Fiscal Environment

Reagan may have failed to starve activist government in the short term, but in the long term fiscal conservatives have succeeded in robbing the welfare state of the resources necessary to fund a robust array of social protections. As Pierson points out, one of the most significant but underappreciated Reagan-era policy changes was the indexing of the federal individual income tax brackets to inflation. Prior to this 1985 change, surpluses tended to arise naturally: with fixed tax brackets, real wage growth plus inflation pushed taxpayers into paying higher rates on their marginal income. With the indexation of the brackets, however, the fiscal situation flipped: now what arose automatically were not surpluses but rather deficits, because as individuals’ incomes increased with inflation, their marginal tax rate remained the same and revenues would not rise in real terms. Paired with the fact that real wages have been flat or falling for many workers over the subsequent decades, this change altered the politics of taxation and constrained federal revenues.

The consequence of this shift is most obvious in cross-national comparison. Back in the mid-1960s, total government revenues from all sources as a percentage of GDP were about the same in the United States as the OECD average. Since then, revenues in peer nations have continued to grow, but government revenue in the United States has been flat at about 25% of GDP for all levels of government and 17.5% of GDP for the federal government—despite the aging of the population and increased medical costs (OECD 2014; US Office of Management and Budget 2014). The result at the federal level has been to squeeze discretionary domestic spending on programs such as education, transportation, and job training (Holzer and Sawhill Reference Holzer and Sawhill2013).

Another program-specific fiscal strategy in the retrenchment toolkit is the block grant. Aid to Families with Dependent Children (AFDC) was an entitlement program, at least for the states—they received federal matching funds for all of the beneficiaries they deemed eligible. But the 1995 welfare reform replaced AFDC with the Temporary Assistance for Needy Families (TANF) program, turning cash assistance into a discretionary block grant program. Moreover, the grant each state receives equals its pre-1996 amount, which is not indexed for inflation. This deviously clever design means that the funds available for “welfare” fall naturally over time. In addition, the reform gave states leeway to use the grant money for purposes other than cash assistance, such as job training or marriage and child support promotion. The result has been devastating for the poor. Forty years ago, four out of five children under the poverty line received cash assistance; now four out of five do not (US House Ways and Means Committee 2011). The program is now so small—just 4% the size of Social Security—that it is barely a force in poverty reduction.

Privatization

Increasing the role of market forces in social programs through privatization is another strategy that welfare state opponents have utilized to reduce government’s role in protecting citizens from risk. After several political debacles during the Reagan administration, conservatives figured out that indirect rather than direct attacks on programs such as Social Security were more likely to be successful. Offering private alternatives to government programs became the preferred strategy. Indeed, conservatives have continued to push for privatization, even when it is more expensive than government provision, ideology trumping fiscal reality.

Because of differences in underlying program designs, this strategy has proven more successful in some arenas than in others. George W. Bush promoted Social Security private accounts at the beginning of his second term, but with little success. One difficulty was overcoming the “double payment” problem: today’s payroll tax receipts fund today’s benefits, and the same money cannot also be invested for the future, as privatization would require. When Bush decided to prioritize tax cuts instead, he eliminated the budget surplus that could have been used to fund the transition to individual accounts. The other barrier was fierce opposition from seniors and, concomitantly, their representatives in Congress, including Republicans (Campbell and King Reference Campbell, King and Hudson2010). In a program with a delivery mechanism as visible and traceable as a public pension (Arnold Reference Arnold1990), a change that decreased the defined benefit and increased the uncertainty of retirement income was bound to fail.

