier this year found that more than half of Americans support “having a national health plan—or a single-payer plan—in which all Americans would get their insurance from a single government plan.” Among the country’s existing social programs, there is only one—welfare—that Americans seldom support.
As for the axiom that Americans hate taxes—which are essential for a sustainable safety net—there was some truth to it in the late 1970s and early 1980s, when revolts against local property taxes were spreading across the country and Ronald Reagan was elected president on a tax-cutting agenda. Yet that moment has long since passed. Public opinion surveys now tend to find widespread support for higher taxes, particularly on rich Americans. The 2017 Republican tax cut was the second least popular major legislative proposal since 1990, according to Warshaw. And state and local referendums proposing tax hikes have grown steadily more popular since the 1980s. They now are as likely to pass as those proposing cuts, the political scientist Vanessa Williamson has found.
Nor does Republican control of the presidency and Congress suggest that Americans want a smaller state. For one thing, the size of the government is just one of many issues that shape voters’ choices. For another, the tax cuts and spending increases of Presidents Reagan, George W. Bush, and Trump have laid waste to the Republicans’ reputation for fiscal prudence, so voting for the Republican Party doesn’t necessarily indicate a preference for smaller government. More important, U.S. electoral rules do a poor job of translating votes into representation. California’s two senators, for instance, represent the same number of Americans as the 44 senators of the country’s 22 least populous states. Since 2010, the gerrymandering of congressional districts has meant that Republicans have needed to win just 48 percent of the vote in order to hold a majority of the seats in the House of Representatives, according to calculations by the political scientist Alan Abramowitz. And although Republicans have done well in local and state elections in recent years, that should be no surprise: as the political scientist James Stimson has found, voters tend to shift rightward during Democratic presidencies, such as Barack Obama’s, and leftward during Republican ones.
If American conservatives were to drop their obsession with small government, they could do a number of things to improve social policy that would be consistent with their other beliefs and commitments. Republicans could reduce regulatory obstacles to employment, such as some occupational licensing requirements; increase choice and competition in the delivery of services such as education and health care; and make the government more effective by pushing lawmakers to consistently use evidence to design policy. But for at least the coming year, Republican officials seem determined to continue to try to shrink the welfare state.
They face three main obstacles in getting there. The first is time. The Republican Party could lose its majority in the House or the Senate in November’s midterm elections, closing the door on attempts to shrink the safety net through new legislation. (Republicans might pass a major reform before then, but that would be unusual in an election year.) The second obstacle involves the veto points in the U.S. political system. Republicans hold 51 of the Senate’s 100 seats, but under that body’s filibuster rules, many proposed changes, including most reforms of Social Security, require 60 votes to pass. The third roadblock is public opinion. During Reagan’s presidency, the political scientist Paul Pierson has found, the popularity of welfare state programs discouraged lawmakers from pursuing the extensive cuts that some conservatives advocated. Something similar happened when the George W. Bush administration proposed a partial privatization of Social Security in 2005 and during congressional Republicans’ attempt at health-care cuts in 2017. When social programs have been around for a while and seem to be improving people’s lives, they tend to become popular, making it harder to weaken them.
The real threat to the United States’ social democratic future is a sustained economic slowdown.
The Trump administration has instituted some cutbacks on its own, without congressional action, and it may put in place more. It has weakened and delayed regulations protecting workers’ safety, ensuring access to fair pay, and securing the right to organize, and it has issued executive orders allowing states to require able-bodied low-income recipients of Medicaid, food stamps, and housing assistance to have a paying job in order to qualify for benefits. Although these changes have real effects on people’s lives, they don’t amount to a frontal assault on the U.S. welfare state, and they can be quickly reversed by a future president.
In the longer term, public support for government services will probably deepen. Many of the groups that back such programs—including professionals, minorities, immigrants, millennials, and single, secular, and highly educated people—are growing as a share of the U.S. population. The opposite is true of groups that are more skeptical of the safety net, such as rural residents, working-class whites, the religious, and the rich but not highly educated. And not everyone in the latter set opposes a bigger role for the state: Trump’s pitch for a government that would secure jobs and maintain public insurance programs helped him win over many working-class whites in 2016. (That plenty of those voters still support Trump despite his abandonment of his earlier commitments to the welfare state may be explained by the president’s positions on cultural issues and his rhetorical commitment to job creation.)
To be sure, the 2017 tax cuts will reduce annual federal revenues by around one percent of GDP, and that could pressure lawmakers to shrink government programs and limit new spending. But recent history suggests that tax cuts tend to be followed by tax increases. Tax rates fell under Reagan, rose under George H. W. Bush and Bill Clinton, fell under George W. Bush, and rose again under Obama. By 2016, tax revenues equaled 26 percent of the country’s GDP, just as they did the year before Reagan took office.
