The Volokh Conspiracy

The passage of the health care demonstrates the ways in which economic crises create opportunities to expand the power of government, often in ways that have little connection to any effort to alleviate the crisis itself. Back in the fall of 2008, I expressed my fear that the combination of an economic crisis, political ignorance by voters, and unified Democratic control of the federal government would lead to a vast expansion of government if Obama were elected. White House Chief of Staff Rahm Emanuel famously said that the Democrats shouldn’t let “a serious crisis go to waste” because a crisis represents “an opportunity to do things you could not do before.”

I. Once Again, a Crisis Facilitates the Growth of Government.

Obama and the Democrats began to realize my expectations by passing a gargantuan “stimulus” bill and pushing a massive expansion of government control over health care, as well as promoting other major increases in the size and scope of government. But recent Republican political victories, especially Scott Brown’s win in Massachusetts, led many people to think that the health care bill would fail and the expansion of government might come to a halt. I had to admit that I had underestimated the political constraints inhibiting the administration. But I still thought that Democrats might be able to pass the bill by getting the House to adopt the proposal previously passed by the Senate – which has indeed happened.

The health care bill will now take its place with numerous Depression and wartime policies that expanded government in ways that would never have been possible absent the crisis, but which had no real connection to alleviating it. Absent the economic crisis, the Democrats would not have won such a sweeping victory in 2008, nor would Obama have had such an enormous reservoir of initial popularity to invest in pushing the health care bill through. As it turned out, the Democrats will have needed almost every bit of their huge crisis-created congressional majority in order to make up for defections in their own ranks.

II. Crisis-Enabled Measures that Make the Crisis Worse.

Whatever its other merits, the heath care bill does little if anything to alleviate the economic crisis that made its passage possible. Indeed, it may well end up exacerbating the crisis because it includes an employer mandate requiring any employers with more than 50 employees to either provide health insurance that meets various federal requirements or pay a $2000 fee per employee, if any of their employees receive federal health care subsidies. You don’t have to be a labor economist to predict that this increases the costs of hiring workers, and therefore is likely to increase unemployment or at least inhibit its reduction, as may already have happened under Massachusetts’ similar plan.

This too is not a new pattern. Many government-expanding policies enacted during the Depression and other past crises also exacerbated their effects. For example, the National Recovery Act – the centerpiece of the initial New Deal – significantly increased unemployment and raised prices for consumers. Later New Deal policies exacerbated unemployment in similar ways. The Agricultural Adjustment Act, famously upheld by the Supreme Court in Wickard v. Filburn, was a scheme intended to raise food prices at a time when many poor families were already having trouble making ends meet or suffering from malnutrition.

In most of these cases, political ignorance likely contributed to the passage of massive expansions of government that could actually make the crisis worse. Voters have incentives to be rationally ignorant about policy issues, and often don’t realize that proposals advanced in a time of crisis may actually exacerbate it or benefit narrow interest groups at the expense of the general public. Unlike much of the New Deal legislation, the health care bill has become quite unpopular. But public opposition would likely have been much stronger if more people realized that it was likely to increase unemployment, at least in the short run.

III. Will the Health Care Bill Become Permanently Entrenched?

The health care bill is also similar to previous historical examples of crisis-enabled legislation in so far as it will be extremely difficult to reverse. Sixty-five years after the Great Depression, we still have the kinds of perverse agricultural cartels created by the AAA, as well as numerous other dysfunctional policies first sold to the public as efforts to alleviate the Depression.

By creating a wide range of new entitlements and interest group payoffs, the health care bill is also likely to become entrenched over time, and even increase in scope. For example, the mandate requiring individuals to purchase insurance will create a ratchet for further expansions of government, as various interest groups lobby to increase the range of conditions against which people are required to buy insurance. Even if the Republicans retake control of Congress in the fall, they are unlikely to be able to repeal the bill in the face of Democratic opposition and a veto by President Obama. By the time a Republican president might be elected in 2012 or 2016, the new entitlements created by the bill will be sufficiently entrenched that they will be even more difficult to repeal or even limit – just as it has become extraordinarily difficult to constrain Medicare and Social Security.

