Constitutional Moments

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Constitutional Moments
by MICHAEL S. GREVE
RE: http://www.libertylawsite.org/libert...ional-moments/

This lengthy essay is adapted from a “Constitution Day” talk delivered at several universities over the past month. It attempts to understand the country’s current predicament in light of the Founder’s “constitutional moment.” Our problems are neither a matter of mere policy nor of “values.” They are institutional, and The Federalist has much to teach us about the dynamics of institutional failure and reform. The essay contains a section on the country’s disastrous financial condition; readers who do not need that reminder (or can no longer bear it) may wish to skip that part.

A videotaped version of the talk, including Q&A, is available here.

225 years after the constitutional convention in that sweltering Philadelphia summer, we may be approaching a true constitutional moment, of a sort that provokes sober thought about the Founders’ experiment.

I do not suggest that the formal Constitution is in any peril, nor even in need of revision. My subject, rather, is the “constitution” with a small c. It encompasses, along with the written Constitution, our basic political traditions and institutions. Think of the administrative state, Social Security, the Civil Rights Act, or the Federal Reserve: technically, these arrangements can be wiped out at the stroke of a pen; practically, they are more deeply entrenched than many formal rules. A “constitutional moment” is when such institutions undergo or at any rate require a profound change.

We have had several moments of this sort. Some of them, foremost the Civil War and the Progressive era, produced formal constitutional changes. Others did not: the New Deal and the Great Society illustrate the point. But they all transformed our political institutions and our constitutional understanding.

Some high-level political theory suggest that we should be nearing another such moment. The late Samuel Huntington observed that every four decades or so, the country suffers a nervous breakdown. The Founding, the Great Awakening, the Civil War, the Progressive Era, the New Deal, and the ‘Sixties: now, we are overdue. Huntington argued that our moments follow a pattern, which he called The Promise of Disharmony: when the gulf between our lofty ideals and our crummy practices becomes too wide, politics engages not just our vulgar interests but our “creedal passions,” and we fight over what our principles mean. You can find signs of that dynamic in our politics. The Tea Party and Occupy Wall Street contingents certainly believe that they are in a fight over first principles. However, my account of a constitutional moment rests on something much more tangible and frightening.

We are broke. The official national debt comes to well over $50,000 for every man, woman and child in America (and we will see that that isn’t the half of it). The economy has dragged itself along for three years, mostly on debt-financed stimulus measures and Fed-supplied fumes. The light at the end of the tunnel has been switched off. It was powered by Solyndra.

Other countries have reformed their way out of very similar distress, more or less in the ordinary course of politics. Germany, Canada, Brazil, and Sweden are shining examples. We won’t: as Huntington taught, our politics either changes not at all or else, convulsively. We will either revamp our institutions, or we will become Argentina.

That danger is very real. While we like to tell ourselves that all our constitutional stories must have a happy ending, constitutional moments are easily missed. The fear is palpable in The Federalist: Publius’s essays resound with do-or-die, now-or-never admonition. The Founders rose to the occasion. We may not: our politics may be too pathological, our circumstances too dire, our spirit too soft to seize the moment. However, there is no reward in a “how-do-you-feel-about-the-future” thumb sucker. Instead, then, let me explore a different and hopefully more productive proposition:

Among all our constitutional moments, the moment that most resembles our own is the Founders’. Of course, I am mindful of the huge and obvious differences. They had just fought a Revolutionary War on American soil, over the soul and the fate of their country; we are trying to get out of seemingly pointless engagements in far-way countries. They fought to establish a more perfect union; ours is in no danger of disintegrating. They needed a whole new Constitution; we merely have to return to it, if we can.

And yet: intriguing lessons emerge once you remember that the Founders were practical statesmen. The Philadelphia Convention was a response to a failed institutional experiment—the Articles of Confederation, whose flawed design had driven the union to the brink of ruin. Whatever else the Convention could hope to accomplish, it had to solve the problems at hand. To that end, the Founders had to and did fix the institutions. That is also our predicament.

Debt and Demoralization

Foremost among the Founders’ problems was the debt. Payments on the national debt amounted to over 40 percent of federal revenues. Bond obligations, including IOUs issued to soldiers in General Washington’s army, were mostly junk. Over the country’s economy and politics hung an air of demoralization.

Today, the official national debt—the headline number you see on “debt clocks” around the country—stands at $16 trillion and counting, at about $4 billion a day. Add the amounts the government owes to its various trust funds, and the debt comes to over 100 percent of GDP. We have exceeded that level only once, in the immediate aftermath of World War II.

Crushing Burden of Debt



http://www.texasenterprise.utexas.ed...Figure2-6s.jpg

In and of itself, this need not be worrisome; after all, the war debt did not do much harm. Upon inspection, however, the situation is worse than it looks.

First, the “headline” and intergovernmental debt is only part of the story. The other part is the debt of “GSE’s,” or “government-sponsored enterprises,” such as Fannie May. Their so-called agency debt, which is guaranteed by the United States government, has at times exceeded the official debt:

Agency and Treasury Debt
1970-2010



http://american.com/archive/2011/jul...ial-experiment

As Alex Pollock has explained, the sum of these debts is the effective debt of the United States. The dip at the tail end of the agency debt curve reflects not a sudden flash of sanity but the fact that we had to take a chunk of the GSEs’ debts on budget by means of a bailout. Agency debt tends to bite sooner or later.

Second, state and local governments are in equally bad condition. Their official (bond) debt comes to about $3 trillion. Their unfunded pension liabilities are north of $4 trillion, tendency rising. Other post-employment benefits, mostly health benefits or retirees, are almost entirely unfunded; $1 trillion is a widely shared estimate. In short, despite balanced budget amendments, states have racked up debts at seven or eight times their annual own-source revenues:

State Obligations v. Revenues



http://www.statebudgetsolutions.org/...ingUpdate.pdf; http://www.cato-at-liberty.org/state...s-3-trillion/; http://www.publicsectorinc.org/other_benefits/; http://www.taxpolicycenter.org/taxfa....cfm?Docid=532

Debts of this magnitude will not be paid. The question is who will take the haircut.