Privatization has made much greater inroads in Medicare due to differences in program design. Despite serving the same vigilant constituency as Social Security, Medicare has experienced a significant shift in the manner of provision. Seniors did ward off fundamental structural change: proposals to turn the open-ended Medicare entitlement into a fixed-value voucher achieved no traction, even during the Great Recession when the size of the federal budget deficit soared. However, Medicare has changed dramatically nonetheless. Fully 30% of Medicare enrollees are in private managed-care programs, not in the traditional government fee-for-service program (Kaiser Family Foundation 2014). This change has occurred through an interaction between facilitating legislation and changes in the managed care industry and the broader health care environment (Kelly Reference Kelly2014). Seniors had long been wary of managed care, but those firms received a big boost in the 2003 Medicare Modernization Act, which increased their reimbursements to 114% of the traditional program’s per person spending. These enhanced revenues allowed private plans to offer more expansive benefits than the traditional program (e.g., dental and vision) and lower cost-sharing. Also, as managed care shifted from narrow health maintenance organization-style provider groups to broader preferred provider organization networks, Medicare enrollees were more likely to be able to retain the providers they had before retirement (Kelly Reference Kelly2014).

Thus Medicare privatization has proven attractive to some seniors, although federal audits repeatedly find a number of private plans in regulatory noncompliance, for example rejecting medical claims and limiting prescription drug coverage improperly (Pear Reference Pear2014). Medicare privatization is also expensive for the government owing to the outsized reimbursement levels. Critics of Medicare private plans were thrilled when the Affordable Care Act (ACA) cut these reimbursements back to 95% of traditional Medicare per person spending. But these cuts have now been watered down, because of the opposition of seniors who fear their private plans will cut back benefits or leave the Medicare market altogether (Kelly Reference Kelly2014). The protective constituency rears its head once again.

Privatization does not necessarily cut government spending but is lauded by conservatives nonetheless because of a belief in the superiority of private provision (Morgan and Campbell Reference Morgan and Campbell2011). Indeed, this belief suffuses the ACA’s design, which expands health insurance coverage using private insurance plans, with no public option. This design not only costs the government more, because it locks in the most expensive and inefficient form of insurance, but also pushes the risk of bad plan choice onto consumers.

Decentralization

A third strategy available to retrenchers is decentralization, pushing program responsibility down from the federal government to state and local governments. Pierson argues that this strategy will achieve social spending reductions because of interjurisdictional competition. No state wants to be a welfare magnet and so each state will have an incentive to minimize social welfare benefits lest the poor move in while affluent taxpayers move out. In addition, many state and local governments simply lack the fiscal capacity to fund social welfare efforts robustly.

Scholarly evidence abounds for these efforts to minimize social welfare spending. Even if the welfare magnet phenomenon does not exist—it is much contested in the literature—state lawmakers believe it exists and try to minimize social welfare generosity (Thompson Reference Thompson2012). Moreover, there is no doubt that lack of fiscal capacity has had destructive effects on redistributive policy. States with a poorer citizenry and lower revenue-raising capacity have lower social spending and lower benefits, and therefore do less to relieve poverty than their richer peers, even after adjusting for differences in cost of living (Campbell Reference Campbell2014).

State administrative effort matters tremendously as well. Take-up rates—the proportion of people eligible for a program who actually enroll—vary substantially across states. This is true even for federally funded programs with the same eligibility rules nationwide, such as food stamps, where the take-up rate varies from 98% of the eligible signed up in Missouri to just 50% in California (Cunnyngham, Castner, and Schirm Reference Cunnyngham, Castner and Schirm2008).

Indeed, decentralization has been a very effective strategy for social spending opponents, and for reasons that go well beyond those that Pierson mentions in his book. One factor is decentralization’s ability to undermine the development of mobilized and protective constituencies. With policy responsibilities pushed to lower levels of government, it is harder to mobilize constituents when there is not one focus of activity, as with the federal Social Security program. And with responsibility split among levels of government, it is difficult for constituents to know where to press their claims: local government? State? Federal? (Levitsky Reference Levitsky2014).

In addition, decentralization enhances the prospects for “policy drift,” that is, for policy to fall behind evolving needs (Hacker Reference Hacker2004). When policy is devolved to the fifty states, no one is watching. ^{Footnote 2} No entity is monitoring program outcomes in a diligent way and flagging instances of inadequacy. And conservatives undermined the entities that did monitor, for example eliminating in 1996 the Advisory Commission on Intergovernmental Relations, an independent agency that collected data on and studied the relationships between the levels of the American federal system.