Looking Ahead to Budget Cutting

Since projected expenditures within the Federal budget have long exceeded projected revenue, it follows that we probably will always have a large deficit. Since it is increasingly possible to define the most efficient level of taxation (somewhere around 18% of Gross Domestic Product, or GDP) by experimentally raising or lowering taxes and then observing the revenue produced, attention shifts to spending levels. At least so far, no one has suggested a level of government spending which is ideal, or efficient, or sustainable. But since large deficits are surely not indefinitely sustainable, it's hard to escape the logic that government spending levels should be just a little greater than 18% of GDP.

Moreover, since entitlements like Medicare and Social Security already make up most of the spending, and will soar in a few years when the baby boomers reach retirement age, it is already acknowledged that no amount of tax increase can balance a deficit of that size. Raising taxes is now recognized to have its own measurable cost, while infinitely rising deficits will surely be blocked by the bond market. Unless you just ignore the recession which would be caused by soaring long-term interest rates, spending must be cut severely. Just about the only remedy left is to shift the cost of entitlements to the private sector. By increasing private savings and drawing compound interest, some unknown amount of progress might be made on this problem. The retirement age must also be increased, second careers after retirement must be encouraged, the costs of retirement must be reduced -- and all other ideas must be explored, too. But one of the main arguments for increasing private savings is that all of the ideas anybody has suggested, rolled up in a ball, are questionably sufficient to finance the approaching problem. It will simply not be possible to evade a serious examination of any suggestion, including this one. Privatize. The public sector is just not big enough to handle the matter, and if you make the public sector bigger, you will destroy the whole economy. Privatize.

It's common belief that the cost of financing Social Security is not nearly as difficult as financing Medicare, but that's just the extrapolation fallacy announcing that trends in motion will continue forever. Medicare seems to be getting more expensive for three reasons, all temporary. The costs of dying are shifting into Medicare as the population lives longer; eventually, just about everyone will live long enough to die at Medicare's expense, and terminal care costs must then stop shifting. Furthermore, the cost of dying is going to decline as medical research turns to the engineering costs involved, separate from heroic efforts to forestall dying. No one is suggesting euthanasia; just simplifying the issues once a final decision has been made. Finally, the cost of chronic illness and disability needs to seek both curative and engineering improvements. Take rheumatoid arthritis (RA) for example.

Thousands of people are painfully crippled every year by RA. They are treated, medicated, pensioned, operated on, and provided with complicated equipment. Suddenly, some new medications have come along which can almost guarantee there will be no further progression of RA in patients who have it; if we use them, the number of existing cripples will soon decline. It has a cost to use new medications, of course, it will cost several thousand dollars a year to offer this miracle to the rheumatoid sufferer. When the patents run out, even on the inevitably improved variants of these drugs, the cost of treatment will surely go down to a thousand or so dollars a year. Meanwhile, the backlog cost of repairing the injured joints of patients who got the disease long ago, will fade away. And the engineers will figure out how to make crutches, canes and electric go-carts out of plastic or equivalently cheap ingredients. Most of those patients who had to be pensioned will now be able to find gainful employment. Maybe, maybe, someone will figure out what causes this disease and invent a simple cure for it, but it isn't necessary to pray for miracles in order to predict a major decline in the cost of treating this nasty disorder. It is safe to predict that other diseases will follow the same trajectory as RA, leading eventually to a resolution of the fearful costs of Medicare. Social Security is something else; if everybody lives a longer healthier life, non-physicians are going to have to figure out how to pay for it.