Third, the federal government has accumulated “unfunded obligations”—that is, obligations that it could legally revoke but probably won’t. Social Security, Medicare, and Medicaid represent such obligations. They are the engines of a voracious transfer state:

Composition of Total Government Transfer Payments, 1960-2010 (adjusted by CPI)



http://www.aei.org/events/2012/06/20...hey-paid-for/; http://www.whitehouse.gov/omb/budget/Historicals

More distressingly yet, the growth rates are expected to accelerate:

Government Spending as a Share of Economy



http://paulryan.house.gov/uploadedfi...perity2013.pdf



Fourth, the absolute debt level is a secondary concern so long as future earnings growth covers at least the cost of servicing the debt (and we do not build up yet more debt). Will it? We may be able to balance the budget and repay the official national debt over time if one assumes that (1) we will continue to be able to borrow at negative real interest rates and (2) we can grow the national economy at five percent, over an extended period. Congressman Ryan’s and Governor Romney’s plans make those assumptions. They are charitably described as heroic. Look at this regression line:

US Real GDP Growth By Quarter
1969-2012



http://www.bea.gov//national/nipaweb/DownSS2.asp

In a powerful, much-noted paper, Robert Gordon has argued that economic growth may remain well below long-term trends for many decades to come. Even if we could double current growth rates, we would still be faced with deteriorating public finances. And we cannot double it—not with a retiring baby boom generation, and not with this record:

Employment/Population Ratios in the US and EU-15
1979-2010



http://waysandmeans.house.gov/upload...sharov9811.pdf

Germany and Holland have put an awful lot of people to work, in a real hurry—for example, by reforming labor markets, raising the retirement age, and reducing unemployment benefits. We have done more or less the opposite. The past fifteen years have witnessed a mass exodus from the labor market and, consequently, falling household incomes.

Median Household Income Index (HHI) and Unemployment Rate by Month:
January 2000 to June 2012



http://www.sentierresearch.com/paypalpurchase.html

Values and Institutions

How did we get into the mess, and what will it take to fix it? Ignore the partisan noise that surrounds us. Neither the Bush nor the Obama administration has been a model of fiscal rectitude, and the still-lingering financial crisis has exacerbated our difficulties. However, unsustainable trends have gone on for a very long time, and the rate of deterioration does not correlate in any obvious way with political control over the presidency and Congress. It is therefore unlikely that ordinary elections—even elections that are ostensibly fought over major policy disagreements—will make much of a difference.

Among conservatives, that recognition has set in and the political agenda has moved to values. My former boss, AEI President Arthur Brooks, argues that we are in a moral and cultural “Battle” between our values of daring and entrepreneurship, versus “you did not build that”; Bain Capital versus community organizers; “The Road to Freedom” versus European-style socialism. Before becoming “a nation of takers,” we must mount a moral defense of capitalism and restore a culture of “earned success.” And we need policies that reflect and foster those values.

I certainly prefer entrepreneurial spirit to an entitlement mentality. And I wholeheartedly endorse efforts to elevate the political debate beyond green eyeshades and economic models. However, I am skeptical about the utility of a worldview that bounces from culture to policy and back again, with nary of thought given to political institutions and the ways in which they transmit values and produce policy.

This was not the way the Founders thought. Publius talks quite a bit about values and virtues, or the lack thereof: the demoralization of industry and merchants; public cynicism and disaffection; a shocking tolerance of debt and of a debased currency. However, with one exception to which I will turn at the end, Publius never suggests that moral rot is the heart of the problem or that better values and mores are a prerequisite for an improved politics. The “Vices” of James Madison’s famous pre-Convention Memorandum aren’t personal; they are the vices of the political system.

Nor does Publius suggest that improved virtues are an object of the constitutional project. His position is much more prosaic: you go into constitutional politics with the Americans you have. “If men were angels, no government would be necessary.” If they were devils, only “the chains of despotism” could restrain them. As it is, they have some qualities that prompt despair and others that “inspire a degree of confidence.” And fortunately, good government does not depend on improving citizens’ character. Throughout, Publius attributes their wretched behavior and their flagging spirit to misconceived institutions—faction-ridden, corrupt state institutions, and the union’s ineffectual Congress. If you can fix the institutions, people’s character may or may not improve. But they will behave very differently, and they will be a more prosperous and contented bunch. Virtues and values are for the most part a dependent variable—dependent, that is, on the institutions.

So, too, with policy. The authors of The Federalist were hardly shy in expressing their views on debtor relief laws, the “rage for paper money,” and tax policy. Time and again, though, their point was that you could not get sensible policies out of the existing institutions, regardless of what cast of politicians might occupy them. To change the policies, you had to create a better-ordered politics.

The Founders were right about their moment. And I believe that our moment strongly resembles theirs: it’s the institutions.

Institutions Matter

A discussion of institutional failures may be a waste of time. Everyone knows that Confidence in our public institutions, with the lone exception of the armed forces, is at record-lows. Next subject. Still, I hope to impress the extent and the depth to which misshapen institutions, built and entrenched at a time when we thought we could afford them, have come to shape our habits and the conduct of our public affairs. Four examples illustrate the theme.

The Housing Market. Consider the housing bubble that imploded so spectacularly many years ago: I find it difficult to attribute the disaster to a spontaneous outbreak of private irresponsibility—to greedy lenders and ignorant or reckless borrowers. Greed and ignorance are constants; institutions and their policies provide occasion for the exercise of those vices. By most accounts, the calamity was prompted by the Fed’s easy-money policy and, more importantly, by the GSE’s policy of juicing the low-end, subprime and no-doc loan market. The supply drove the demand and the irresponsible conduct in this artificially inflated market. It was in turn produced by a political consensus between a Republican administration that sought to push up homeownership rates and Democrats who, in Congressman Barney Frank’s words, wanted the GSEs to “roll the dice” on the American economy. It was supported by a coterie of powerful lobbies: “fair housing” advocates, realtors, construction industries, banks, and above all Fannie and Freddie themselves. This constellation of forces was entirely self-propelling. Before reckless consumer borrowing “caused” the bubble, it was caused by the political system.

Earned Success. Conservatives campaign against an entitlement mentality and for an ethic of “earned success.” As a general proposition, that is surely right. In several ways, however, it misses the mark. To start with the obvious: most Americans, especially over age 65, regard Social Security, Medicare, and defined benefit pensions as earned. Even politicians who want to reform those systems insist that they embody promises that must be kept. Yet none of this is true. Most retirees could not have earned their expected payment streams if they had worked two or three jobs. And the promises will not be kept, because they cannot be kept.