Ultimately, the political lesson of the health care bill is that the combination of crisis and single-party control of the White House and Congress leads to massive government growth even in a situation where the proposal in question faces public skepticism and unified opposition by the minority party. I don’t claim that this by itself proves that the bill is a bad policy. But it does teach an important lesson about the dynamics of government in times of crisis.

UPDATE: The original version of this post went up just a few minutes before the bill passed. I have changed the language to reflect the fact that the House has now actually voted for the Senate bill.

Prominent political blogger Matthew Yglesias recently wrote an interesting post arguing that the proliferation of elections increases the difficulty of acquiring enough information to vote in an informed manner. He quotes a post by Jonathan Bernstein, which expresses bewilderment at the range of offices he voted on in a recent Texas election:

Yesterday was election day in Texas, and I voted. And I voted. And then I voted some more. If my count was correct, I voted fifty-two times. I voted for Governor, and I voted for U.S. House and Texas House and Texas Senate…OK, I didn’t actually know the candidates for the state legislature, by I did feel a bit guilty about that. I voted for Lt. Governor (which is a big deal here in Texas). I voted for Attorney General, and Commissioner of the General Land Office, and Commissioner of Agriculture, and Railroad Commissioner. I don’t know what the General Land Office is, no. I voted for judges — judicial judges, and the county judge, who is the head of the county government, not a judicial judge at all. I voted for more real judges. We know someone who is running for “Judge, County Probate Court No. 2.” I voted for her. I voted for District Clerk. I don’t know what kind of district the District Clerk is clerk for.

Yglesias himself comments:

[I]n US political culture, the answer to every government reform problem is always that things need to be “more democratic” and this often proceeds without any real effort to think about what you’re trying to achieve. There’s obviously a sense in which subjecting more and more officials to popular election is “more democratic” but if you think that what’s good about democracy is that it creates accountability you’ll see that asking people to vote for Commissioner of the General Land Office is undermining accountability.

No real people are paying attention to what these different offices are, what the incumbents are doing, how they interact, who’s doing a good job, etc. Special interests who are able to hire professionals to monitor elected officials for them, by contrast, are able to make out like bandits.

I completely agree with Yglesias that most voters know little or nothing about these offices, and that this creates an opening for interest group influence. I have made similar arguments myself. The problem is exacerbated by the reality that for most voters, it is actually rational to devote little or no time to acquiring political information. It’s also rational for them to do a poor job of analyzing the political information they do know.

At the same time, I am skeptical of the solution that Yglesias implicitly seems to advocate: making these positions nonelected offices. If the Commissioner of the General Land Office becomes a bureaucratic position appointed by the governor, that doesn’t eliminate the problem of voter ignorance. It merely shifts it to a different election. Now, the question of who the governor is likely to choose as the next Commissioner is added to the long list of issues at stake in the gubernatorial election. Realistically, most voters won’t pay any attention to the office when they vote for governor, and small interest groups will still dominate the process. Instead of doing so by influencing the election of the commissioner, they’ll do it by lobbying the governor and the state legislature. The US and Switzerland are unique in having an extremely large number of elections. But there is little if any reason to believe that interest group “capture” is more of a problem in these countries than in the many European and East Asian democracies where more government positions are held by appointed officials. Indeed, Switzerland is widely believed to be one of the best-governed nations in the world.

The lack of “accountability” that Yglesias deplores is caused not by elections as such, but by the sheer size and scope of the modern state, a point I discussed in greater detail here and here. Texas has so many officials because the state government has taken on so many different functions. Ultimately, the best way to increase democratic accountability to voters is to have less government. That will make it easier for rationally ignorant voters with limited time and attention spans to monitor the officials we do have.

