The Return of the Greater Common Good

Congress is in recess, but you’d hardly know it. This has been the most do-nothing, gridlocked Congress in decades. But the recess at least offers a pause in the ongoing partisan fighting that’s sure to resume in a few weeks.

It also offers an opportunity to step back and ask ourselves what’s really at stake.

A society — any society —- is defined as a set of mutual benefits and duties embodied most visibly in public institutions: public schools, public libraries, public transportation, public hospitals, public parks, public museums, public recreation, public universities, and so on.

Public institutions are supported by all taxpayers, and are available to all. If the tax system is progressive, those who are better off (and who, presumably, have benefitted from many of these same public institutions) help pay for everyone else.

“Privatize” means “Pay for it yourself.” The practical consequence of this in an economy whose wealth and income are now more concentrated than at any time in the past 90 years is to make high-quality public goods available to fewer and fewer.

In fact, much of what’s called “public” is increasingly a private good paid for by users — ever-higher tolls on public highways and public bridges, higher tuitions at so-called public universities, higher admission fees at public parks and public museums.

Much of the rest of what’s considered “public” has become so shoddy that those who can afford to do so find private alternatives. As public schools deteriorate, the upper-middle class and wealthy send their kids to private ones. As public pools and playgrounds decay, the better-off buy memberships in private tennis and swimming clubs. As public hospitals decline, the well-off pay premium rates for private care.

Gated communities and office parks now come with their own manicured lawns and walkways, security guards and backup power systems.

Why the decline of public institutions? The financial squeeze on government at all levels since 2008 explains only part of it.

The slide really started more than three decades ago with so-called “tax revolts” by a middle class whose earnings had stopped advancing even though the economy continued to grow. Most families still wanted good public services and institutions but could no longer afford the tab.

Since the late 1970s, almost all the gains from growth have gone to the top. But as the upper-middle class and the rich began shifting to private institutions, they withdrew political support for public ones.

In consequence, their marginal tax rates dropped — setting off a vicious cycle of diminishing revenues and deteriorating quality, spurring more flight from public institutions.

Tax revenues from corporations also dropped as big companies went global — keeping their profits overseas and their tax bills to a minimum.

But that’s not the whole story. America no longer values public goods as we did decades ago.

The great expansion of public institutions in America began in the early years of 20th century, when progressive reformers championed the idea that we all benefit from public goods. Excellent schools, roads, parks, playgrounds and transit systems would knit the new industrial society together, create better citizens and generate widespread prosperity.

Education, for example, was less a personal investment than a public good — improving the entire community and ultimately the nation.

In subsequent decades — through the Great Depression, World War II and the Cold War — this logic was expanded upon. Strong public institutions were seen as bulwarks against, in turn, mass poverty, fascism and then Soviet communism.

The public good was palpable: We were very much a society bound together by mutual needs and common threats. It was no coincidence that the greatest extensions of higher education after World War II were the GI Bill and the National Defense Education Act, or that the largest public works project in history was called the National Interstate and Defense Highways Act.

But in a post-Cold War America distended by global capital, distorted by concentrated income and wealth, undermined by unlimited campaign donations, and rocked by a wave of new immigrants easily cast by demagogues as “them,” the notion of the public good has faded.

Not even Democrats still use the phrase “the public good.” Public goods are now, at best, “public investments.” Public institutions have morphed into “public-private partnerships” or, for Republicans, simply “vouchers.”

Outside of defense, domestic discretionary spending is down sharply as a percent of the economy. Add in declines in state and local spending, and total public spending on education, infrastructure and basic research has dropped dramatically over the past five years as a portion of GDP.

America has, though, created a whopping entitlement for the biggest Wall Street banks and their top executives — who, unlike most of the rest of us, are no longer allowed to fail. They can also borrow from the Fed at almost no cost, then lend out the money at 3 percent to 6 percent.

All told, Wall Street’s entitlement is the biggest offered by the federal government, even though it doesn’t show up in the budget. And it’s not even a public good. It’s just private gain.

We’re losing public goods available to all, supported by the tax payments of all and especially the better-off. In its place we have private goods available to the very rich, supported by the rest of us.

Robert Reich, former U.S. Secretary of Labor and Professor of Public Policy at the University of California at Berkeley, has a new film, “Inequality for All,” to be released September 27. He blogs at www.robertreich.org.

