American Exceptionalism Revisited

American public policy has always defied tidy summary. The Constitution bequeathed a set of institutions designed to cabin and fragment as well as enable and embed central authority. The resulting “Tudor Polity,” as Samuel Huntington memorably labeled it, generates institutional conflict, recurrent gridlock, and (when that gridlock is broken) untidy compromises that madden administrative rationalists.^{Footnote 3} Descriptions of American public policy run the gamut of disparagement: “kludgeocracy,” “Rube Goldbergesque,” “jerry-rigged,” “patchwork.”^{Footnote 4} Contradictory rules and workarounds substitute for the coherent administration seen—or at least presumed to exist—abroad.

Perhaps nowhere is this more true than in U.S. social policy. The American welfare state consists of a bewildering hodgepodge of policies at all levels of government. These range from spending programs like Social Security, to public programs that finance private services or even private insurance itself, to a wide assortment of subsidies for non-governmental benefits. Many of these policies involve delegation to nonprofits and businesses that serve, in effect, as mini-welfare states. As Faricy’s book reminds us, moreover, many are delivered through the tax code rather than direct spending.

Among tax policy experts, these provisions are known as “tax expenditures,” departures from the normal tax treatment of income that lower taxes on particular people, institutions, or activities. Such special provisions are equivalent to direct spending because, just as with cash expenditures, lower taxes on some taxpayers require higher taxes on others (or lower spending or higher deficits). Indeed, tax expenditures look much like public “entitlement” programs in practice, with spending determined not by appropriations but by the number of people eligible for (and claiming) tax benefits.

For at least half a century, tax reformers have demanded that such hidden spending be restrained and brought into the open. Instead, it has expanded faster than direct spending, and particularly so in social policy. According to Faricy, around 80 distinct tax provisions with social welfare purposes now cost the federal government over a half trillion dollars in forgone revenue each year, making these hidden expenditures roughly equal to federal spending on public employee pensions, unemployment insurance, Supplemental Security Income, food stamps, and cash assistance for the poor combined.

As for greater openness, the federal government has become somewhat more transparent: Both the Treasury Department and Congress’s Joint Committee on Taxation produce estimates of the revenue cost of tax expenditures. Unlike direct public spending, however, tax expenditures are not budgeted for by the federal government, and very few Americans know how large the benefits they receive through the tax code are—or even that they constitute special benefits at all.

The result is a framework of social protection that is not just maddeningly complex but also unevenly perceived. Big expenditure programs like Social Security and Medicare are hard to miss. But the rest of the framework—the assortment of tax breaks and regulated private benefits and third-party providers—lies mostly beneath the surface of public consciousness. It is, as Suzanne Mettler puts it in her important 2011 book, a “submerged state.”^{Footnote 5} At least until retirement, an American can benefit extensively from public social policies and yet never come into contact with a government agency or receive a check from the U.S. Treasury.

Two developments in the 1990s made these benefits more visible, at least to scholars. The first was the meteoric rise of a once-obscure tax credit enacted in the 1970s: the Earned Income Tax Credit (EITC). Expanded in 1990 under Republican George H.W. Bush and then again in 1993 under Democrat Bill Clinton, spending on the EITC surpassed spending on traditional cash welfare even before the 1996 welfare overhaul. By 2012, after another expansion advocated by President Barack Obama, spending on the EITC was roughly three times as large. No longer was it possible to deny the central role of the tax code in U.S. social policy.

The second development was intellectual. In 1997, Christopher Howard published The Hidden Welfare State: Tax Expenditures and Social Policy in the United States. At almost the same time, the Organization for Economic Cooperation and Development (OECD) released a series of papers that attempted to recalculate the level of rich nations’ social spending.^{Footnote 6} The OECD results were the first reliable cross-national measures of what their key inventor Willem Adema called “net social expenditure”—public social spending plus (mandatory or tax-subsidized) private social spending net of taxes.

The message of these groundbreaking publications was similar: The United States spends much more on social benefits than anyone had thought. The OECD tallies showed that while U.S. public social spending was relatively low, public and private spending after taxes was enormous. In 2011, the most recent year of the OECD estimates, net public and private social spending constituted a stunning 29 percent of GDP. That total placed the United States behind only France in net spending, and well ahead of Sweden and Germany (25 percent of GDP) and the United Kingdom (26 percent; refer to figure 1).

