Obama’s misguided ‘middle-class economics’

The U.S. is second among developed countries in social spending. But you wouldn’t know that from reading the budget the president submitted on Monday.

His budget assumes that social spending is too low and that “middle-class economics” requires government to spend, tax, regulate and borrow more, plunging the federal government more deeply into debt.

The assumption that government is the only source of social benefits is held by most developed countries. It has led them to centralize financing of healthcare, pensions and other benefits for the middle class. The genius of the American system of middle-class economics has been to leave room for the private sector to make many of these benefits available voluntarily.

{mosads}The result, according to the OECD, is that private voluntary social spending in the U.S. amounted to 10.5 percent of GDP in 2011. No other country comes close. As a result, total U.S. social spending — the sum of government spending and private voluntary spending — came to 28.8 percent of gross domestic product (GDP). Only France (31.3 percent of GDP) spent more. Social spending in Sweden, with its legendary social welfare system, was at 24.6 percent of GDP. Denmark (26.1 percent), Germany (25.3 percent) and the United Kingdom (26.1 percent) also lagged the United States.

Because private social spending is so great, the U.S. has managed to enlarge benefits while keeping public social spending low, at least in relative terms. The OECD found that the U.S. ranked 23rd in public social spending among developed nations.

The president’s budget proposes to enlarge public social spending, displacing informal voluntary arrangements between employers and their workers that are more flexible than government-mandated benefits.

We already are seeing the adverse effects of this approach with healthcare. Prior to the adoption of ObamaCare, most people worked for companies that voluntarily offered them coverage. Employers provided benefits out of concern for their workers, to gain an edge over their competitors, to take advantage of tax breaks for non-wage compensation and for a variety of other reasons.

ObamaCare has changed that dynamic. Avoiding penalties has become a leading concern for employers. Since its enactment, the business sector has spent untold sums lobbying Congress and the bureaucracy to shape federal rules and on consultants to sniff out loopholes.

The effects are insidious. Many small firms were told they couldn’t renew their existing coverage and were forced to buy policies that were in many cases more costly, more restrictive in choices among providers and more burdensome with respect to cost-sharing than their canceled plans.

The law’s requirement that firms subsidize coverage of employees who work 30 hours per week has led some to devote considerable effort to keeping as many employees as feasible below this threshold. President Obama acknowledged this perversity in his threat to veto a bill to raise the threshold from 30 hours to 40. A government-established threshold, he argued, would give employers “an incentive to reduce hours to avoid the requirement.” Exactly so.

ObamaCare also has induced many companies to scale back benefits and others to drop them entirely. Relying on data from filings that insurers made to state regulators, Ed Haislmaier of the Heritage Foundation found that nearly 5 million people lost employer-sponsored coverage during the first nine months of 2014.

This trend toward dropping or scaling back benefits will become more pronounced in a few years, when the federal government begins to impose a 40 percent excise tax on employers who provide what the government regards as “excess” health benefits. Rules require uniformity, leaving government little choice but to punish companies that provide excessively generous benefits.

There is another side effect of substituting government coercion and increased public social spending for private: public debt. As the government crowds out voluntary social spending with public spending, its own debt deepens and its efforts to disguise that debt become more desperate. Like alcoholics hiding bottles in their sock drawers, the government seeks new ways to conceal the extent of its borrowing and indebtedness.

The president proposes to spend more than $4.5 trillion in 2016, and to offset $524 billion of this spending with various “collections” and “receipts.” These receipts include $77.4 billion in Federal Reserve “profits,” much of which are the result of the nearly $2.5 trillion in Treasury debt that the Fed carries on its balance sheet.

The Fed conjured credit out of thin air and extended it to the Treasury Department, which pays the Federal Reserve interest, which the Fed then returns to the Treasury. The more Treasury borrows from the Federal Reserve, the more it can claim in “offsets” against its $4.5 trillion in spending.

The budget seeks to downplay the size of its debt by subtracting the net present value ($1.3 trillion) of outstanding student loans and other direct lending from debt held by the public, even as it pursues policies that encourage loan forgiveness and restructuring. But if the government insists on including the net present value of assets in its debt estimation, it should also include the net present value of its liabilities. The unfunded liability for federal pensions now stands at $3.6 trillion, according to the Federal Reserve. The unfunded liability of Social Security, according to program trustees, is $23.1 trillion. The administration prefers to overlook these sums in accounting for federal debt.

Such are the evasions that arise from increases in public social spending. A genuine focus on middle-class economics would encourage voluntary private social spending and limit the noxious side effects of increased social spending by the government.

Badger was formerly deputy assistant to the president for legislative affairs, where he helped formulate the George W. Bush administration’s policy and legislative strategy.