In the productive economy, too, the lines between earned success and dependency have become very blurry—foremost, because the economy is much more dependent on government than we admit to ourselves. In a recent National Affairs article (“Facing Up to Big Government”), John J. DiIulio surveys our Big Inter-Government and its Private Administrative Proxies, or BIG PAP for short. It includes the military-industrial complex; the government health care-industrial complex; the security-industrial complex (188,000 Homeland Security employees, plus over 200,000 private employees); the environmental-industrial complex, featuring thousands of EPA contractors and Department of Energy subsidy recipients; the welfare-industrial complex (13.5 million employees and $1.9 trillion in spending in 2009, much of it from government grants and contracts), and so on. DiIulio summarizes:

BIG PAP looks staggeringly immense. It represents some $7 trillion a year (and counting) in spending, more than 20 million public workers, and millions more de facto government employees in the business and non-profit sectors. It consumes more than 40% of GDP, and is on track to push the national debt above $20 trillion by the year 2020.

These are low-ball estimates. For example, “systemically important” financial institutions are joined at the hip with government; the nominally private housing sector lives on government guarantees and subsidies; and large chunks of the farm economy, from ethanol to sugar, depend on government hand-outs.

What DiIulio describes is a middle class whose income and fortune depend more or less directly on government programs. “Middle class” covers an enormous swath: from the government’s stick-figure “Julia”; to academics like myself, whose ludicrous benefits are supported (so long as they will last) through government student loans and commitments of future tax dollars; all the way to wealthy lawyers and compliance officers who owe their extravagant compensation to the Dodd-Frank Act and the EPA. The vast majority of these people live and embrace an ethic of earned success that is probably more resilient than critics allow. However, that does not mean our institutions are sustainable.

Fragmentation and Intergovernmentalism. Among the hallmarks of modern American government is the proliferation of virtually autonomous, poorly monitored and controlled power centers—an endless array of agencies, boards, and commissions; state attorneys general; state courts; and so forth. We have endowed these institutions with overlapping jurisdiction and with veto rights. Fragmentation does not discriminate between left and right: it blocks the Keystone XL pipeline but also wind farms, solar power facilities, and transmission lines for those industries. Sometimes, multiple vetoes work to good effect, as when California’s multiple layers of environmental review block an absurd high-speed train project. Much more often, the mechanisms thwart sensible projects or work at cross-purposes, as when the Treasury Department recapitalizes big banks and state attorneys general, empowered by the Dodd-Frank Act, rake a big chunk of that money off the table by means of settlements for allegedly fraudulent mortgage practices.

Worse than intergovernmental blockades are intergovernmental cooperation, that is, the joint production of education, environmental protection, health care, and other goods by multiple layers of government. Because the federal government cannot commandeer state or local officials, cooperation will occur only when it makes all government actors and their interest group clientele better off. That, though, takes money, which must come from us taxpayers.

That might not be so bad if intergovernmentalism produced results—but it doesn’t. It entails enormous coordination costs and a dramatic loss in political transparency and accountability: when everyone is responsible for results, no one really is. The outcomes look like this:

Public Education:
Cost and Percentage Change in Achievement since 1970



http://reason.com/archives/2011/02/2...he-brains-race

You are looking at four decades of continuous school reform by Democrats and Republicans; centralizers and advocates of local control; school choicers and union supporters. Yet measured student achievements have flatlined. The only measurable result has been the growth of government.

Another deleterious effect of intergovernmentalism is to produce fiscal illusions and, in short order, a much bigger government. Because the federal government pays between 50 and 80 percent of state Medicaid expenses, those services look very cheap to a state’s citizens, so they demand more of them. Each state will expand the services to maximize federal dollars. Along the way, Medicaid crowds out other, non-funded programs. When a fiscal crisis hits, Medicaid can no longer be cut, because that would mean leaving federal money on the table. And states cannot opt out, because their citizens would pay the federal taxes for the program in any event. All the states can do is what their voters ask them to do: demand yet more favorable terms. The institutional arrangements drive the demand for government.

Precommitment. There has been much talk about excessive regulation as a presumed cause of anemic economic growth. I suspect the real problem is sheer uncertainty. The American economy is sufficiently resilient to adjust to stringent regulation. What it cannot absorb so easily is an institutional environment in which anything can happen. The Affordable Care Act and Dodd-Frank have extended and institutionalized that regime over vast sectors of the economy. The statutes have created new institutions with awesome, poorly circumscribed authority and charged them with issuing hundreds of rules. That cannot be done. The only plausible private response is to postpone investment and hiring decisions and, meanwhile, to seek profits in the only promising venue—the lobbying corridors in Washington.

Political economists call this dysfunction an institutional inability to “precommit.” James Madison called the condition a “mutable government,” and he described its consequences in grim colors. “It poisons the blessing of liberty itself,” he wrote in Federalist 62, and he lamented

the unreasonable advantage [a mutable government] gives to the sagacious, the enterprising, and the moneyed few over the industrious and uniformed mass of the people. Every new regulation concerning commerce or revenue, or in any way affecting the value of the different species of property, presents a new harvest to those who watch the change, and can trace its consequences; a harvest, reared not by themselves, but by the toils and cares of the great body of their fellow-citizens. […]

What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not but that his plans may be rendered unlawful before they can be executed? What farmer or manufacturer will lay himself out for the encouragement given to any particular cultivation or establishment, when he can have no assurance that his preparatory labors and advances will not render him a victim to an inconstant government? In a word, no great improvement or laudable enterprise can go forward which requires the auspices of a steady system of national policy.

But the most deplorable effect of all is that diminution of attachment and reverence which steals into the hearts of the people, towards a political system which betrays so many marks of infirmity, and disappoints so many of their flattering hopes. No government, any more than an individual, will long be respected without being truly respectable; nor be truly respectable, without possessing a certain portion of order and stability.

We have institutionalized inconstancy and infirmity. James Madison called that sort of politics no better than a Hobbesian state of nature. Washington is a Hobbesian world, except with better ethnic food.

What Would it Look Like?