Democracy Turns Out To Be a Two-Party System

America's two-party system took fifty years to stumble into existence. Regardless of the happenstances of its eventual emergence, it was clearly not designed into the original plan. Those few founding fathers who did think about political parties rejected them as "factionalism", something to be condemned. The true nature and advantages of a two-party system began to be venerated when other nations tried something different, which we now call Proportional Representation. PR is a fairly natural outgrowth of creating a large democracy from a collection of little tribes -- and creating surrogate political parties for them as part of the original design. Guided by historical experience, it is now possible to ignore all minor differences between two-party democracy and multi-party democracy, except one. In a two-party system, the political dealing and vote-swapping takes place at conventions before the election, with all the players jockeying and sacrificing principle to answer a single candidate question, "Can he win?" By contrast, in a multi-party or proportionally-represented democracy, the election comes first, and only subsequently do vote-swapping and artful promises construct the ticket of candidates and the policy platform. The plain fact is the public doesn't know whom it is voting for, and often is disagreeably surprised. Furthermore, important matters remain unsettled by the election. A cabinet member of a splinter party, potentially one with negligible public support, retains the threat of resigning if things don't go his way, and his resignation may trigger a whole new national election if it breaks up the political margin of the ruling coalition. At least, a two-party system settles things for a while, and gives the public a relative rest from factional tensions.

The American system has evolved into a universal conviction, stronger than any Constitution, that two parties are enough. Third parties are of course tolerated because they aren't forbidden, but mostly offer a mechanism in case there is a serious wish to reconstitute one of the two major parties. The strength of third parties is to discipline the leadership of the major parties; the weakness is they threaten the unifying principle of compromise-in-order-to win. Nothing except religious fanaticism would likely induce any ambitious American politician to remain within a third party, fruitlessly frittering away his life's chances. Because of 18th Century history more than wisdom, an "established" religion is constitutionally prohibited in America; observation of the turmoils in other nations, and perhaps wisdom also, keeps it that way.

If two parties are then quite enough, is it possible only one would be better? The quickest look abroad, the briefest exposure to history, shows a one-party system is synonymous with dictatorship. Communism and fascism had only this one feature in common; in fact, China seems to be morphing from one to the other, while resolutely retaining its single ruling-party system. The paradox of this situation is that it leads to the American realization that maintaining a two-party system means that neither party must ever achieve total victory. After each national election, the electorate settles back with relief that one side won, but neither side conquered. Even academics are muffled by the system; with much to criticize, there is nothing else worth substituting.

There is one thing left to mention about the two-party system. Any schoolchild can notice, but the participants restrain themselves from mentioning, that issues keep moving back and forth between the two parties. Whether it is tariffs, public schooling, the gold standard or a thousand other matters, the issues repeatedly shift to the other party when they are disappointed by progress, or offended by apparent betrayal. The special interests seek to use the parties, and the parties regard each special interest as a bargaining chip; somehow, the system keeps reaching for equilibrium. Some issues just have to be banished. There will always be more poor people than rich ones; the Federalists learned that notorious elitism soon leads to extinction, and the New Deal learned that class warfare wins certain precincts. Therefore, the Whigs and the 20th Century Republicans keep searching for issues that cut across class boundaries, while the Democrats keep weeping for the working man. The long-term goal of Republican posturing is to punish class warfare until the other party banishes it, too. The best way to eliminate class warfare is to eliminate poverty, and the best weapon to use is to demonstrate that the other party actually likes poverty, at least just a little.

Term Limits, With Exceptions

Because of precision gerrymandering with computers, congressional incumbents now face very few serious re-election contests. Left with only a few seats in serious contention at each election, the public is dissatisfied by this reduced level of control but does not know how to strengthen it. Turning to the courts, for better rules, probably won't help. Once you fix the number of seats in Congress, give at least one seat to each state, and insist that geographically contiguous districts within a state should all contain the same number of inhabitants, there isn't much wiggle room. That's what then creates the rather strange connection between restraining gerrymandering, and imposing term limits.

Long-term incumbents in a legislative body maintain its institutional memory; their experience is a valuable thing, and recognized gifted veterans should be retained. Although a dozen states have even willingly sacrificed such advantages by imposing term limitations anyway, no one contends that all long-term incumbents are bad. We just have too many of them. The nominating process favors extremists, and they have crowded out the legislators from close districts who must be constantly mindful of current public opinion. Legislative bodies need to have a better balance between the two kinds.