40 replies »

  1. Same with government spending at all levels.

    Only the feds have no limit, so we have no valid currency and no valid budget.

    Actually we have had no federal budget at all under this president.

    How long can this go on?

  2. “Would their landlords and food stores see the extra income and raise their prices?”

    Peter1 –

    Presumably, the theoretical alternative to the 12.4% payroll tax would be a comparable deposit into a personal retirement account to be invested in a balanced, broad based index fund of stocks and bonds. Under those circumstances, nobody is going to raise prices because of that change.

    At the same time, I don’t think most people can be trusted to adequately save for their own retirement. If they wind up with not enough money to live on, our society won’t let them starve just as we won’t let them die if they show up at the ER without health insurance.

    In my recent comment when I stated that it would take 9.26 years to recover my lifetime social security tax payments along with my employer’s in nominal dollars, the comparable time period 30 years ago was closer to 3 years. Payroll taxes and other changes relative to benefits have increased a lot since the early 1980’s. Once upon a time, benefits weren’t taxable. Now, 85% of benefits are subject to federal income tax if adjusted gross income is above $25K for a single filer and $32K for a joint filer. The 1983 reforms increased the retirement age from 65 to 67 but the increase didn’t even start to phase in until 2003 and it won’t be fully effective until 2027. Like I said before, it’s not nearly as good a deal as it used to be and it will be even worse for the younger generation.

  3. I don’t know, would a 12.4% income rise elevate them out of poverty or cause them to save/invest the 12.4%? Would their landlords and food stores see the extra income and raise their prices?

    Since the question is yours why don’t you get us the figures?

  4. Please find the data on how many of these folks would not be poor if they took home 12.4% more income every day. Thanks.

  5. In modern terminology, yes, SS is a “welfare” plan in that anything that comes from the government in excess of the amount actually invested in a program minus a reasonable return (redistribution) is defined as welfare. Ultimately, and I think this was Reich’s point, we do have to decide how civilized a civilization we want to be. This is a philosophical question–a national dialogue–not an economic one. We can fund and improve the things we genuinely value, which, from the look of it, does not include education or healthcare.

  6. Peter1

    FDR deliberately intended for high income people to be included in the SS program to ensure maximum and lasting political support for it. The benefit structure has always been heavily tilted toward lower income people meaning that they get a higher wage replacement ratio than high income people do. On the flip side, some of benefit of that tilt is reduced by lower average life expectancy of lower income people.

    Following the 1983 reforms developed by the Greenspan Commission, payroll taxes went up significantly in several stages over eight years or so with most of the impact falling on higher income people as the wage base to which the tax applied went up a lot. Specifically, in 1982, the payroll tax applied to wages up to $32,400. That increased to $53,400 in 1991 and was $110,100 in 2012. So, the wage base went up about 3.4 times over the last 30 years while the general price level “only” about doubled over the same period.

    During the Clinton Administration, when some liberals suggested applying the SS tax to all wages, even President Clinton opposed it saying that you would just be confiscating another 6.2% of their marginal income above the existing wage base plus a matching share nominally paid by the employer for either no benefit increase at all or a nominal increase at best. It’s bad policy plain and simple.

    If taxes need to be raised, my preference would to include capital gains and qualified dividends in the income base used to calculate the Alternative Minimum Tax. We could also look to a carbon tax.

  7. “SS was not meant for “those of us”, it is a basic pension plan mostly for those who could never save or invest”

    So, social security insurance was really a welfare program from the beginning, correct? I wonder how many of 60 million plus on ss consider themselves welfare recipients.

  8. “The bottom line is that this is a pretty crummy deal in terms of an investment return for those of us like me who always earned at least the maximum amount subject to payroll taxes.”

    Barry, SS was not meant for “those of us”, it is a basic pension plan mostly for those who could never save or invest. Most people like you have and can afford diversified pension and investment plans, stock options and bonuses for which SS is only a part.

    SS is at least a minimal protected plan (for the employed) there when the protected crooks of Wall Street take away everything else.

  9. “Social Security is not really “dysfunctional”, it just needs more payroll taxes to keep up with general inflation – just like any other pension plan.”

    Peter1 –

    I’ll share some numbers here. Over the course of my 40+ year career, my employer and I paid over $284K in Social Security payroll taxes. At my current social security benefit payment rate, it will take 9.26 years to recover my and my employer’s combined lifetime contribution in nominal dollars. That excludes foregone investment returns that money could have earned if invested in a balanced index fund of stocks and bonds over that time.