Unsustainable entitlement programs. A socialized housing market. BIG PAP. Intergovernmental blockades, duplication, and collusion. An inconstant government that has forfeited citizens’ confidence. We built those institutions in an era of prosperity, when and because we thought we could afford them. That era has come to an end. But the institutions are far too entrenched to be dislodged in the course of ordinary politics. They would have to be reconstructed. What would that look like?

Our most recent constitutional moments—the New Deal, and the Great Society—provide guidance only by way of contrast. They were about promising people more stuff and about building institutions to entrench their entitlements. That m.o. is not a model; it is our problem.

The Founding is also not be a model—certainly not in the sense of a playbook. However, The Federalist can teach us to recognize a constitutional moment and to realize what it would take to seize it.

Moments. Constitutional moments are moments—brief periods when the rules of ordinary, shortsighted interest group politics are suspended; bigger, more fundamental questions engage the citizenry; and statesmen gain room for public-spirited ventures. However, citizens must be made aware that they are living such a moment. They must be attuned to the possibilities and mindful of the dangers of letting the moment slip by.

To that end, The Federalist recalls the recent war, waged successfully and at great cost: we did not fight that war for the petty, dispiriting, parochial politics that now engulfs us. “It is too early for the politicians to count on our forgetting,” the usually plodding Madison writes in a terrific sentence.

A second factor made 1787 possible: public alarm over the union’s predicament was a consensus on which statesmen could build. What need is there, Alexander Hamilton asked, “to illustrate a position, which is neither controverted nor doubted; to which the understandings and feelings of all classes of men assent; and which in substance is admitted by the opponents as well as by friends of the new constitution?” (Federalist 15). I suspect that this was not quite true. Then as now, there must have been people who denied the depth or the urgency of the country’s problems. But it was true enough to allow Hamilton to recount the country’s “melancholy situation” in a single page and to proceed, in that same essay, to its causes and remedies.

Is that us? Obviously, we haven’t fought a war lately, at least not a war that unites us in a common cause. Do we have a consensus that the situation is sufficiently dire to contemplate dramatic measures? My sense is, not quite yet. Our operative consensus is to have a big transfer state, and not pay for it. Sooner or later, though, that consensus will break one way or the other. When that happens, the task will be to generate a different consensus: we cannot afford this.

Reflection and Choice. A constitutional moment, Publius famously wrote, is a moment of “reflection and choice.” “Reflection” points beyond raw self-interest and the short-term calculus of politicians and factions. But it does not mean arid principle, devoid of interest; it means civic, engaged deliberation and argument over matters of grave public concern, from a broader and more long-term vantage.

“Choice” means that events can be shaped; it is opposed to “accident and force.” As Publius works through the moment, though, it turns out that constitutional choice means a binary choice: it’s the Constitution, or misery. The stark alternative, in turn, requires a coherent plan of action—not a mere “let’s do something dramatic,” but an actual Constitution. But it also requires something else: candor and boldness. Even over a span of 225 years, the Founders’ sheer guts remain breathtaking.

The Constitution, Antifederalists wailed, would disempower state officials—not a small matter then, or now. Yet without even a nod to state autonomy or local attachments, Hamilton takes up the challenge in Federalist 1: that is exactly what the Constitution means. State politicians are unpersuadable, he tells his readers, because the “emoluments and consequence” of their offices is all they care about and ever will care about. Are you with me, Hamilton asked, or with them?

This Constitution will mean a government with virtually unlimited taxing powers. We Federalists believe that this will actually lower your burdens, debt, and distress; but we are not going to shade or disguise the power. Do you want it?

This Constitution means a standing army, under the command of a single executive. Are you ready for that?

This Constitution means a central government, almost as far away as London, with the power to tax and regulate you directly, with no power to interpose or protect you. Are you prepared to take that step?

We tend to think that the Founders’ boldness had to prevail. The Antifederalist proponents of a middle course—a reform of the Articles of Confederation—lost because their plan was incoherent, and because they lacked compelling arguments and political imagination. But we think that way mostly because we know who won, and so we underestimate the Founders’ daring and what they were asking of the American people. Robert Morris’s investments were effectively a bet against the union, which he lost. (He knew he would, and still supported the Constitution.) New York would lose the dubious privilege of taxing Connecticut consumers. Debtors would lose the protection of state governments. State politicians would lose power and revenue. To all of them, The Federalist responds: yes. We are asking you to give it up, in return for a wholly untried political experiment. A politics of “reflection and choice” is ambitious and inspiring, but it has a very hard edge.

Again, is that us? Not really. Our politics aims at inspiration on the cheap, without the edge. One camp says: “Have some more benefits (unless you are rich).” The other side says, “Our program will be to everyone’s immediate advantage (except unnamed members of a culture of dependency).” This is the politicians’ holy grail—a full set of Pareto-superior policies. It is Antifederalist in spirit. That was wrong then. I strongly suspect it is wrong now.

Institutions. The Founders’ focus, I noted, was on institutions. It is instructive to follow the trajectory of their argument.

To end debt, despair, and defenselessness, Publius explained, we must increase the tax capacity of the central government. That cannot be done within the existing framework of requisitioning states: we have tried that system, and it failed. And it cannot be done by heaping yet more authority on a government whose legitimacy is already in doubt. If you care about effective government, you have to give it direct tax authority; and if you care about republican government, you have to elect that government and hold it directly accountable. In short: once you think seriously about the policy question, you have to reinvent the entire institutional structure.

We need not go that far. But we probably cannot stop very far short. Any serious debate would move along The Federalist’s path, from the policies that we cannot afford to the institutions that produce them.

We would not try to fine-tune Fannie and Freddie (as both parties propose to do) so that the GSEs can continue to dominate over 90 percent of the mortgage market and one day pay back the debt that we shuffled from one account to another. We would recognize that the GSE’s in any configuration are disasters waiting to happen again. We would take their obligations on the books, wipe out the institutions, and re-create what the United States, virtually alone among advanced nations, no longer has—a private mortgage market.

We would end the government’s complicity in creating dependency and illusions, and reverse course. We would send retirees a statement showing the estimated present value of their old-age benefits; their lifetime earnings and contributions; and the earnings and contributions that it would have taken to “earn” those benefits. We might then ask them who precisely should earn and remit the missing millions and in what sense it would be “unfair” to modify the empty promises.