So here's a proposal. Go ahead and impose a reasonable term limit, perhaps eight years. But then allow exceptions for districts which can demonstrate a plausible amount of bipartisanship. If the district in its last election had elected a governor or president of the opposite party from the incumbent congressman, or if one Senator in the state is of the opposite party, these might be reasonable grounds for permitting a district to keep re-electing its incumbent congressman. That might not be enough; perhaps a district should demonstrate two of those proofs of bipartisan spirit. But this would be a start. And a warning.

Mister Roberts

Fidelty Building

The Fidelity Building on Broad Street, now bearing the name of a successor bank, has its own ZIP code. It houses bank offices in one of its two towers, and a general office building in the other. The top floor, the 29th, was originally the executive suite of the bank, with executive dining rooms, and lesser dining rooms where big deals were dealt. As an economy move, the executive floor eventually became a mid-day luncheon club, and right now it houses the law library of Montgomery, McCracken and Rhoads. It carries the name of the law firm's most famous partner, Associate Justice of the United States Supreme Court, Owen Roberts. In the center of the hushed library, a single volume sits on a table, held in place by two very heavy bookends. It's the bound 1955 volume of the University of Pennsylvania Law Review, with a small green tab attached where a hundred pages of testimonials to Roberts are found. The tabbed page itself begins an essay by Felix Frankfurter, written in prose so elegant it seems like poetry. His topic is the mind of Justice Roberts at the time he switched sides in the 1936 Roosevelt Supreme Court packing episode, the famous "switch in time, which saved Nine."

Frankfurter and Roberts sat on the Supreme Court together for years, but the events in question took place before Frankfurter was appointed. Like the rest of us he has to conjecture what was in Roberts' mind. Felix Frankfurter offers two pieces of special evidence, his long personal observation of Roberts' character, and a private memo. Roberts had written in the memo that he had been ready to switch for Roosevelt before the court-packing proposal was made, but held off taking the step for several months because Justice Harlan Stone was absent for medical reasons. Stone, later elevated by Roosevelt to Chief Justice, was known to favor Roosevelt's New Deal proposals, particularly the Minimum Wage, which were central to the Constitutional question: whether the federal government had a right to go beyond regulating interstate commerce, to regulating all commerce. Frankfurter concludes that Roberts did not make the switch in response to Roosevelt's threats, because he had already decided to act before the threat was made to enlarge the court until it contained a majority in favor. Not only had Roberts decided to switch before the Presidential threat was made, he proved to be a courageous and highly moral person throughout the later years when he and Frankfurter were closely associated.

Unfortunately, Frankfurter's 1955 eulogy has not convinced historical opinion. After all, there were dozens of people on the inside of the Supreme Court and the Presidential Administration who knew Roberts better than Frankfurter did, and probably talked about nothing else for weeks. Up until the fateful decision, almost all of Roberts' close friends had been on the other side of the issue, and felt entitled to some sort of explanation if not apology. Washington is simply crawling with reporters whose job it is to search out gossip and hearsay. When an opinion emerges from such a cauldron and survives for seventy years, it has substance. The prevailing view is that Roberts felt the Judicial Branch of government was in jeapardy, and that someone must sacrifice himself in the crisis. Roosevelt had just been re-elected in a landslide, the new Congress would surely do anything he asked, the nation was in the depths of a horrendous economic depression for which Roosevelt was proposing the only conceivable Keynsean solution of increasing national liquidity through government spending. Roberts knew he would become a political pariah, but his duty seemed clear to him. It is merely a matter of phrasing whether his position was described as knuckling under to Roosevelts's threats, or throwing his body over Roosevelt's hand grenade.

