[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.