We, and especially conservatives, would squelch mindless blather about states’ rights and prerogatives as a bulwark against tyranny and instead acknowledge that our so-called federalism drives the growth of a bloated, irresponsible, ineffectual government. In John DiIulio’s words:

America would almost certainly have a smaller government than it does today if, by means of some traditional political norm or by some constitutional provision, every post-1960 federal policy, program, rule, or regulation had to be administered directly and exclusively by full-time federal bureaucrats. The use of sub-national civil servants, private contractors, and non-profit grantees to carry out federal laws—a practice surely intended to restrain the size of government—has instead inflated the state.

We would declare surrender in the fifty-year campaign to get the institutional incentives in the intergovernmental blob just right. We would stop migrating from block grants to categorical grants and back again and instead act on the obvious recognition that no good can come from authorizing one government to tax and another to spend the proceeds. We would align taxes and spending and hand Medicaid, education, and most everything else to one or the other level of government but not both, on the principle that undergirds the Founders’ Constitution: one problem, one sovereign.

Above all, we would heavily discount policy programs that promise prosperity around the corner and instead ask the question that the Founders invited and sought to answer: can you make this last? If I take my hit today, can you assure me that I can make reasonable plans from hereon out? Will this protect my children and grandchildren, or will you and your successors again hand the proceeds to your cronies? As the Founders might have put it and did in fact put it, can you reasonably assure us that this project will secure the blessings of liberty to ourselves and our posterity?

That is not a values question, and it is not a policy question. It is an institutional question. We do not have an answer. We haven’t even seriously asked the question. But we will have to. Now as in 1787, our broken institutions force it upon us.

Values After All

Perhaps, I have this all backwards. In our mutable, faction-driven system, one might argue, one cannot even change or shape policies. The supposedly stark alternative before us in November is a mirage that will dissolve in a divided government. How then can one reform institutions without some fundamental change in values? Doesn’t that have to come first?

I take the point, but I do not think that it is persuasive. Of course, dysfunctional institutions will in the ordinary course of politics perpetuate bad policy and put meaningful reform beyond reach. However, values and culture cannot change that, either; the institutions are far too resilient. What I hope to have illuminated, or at any rate put into question, is what might happen when the institutions threaten to collapse.

At that point, ordinary interest group politics is suspended and politics becomes more fluid and engaged—more constitutional. And then, yes: we will need values and virtues after all. Here again, I take my bearings from The Federalist. After all the institution talk, the reliance on ordinary Americans, and the insistence that it would be in citizens’ interest to adopt the Constitution, Publius does eventually appeal to virtues. The appeal, however, is not to now-fashionable bourgeois virtues of entrepreneurship and self-reliance.

There is no need to belabor our wretched condition, Alexander Hamilton writes. But then he does devote a page to the matter, and he encapsulates his litany in a single sentence: “We may indeed be said to have reached almost the last stage of national humiliation.” Eleven years ago, in 1776, we paid “a decent respect to the opinions of mankind.” We demand that respect in return; but to do so, we ourselves must be respectable. Honorable.

Our constitutional moment will come, to be missed or seized. And when it comes, it will not turn on unemployment rates or Medicare reimbursements or even earned success with all its ambiguities. It will be, or not be, a moment of honor.

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A few reply's to this article:

A. Toward a Softer, Kinder Constitutional Moment
by WILLIAM GALSTON

I admire all of Michael Greve’s essay and agree with much of it. Like him, I worry about the long-term solvency of the United States. Like him, I doubt the capacity of partisan politics as currently structured to address that problem. And like him, I am a dyed-in-the wool Madisonian institutionalist who views changes of incentives as a more reliable basis for reform than an outburst of civic virtue.

It was not so long ago that I regarded Herbert Stein’s well-known aphorism as an antidote to despair. Lately I have begun to wonder. Yes, if something cannot go on forever, it will stop. But it matters how it stops. If a car is speeding toward a washed-out bridge, it can come to a halt on dry land . . . or plunge into the river. The question before us is whether the U.S. political system retains the capacity to hit the brakes before it’s too late—and then move in a different direction. Greve isn’t sure that it does, and neither am I. But my diagnosis of our current plight is a bit less dire than his, and my prescription is therefore somewhat less far-reaching.

Someone is “broke” when his expenses exceed his income, he has run through his liquid reserves, and no one will lend him what he needs to cover the shortfall. By that standard, the government of United States is not yet broke. Indeed, the rest of the world is throwing money our way at interest rates that would have been unthinkable just a few years ago. This isn’t just short-term hot money: the Treasury is selling 10-year notes yielding less than 2 percent, and 30-year bonds at under 3 percent. This may represent a flight to safety. Still, it wouldn’t be happening unless the market believed that we’re good for the money.

Yes, public debt has risen steeply as a share of our GDP. But after household debt soared to unsustainable heights and the Great Recession wiped out trillions in household assets, a significant increase in public debt was an unavoidable prophylactic against outright economic collapse. Greve would agree, I suspect, that the real issue is what we can expect when the economy has returned to whatever “normal” now means.

It’s also worth remembering that our public debt problem–at least at the federal level—is of recent vintage. Bill Clinton inherited a budget that represented 21.4 percent of GDP and debt held by the public amounting to 44.4 percent of GDP. When he left office eight years later, federal spending stood at 18.2 percent of GDP and debt held by the public at 27.2 percent. Adjusted for inflation, outlays rose by less than 12 percent during that period, just slightly more than 1 percent per year (compounded). While military spending declined as a share of GDP during the Clinton years, so did domestic discretionary spending. Fiscal prudence is possible under contemporary conditions, not just those of Calvin Coolidge.

Nor is it clear that the United States is doomed to a new normal of 2 percent growth. Indeed, a respectable case can be made for a more optimistic view. Once households reduce their debt burden to manageable proportions, consumer spending should pick up. Housing has bottomed out and should be a net positive over the next five years—less so than in the preceding twenty, but that’s a good thing. The boom in the energy sector should continue. And the one upside of wage stagnation is that the United States has become more competitive as a site for manufacturing.

