[This
book review was published in the Summer 2012 issue of The Journal of Social, Political and Economic Studies, pp.
220-230.]
Book Review
Keeping the Republic: Saving America by
Trusting Americans
Mitch
Daniels
Sentinel, 2012
Mitch Daniels, now the president of Purdue University,
was the governor of Indiana for two four-year terms running from 2005 until
early 2013. His career has included a
number of roles in public and private life: many years in the pharmaceutical
industry, chief of staff to U.S. Senator Richard Lugar, senior aide to
President Ronald Reagan, president of the Hudson Institute (a think tank), and
director of the U.S. Office of Management and Budget under President George W.
Bush from January 2001 until June 2003.
Much, if not all, of this experience,
but most especially his work with the federal budget, has fed into the
perception that is the central focus of this book: that the amount of federal
debt has grown, and is continuing to grow, to a level that mathematically the
United States will not be able to handle, no matter how much taxes are
increased or spending cut, unless economic growth becomes sufficient to allow
the United States to transcend the problem.
So great are the potential consequences of a failure to deal with this
debt that Daniels sees the debt as posing what is, in effect, an existential
threat to the country. “Our debts
imperil our republic in a way that no other issue, foreign or domestic, does.”
To illustrate the threat, he asks readers to imagine a
scenario in which China, which even at the time of his writing in early 2012 held
$5 trillion in U.S. Treasury securities, decides to stop its lending, an action
that is followed by a precipitous drop in the value of the dollar, a “massive
sell-off of U.S. stocks,” sharp rises in interest rates, and a loss of the
dollar’s status as the world’s reserve currency, all with a tidal wave of effects
on the financial system, America’s standing in the world, and the real economy.
Other scenarios also point to
catastrophe. The interest on the
national debt, by itself, he says, is taking an escalating portion of the
national budget, and as it grows will come to crowd out expenditures on most
else.
Though Daniels is a Republican, he
says the debt problem is best seen as one of mathematics, not of politics or
ideology. “Whether one prefers big
government or limited government… has nothing to do with the brute fact that
no… modern nation-state can survive, let alone thrive, while carrying the
incredible debt burdens we are about to confront.” He argues, accordingly, that it should be as
much a concern for the Left as for the Right.
Nevertheless, Daniels’ analysis of the
origins of the problem and of what is going to be necessary to overcome it
leads him directly into many facets of his own free-market, limited government
philosophy. It is hardly to be imagined
that the Left can or will agree that it must follow him in that direction. The Left understands the problem through a
different prism. The problem itself is
not directly ideological, but much ideology and politics come to bear upon it.
It will be helpful to see the role the threat plays in
Daniels’ analysis. The debt problem is,
in effect (even though he himself doesn’t use this metaphor), a “black hole”
that is fed by a vast array of social and political forces. Because that is so, Daniels’ discussion goes
far beyond the debt per se. As he examines the many pathologies that have
led the United States into this conundrum and spells out what he believes
necessary for the tsunami of growth that is essential if the threat is to be
transcended, he is led into an explication of free-market, limited government
policies. Accordingly, the book becomes
more a brief and easily readable treatise on contemporary public policy than a
monograph on the debt issue alone. It is
also something of a memoir of his actions as governor.
We will want to consider the elements of his analysis,
but first it is well to mention an attribute of Daniels’ thinking that deserves
notice. A quality that stands out about
the book is Daniels’ civility. He is no
rhetorical bomb-thrower; rather, in the words of columnist George Will in the
Introduction, Daniels “talks softly, thinks clearly, and respects the
intelligence of the public.” He has
strong opinions of his own, but he possesses a becoming intellectual humility
that shows deference to the opinions of others.
“To me, grown-up public conversation includes… the candor to concede
that one’s own ideas may not be the absolutely optimal ones, and the openness
to accept criticism and constructive alternatives… We must on occasion doubt
our own infallibility, if we are to find solutions….” In the context of the sharp polarization of American
politics in the early twentieth century and the unappealing infantilism (along
with frequent incivility) of so many of those who have recently occupied places
alongside Daniels on the American Right, this humility and reasoned tone makes
Daniels something of a unique figure. If,
too, we think in the long term and consider what is occurring in this most
rapidly changing epoch in history, the need of peoples to adapt to radical new
conditions will require the sort of civility Daniels exhibits. It is an understatement to say that if it is
absent, we are in for a most acrimonious time.
Returning now to Daniels’ substantive message, we notice
that there were three elements to the brief statement that we made earlier of
his thesis: the debt, the point that no amount of spending reduction and
additional taxes will be sufficient to handle the debt, and that the solution
must involve much economic growth.