With seventy years of retrospect, it all seems so pitiful. Public opinion and congressional action was in fact outraged at Roosevelt, landslide or no landslide. Roberts and Stone had no need to do what Roosevelt asked. Any class in economics today can marshal a respectable argument against the wisdom of minimum wage laws, every class in law school is amazed and mostly appalled by their fresh reading of the Constitution's prohibition against Congress acting outside the limits of "commerce between the several states". On the level of governments rescuing their countries from depression by expanding liquidity, the experience has been that tax cuts usually succeed in that, while government spending usually does not. Paradoxically, the one principle to survive respectably from the 1936 political revolution was the movement toward national standards for internal trade and commerce, away from Balkanization. That's too big a step to take without public debate, perhaps, and highly disruptive if it's done in a single step. But the general idea is probably a sound one.

Poor Roberts probably never even considered that aspect. He was overwhelmed in his role as a Greek tragic hero, pursuing tragic inevitability.

Neglection

Billy Phelps, that's William Lyon Phelps, once remarked he had watched a performance of every single Shakepeare play, except two. That put the idea in my young impressionable head, and eventually my wife and I watched a performance of every single one of those plays. Some of these blur in my recollection, a little. And although watching those thirty-six performances was a great overall experience, I would have to say that about fifteen of them seemed very poor. It's particularly vexing that several of the bad plays were written after most of the divinely wonderful ones, so their poor quality can't be blamed on inexperience, and the whole thing is a little hard to explain.

Indeed, if you did nothing but read the plays, you would think many more of them are of poor quality. But in the hands of a clever director, the bloody plays like Titus Andronicusare extremely effective; one easily sees why Elizabethan audiences flocked to see the melodrama. That's also true of the scenes of shipwrecks and storms , as seen in The Tempest and ,Pericles, or on land in King Lear. And the silly little comedies, with ladies in disguise or twins confused, are delightful little jigs on the stage when you actually see them performed. The experience leads to the question whether some of the other plays are not poor at all, just misunderstood.

After sixty years of intense devotion to a scientific specialty, the Shakespere Society of Philadelphia created a refuge to return to. After long sensing that scientific colleagues regarded attendance at thirty-six plays as a strange quirk, here was a group which regarded it as an achievement to be respected. A group which understood that the only times Shakespeare signed his own name, he spelled it Shakespere. And who took seriously the idea that some of the inferior plays in the canon might well have been written, wholly or in part, by some other person.

It thus happens that this group, after fifty years of avoiding it, was restudying Pericles. The tradition has been that this secondary play was written about the same time as King Lear, although it is hard to believe. Eminent scholars regard the first two acts as having been written by someone else, while the last three acts were written by Shakespeare, but this group thought it questionable that any of Pericles measured up to standard. The speeches are choppy, the plot jumps all about, the characters seem unreal. And then we come to neglection. As in the speech by

Rosencrantz and Gildenstern (4)

A few Broadway seasons ago, Tom Stoppard's play and movie Rosencrantz and Gildenstern are Dead described an experience, resonating with the early years of the Reagan presidential administration. If you are a small witness to palace politics, you mostly have no clue about what is actually happening. At that time, it was widely accepted among Washington gossips that the appointees who filled the Executive Office Building belonged to three hostile tribes in temporary alliance, and the Libertarian tribe was cast out. According to this recounting, the other two tribes were the Religious Right, and the Win-at-any-cost California political professionals. A more mature view of it might be that all administrations of all parties contain hard-noses who make a profession of the ruthless winning of elections. An ideological president can't win without hard-ball lieutenants, so although their presence is inevitable, what matters is how well they are controlled.

David Stockman

Ignoring these unattractive fixtures of political machinery, David Stockman seemed to symbolize a libertarian economic ideology within the Reagan White House, and Caspar Weinberger a militaristic one. When Stockman was sacrificed to power realities in Congress, the Libertarians followed the lead of William Niskanen and bitterly retreated to the neighborhood think tanks. But a few years later, Weinberger was similarly sacrificed over the Star Wars and Iran-Contra matters.These functionaries working at EOB thought they ran the country, but that most affable of men, Ronald Reagan, ran things. He seriously meant to discredit New Deal economics and to win the Cold War. To do so, he willingly sacrificed small improvements in our economic system like the Medical Savings Account, and minor enhancements of military hardware like the Strategic Defense Initiative. He would like to see these things succeed, but they would have to do it on their own, without cost to his political capital.