Greve is much taken with the late Samuel Huntington’s thesis that change in America happens convulsively, in moment of creedal passion, or not at all. I’m less confident of that than he is. The system also admits of more modest and incremental reforms that can significant alter that nation’s course. For example, we moved from the sizeable deficits of the late 1980s to the surpluses of the late 1990s in three stages: the 1990 budget accord that may well have torpedoed George H. W. Bush’s chances of reelection; the 1993 Clinton budget, which passed without a single Republican vote; and the 1997 bipartisan accord between Clinton and House Speaker Newt Gingrich.

But—you may object—that was then, and this is now. The issues are different—and much less politically tractable. Baby boomers began retiring five years ago, setting in motion upward pressure on Social Security and Medicare that will last for a generation. Meanwhile, the Affordable Care Act (AKA Obamacare) dramatically expands Medicaid. Fair enough, but some distinctions are in order.

Social Security expands only modestly over the next quarter century, and it can be brought into long-term actuarial balance through a well-understood combination of benefit cuts for upper-income beneficiaries and slow increases in the share of earned income subject to the payroll tax to restore the historic norm of 90 percent of wages and salaries. As for structural changes in the program, there was nothing like majority support for private accounts when George W. Bush pushed for them to no avail in 2005, and if anything they are less popular today. (The intervening gyrations of the stock market increased the public’s appetite for stability and security over the prospect of gain accompanied by the risk of loss.)

The nub of the matter is publicly funded health care. In the not too distant future, we’ll have no choice but to endure a frank and painful public discussion of who gets what and who pays for it. The outcome of that discussion will determine both the size of 21st century government in the United States and the terms of long-term fiscal stability. If Americans opt for publicly guaranteed health insurance security, they will also have chosen a substantially larger public sector than we have today. That would substantially narrow the gap between the United States and Europe, an outcome that many liberals would welcome and nearly all conservatives would loathe.

Turning to the states, the facts support Greve’s gloomy assessment of current conditions. Massive unfunded obligations for public employees’ retirement and health benefits jeopardize the fiscal stability of all but the best-managed states. But here, as with the federal government, the prospects for reform may be brighter than Greve acknowledges. In deep-blue Rhode Island, for example, a young treasurer defied the odds by pushing through reforms that cut the state’s unfunded liability in half. The legislature agreed to push back the retirement age for public employees, suspend cost-of-living increases, and shift some of the risk from taxpayers to beneficiaries. Unlike even Scott Walker’s Wisconsin, which exempted police officers and firefighters, the changes applied to all categories of employees. Most amazing of all, they affected current employees, not just new hires. (Not even Paul Ryan had the audacity to recommend anything like that.)

Not every state will reform as quickly and as well as Rhode Island, and down the road some may experience difficulty refinancing their debt. Like Greve and the markets, I do not expect direct federal action to share their burden or lighten their load. Unlike Greve, I do not expect what he terms “undercover bailouts” to continue, for the simple reason that the federal government cannot afford them. There is no reason to expect a repetition of the 2009 stimulus, and the long-term growth of federal contributions to the existing Medicaid program will be limited, one way or another. The wild card is the Affordable Care Act, which (Greve predicts) will allow the states to “dump” large numbers of employees and retirees into federally funded programs. That is not what most health policy experts expect, but if Greve turns out to be right, it would compel major structural modifications of the ACA—assuming that it survives the 2012 election.

What about the future? As I said at the outset, I agree with Greve: we must think institutionally, and we should think big. Phasing out the housing-specific GSEs makes sense and enjoys substantial bipartisan support. Federal experts such as Brookings’ Alice Rivlin have long argued for a sorting-out of responsibilities between the federal government and the states to reduce complexity, enhance efficiency, and better align funding responsibilities with programmatic control. As for entitlements, some years ago a bipartisan group proposed a new strategy, modeled on the successful Swedish reforms of the 1990s, that would take these programs off auto-pilot and put them on five-year budgets, with legislated trigger mechanisms that would force the Congress to eliminate any gap that may develop between budgetary assumptions and fiscal reality.

A reform of fiscal governance is overdue. For example, backdoor spending through the tax code should be curbed. (Maya MacGuineas and I have proposed a ten-year phase-out of all the preferences and loopholes that currently honeycomb the federal system of taxation.) And the president should receive enhanced rescission authority—a constitutional version of the line-item veto—that would force Congress to take direct responsibility for the thousands of targeted spending programs that it now slips into veto-proof omnibus legislation in the dark of night.

It is a matter of semantics whether one regards these kinds of institutional changes as “constitutional.” What does matter is that they represent a significant change of course. Enacting them—or their functional equivalent—into law would require an exercise of political capacity that the federal government hasn’t displayed for quite some time. Still, in dark moments I console myself with Winston Churchill’s much-quoted aphorism , that you can always rely on America to do the right thing–once it has exhausted the alternatives. The good news is that at long last, we have.

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B. Can America Undo Its Purple Compromise?
by WILLIAM VOEGEL

If something can’t go on forever, Herb Stein instructed us, it won’t. The relief that bad arrangements will not get eternally worse yields once more to alarm, however, when we contemplate how they will stop going on forever. With ample warning before we face mortal peril, and sufficient reservoirs of probity, good will, and intelligence to meet the challenges? Or, as Hemingway wrote, gradually and then suddenly? If it’s the latter, and a gathering storm breaks fiercely, we’ll have bracing opportunities to find out what we’re made of, and may not like what we learn.

“We are broke,” Michael Greve states. Why? Because, “Our operative consensus is to have a big transfer state, and not pay for it.” The effort to satisfy those contradictory desires might go on forever if someone were to discover the policy formula guaranteeing permanent and rapidly growing prosperity. Greve shows how unlikely it is that the government will find and activate that elusive 5% growth button.

Even if he’s wrong, there’s good reason to fear that if the economy builds a 5% levee the polity will just come up with a 6% flood. We humans adroitly use scant and equivocal evidence to convince ourselves that the most congenial interpretation of events is also the most plausible and durable. The defining feature of every bubble is a broad consensus that it’s not a bubble, but the dawn of a new epoch supplanting scarcity with plenty, and lots of it. We happily interpreted just a couple years of the dot-com boom as an all-clear signal to make our transfer state bigger and tax ourselves more lightly to pay for it, before anyone thought hard about whether OvenMitts.com’s business model really justified a stock price 600 times earnings.