Figure 1

Public, private, and net total social expenditures, 2011

Source: OECD Social Expenditure Database (www.oecd.org/social/expenditure.htm), 2014.

Notes: To avoid double-counting, tax expenditures that subsidize private benefits are not included. Ranking of public spending and net total spending in parentheses.

Let that sink in: A larger share of the American economy is spent on social benefits than the comparable share of the Swedish economy. For decades before the OECD results, the question among scholars had been why the United States spent so little. But that turned out to be the wrong question. The biggest difference between the United States and other rich democracies is not the level of the spending. The biggest difference is the source: In the United States, a very large share of social spending—more than one-third in recent years—takes place in the private sector. In other rich nations, private social benefits have a much more limited (though increasing) presence.

Welfare for the Wealthy

In the OECD’s groundbreaking reports, the revised estimates of social spending were portrayed as an accounting exercise—as if public and private spending were just alternative ways of doing the same thing. Yet as Howard recognized in The Hidden Welfare State and I elaborated in The Divided Welfare State, the differences between public benefits and tax-subsidized private benefits are profound.^{Footnote 7}

To begin with, public benefits tend to be mandatory, which helps them spread risks broadly.^{Footnote 8} No less important, tax breaks for private benefits tend to help those at the top, not those at the bottom. In this respect, the EITC is doubly exceptional. It is not just a tax credit that has come to overshadow traditional antipoverty programs. It is also a tax credit that gives the most to the neediest. Other tax breaks with social policy aims largely do the opposite. They give the most to the richest. They are like a Robin Hood film played backward, taking from the poor and middle class to benefit mostly the affluent.

For starters, very few tax breaks are refundable as the EITC is, so those who pay no federal income taxes receive no benefit. That means the famous “47 percent” of Americans whom Mitt Romney criticized during the 2012 presidential campaign are out of luck—even though virtually all of them pay federal payroll taxes and state and local property and sales taxes.^{Footnote 9} What’s more, many social welfare tax breaks require that taxpayers itemize their deductions. Yet only a minority of middle- and lower-income taxpayers itemize while nearly everyone at the top does.

Romney described those too poor to pay income taxes as people “who are dependent upon government.” But when it comes to social welfare tax breaks, it is the other half of Americans—the upper-income half, and particularly its top reaches—who are the “dependent.” Not only are they more likely to pay income taxes. They also pay at higher rates, meaning the tax forgiveness they receive is worth more.

Most important, virtually all the big-ticket tax breaks with social policy aims involve favorable tax treatment of private social provision, such as workplace health benefits. It will come as no surprise to anyone who has followed recent economic trends that higher-income Americans are most likely to be offered such benefits and to take maximal advantage of them. When labor unions covered a good chunk of the blue-collar workforce, tax benefits for private benefits were somewhat more progressive. Today, however, they basically reinforce the labor-market advantages (and greater capacity to save) that the affluent already enjoy.

The combination of these regressive effects can be staggering. Take the favorable tax-treatment of workplace retirement savings plans, such as 401(k) accounts. In 2015, tax breaks for such plans for workers and the self-employed topped $87 billion.^{Footnote 10} According to the Treasury Department, fully three-quarters of these tax benefits accrue to the richest 20 percent of Americans.^{Footnote 11} “Welfare for the wealthy” indeed.

In short, American’s framework of social provision has at least three levels, each less visibly governmental than the last. The most visible benefits are direct-spending programs like Social Security. Next are tax breaks with social policy purposes. Finally, there are the private benefits that these tax breaks encourage (and which the federal government extensively regulates through tax and labor rules). In general, moving across these levels shifts the prevailing distribution of benefits—from the familiar reality of progressive benefits to the less familiar but pervasive reality of regressive benefits.

At the same time, it changes fundamentally who is responsible for delivering benefits. Though many public programs rely on nongovernmental actors, these arrangements tend to involve explicit delegation (as in the public purchase of private services). Far less visible and easily controlled is the delegation that occurs when tax breaks subsidize private actors to pursue public aims. In these cases, social policy is made in the workplace, in corporate boardroom, and in the offices of tax lawyers, insurance companies, and financial institutions at least as much as it is made in Washington. Americans don’t have a welfare state so much as a welfare parastate.