The connection between voter ignorance and democratic accountability isn’t the only issue we should weigh when we consider how much government we should have. But it is an important one that is too often ignored.

UPDATE: I am not certain that Yglesias’ preferred solution to this problem is to have more appointed offices and fewer elected ones. I think some such claim is implicit in his statement that “asking people to vote for Commissioner of the General Land Office is undermining accountability.” Presumably, this means that he wants there to be a Commissioner of the General Land Office (or some other official tasked with the same responsibilities), but that the holder of the job should be chosen by some means other than elections. Reducing the number of elected offices and increaseing the number of appointed ones is in fact the solution advocated by Jonathan Bernstein in the post that Yglesias linked to approvingly. However, if that’s not what Yglesias means, I’m happy to correct the record.

A few weeks ago at Minyanville, John Mauldin wrote:

The EU is backed into a corner. They have this treaty that says governments will act in certain ways. Greece is flaunting that treaty. Everyone acts as if Greece defaulting on its debt would be the end of the EU. Will the EU force Greece to withdraw if they don’t control their budget? Upon reflection, I’m not so sure.

Let’s take that proposition to the US. What if Illinois defaulted on its debt? Would we kick them out of the Union? Hardly. A default would mean a severe loss of credit, a forced retrenching, and a severe economic crisis in Illinois. The losses would be serious for banks and investors. There would be negotiations on how to deal with the debt, who gets a haircut on their bonds, what pension assets and expenses would be cut, and so on. A crisis? Yes. End of the world? No.

So what if Greece does default? The banks and those who lent them the money would take a loss of some amount. The cost of borrowing for Greece would rise dramatically, if they could even get into the debt market. If they actually cut their budgets enough to deal with the deficit in a responsible way, it would mean, at best, a severe and prolonged recession. If Stratfor is right about deficits reaching 15% of GDP, it could mean a depression. They have no good choices.

It’s doubtful that German and French voters will be happy with any bailout using their tax money that doesn’t impose serious cuts in Greek budgets, with realistic controls as a condition for the bailout. Can Greece live with that? We’ll see. . . .

But is it so unthinkable that Greece could simply default and then be forced by the market to get realistic about its deficits? The same market forces that work in Illinois can work in Greece.

But if the EU does bail out Greece, what then of Ireland, which is making the tough choices? Will Portugal be next? If Greece is allowed to fail, or better, actually shows some fiscal discipline, that bodes well for the EU in the long run. It will be a lesson that each nation is responsible to maintain its own house.

The line “The same market forces that work in Illinois can work in Greece” jumped out at me.

So far I see no evidence that Illinois has changed its wasteful ways, let alone come up with a plan to deal with its existing debt.

Nor is fiscal responsibility necessarily on the horizon. And in a very close Illinois primary for governor, the apparent Republican winner (Bill Brady) is viewed as the weakest of the three top Republican vote-getters for the general election. Indeed, many observers assumed that Gov. Pat Quinn (Dem.) would be an almost certain loser in the fall — until the Republicans nominated the weakest of the possible candidates. Now it might be close.

I have been wondering about the effects of an Illinois or California default on its bonds. Would it really be such a disaster as to merit a federal bailout?

In the State of the Union, Obama continued to blame Bush and the Republicans for our current economic problems. This is understandable for two reasons. First,the GOP does deserve a good deal of blame, though my list of their misdeeds would probably look different from Obama’s. Second, pretty much any president in Obama’s position would do the same thing.

Much less defensible is Obama’s attempt to claim that the Republicans purused free market policies during the last eight years, and thereby caused the economic crisis:

From some on the right, I expect we’ll hear a different argument — that if we just make fewer investments in our people, extend tax cuts including those for the wealthier Americans, eliminate more regulations, maintain the status quo on health care, our deficits will go away. The problem is that’s what we did for eight years. That’s what helped us into this crisis. It’s what helped lead to these deficits. We can’t do it again.