“Sooner or later,” Greve advises, the consensus demanding big transfers and disproportionately small taxes “will break one way or the other.” A house divided against itself cannot pay for maintenance. He argues that this contradiction is not a fiscal problem that could be solved by the discovery of more money lying around, but a political problem caused by our chronic, long-term proclivity to demand more from the government than we are prepared to surrender to it. Moreover, this bad habit is not just any old political problem, one we can expect to muddle through the way we have muddled through others, but a constitutional crisis. It calls into question whether the form of the republic, our governmental architecture, and its substance, the people’s convictions about what they’re entitled and obligated to, conduce to the American experiment’s perpetuation or its disintegration.

Our purple compromise, giving blue-staters the social welfare programs they refuse to diminish and red-staters the tax burden they refuse to increase, is untenable. One of the reasons Greve is wise to frame this as a constitutional dilemma is the way questions of governmental competence and social cohesion are bound up in ostensibly fiscal issues. Democrats believe that there’s nothing wrong with our transfer state that couldn’t be solved by adequate revenues. Things were going along fine, in their view, until Howard Jarvis and Ronald Reagan beguiled the people into believing that taxes they had theretofore been willing to pay, in order to enjoy the government benefactions they had been theretofore happy to accept, could be slashed without affecting the benefactions in ways anyone would notice. Things will be fine again, Democrats argue, if we come to our senses, repudiate conservative anti-tax ideology, and restore a fiscally sound transfer state by recommitting to providing it an adequate revenue stream.

That movie suffers from a gaping hole in its plot: If Americans had long displayed the common sense and common decency to align the tax burdens they accepted with the public benefits they expected, and were justifiably satisfied with the resulting policy configuration, how did the preposterous, malicious idea the two could be decoupled ever get taken seriously, much less come to dominate politics at every level? Democrats can only ascribe this bitter, incomprehensible setback to the malevolent cynicism of anti-tax, anti-government Republican politicians and apparatchiks. They discovered how easily sensible, honorable voters could be induced to behave fecklessly and shamefully, and then exploited this knowledge with startling indifference to the resulting fiscal disorder and human suffering.

The last place to look for the guilty party is in a mirror, which is why Democrats have paid so little attention to an obvious alternative theory of the case. By the late 1970s a sizeable number of citizens were amenable to calls to cut Club America’s dues because they were increasingly convinced they had been paying exorbitant amounts while receiving shoddy benefits and imperious attitudes from the hired staff. If America is going to offer K-Mart public benefits – schools that don’t teach; streets that aren’t safe; infrastructure that’s poorly planned, constructed, and maintained – it will at some point become politically impossible to advocate a Neiman Marcus tax code. The social pathologies and governmental imbecilities of the 1960s and ’70s were a predicate for the tax revolt, as voters who despaired of aligning the benefits and burdens of citizenship by improving government’s performance decided the only other way to restore proportionality was by cutting taxes.

The Democratic Party has become the party of government in two senses. It defends: 1) the government’s capacity and duty to solve problems and improve the nation’s quality of life, and 2) the competence, sincerity, and desert of government employees and clients. Democrats are most complacent when they blandly assume these two missions are in perfect harmony. Their tranquility is disturbed when they are forced, as in the recent Chicago school strike, to confront evidence that the missions are at cross-purposes. The public will not trust the government to solve problems or perform basic functions if it cannot trust government to hold itself to rigorous standards, using its resources efficiently and effectively.

This position, which the city’s Democratic mayor embraced, was rejected strenuously by the teachers union, one of the party’s core constituencies. The mayor appealed to the public’s awareness of the kind of data Greve presents, showing that per-pupil expenditures, adjusted for inflation, have soared while student performance has languished. The teachers have a great deal of self-interest motivating them to dispute or disregard such evidence, but a more commendable argument, as well. It is that the schools – and many other public institutions doing less and less with more and more – have not lost the capacity to function, but are being assigned an increasing number of problems more severe and complex than they were built to handle.

Thus, teachers forced to devote most of their day to keeping order among children who have acquired, on mean streets and in random, dysfunctional homes, an ethic that prizes self-assertion but disparages self-control, rightly resent becoming the villains in the story of an educational system that has lost the capacity to educate. By the same token, however, citizens who strive to keep their lives and families intact, to raise respectable and respectful children, feel less and less solidarity with those who disregard those obligations. They chafe at the accusation that they’re greedy or mean for opposing taxes and government programs intended to help those who are so much better at harming than helping themselves.

Greve, then, is right to contend that we face a small-c constitutional crisis. As in the 1780s, we confront the question of whether and how we can govern ourselves. Can we devise and sustain institutions that enable the government to govern while obliging it to control itself? And can we embrace and preserve the ethos of individual self-control and self-respect on which collective self-government rests? The house always wins, as they say in Las Vegas. For 225 years America has defied the odds that saw all of history’s previous republics implode. Sadly, the list of things that can and won’t go on forever includes winning streaks.

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a1. Toward a Softer, Kinder Constitutional Moment
Reply by: WILLIAM GALSTON

I admire all of Michael Greve’s essay and agree with much of it. Like him, I worry about the long-term solvency of the United States. Like him, I doubt the capacity of partisan politics as currently structured to address that problem. And like him, I am a dyed-in-the wool Madisonian institutionalist who views changes of incentives as a more reliable basis for reform than an outburst of civic virtue.

It was not so long ago that I regarded Herbert Stein’s well-known aphorism as an antidote to despair. Lately I have begun to wonder. Yes, if something cannot go on forever, it will stop. But it matters how it stops. If a car is speeding toward a washed-out bridge, it can come to a halt on dry land . . . or plunge into the river. The question before us is whether the U.S. political system retains the capacity to hit the brakes before it’s too late—and then move in a different direction. Greve isn’t sure that it does, and neither am I. But my diagnosis of our current plight is a bit less dire than his, and my prescription is therefore somewhat less far-reaching.

Someone is “broke” when his expenses exceed his income, he has run through his liquid reserves, and no one will lend him what he needs to cover the shortfall. By that standard, the government of United States is not yet broke. Indeed, the rest of the world is throwing money our way at interest rates that would have been unthinkable just a few years ago. This isn’t just short-term hot money: the Treasury is selling 10-year notes yielding less than 2 percent, and 30-year bonds at under 3 percent. This may represent a flight to safety. Still, it wouldn’t be happening unless the market believed that we’re good for the money.