    The bottom line is that this is a pretty crummy deal in terms of an investment return for those of us like me who always earned at least the maximum amount subject to payroll taxes. The investment return will be even worse for today’s younger generation which is why we can expect political support for the program to decline over time. The more we try to raise payroll taxes without increasing benefits commensurately, the worse the deal will be in the future and the faster political support will erode. By the way, the wage base subject to payroll taxes increases each year by the growth rate in average wages. The same metric drives annual benefits growth as well.

  10. If you believe they are dysfunctional (I’d need a definition – not dictionary) they are because the real conversation is taking place, not here, but over a desk between a legislator and a lobbyist with a bribe of some sort.

    Given the financial meltdown with ongoing tax/fed/treasury bailouts, is the financial system dysfunctional? We never seem to want rich people to fail.

    Social Security is not really “dysfunctional”, it just needs more payroll taxes to keep up with general inflation – just like any other pension plan. So I’d argue to not include SS in the conversation. However the longer we wait to add dollars the closer to crisis we get.

  11. “Most people will be fine without healthcare.”

    Over what time frame? Most people will be fine without education. Most people will be fine without retirement savings.

    For the “most” people reference there seems to be a lot that seek out employer paid health care.

    I guess MD you’d be fine with a 20% pay cut.

  12. Bobby Gladd —

    See also “Setting Limits Fairly” by Saban and Daniels. Copyright 2008.

  13. Bob –

    I agree about the cost related risks inherent in open ended entitlement programs like Medicare. There was an article in the NYT yesterday about a few hospitals in rural Western Maryland where global budgets within a fee for service framework are being tried out. It gives the hospitals an incentive to keep patients out of the hospital and to find more cost-effective ways to manage people with chronic conditions like diabetes and asthma.

    If the hospital exceeds its budget, which it presumably covers with financial reserves, it can raise its prices the following year to make up the shortfall. If it generates a surplus, it has to lower prices the following year to give the surplus back. The featured hospital earned an operating profit of $15 million on $379 million of revenue in its most recent year which is a pretty good performance.

    The challenges are greater to apply the global budget concept to urban hospitals because one way to lower costs is to send some of your patients to other hospitals down the street or across town. As you may also remember, MD is one of very few states that have an all payer system for hospital based care which has been in place since 1977. While costs per service, test or procedure are now 4% below the national average vs. 26% higher in the late 1970’s, the state had much less success in controlling volume / utilization.

    On a national scale, some countries made a political decision about the percentage of GDP their society is prepared to spend on healthcare which does not necessarily match up with how much care citizens might want or need. Some form of rationing is required to square the circle. As you, I and others have pointed out in the past, we can have our healthcare good, fast or cheap. Pick any two.

  14. I might go one step further than MD as Hell, which is mildly surprising since I often disagree with him on this blog.

    Anyways, after reading about health care reform for 20 years, I find myself returning to one of the very first article I read, by Adam Wildavsky. He contended that health care spending will always rise to the amount of money that society makes available.

    This is the reason that open-ended insurance programs like Medicare are so hard to control. Without a budget limit, there is always some form of care with some marginal benefit that can be done.

  15. Healthcare is not an essential service. That is the illusion. Most people will be fine without healthcare.

    The costs of care for the rest have been socialized into a political and financial bonanza for all who milk the herd.

    Costs will not go down until the amount of money available for the picking is decreased and in private individual hands.

  16. Misplaced the question mark. My point is that by every measure the results of our educational system have not improved over the past 40 years despite increased spending.

    I also suspect that the ACA won’t bring down health costs but its proponents sold it on that basis along with providing wider coverage.

    So, to your point – we spend the most on health care but aren’t any healthier and we are told we need to bring down health care costs. If you look at comparable stats for the developed world we spend the most on education but have results worse than most countries and are told we need to spend more.

  17. This is what I mean – it’s just incoherent babbling:

    “Since the late 1970s, almost all the gains from growth have gone to the top. But as the upper-middle class and the rich began shifting to private institutions, they withdrew political support for public ones.

    In consequence, their marginal tax rates dropped — setting off a vicious cycle of diminishing revenues and deteriorating quality, spurring more flight from public institutions. ”

    He gets facts wrong – there is more revenue and confuses cause and effect. The reason people (and not just the rich) are withdrawing from institutions like public schools is not driven by some deep philosophical principles – it’s that these institutions have gotten worse. I wish public schools were better but we went through this very experience (and I continue to pay my taxes, which continue to go up, to support them even though we had to finally pull our children out).