The debt has accumulated through a combination of expenditures
that exceed revenues and inadequately funded mandates. Daniels observes that “a large part of each
year’s federal deficit” comes from farm supports, and looks ahead to biofuels
as “the best basis yet for ending” them.
Enormous components of the load come from Social Security, Medicare and Obamacare (America’s new universal health care insurance
system). Nothing has been held in trust
for the Social Security obligations, which are growing as the “baby boom generation”
retires, and the payroll tax eventually won’t be able to cover the
payments. As a political imperative and
to honor the commitments people have depended upon, Daniels would keep the payments
as they are for those who are now drawing benefits; but he advocates three
reforms to keep the system viable: a lengthening of the retirement age, a
revamping of the “cost of living adjustment” which he says has been
overcompensating for inflation, and the application for the first time of a
“means test” so that benefits are no longer paid to people who don’t need
them.
As to Medicare,[1] he sees it as an extreme
problem, given the rising cost of health care, the aging of the population to
historically unprecedented levels, and the out-of-proportion costs (an
estimated 40 percent of Medicare expenditures) incurred in end-of-life
care. To encourage responsible
decision-making about those disproportionate costs, he would involve families
in paying a share of them.[2]
Daniels says Obamacare,
together with the new extension of coverage to long-term care insurance, will
“add a couple trillion dollars to the next generation’s bill.” He argues that the Affordable Care Act (i.e.,
Obamacare) leaves intact “the worst features of the
current system,” under which people have their medical bills paid for almost in
full by insurance rather than having to make discriminating choices about what
care they receive. Daniels favors a
system of “health savings accounts” where people will have tax-exempted money
set aside to share in the cost of ordinary care (with “major medical” coverage
for extraordinary expenses). He sees
that so long as the incentives, on the side both of medical care suppliers and
consumers, are all conducive to the rendering of maximum services there is no
real chance of getting medical costs under control. Further, he argues that the tort system, by entertaining
large claims against medical providers and thereby causing the providers to run
a good many unnecessary (but expensive) tests to help themselves defend
lawsuits, needs an overhaul.
Because much of the spending comes from the fact that
“for the American political class, pandering is a reflex action,” a
precondition for significant reforms will be a seismic redirection of the political
culture and of the thinking of the millions of people who have been caused to
believe that abundant benefits are theirs as “entitlements.” It would greatly assist this change, he says,
if the president were given a power that governors have in some states, the
power of “impoundment.” This would let
the president spend less than is appropriated by Congress on any given
item. Members of Congress could then
continue “pandering” to the hungry public with their votes, while allowing the president to cut things
back.[3]
Even if all this were to occur to cut spending, and
new taxes were added, that wouldn’t be enough, in Daniels’ view. The only way to get over the hump is for the
United States to go onto “a maximum-growth footing.” What would this consist of? Daniels mostly leaves this to “reams of
suggestions, from authors far more economically learned than I.” But “I will mention three categories:… our tax
‘system,’ our regulatory policy, and our energy opportunity.” “The fundamentals of a pro-growth tax system
are simplicity and low rates.” To
achieve these elements, he would “eliminate all or almost all current
exclusions and deductions,” and tax only compensation, exempting “interest,
dividends, and capital gains.” As to
regulation, he would “declare a multiyear moratorium on new rules of any kind.” He is highly critical of the Dodd-Frank
regime of regulation that was enacted after the recent economic crisis and that
calls for agencies to write extensive rules regulating the financial sector. One of his criticisms of Obamacare
is that an ocean of regulations will come as it is implemented. Further, “environmentally minded citizens”
have been “accustomed to opposing almost any new economic activity –
industrial, manufacturing, power production, infrastructure, agricultural –,” imposing
“rules that are strangling growth and costing us jobs.” To Daniels, a developed economy is environmentally
cleaner than a less developed one.
Hence, he sees his way clear to call, as part of his stress on the
importance of economic growth, for “exploiting as fully as possible our
domestic energy opportunities… our massive coal reserves… our ability to
generate large quantities of biofuel energy… [and] the expansion of the nuclear
power industry.”
His discussion of public policy goes further. He ventures briefly into the issue of
America’s foreign relations, questioning how long, in light of “massive and
mounting debts,” the United States can aspire to an “unrivaled military status”
and to its self-assigned task of recasting the world in a democratic, free-market
image. But his concern is not entirely
about the cost; he is clearly reluctant to embrace the neoconservative/neoliberal
internationalist vision when he expresses such a heresy as this: “It is far
from clear that our Western ideals have appeal in as many quarters as we like
to imagine.” He calls for a critical
review of the missions given the American military: “What, very strictly
defined, are the national interests of our country?… What size and kind of
military is absolutely essential to preserve the physical safety of
Americans?”