In reality, of course, the Bush-era GOP greatly expanded government control of the economy, including major increases in spending, regulation, and federal “investment” in education. I discussed this at some length here, here, and here. Far from “maintain[ing] the status quo in health care,” Bush established the Medicare prescription drug benefit, the biggest new government program since the 1960s. Ironically, Obama referred to the prescription drug program and other Bush-era spending increases as contributing to the deficit earlier in this very same speech.

The Bush as free marketeer meme is an important prop in the Democrats’ case for massively expanding government control of the economy today. Logically, of course, it is possible to argue for such an expansion even if Bush did it too. Maybe he just didn’t go far enough, or didn’t calibrate his interventions as precisely as the Democrats plan to with theirs. From the standpoint of political rhetoric, however, it’s much easier for Obama to justify greatly expanded government if he can portray it as the opposite of his discredited predecessor’s policy. The gambit probably wouldn’t work if the public knew the facts about what Bush did. Obama, however, may be banking on widespread political ignorance, reinforced by the GOP’s image as the pro-free market party. He is far from the first politician to try to take advantage of ignorance. The Republicans have hardly been above doing the same thing when it suited their interests. But the fact that everyone does it doesn’t make it right.

During the second half-hour of Mad Money on CNBC tonight, Jim Cramer has a revealing criticism of the Obama Administration’s proposed banking rules.

He concludes that the collapse was not the result of proprietary trading by banks, but rather mainly because of bad real estate loans. Cramer sees the proposal as targeting those who are making more money than Obama thinks they should.

Cramer does not point out the obvious: few lawyers and politicians worked as hard as Barack Obama to get banks to lower their lending standards (though to be fair, Obama also promoted Illinois legislation that prohibited some forms of lending fraud).

Obama went from being the lawyer for ACORN, to “the Senator from ACORN” (as he was sometimes called in Illinois in 2007 and 2008), to the presidency. He pushed ACORN’s agenda in the Illinois legislature, and he pushed ACORN’s agenda in the US Senate. It shouldn’t be surprising that he has taken up a more sophisticated version of the ACORN-SEIU campaign against bankers, just as he did as a lawyer in the 1990s.

The show is being rebroadcast at 11pm ET Monday night.

Instead of letting housing prices find the natural market-clearing price, many in the government have been supporting the efforts of those trying to reinflate the housing bubble.

The Federal Housing Authority (FHA) has been backing up to half of the mortgage market in some locales — allowing ridiculously low down payments of 3.5%, plus allowing the seller to provide closing costs up to 6% of the purchase price.

Now the FHA is slightly tightening loan requirements:

The Federal Housing Administration will announce more-stringent lending requirements and higher borrower fees on Wednesday to cushion against rising defaults and stave off the need for a taxpayer bailout of the agency.

The FHA, which has taken on a major role in the housing market during the economic downturn, doesn’t lend money to home buyers, but insures lenders against default on loans that meet FHA criteria. In exchange for that backing, borrowers who take out FHA-backed loans must pay an upfront insurance premium, currently set at 1.75% of the total loan amount. The premium can be rolled into the loan.

The FHA is set to raise that fee to 2.25%, the second increase in the past two years, according to people familiar with the matter. The value of the FHA’s reserves to cover losses has fallen to $3.6 billion, about 0.5% of the $685 billion in loans outstanding, down from 3% a year earlier. Congress requires the agency to maintain a 2% capital-reserve ratio. If the larger upfront fee had been in place last year, the FHA would have boosted its reserves by more than $1 billion.

Also to boost the reserve, the FHA will ask Congress to increase a separate insurance fee that borrowers pay annually, people said. If the agency were to run short of cash to cover projected losses, it likely would have to ask Congress for money for the first time ever. . . .

