Underwriting and Reform

In an editorial contrasting Scott Walker with President Obama, the editors of the Chicago Tribune observe, I believe correctly:

On this we all can agree: Wisconsin’s election was a referendum on Walker. All else paled. A traditionally liberal electorate knew he had made mistakes, then decided that, on balance, his policies had helped his state. That conclusion — not whichever Democratic candidate opposed him — sealed Walker’s fate.

We invoke Wisconsin not to predict the outcome of the nationwide presidential race, but rather for what it teaches about the sitting president.

On Nov. 6, 2011, when we launched this series of occasional editorials on a defining contest in a divided nation, we didn’t anticipate that the election of Nov. 6, 2012, would narrow in scope to a referendum on Barack Obama. But it has.

Yes, the balky U.S. economic recovery and the rise of taxpayer debt (see today’s companion editorial) were destined to play large roles, and they have. But over the past seven months, Americans mostly have used these issues as prisms through which to view the one overarching issue of this yearlong campaign cycle: Obama, yes or no. Vote.

We wish the White House understood that Americans won’t make their choice because of Bain Capital, or Romneycare in Massachusetts, or whether the Republican nominee transported his dog atop his car. No, the issue is the president.

When the kerfuffle over the president’s remark to the effect that the private sector was doing fine arose last week my immediate reaction was that it was a poor choice of words being blown completely out of proportion. However, Mickey Kaus makes a good point:

The problem is the public jobs part, not Obama’s “private sector” characterization (which seems like ordinary misspeaking). There are at least two ways to read it: 1) As a Keynesian, Obama’s arguing that if state and local governments could stop laying people off for a while it would have a salutary effect on the economy by boosting demand, the same way tax cuts or public works projects or unemployment benefits boost demand; or 2) Public jobs are equivalent to private jobs, including housing jobs. In a healthy economy we have lots of private jobs, lots of housing jobs, and lots of goverment jobs. They’re all good!

Obama clearly means #1–he’s proposed $35 billion in subsidies to help states rehire “teachers and cops and firefighters,” with a fairly explicit Keynesian rationale. But does he also mean #2? There’s nothing in his press conference to suggest he doesn’t, and lots to suggest he does–the parallelism with the construction industry, for example, in which goverment jobs are treated as just another “sector” in which more employment is better.

The problem is that many voters (myself included) don’t think government jobs are just another sector. We want the number of housing and manufacturing jobs to keep growing–the more the merrier, all things being equal. We don’t want the number government jobs to keep growing, in part because we pay for them without the assurances, offered in a competitive private economy, that we’re getting our moneys worth or that the jobs are necessary at all. It’s one thing to boost government jobs as a temporary stimulus measure. It’s another thing to never let federal, state and local governments shrink to a more sustainable size.

Nationwide the states’ problem isn’t that their revenues aren’t growing. State tax revenues rose 6% last year, substantially faster than inflation. Their problem is that the cost of public employee benefits is not only rising faster than revenues but rising faster than the underlying goods, i.e. property values, incomes, and retail sales, on which their tax revenues depend. Due to the contracts they have with the public employees’ unions state and local governments have little recourse but to cut the number of employees to stay within their budgets.

Raising taxes is not an adequate solution. As long as present circumstances (slow growth, rising costs) persist it would take a commitment to repeatedly raising taxes, indefinitely. Raising taxes once is sufficiently politically painful. Repeatedly raising taxes, indefinitely, is not a credible strategy.

The federal government could step in a fill the gap, as the legislation that President Obama was advocating in the speech cited by the Tribune editors, would do. However, merely filling the gap of itself is not nearly enough and IMO is feckless. The federal government should tie any such aid to changing the conditions faced by the states.

IMO if the president wants to push legislation to help the states, a better choice would be for the federal government to take on a greater percentage of Medicaid or Medicaid in its entirety. An even better solution would be to reform the healthcare system in such a way as actually to reduce costs but, as we have seen, the federal government is unwilling to reform the system as radically as would be necessary.