Explaining America’s Welfare Parastate

Why would anyone create such a complex amalgam? The answer, of course, is that no one political actor did. Public programs typically have clear origins stories: presidents run on a platform of reform and, once elected, press their policies through Congress. Or perhaps a congressional majority pressures a reluctant president into action. Private social benefits and the tax breaks for them tend to have more diverse and less noticeable paths to creation: a provision slipped into a tax bill at the eleventh hour, a bargain struck by a union with management, a federal regulatory or court decision, a savvy move by a private benefits provider to take advantage of ambiguous law.

Still, that does not make these origins stories any less political. In the expanding literature on the private side of U.S. social policy, analysts have presented a set of arguments about politics that depart significantly from prior theories of the welfare state. These arguments suggest that the big action on the private side is not in the White House, but in Congress, with the congressional revenue committees playing an outsized role; that these political struggles are generally low-salience affairs that rarely rise to the level of public consciousness; that, as a result, organized political interests, especially labor unions and business groups, have the greatest sway in these fights; and that champions of private social provision are generally in the center and on the right, rather than on the left.

In Welfare for the Wealthy, Faricy links up these generalizations to partisanship. Using time series data, he shows that there is a correlation between Democratic presidencies and expanded public social spending and between Republican presidencies and expanded social welfare tax breaks and private social spending. He also finds that these tax breaks and private benefits increase overall inequality, independent of the effect of having a Republican in the White House. Correlation does not equal causation, of course, and almost anything that becomes more common over time will move in tandem with America’s steeply rising inequality. But Faricy’s evidence is powerful, and it provides a simple explanation of America’s divided welfare state: Republicans like the private side of American social provision; Democrats like the public side.

Alas, this simple explanation is too simple. It may be a good approach to explaining variation in public and private spending in the contemporary era. But as important as that is—and it is certainly reason enough to read Faricy’s book—it leaves unanswered the basic question of why the United States ended up with the unusual system it did. After all, with one eight-year break under Dwight Eisenhower, Democrats held the White House from the early 1930s into the late 1960s, when most of the formative decisions that created America’s huge complex of private benefits occurred.

Nor does Faricy’s argument take seriously the enormous changes in the positions of both Republicans and Democrats over the past half century. Republicans were once much less hostile to public programs than they are today: Under Eisenhower, for example, Social Security massively expanded, as it did under Richard Nixon, who also tried to enact a basic minimum income and a mandate on employers to provide health benefits.^{Footnote 12} Meanwhile, beginning under Jimmy Carter and accelerating under Clinton, Democrats became much more willing to harness tax breaks and private benefits to their own ends.

Faricy can be forgiven for dodging these thorny issues, for much of the literature has. In my 2002 book, for instance, I emphasized the notion of “path dependence” to explain how decisions to rely on private benefits (or public programs) were self-reinforcing over time.^{Footnote 13} The implication was that American exceptionalism is a product of early policy decisions the consequences of which have magnified over time.

This still seems to me a satisfying explanation of why the United States came to rely so heavily on private health benefits (even as it created a relatively generous public pension program in the form of Social Security). The early and repeated failure of national health insurance didn’t simply leave the field clear for the next Democrat in the White House to revive the idea. It changed what was feasible by creating a well-established system of employment-based benefits on which millions of Americans relied—a system that powerful business and labor groups and private insurers and providers fought tenaciously to preserve and expand. How else to explain why President Obama sought in 2010 to create a fallback system of mandated private health plans and to expand the Medicaid program to fill the growing gaps in this employment-based system? Bernie Sanders ran for president in 2016, promising that, if elected, he would enact “Medicare-for-All.” But the reality is that getting to such a system will take even more than the grassroots “political revolution” his campaign has rhetorically invoked yet so far failed to produce.