Daniels’ cultural conservatism shows when he speaks of
the breakdown of the American family, a breakdown he considers “a huge
contributor to virtually every heartbreaking social pathology we face.” His main theme is never far out of mind,
though, as he writes that “a virtues recovery would help spur an economic
one.” And, again, he mixes a culturally
conservative preference with his goal of economic growth when he speaks to the
immigration issue. He cites with
apparent favor the view that “illegal immigration… [leads to the] erosion of
our national culture and patriotism that a huge, unassimilated ethnic group
might pose,” but he favors an expanded – and more selective – legal immigration. The purpose would be “to admit many more
immigrants who create the most jobs and economic value.”
Among the many other points made by Daniels, we find
his support for privatizing a number of
governmental functions, as he did in Indiana, forming
“public-private-partnerships.” He has
given considerable attention to how government can be made more efficient, such
as by substituting rewards-for-performance for the seniority system. The inefficiency and corruption stemming from
governmental employee unions incur his continuing wrath, and limiting those
unions was a major focus of his terms as governor. Indeed, even though he is a Republican, he
quotes Franklin Roosevelt, who said “the process of collective bargaining, as
usually understood, cannot be transplanted into the public service.” Daniels reformed the Indiana motor vehicle
bureau by consolidating its offices and computerizing its work. And,
as a replacement for the existing multitude of safety-net programs and
agencies, he would have the United States adopt the “negative income tax”
proposal made years ago by Nobel prize-winning economist Milton Friedman. This would provide direct cash support to
low-income individuals, allowing them something Daniels values: the freedom
(and responsibility) to make spending choices of their own.[4]
There is much that is provocative about each point
Daniels makes (and many others that we haven’t mentioned). The following reflections aren’t intended to
exhaust the possible discussion:
1. Consistently
with his independence, Daniels refuses to join with the great preponderance of
present-day Republicans in opposing any new taxation. He invites their wrath when he says that “to
drift into the viewpoint that opposes any tax, at any time, at any level, is
illogical and unjustifiable.” It seems
incongruous, then, what he says “I don’t happen to favor a VAT [Value Added
Tax]… because of the purely practical risk that it might be increased too
easily.” In doing so, he dismisses
something that would help immeasurably in addressing the debt problem that he
rightly sees as existentially threatening.[5] The economist Pat Choate says “the VAT is the
most powerful and efficient way ever invented to raise government
revenue.” The VAT is used by all
industrial countries other than the United States and by 153 countries in all,
both as an abundant source of revenue and as a device to protect domestic
industry from foreign competition. Such a
tax, as a replacement for the income tax, could foster economic growth by not
taxing savings and investment, eliminate the federal budget deficits, and,
perhaps most importantly, help bring industry (and jobs) back to the United
States.
2. Daniels
observes that “the power of free institutions has always rested on their
ability to produce prosperity.” Though
seemingly simple, this remark suggests the vital importance, in the theory and
practice of a market economy and of a free society, of overcoming the problem
of the business cycle’s severe dislocations.
As things stand, many millions of people’s lives and fortunes depend on
factors beyond their own control, putting the legitimacy of such a social order
in jeopardy. One would have thought that
the recent Great Recession, reviving memories of the Great Depression, would
have created a consensus in favor of a radical reconstruction of the United
States’ monetary and banking systems, reviving perhaps the Chicago Plan
advocated in the 1930s by 250 economists
centered around the University of Chicago.[6] But there has been no such demand, and
Daniels seems unaware of the need, as do most other Americans.
3. As we have
seen, Daniels considers economic growth a necessary key to transcending the
threat posed by the debt problem. We
have reviewed various of his suggestions for improving growth. What is missing is any comprehension of the
extraordinary changes the world is undergoing with the onrush of jobless
technology. With computerization,
robotics and other automation, the potential for undreamed-of increases in
productivity and human well-being is here and is growing. The issue is rapidly becoming a mixture of
how business can be rescued from totally unnecessary economic doldrums, the
vastly enhanced productivity can be unleashed, and a population that can no
longer depend on remunerated labor for its livelihood can thrive.[7] Almost all contemporary discussion, including
Daniels’, proceeds as if everything is fundamentally unchanged. The result is an intellectual trap from which
little chance of escape is apparent. This
inability to look ahead leaves the United States (and the world) naked in the
face of heretofore unimaginable change.