Yes, public debt has risen steeply as a share of our GDP. But after household debt soared to unsustainable heights and the Great Recession wiped out trillions in household assets, a significant increase in public debt was an unavoidable prophylactic against outright economic collapse. Greve would agree, I suspect, that the real issue is what we can expect when the economy has returned to whatever “normal” now means.

It’s also worth remembering that our public debt problem–at least at the federal level—is of recent vintage. Bill Clinton inherited a budget that represented 21.4 percent of GDP and debt held by the public amounting to 44.4 percent of GDP. When he left office eight years later, federal spending stood at 18.2 percent of GDP and debt held by the public at 27.2 percent. Adjusted for inflation, outlays rose by less than 12 percent during that period, just slightly more than 1 percent per year (compounded). While military spending declined as a share of GDP during the Clinton years, so did domestic discretionary spending. Fiscal prudence is possible under contemporary conditions, not just those of Calvin Coolidge.

Nor is it clear that the United States is doomed to a new normal of 2 percent growth. Indeed, a respectable case can be made for a more optimistic view. Once households reduce their debt burden to manageable proportions, consumer spending should pick up. Housing has bottomed out and should be a net positive over the next five years—less so than in the preceding twenty, but that’s a good thing. The boom in the energy sector should continue. And the one upside of wage stagnation is that the United States has become more competitive as a site for manufacturing.

Greve is much taken with the late Samuel Huntington’s thesis that change in America happens convulsively, in moment of creedal passion, or not at all. I’m less confident of that than he is. The system also admits of more modest and incremental reforms that can significant alter that nation’s course. For example, we moved from the sizeable deficits of the late 1980s to the surpluses of the late 1990s in three stages: the 1990 budget accord that may well have torpedoed George H. W. Bush’s chances of reelection; the 1993 Clinton budget, which passed without a single Republican vote; and the 1997 bipartisan accord between Clinton and House Speaker Newt Gingrich.

But—you may object—that was then, and this is now. The issues are different—and much less politically tractable. Baby boomers began retiring five years ago, setting in motion upward pressure on Social Security and Medicare that will last for a generation. Meanwhile, the Affordable Care Act (AKA Obamacare) dramatically expands Medicaid. Fair enough, but some distinctions are in order.

Social Security expands only modestly over the next quarter century, and it can be brought into long-term actuarial balance through a well-understood combination of benefit cuts for upper-income beneficiaries and slow increases in the share of earned income subject to the payroll tax to restore the historic norm of 90 percent of wages and salaries. As for structural changes in the program, there was nothing like majority support for private accounts when George W. Bush pushed for them to no avail in 2005, and if anything they are less popular today. (The intervening gyrations of the stock market increased the public’s appetite for stability and security over the prospect of gain accompanied by the risk of loss.)

The nub of the matter is publicly funded health care. In the not too distant future, we’ll have no choice but to endure a frank and painful public discussion of who gets what and who pays for it. The outcome of that discussion will determine both the size of 21st century government in the United States and the terms of long-term fiscal stability. If Americans opt for publicly guaranteed health insurance security, they will also have chosen a substantially larger public sector than we have today. That would substantially narrow the gap between the United States and Europe, an outcome that many liberals would welcome and nearly all conservatives would loathe.

Turning to the states, the facts support Greve’s gloomy assessment of current conditions. Massive unfunded obligations for public employees’ retirement and health benefits jeopardize the fiscal stability of all but the best-managed states. But here, as with the federal government, the prospects for reform may be brighter than Greve acknowledges. In deep-blue Rhode Island, for example, a young treasurer defied the odds by pushing through reforms that cut the state’s unfunded liability in half. The legislature agreed to push back the retirement age for public employees, suspend cost-of-living increases, and shift some of the risk from taxpayers to beneficiaries. Unlike even Scott Walker’s Wisconsin, which exempted police officers and firefighters, the changes applied to all categories of employees. Most amazing of all, they affected current employees, not just new hires. (Not even Paul Ryan had the audacity to recommend anything like that.)

Not every state will reform as quickly and as well as Rhode Island, and down the road some may experience difficulty refinancing their debt. Like Greve and the markets, I do not expect direct federal action to share their burden or lighten their load. Unlike Greve, I do not expect what he terms “undercover bailouts” to continue, for the simple reason that the federal government cannot afford them. There is no reason to expect a repetition of the 2009 stimulus, and the long-term growth of federal contributions to the existing Medicaid program will be limited, one way or another. The wild card is the Affordable Care Act, which (Greve predicts) will allow the states to “dump” large numbers of employees and retirees into federally funded programs. That is not what most health policy experts expect, but if Greve turns out to be right, it would compel major structural modifications of the ACA—assuming that it survives the 2012 election.

What about the future?

As I said at the outset, I agree with Greve: we must think institutionally, and we should think big. Phasing out the housing-specific GSEs makes sense and enjoys substantial bipartisan support. Federal experts such as Brookings’ Alice Rivlin have long argued for a sorting-out of responsibilities between the federal government and the states to reduce complexity, enhance efficiency, and better align funding responsibilities with programmatic control. As for entitlements, some years ago a bipartisan group proposed a new strategy, modeled on the successful Swedish reforms of the 1990s, that would take these programs off auto-pilot and put them on five-year budgets, with legislated trigger mechanisms that would force the Congress to eliminate any gap that may develop between budgetary assumptions and fiscal reality.

A reform of fiscal governance is overdue. For example, backdoor spending through the tax code should be curbed. (Maya MacGuineas and I have proposed a ten-year phase-out of all the preferences and loopholes that currently honeycomb the federal system of taxation.) And the president should receive enhanced rescission authority—a constitutional version of the line-item veto—that would force Congress to take direct responsibility for the thousands of targeted spending programs that it now slips into veto-proof omnibus legislation in the dark of night.

It is a matter of semantics whether one regards these kinds of institutional changes as “constitutional.” What does matter is that they represent a significant change of course. Enacting them—or their functional equivalent—into law would require an exercise of political capacity that the federal government hasn’t displayed for quite some time. Still, in dark moments I console myself with Winston Churchill’s much-quoted aphorism , that you can always rely on America to do the right thing–once it has exhausted the alternatives. The good news is that at long last, we have.