As a general explanation, however, “path dependence” raises questions as well as answers them. Why was American politics so hostile to public social programs? How realistic is it to argue that the United States could have enacted some kind of major health program before the rise of private health benefits in the 1940s and 1950s? In other words, how stacked was the deck in favor of private arrangements, and how important were early developments in embedding those arrangements and reshaping public opinion, partisan strategies, and the interest group environment?

A major problem with extant studies is that they don’t contain the sort of extensive cross-national comparisons that would be helpful to answer these questions. All of the books mentioned so far, including my own, look only briefly at other nations, if at all. This has limited the degree to which these works have been incorporated into the large body of cross-national research on the welfare state, even though their relevance to that research is clearly substantial. It is as if “exceptionalism” describes not just U.S. social policy but also the scholarship on it. If scholars are to better understand the sources of American policy distinctiveness, they will need to become less parochial in their analysis of it and better leverage cross-national variation to examine its roots.

Whither America’s Welfare Parastate?

Despite leaving these roots largely unexamined, Faricy’s book presents a rich new analysis of partisan politics that, in turn, offers a timely reminder: America’s distinctive system is still changing, and the polarization of the parties will be a key influence on its continuing evolution. If Democrats win the presidency in 2016, public social programs are likely to expand at the expense of private benefits and tax breaks for them. If Republicans take back the White House, the opposite is likely to occur.

These clear predictions raise what may be the biggest unanswered question: Where is America’s distinctive framework heading? The rise of Donald Trump and the insurgent campaign of Sanders in 2016 both suggest that public pressures for social protection are building. At the same time, the private framework of social provision in the United States has bifurcated. In much of the workforce, private protections are anemic or nonexistent. At the extreme, workers in the so-called gig economy of independent contractors (think Uber drivers) have no benefits to speak of and, indeed, are not even legally treated as workers at all.

A consequence of these changes is that much of the white working class is moving into the world of social benefits that used to be the exclusive province of minorities and the poor. Medicaid, for example, has transformed from a small program to mop-up those left behind by private insurance into a system larger than the more familiar Medicare program for the elderly. Meanwhile, few white workers of modest means have generous social benefits at work. Outside of the unionized public sector—which is under fierce political attack in part because its benefits now look comparatively lavish—workers that make a middle-class living must rely more and more on their own sparse savings, help from friends and family, or patchwork public protections if they are to have any insulation from the increased economic risks they face.^{Footnote 14}

Will these changes spark broader support for public social protections? So far the answer is mixed. On the one hand, even conservative voters remain deeply attached to Medicare and Social Security, which are portrayed as earned benefits that do not place people in Romney’s “dependent on government” category. On the other hand, budget pressures caused by rising health costs and repeated tax cuts constrain the fiscal space for new initiatives.

Perhaps more important, race and racism continue to greatly complicate the task of increasing support for public protections. Among many downscale white voters, public programs are seen as the province of blacks, Hispanics, and undocumented immigrants (even though virtually every social program is majority white, Hispanics are generally underrepresented among program beneficiaries, and undocumented immigrants are often excluded altogether). Donald Trump’s presidency augers a nativist backlash at least as much as it suggests a latent coalition for robust measures to aid displaced workers. As students of U.S. social policy look to the future, they would do well to examine more closely the role of race in the struggle between public and private benefits—a topic neglected by Faricy along with most other researchers.

Scholars also need to drill more deeply into what voters are really thinking about the possibilities for policy change embodied in recent economic shifts. Mettler, for example, has shown that those who receive tax breaks with social welfare purposes neither recognize that they are beneficiaries of government action nor think of these tax breaks as public benefits.^{Footnote 15} Faricy, too, finds that voters prefer tax expenditures over public spending (though Democrats become less supportive when they are informed of their regressive effect). Their findings suggest that “submerging” public action is not just a policy choice, but a major potential influence on the political thinking of Americans—including how they judge government performance and see themselves relative to those reliant on more visible benefits. Yet research on the way in which people form their views of public and private spending or translate those views into political demands remains sparse.

The recent wave of research on U.S. social policy has opened up a large new landscape for scholars to explore. Social scientists and historians are now surveying these previously uncharted territories and building roads between them and the areas already mapped. Faricy's important book suggests how fruitful these intellectual journeys are. But there is plenty of America’s subterranean state still to uncover.