And so, in time, John McClaughry went back to Vermont, founded a think tank called the Ethan Allen Institute, ran unsuccessfully for governor against Howard Dean, and became Majority Leader in the Vermont Senate. Meanwhile, I devoted my efforts to selling the Medical Savings Account concept to that most reserved of audiences, the American Medical Association.

Commercial Think Tank

Stephen P. Mullin recently addressed the Right Angle Club of Philadelphia about assorted economic subjects; he is certainly qualified. He was once the only Republican in Mayor Rendell's cabinet, acting first as Finance Director and then as Commerce Director. At first he doesn't appear extroverted enough to be a politician, but quickly demonstrated that he knew the first names of more of the members of the club than the president did, so maybe he does have the innate talents of a politician. Urban political machines don't usually respond cordially to graduates of Exeter and Harvard, so he probably also knows when to keep his mouth shut.

Econsult, of which he is a senior vice-president, is an economics consulting firm located near the campus of the Wharton School of the University of Pennsylvania. A number of University professors are consultants to the firm, which offers statistical economic advice to the many law firms in town, to philanthropic organizations considering public-interest projects in the region, to government agencies faced with regulating unfamiliar activities, and very likely to anyone else willing to pay for the service of academics, statisticians and analysts. It certainly sounds like a service that governments and philanthropies need, and which the region needs to avail itself of. In a way, it is probably something the University needs, as well. A friend of mine is now retired, but at one time I commuted on the train with an academic administrator of the Wharton School, who was quite obviously disturbed by handing diplomas to students who promptly took jobs which paid those graduates more than he was paid himself. Obviously, such a system cannot persist very long without creating a brain drain, so income supplementation by commercial consulting is a necessary and valuable support for academics. There are, of course, probably some negative features as well.

It is interesting to hear how Philadelphia can be described. We have, for example, significantly less foreign immigration than other cities. New York, by contrast, has a net immigration of about 700,000 persons a year; such forces can quickly transform a city in a variety of ways. The bombing of West Philadelphia during the Goode Administration was news for a while, then vanished from the papers. But it had a shattering effect on Philadelphia commerce, leading to 8 or 9 years when there was essentially no private investment in the city. Philadelphia now needs to have its municipal bonds issued by the state bonding authority, because our own bond rating is so low that the extra cost of municipal debt is a significant one. And there is the cost of invisible shifting of power to Harrisburg. An unexpected result is that sales and real estate transfer taxes escalated to make up for property taxes which then could not possibly be raised as much as inflation. Real estate was in big trouble; whether ingenious strategies like the 10-year tax abatement for new property will be successful in rescuing the real estate industry, remains to be seen. New office towers have been built, but they drain off tenants from older office buildings. We're seeing a massive conversion of older office space into residential apartments, an apparently successful maneuver. But that drains the older residential areas, which leads to -- well, who knows what it will lead to, but it could be slums.

The traditional hostilities between Philadelphia and its neighbors can be defined in a new way, too. For a century, Philadelphia contributed more tax money to the rest of the state than it received in state services. But in the past 20 years, Philadelphia city has become a net importer of an annual billion dollars -- from the rest of the state. Two or three billion go to the schools, which the rest of the state regards as a deplorable waste in view of the quality of the product. And yet, the most hopeful feature of the situation is the vigor and ingenuity of the attempts being made to rescue the situation. In a certain sense, Mayor Nutter is the candidate of the Wharton School. He may well have some innovative ideas, and academic places like the Wharton School will surely suggest others. It remains to be seen whether he can combine idealism with sufficient ruthlessness to make the city function. Cynical oldtimers will grumble that a mayor has to employ a moderate amount of deception and corruption in order to accomplish his mission. Maybe that overstates things, but it is very certain he must be tough. He's dealing with construction unions who will certainly be tough, and whose interest in sacrificing their own agendas in order to help the schools or street crime is impaired by the econometric fact that 70% of them live in the suburbs. We wish our new mayor all the best, since he seems smart enough to know what needs to be done, and is definitely smart enough not to drop any bombs on houses. But beyond that he needs to be competent, which means he needs to be tough.

