Oceans of Red Ink

You can still hear this important chatter over cocktails and in between dishes in a five-course meal, but there's a new theme that is barely above a whisper now but on everyone's lips: If we don't do something to rein in the spending of Social Security, Medicare, and Medicaid and reform these programs in order to avoid the oceans of red ink that economists say is the future of public-sector finance, there won't be dollars in the federal budget for anything other than defense and highways. In short, there's a specter haunting Washington, and it's the specter of runaway entitlements.

What these masters of the policy universe sense is the possibility that policy commitments to income and health security made generations ago are fundamentally changing the roots of the American policy tree. If they are right, then politics also is changing fundamentally, since politics stems in large part from debates over policy. If that happens, we might be on the verge of a future in which politics becomes dominated by generational differences and even more by differences in income.

America's Constitutional Settlement

So what is this all about? Let me step back from the whispering and take you on a brief tour of the American constitutional settlement and its subsequent adaptations that make up the roots of policy change today. The "constitutional settlement" to which I refer is the set of underlying agreements to the U.S. Constitution and supporting documents and policies that permitted the Union to be formed in 1789 and then reformed in 1866. The settlement begins with geography.

Every American school child knows that a major debate in the Continental Congress, and subsequently in the Constitutional Convention of 1787 in Philadelphia, centered on the relative power of big and little states. The big-population states, principally Virginia, New York, Pennsylvania, and (perhaps less so) Massachusetts, insisted on more say in the determination of policy than the little states like Connecticut, Delaware, or Rhode Island. The little states, on the other hand, feared the dominance of states with large populations and incomes. Mindful of the potential that those populations and incomes held for cultural and political hegemony, they insisted on state equality: Every state gets the same vote.

Less noticed is the geography of all of the states: They generally were bordered by the Atlantic Ocean or its major estuaries in the east and by the Appalachian/Allegheny Mountains in the West. That fact of physical geography with all of its differences in climate, economy, and labor force (slavery being foremost here) created a distinct regional element that superseded big- and little-state dynamics. As the Republic grew west, a distinct though less important East/West regional element came into the settlement.

The Founders and their successors balanced tensions by structuring a federal system in which the House represented the people, the Senate represented the states, and responsibilities for policy execution were divided between the federal government (initially the minor partner) and the states. Thus, majorities could act decisively in the House to instigate policy change and move issues important to the majority of the people, with representation for the chamber calculated by a population formula.

The Senate, on the other hand, acted in many different capacities, but principally to secure the federal system of government, balance geographical and population tensions, and debate or deliberate on policy issues. That simplifies a complex antebellum institution, but it largely succeeded in performing its key roles through the 1840s: no small task given the expansion of the Republic to the west and the spread of slavery to the territories and new states.

Destroying the Federal-State Balance

The Civil War broke the back of the Founding settlement and, consequently, the Constitution itself. Not only did it destroy the careful balancing act of the antebellum period as Congress attempted to keep an equal number of slave and non-slave, North and South states, but the Civil War also undermined the Senate as a policy body representing federal and state interests. The reconstructed Senate represented federal interests, particularly as the 14th Amendment took hold, and increasingly the interests of national economic and social factions.

The tendency of such a policy system to evolve into a syndicalist form of government, where representation in the Congress was by economic or social group rather than by state and sub-state districts, was clearly present in the latter half of the 19th century. It may have been prevented from formally taking hold in the representative branch of government solely because it became a central aspect of the regulatory state. There, in the increasingly dense administrative structure of the corporate welfare state, the teeming contests between economic and social factions were balanced. The House and Senate increasingly took on the roles of expanding federal power to legitimate the regulatory state and fine-tune its mission of balancing factions.

But a curious thing happened on the way to the Federal Trade Commission. Federal power extended itself into an area that appeared economic but turned out to be something entirely different. In 1935, Congress and the President created Social Security, a program designed to keep retired elderly Americans out of poverty. It appeared, innocently enough, to be just another economic program. However, over the next 70 years, Social Security grew into something quite different. It became the fountainhead of programs that Americans increasingly came to view as entitlements: an entitlement to income security in retirement, to health security in retirement, to health maintenance during the working years, and to security generally against the many things life throws up to frustrate happiness.

These programs have become spectacularly popular, defy every effort to restrain their growth, and have crowded out large portions of privately provided income and health security. Not only did Congress and the President fundamentally alter the course of public policy by aligning it with the principles of private mutual aid, but they also established a virtually irrevocable promise to future generations. Today's workers insure themselves against certain vagaries of their future economic lives by supplying tax dollars for those who are in need today. Social Security is the quintessential intergenerational insurance program. In exchange for lower disposable incomes, current workers shift the provision of their own future retirement needs onto the earnings of future workers.

Demographic trends unimagined by the system's founders, combined with numerous expansions of Social Security's original mandate, now threaten the future of this commitment and of public policy generally. It is altogether possible that a failure to change the retirement and health elements of Social Security and Medicare will lead to significantly higher taxes on low- and moderate-income workers. Indeed, mid-century Congresses may be (in the extreme case) focused on nothing else but finding money to pay for elder entitlement programs. In short, the entitlement policies may be unfixable in a legislative arena that was crafted and re-crafted to deal with geographic and economic interests.

Conclusion

Of course, this reform plan, like others fronted by think tanks in Washington, assumes that the Senate can deal with the challenge before it. Is this legislative body capable of acting on this public policy crisis when doing so requires that it act against the parochial interests of powerful geographic, demographic, and economic interests that have shaped the Senate's modern form?

I have my doubts. Recent history appears to indicate that the Senate is an increasingly ineffective body when it comes to serious policy issues. If the past 20 years of poor performance reflects structural limitations rather than inadequate leadership and membership, then the United States will enter the era of its greatest public financial crisis with the weakest legislative apparatus ever.

No wonder the lobbyists are nervous at Washington's top watering holes. What haunts them is nothing less than the end of Congress's ability to direct large sums of "discretionary spending" toward the many interests who employ Washington's lobbying community. What should haunt the rest of us is the continued failure of Congress, especially the Senate, to grasp the gravity of this crisis, to reform fundamental public policies dealing with the income and health care of retirees, and to arrest thereby the slide of our political system into a paralysis of policymaking not seen since our Civil War.

William W. Beach is Director of the Center for Data Analysis at The Heritage Foundation and a Visiting Fellow at the University of Buckingham in the United Kingdom. These remarks were prepared for delivery at an Economics and International Studies Seminar held at the University of Buckingham on March 1, 2006. An earlier version of this lecture was presented at St. Vincent's College in Latrobe, Pennsylvania, on September 21, 2005, as part of the Alex McKenna Lecture Series.