4. Daniels does
not allow himself a rote-like repetition of the ideological fixations of so
many free-market enthusiasts in today’s United States, but he does follow them
in failing to see that private business has fallen far short of the behavioral
expectations that have so long been thought a necessary foundation for a market
economy. In the run-up to the economic
collapse, the financial world was guilty of the most egregious abuses, taking
advantage of the lack of regulation to run wild with imprudent and often
fraudulent actions that it would seem no respectable free-market advocate
should support. And Emerson’s old phrase
“abuses in which all connive” isn’t far off as a description of much other
business practice, which is often unconscionable in its lawyer-driven,
bureaucracy-simulating callousness toward consumers. (This is a callousness that is not the unique
property of a certain class of uncaring people, but seems more a reflection of
character traits that are widely shared among the population at large.) No doubt, supporters of a market economy want
to be “pro-business.” But it is not
unreasonable to ask: What serves business best in the long run, an ideological
blocking-out of awareness about the abuses – or a candid facing up to them?
These thoughts point to limitations that make Keeping the Republic fall short of all
that it needs to be. They should be
considered with all the civility of a mature mind such as that shown by Daniels
himself. Notwithstanding the
limitations, we have seen that this is a book highly to be recommended. It has been “a national bestseller,” and
deserves to be.
Dwight D.
Murphey
[1] “Medicare”
(for readers unfamiliar with American programs) is a federal program that pays
much of the health care costs for the elderly.
[2] A question that comes immediately to mind, if Daniels’ suggestion is to work, is how he would avoid the common practice of families’ transferring assets to avoid such levies. Care will need to be taken to assure that families are informed about, and agree to, the end-of-life care that is given, and that medical providers not, contrary to the family’s wishes, pile on unneeded tests and other costs. This last point is brought to mind by an experience in this reviewer’s family, where an uncle and his wife met with their doctor before the uncle entered the last stages of emphysema and thought it was agreed that the uncle would, when the end came, simply be put in the hospital for palliative care. The hospital nevertheless did several thousand dollars’ worth of tests during the uncle’s last three days of life, paid for by insurance.
[3] Daniels is sensitive to the fact that this would run counter to the
Constitutional placement of “the power of the purse” in Congress, to which we
might add that it would also amount to a sleight-of-hand being exercised on the
public; but it is arguable that neither of these objections is sufficient to
trump the need to do something institutionally to reverse the political
incentives that lend themselves to overspending. After all, the “spend and elect” pandering is
itself a major flaw in democracy.
[4] The desire
for individual choice is very much a libertarian preference. This reviewer was acting on that principle
many years ago when he declined to take the G.I. Bill to pay his law school
expenses after he mustered out of the Marine Corps. His thinking was very similar to Daniels’: “If
they thought I was worth it, they should have just paid me the money and let me
decide what to do with it.” (Full disclosure, however: This reviewer’s
libertarian purism failed him later when after he was married he obtained a
V.A. loan to buy his first home.)
[5] A VAT is a
consumption tax imposed each time a sale is made. The rules of the World Trade Organization
allow countries to rebate the tax to their exporters, while taxing
imports. It is this feature that makes
the VAT a vastly significant protectionist device used by other nations against
American imports, contributing greatly to the trade imbalance that has caused a
hollowing-out of American manufacturing.
Of course, most free-market advocates, such as Daniels, oppose “protectionism,” a position that this
reviewer traces back to classical liberalism’s historic refusal to embrace the
thinking of nineteenth-century economist Friedrich List (along with that of Henry
George). It is damaging to classical
liberalism that List and George have so long been brushed aside, since they
provided insights that would be of considerable value to free-market thinking
and would, in addition, make a market economy far more palatable than it has
been to millions of people. Readers
wanting an explication of this reviewer’s favorable appraisal of Friedrich List
and Henry George may wish to read “A Critique of the Central Concepts in
Free-Trade Theory,” published in this Journal in its Winter 1998 issue, that is
available free of charge as A77 (i.e., Article 77) on the web site www.dwightmurphey-collectedwritings.info.
One
reason the VAT is a powerful revenue producer is that it doesn’t lend itself to
the high administrative costs, tax avoidance and fraudulent evasion that create
an enormous leakage from an income tax system.
Economist Pat Choate discusses VAT in greater detail than we are able to
here in his Saving Capitalism: Keeping
America Strong, reviewed in our Spring 2010 issue, pp. 125-130. The review appears on the aforementioned
website as BR134 (i.e., book review number 134.
[6] The Chicago
Plan and associated other ideas are discussed in this reviewer’s “Capitalism’s
Deepening Crisis: The Imperative of Monetary Reconstruction” in our Fall 2011
issue, pp. 277-300. The article appears
on the web site referred to in Footnote 5 here as A105 (i.e., Article 105).
[7] It was not
the expectation of this reviewer that he would use this review as a vehicle for
promoting his other writings, but the reader would be ill-served, in the
context of issues such as the social/economic/political implications of jobless
technology, if mention were not made of writings that are directly
pertinent. See this reviewer’s book A “Shared Market Economy”: A Classical Liberal Rethinks the Market
System, a link to which appears in the first paragraph of the web site
referred to in the earlier footnotes.