Volunteerism Needs a Business Plan

The visiting Frenchman Alexis de Tocqueville was struck most by the volunteerism he found everywhere in the young American nation; in his view, the first reaction of 19th Century Americans to a problem was to create a volunteer organization to fix it. Benjamin Franklin, who created dozens of such initiatives, was held up as its great exemplar. But de Toqueville visited us at the beginning of the Industrial Revolution, and we are now well past that into the Information Revolution, and voluteerism has noticeably declined. Not only have the great volunteer organizations like the Masons and the Red Cross suffered, but it is far more difficult to enlist the help of others to form a pick-up group to attack some issue or other. It is in that sense the general spirit of volunteerism has declined. The likely difficulty is not selfishness, but helplessness of people to control their own time.

When volunteer groups do assemble, they are mostly composed of self-employed people like plumbers and dentists, free to be somewhere else during "normal business hours", which may be shorter than they once were, but are extended by commuting time and chores pushed aside by confinement during business hours. That's no accident; a successful big business has to employ strategies to get employees to stick strictly to business while the employer is paying for their time. Now that so many women are going out to work, the family unit needs to struggle to coordinate everyone's work time so there will be some remaining opportunity to conduct family life. When a working couple shares the home tasks and baby sitting, the preempted time is enlarged, and what is left is called "quality time". A probably temporary elaboration of this time competition is the need to chauffeur teenagers to their resume-enhancing activities. For the time being you don't pick a college, the college picks you, and parents desperately labor to assist their children on a career path. Quite obviously, America needs to evolve better ways of trading work at home for more flexibility in the actual workplace, and we also need to build more colleges, but those issues are not the present topic. It's awfully hard to assemble a group of volunteers simultaneously, because employers have so successfully assembled them somewhere else, fragmenting the remains of the day.

Consequently, volunteer organizations tend to regard their chores as something you hire someone else to do, or else dump them on someone who is retired or unemployed, or too timid to refuse. This leads to recruitment slogans along the line that naturally you must sacrifice if you truly believe in the goals of the dear old Whatsis Association, surely an unattractive concept. That was never the case during the age of universal volunteers; volunteering was just one of those things everyone did to get something accomplished. We're losing something important if we let this continue. Sometime during the first twenty-four hours in military service, for example, someone will surely advise the new recruit -- never volunteer.

For a penniless non-profit to adopt the solution of hiring staff when there is no revenue stream to pay them, is the first step toward dissolution of the organization. Essentially, the non-volunteers are ordered to contribute money if they choose to be draft-evaders, and eventually the officers and staff begin to look back at the organization members as cows to be milked. A class of people who are only making a living are substituted for those who have a genuine commitment to the goals, and it just goes downhill from there.

Instead, the volunteers really must each do some unpaid work, and the officers and directors must set an example of it. What the organization does next is crucial. Individual members, either anonymous or hoping to remain anonymous, must be approached with the suggestion they accept responsibility for a task. The wild-eyed response to this approach is quite familiar, like the lame excuse that there is no time. A counter response that I'm busier than you are, does not improve the conversation because it suggests the refuser is merely a selfish shirker. Instead, the initial request must be for a simple, limited task without any obligations stretching to infinity. Almost everyone will be glad to bake a cake for a party, but almost no one will agree to be chairman of the cake-baking department unless the boundaries of that commitment are more reliably limited than they usually are.

In modern times, any major undefined volunteer responsibility is seen as potentially leading to an unwinable conflict with gainful employment or else outgrowths like commuting. Since that's the basic problem, all such invitations must recognize the true issue and devise simple ways to circumvent it.