The FHA will keep minimum down payments at the current 3.5% level for most borrowers. But the agency will require riskier borrowers with credit scores below 580 to make a minimum 10% down payment. While the FHA doesn’t have a credit-score cutoff, most lenders require a minimum 620 score. . . .

[Instead of raising the down payment from 3.5% to 5% as some have proposed,] the FHA will reduce the amount of money that sellers can kick in for closing costs to 3% of the sale price, down from the current level of 6%. The higher cap led to abuses where sellers “heavily marked up the purchase price,” says Lou Barnes, a mortgage banker in Boulder, Colo.

So the FHA is supporting lending at 3.5% down with the seller also providing up to 3% for closing costs. What could possibly go wrong?

President Obama famously promised the country “change we can believe in.” As a longtime Massachusetts resident, one change I would never have believed in until shortly before it actually happened is a conservative Republican winning a Senate seat in my home state. No Republican has won a Senate race in the Bay State since 1972, and even then it was liberal Edward Brooke. With some justice, the White House will point out that Democratic nominee Martha Coakley was a poor candidate. But a Democrat usually doesn’t have to be a good candidate to win in Massachusetts. Normally, it’s enough to be a warm body with a D next to her name. The fact that the election was even close is a sign that the administration and its agenda have become unpopular.

Back in 2008, I wrote that, despite many reservations about McCain and the GOP, I feared an Obama victory because the combination of unified Democratic control of government and a crisis atmosphere was likely to lead to a vast expansion of federal spending and regulation. Naturally, I have to ask whether recent events have proven me wrong. If Obama is this unpopular in liberal Massachusetts, he is likely to have great difficulty in enacting an expansive legislative agenda, especially if the Republicans make major gains in November as many analysts expect.

I either overestimated Obama’s political skills or underestimated the structural obstacles he would have to overcome; probably it was some combination of both errors. His window of opportunity for major left-liberal policy changes is closing faster than I expected. Probably faster than Obama himself expected too.

At the same time, I don’t think I was totally wrong. Obama has already secured an enormous increase in government spending with last year’s $800 billion “stimulus” bill, putting in place policies that will greatly expand federal expenditures for years to come. Despite Scott Brown’s victory, the Democrats still have several options for pushing the health care bill through Congress. For example, they can get the House to pass the version already enacted by the Senate, thereby cutting Brown out of the process. Meanwhile, several other important expansions of government are making their way through Congress, and have attracted much less popular opposition than the health care bill. One example is the Consumer Financial Protection Agency, which would vastly expand federal regulation of financial products. Some of these are highly technical in nature, and could pass in part because most voters won’t notice or understand them.

If the health care bill and some of these other items pass, the Obama administration will still have presided over the largest expansion of government since at least the 1960s, surpassing President George W. Bush’s dubious record. Significantly, the Bush spending explosion also occurred in part because of the combination of united government and crisis. Once enacted, major expansions in spending and regulation are very difficult to reverse.We are still saddled with some of the more dubious policies enacted during the Great Depression, such as massive agricultural subsidies and output restrictions that drive up the price of food. I fear that Obama’s policies will be equally difficult to reverse. If a health insurance mandate is enacted, it will create a ratchet for further expansions of government, as various interest groups lobby to increase the range of conditions against which people are required to buy insurance.

In sum, I fear that the potent brew of unified government, crisis, and widespread political ignorance leads to greatly expanded government even when the administration in power makes political errors and is countered by a well-organized opposition. It now looks like I overestimated Obama’s ability to exploit the economic crisis to increase the power of government. At the same time, the administration hasn’t exactly “let a serious crisis go to waste” either.

UPDATE: The the Democratic leaders in the House seem interested in pursuing the Senate bill, which they consider to be “better than nothing.” We will see if they stick to that view.

UPDATE #2: Many House Democrats are now saying that they don’t like the idea of passing the Senate bill, while others want to leave the door open to it. As noted above, the Democrats still have several other options available for passing a major health care bill in the near future. Whether any of them can get through Congress remains to be seen.