    He also seems oblivious to the fact that most K-12 educational funding comes from local property taxes which are not related to marginal rates.

    I can’t even figure out what this post is doing on this blog which has some very interesting posts regarding the healthcare system from which I’ve learned quite a bit.

  18. If that is his argument it is even more incoherent that I thought. As Barry Carroll notes spending in these sectors grows faster than inflation for decades. If the interest in funding them is less (even though there is more ACTUAL funding) because they are dysfunctional then the question is why are they dysfunctional which Reich does not address. At bottom this is just another Reich screed for spending more money.

  19. The healthcare sector and the education sector have two important things in common. First, costs have grown materially faster than general inflation for decades now. Second, government plays a dominant role as either a payer or a lender. The second factor accounts for why there is little or no market discipline in either sector.

    By contrast, charging tolls to use major highways and charging admission to national parks ensures a closer connection between the actual users of those facilities and the cost of operating them. When the user pays the freight, resource allocation is more efficient.

    For costly but essential services like healthcare, a significant percentage of the population will need a subsidy to buy insurance but they should at least be aware of how much the policy costs and there should be reasonable deductibles and co-pays to drive home the message that healthcare isn’t free.

  20. “Government should be nearly invisible in the lives of Americans.”

    If Medicare, Medicaid, farm subsidies, disability, the VA, the DoD, etc., become invisible, does that mean I don’t get to use them?

    Way to keep it civil by not commenting on the author’s stature.

  21. The point is that spending is down “as a portion of GDP.” It hasn’t been scaled back below previous levels. He is saying that corporations and the wealthy are finding ever more effective ways to pay less in taxes–they are withdrawing their financial support for dysfunctional institutions. He isn’t arguing that these institutions actually function quite well and deserve financial support. But he is saying, perhaps tacitly, that since the idea of a public good has gone the way of the dodo, there is little chance of public institutions improving to earlier levels.

  22. ” What has happened is that the results haven’t improved despite the spending?”

    What results?

    As to your reference to health care, we spend the most but aren’t any healthier. The ACA won’t bring down health costs, it just gives out subsidies to keep insurance companies and the medical professions happy.

  23. “Many of us who pay a lot of taxes see most of that money going to prop up foreign governments and fight wars.”

    That comes back to U.S. contractors = jobs/profits

    “Some taxpayers really do want their money to go to public services, but we don’t get to say where our money will go.”

    I sure would love check boxes on the tax form to spend my money where I think it’s needed most – but you may not get what you want.

  24. Is this column some kind of joke? We’ve increased public spending on K-12 education for 40 years at a much faster rate than inflation. And, as for higher ed, that spending has gone through the roof in the same period. What has happened is that the results haven’t improved despite the spending? Prof Reich can bemoan the fact that universities are getting even more money but it is simply a fallacy to keep pretending spending has been cut. Your constant repeating of this does not make it true.

    Now in the case of healthcare this same pattern prompted the ACA with its promise to reduce healthcare costs and premiums. Perhaps we need the same type of approach to education to reduce its costs.

  25. I’d agree about unions in the public sector for the most part but the reason for the incarnation rates/spending has more than anything with the ’86 federal revision of sentencing laws which created more felonies and much more mandatory and lengther minimum sentencing laws.

  26. Barry is right. We spend a lot of money on public services, just not the right ones, and not in the right way. If we spent as much on public education as we do on incarceration maybe the ratio of educated to incarcerated would improve.
    I also think that you can’t separate foreign policy from domestic policy in this regard. Many of us who pay a lot of taxes see most of that money going to prop up foreign governments and fight wars. Some taxpayers really do want their money to go to public services, but we don’t get to say where our money will go.

  27. Barry, given the job performance of the Congress and the Senate, are we paying them too much or not enough?

    Union power pales in comparison to corporate power and their unions – trade associations, you need only look at the decline in union membership over the last 40 years. Teachers and state employees here in NC are not paid that well, even with a union. To blame unions, which helped spawn the middle class, is just not accurate. The decline of the middle class is not because of unions.

  28. I agree with Bob Hertz on this one. A few months ago, I heard a governor of a western state tell an interviewer that 80%-85% of state and local government spending goes for three things. He said “We medicate, educate and incarcerate.”