If Trump ends his presidency as unpopular as he is today, reversing his administration’s tax reductions may prove relatively easy. Lawmakers could raise the corporate tax rate from 21 percent to 25 percent—the rate that the Republican presidential candidate Mitt Romney proposed in 2012—and undo Trump’s tax breaks for rich individuals and business owners. Even without increasing rates, lawmakers could collect more unpaid taxes, crack down on tax havens, and raise the cap on income subject to the Social Security tax, among other measures. As for state governments, they will likely adjust to the blow of last year’s reform, which damaged their ability to collect revenue by limiting the amount of state and local taxes their residents can deduct for federal income tax purposes, by, for instance, shifting from income to payroll taxes.
The real threat to the United States’ social democratic future is a sustained economic slowdown. Over the last century, the country’s GDP per capita has grown at an average rate of 1.9 percent per year. But between 2000 and 2007, the rate dipped to 1.5 percent, and from 2007 through 2017, it fell further, to an average of just 0.6 percent. The Great Recession is the chief culprit: its arrival in 2008 cut short an economic expansion, and its depth dug a big hole from which the U.S. economy has yet to emerge. Yet some analysts believe that the United States has entered not a moment but an era of slow growth. One version of this story points to weak demand, perhaps due to the rising share of income that goes to the rich, who tend to spend a smaller fraction of their earnings than do middle- and lower-income households. Others contend that the problem is a decline in competition in important sectors, such as the technology industry, or a slowdown in the formation of new businesses. The most pessimistic assessment comes from economists such as Tyler Cowen and Robert Gordon, who argue that inventions such as electricity, railroads, and the assembly line boosted productivity and growth in earlier eras to a degree that more recent innovations cannot match.
The slowdown is worrisome because economic growth facilitates the expansion of public social programs. For one thing, it makes them more affordable; as the economy grows, so do tax revenues. Economic growth also increases public support for the welfare state. Most people are risk averse and altruistic, so as they get richer, they tend to want more protections for themselves and more fairness in their society. If the United States suffers years of slow growth, Americans’ embrace of generous public insurance programs may wane. One worrisome sign: the slow recovery from the 2008–9 economic crisis has fueled support for right-wing populists across the rich democracies. Although many populists support the safety net itself, nativism could undermine the public’s commitment to the kind of fairness and inclusivity on which social democratic policies depend.
The economic policies of the Trump administration and congressional Republicans are as likely to hurt growth as to help it. The 2017 tax cuts and the additional government spending authorized by the 2018 budget agreement may boost economic growth by about one percentage point this year, because the economy is still operating at less than full capacity. But they won’t spur growth in the longer term, if the historical record is any guide. Most economists believe that Trump’s efforts to reduce imports and immigration will reduce growth. And there is a risk that Washington will overshoot in scaling back financial regulations, setting the stage for a replay of the 2008 financial crisis.
Still, growth could return to a higher rate in the coming decades. There have been previous periods, such as the 1930s, when the economy slowed down before returning to the long-term trend. And the productivity benefits of new technologies such as the Internet may take years to appear; after all, the period of strongest productivity growth stemming from electricity and other nineteenth-century innovations occurred decades later, between the mid-1940s and the mid-1970s. Moreover, economists have an array of proposals for remedying the slowdown, from improving the educational system to toughening antitrust efforts to reducing income inequality.
Even if the slowdown in the rate of economic growth persists, the United States could still become far richer in the coming decades. Over the last 70 years, per capita GDP in the United States, adjusted for inflation, has increased by about $40,000. The country is now wealthy enough that securing the same increase over the next 70 years would require a yearly growth rate of only 0.8 percent.
Then again, it may be people’s perceptions of their living standards, not GDP growth rates, that shape their feelings about public insurance programs. Since the late 1970s, the real incomes of American households in the middle and below have grown slowly. There have been many causes—technological advances, globalization, firms’ privileging shareholders over employees, the decline of unions, and more—and that will make it difficult to reverse the trend. Increasing the federal minimum wage would help, as would pressuring employers to pay workers more by keeping the unemployment rate low. Another important step is to boost the supply of affordable housing in big cities, which are the most productive, environmentally friendly, and in many respects attractive places for ordinary Americans to live. It will also help if Americans continue to enjoy advances in health care, consumer products, entertainment, and access to information, which cost-of-living measures don’t fully capture. Taken together, such improvements could preserve Americans’ support for the safety net.
At some point, perhaps as soon as 2021, there will again be an opportunity to move federal policy in a social democratic direction. When that happens, policymakers should push for public investments in early education, universal health insurance coverage, paid sick and parental leave, upgraded unemployment insurance, and more. There is evidence that such programs improve lives. Less clear is which measures to prioritize—and how to implement them. Should the United States move to universal health insurance coverage by expanding Medicare, Medicaid, or both? Should public preschool begin at age four or earlier? Should paid parental leave last six months or 12 months? Questions such as these, rather than whether or not to shrink the government, should be at the center of policymakers’ debates.