    The healthcare system which Medicaid helps to finance is grossly overpriced in the U.S., especially for hospital based care. Fraud is also a big problem. Employees in both the education and law enforcement sectors are paid significantly more in total compensation that private sector workers with similar skill and education requirements.

    As a taxpayer, I want to pay enough to attract and hold employees who can perform their jobs in a competent, efficient and professional manner. I don’t want to pay significantly more than that which we do now mainly because of strong unions. If employee compensation were more closely related to what the jobs are worth and were less a function of union greed and monopoly power, we could much more easily afford necessary investments in infrastructure and other worthwhile public priorities.

  29. The Banks are the real producers and not moving into a classic rental extraction role? News to me and is exactly what they aren’t doing.

  30. Thanks, Bobby, but I will give it to the Little Tyrant so he will hush. Thanks for your kind offer. Can you give some to everyone? I am sure they already have their own whine. It would only be just.

  31. I agree completely with Bob’s points, especially the last one. It’s not just the endowed chair now (i.e., lifetime employment/compensation with extravagant benefits), but that the good professor has churned his through basically two work environments: government and academia. The former is an ethical and financial cesspool and the latter is a tax-advantaged black hole for both taxpayer dollars and family resources.

    For those of us who have spent the last two decades running small businesses (actually functioning in the markets and neighborhoods that Reich waxes about so beautifully), his lamentation just simply rings hollow. For that time, he’s been a party to the destruction of faith in public goods, and now he wants to be its savior. Good luck with that.

  32. Prof Reich always has valuable points, but let me add a couple of ‘side issues’:

    1. Public services have always been stronger in New England and the Middle West, and skimpiest in the South and Southwest. This goes back over a century. One can read several articles by Michael Lind in Salon to get more details.

    It is always somewhat misleading to cull out ” trends in America” or “rtrends in Europe: and not stress the great differences between the regions of these large continents.

    2. If there is a growing unwillingness to fund public services, some of this is due to a resentment of public employee compensation. In Mr Reich’s California, there is a ” $100,000 club” of retired public employees who receive six figures in just their defined benefit pensions. (see a blog called Pension Tsunami)

    In fact, though I am being a little snarky here, the salaries paid to persons like Prof Reich for part time work at the University of California are of some impact in the decline of public services. (these salaries are public record.)

  33. The Little Bureaucrat must be whining so much because government can no longer steal from the producers without real decline in tax revenue.

    His definitions are totally self-serving.

    We are being crushed by too much government.

    Government does not define a society. Government should be nearly invisible in the lives of Americans.

    Using Government for some crazy indefensable notion of “social justice” is tyranny.

    Little bureaucrat. Little Tyrant.

  34. US is a corporate kleptocracy and the future (argue we are already there) is going to be about taking things away from people or certain groups. When you have that type of environment and backdrop, people don’t care about public goods but instead protecting their own.

    Just look at the largest Wall Street banks that have radically scaled back their lending to the local economy. I would care to venture that loan-to-deposit rations aren’t low because they can’t creditworthy borrowers but more because it is more profitable to buy physical assets and commodities through their prop trading desks than small business loans. Also a hedge that if the bottom does fall out again like in ’08 and even the Central Banks can’t step in to plug the hole that banks own hard assets that kick off cash through rent payments which is exactly what if a country goes through a period of real turmoil.

  35. Yes, yes, Vik … wholehearted agreement. But what will it take? The re-election rate for members of Congress is between 85 and 90 percent (House and Senate). Most voters have a very, very negative opinion of Congress, but, paradoxically, not their particular elected representatives. The Citizens United decision creates a legal precedent for massive spending by PACS, corporations, etc. I feel like these and other political realities are aligned to preserve the status quo (not coincidentally, also one perspective on conservatism in general). The only thing, in my opinion, that might alter our current reality is an economic cataclysm that throws the system into complete disarray. Overly pessimistic? I hope so.

  36. The decline in support of public goods stems largely from the irresponsibility of political leadership (both parties, both ideologies) and demise in trust of public officials, who are (correctly) perceived as using “public service” as a means to curry favor with constituencies that will reward them later for their “objectivity” in having seen things the “right way”.

    Until we reform campaign finance laws, impose term limits, and take a cleaver to Congressional (elected official and staff) pay, perks, and pensions, the destruction of the public’s trust in public goods will continue unabated.