We the People of the United States, in Order to form a more perfect Union, establish Justice, insure domestic Tranquility, provide for the common defense, promote the general Welfare, and secure the Blessings of Liberty to ourselves and our Posterity, do ordain and establish this Constitution for the United States of America.
—Preamble, Constitution of the United States (1789)

Taxation and public spending have always been conspicuous sources of political tension in our society—sometimes toppling kings, sometimes reshuffling congressional majorities. Still, as we will argue, how a government exercises its power to tax and spend offers a window to its soul—and, in the U.S. context, an indication of commitment to its constitutional obligation “to promote the general welfare.” What, then, can be reasonably inferred from the tax and budget policies of the current administration?

This question is especially timely given the convergence of Bush’s controversial proposal for tax relief for the rich, with the mounting evidence of glaring disparities in wealth, in quality-of-life indicators, and in political representation of certain social groups—all of which may be made worse by the growing federal deficit.

Yet, driven by the fervent (some might say religious) belief that limited government and market-inspired solutions to social problems are almost always better, the Bush administration has made no secret of its intention to shift the responsibility for the care and well-being of its citizens to the private sector. As social policy, this notion is deeply flawed—and equally so as a strategy for national economic recovery.

From the very founding of this nation, there was a social contract, an agreement binding on all parties of society, the heart of which was the promise of equity, justice and equal opportunity. Over time, that promise, enshrined in the Preamble and first ten amendments to the U.S. Constitution, has been interpreted in different ways—sometimes with an alarming degree of bias and selectivity. Nevertheless, throughout our history, Americans have created new institutions to update the contract and meet the challenges of changing times. This ability to change with the times is too often underemphasized in our study of history.

Beginning with the construction of roads, canals and railroads in the early 19th century, infrastructure projects supporting the expansion of commerce between emerging states and with territories were often subsidized by government. Indeed, over the course of the following two centuries, the federal government has remained a critical engine for national economic growth, guaranteeing access to land, ensuring open competition in markets, developing a free and mandatory education system, subsidizing universities, creating the interstate highway system, and funding medical, pharmaceutical and technological research, and often favoring key industrial sectors (like steel, automobiles and airlines) with a variety of legal advantages.
With the Progressive Era of the early 1900s in particular came the populist expectation that the federal government should enforce laws regulating corporate and banking excesses, defend worker’s rights and improve working conditions, as well as provide broad protections from cyclic business downturns. Social security and unemployment insurance would prove critical to equitable economic growth, and eliminate the sources of the harshest poverty in free-market economies.  In fact, government oversight of food and drug quality, occupational safety, and public health programs set the stage for later efforts at regulating the environment and the economy. Likewise, massive government investment in dams, bridges and similar infrastructure projects during the Great Depression provided needed jobs, while also restoring national pride and

Bolstering the postwar economic boom of the 1950s and 1960s, the GI Bill secured education and home loans for returning veterans, increasing the ranks of skilled workers, transforming farmlands into housing subdivisions and easing the shift of production from war to consumer goods. Americans also came to believe that health care for the elderly and the poor was also integral to the social contract; Medicare and Medicaid seemed like logical extensions of the innovative Social Security program launched a generation earlier. We even declared a brief “War on Poverty” and developed new social programs dedicated to eliminating the persistent contradiction of “poverty in the midst of plenty.” (Some, like Head Start, proved more effective and enduring than others.) For a time, the national consensus seemed to be that the values of the market place were insufficient measures of a society’s greatness, or an individual’s worth.
However, this consensus proved temporary, in part because the nation’s resources grew more slowly than in the past, and also because the choices between guns and butter has again tilted toward guns—often accompanied by mean-spirited rhetoric on who was “deserving” of our compassion and who was not.

Reneging on the Social Contract

Assuming office with less of the popular vote than his opponent, George Walker Bush used his first 100 days—a benchmark since the time of FDR—to establish his conservative credential, which, it turns out, has been far more conservative than was suggested by his campaign. Highly unequal tax cuts, deep cuts in social spending and promotion of the religious right’s family agenda brought accolades for—as the 700 Club’s Pat Robertson put it—“breathing new life into conservative issues.”
Since then, the Bush administration has seen the $236.4 billion federal budget surplus left by the Clinton administration turn into a projected deficit of $307 billion in less than three years— with no small help from his own policies and general neglect of economic issues. Under his watch, the nation has lost some 2.7 million jobs, in some respects the worst performance of any president since the Great Depression. In the meantime, the White House has floated a number of schemes for privatizing Social Security, Medicare and education. Finally, as Commander-in-Chief, Bush has not only embarked on a dangerous new foreign policy, but effectively exploited the fear and patriotic fervor generated in the wake of September 11 to promote a sweeping agenda that is antagonistic, in my view, to this nation’s long-standing social contract.
A second Bush term may take the reversal of much—if not most—of what was gained by the various social reform movements of the 20th century a lot further. In effect, the Bush administration’s crusade to withdraw support from social investment is reneging on government’s end of this hard-fought agreement. To take one ironic example: while the administration was exhorting Americans to “support our troops” in Iraq, a curious provision embedded in the House budget bill would have cut taxes for the rich at the expense of veteran’s disability, health care and other benefits amounting to some $25 billion over the next 10 years. A few weeks later, the New York Times reported that one in six American children under age 17 were deleted from the list of beneficiaries in the newly enacted federal tax cut program—apparently recognizing that, without these cuts, the costs of war and military occupation in Iraq would push the total cost of the tax reforms above its $350 billion ceiling.

As states struggle with their own fiscal woes, federal disinvestment threatens further reduction, elimination or privatization of needed social programs. With states facing deficits of up to $100 billion for fiscal year 2004, and with no appetite on Capitol Hill to increase state aid, the administration’s apparent intention is to force state and local governments to choose between responding to terrorist alerts or preserving public health and educating young children.
For example, in Portland, Oregon, state cuts in education aid will apparently shorten the district’s current school year by 24 days. State colleges and universities in 16 states have already seen a 10 percent-or-greater increase in tuition. In Indiana, childcare subsidies for 7,000 children are facing the axe, and Connecticut expects to cut $40 million from childcare assistance programs that serve 30,000 low-income children. According to May 20 estimates by the Center on Budget and Policy Priorities, “proposed federal tax changes [are] likely to cost states billions of dollars in coming years.”
This not only makes for unwise social policy, but it is economically counterproductive. As we have seen, the great advantage of federal government is that it can borrow when economies are weak and spend to keep the nation from sliding into deep economic straits. Because state and local governments, for the most part, are not allowed to borrow when tax revenues drop, they are compelled to cut spending during bad economic times. As a result, not only do people suffer, but reduced public spending can lead to a vicious circle: a weakened economy when staff are fired, forcing reduced levels of consumer spending, leading both to further reductions in private incomes and harder times for service vendors and users alike.
When an economy is in recession near term, government spending on expanded uneµmployment insurance, on education and job training, on health care and affordable housing, and not on tax cuts for the wealthy, is the wiser course of action.
The argument employed by supporters of the administration is not necessarily cynical—at least not on the part of some. To believers, government almost always reduces economic efficiency: thus, the less government, the better for all. Incomes rise faster, labor—through efficient markets—is paid what it deserves, alleged disincentives such as welfare or even unemployment insurance are reduced, and most will benefit materially.

History, sound economic theory and current empirical studies do not support the extreme version of this view. Markets remain extraordinary institutions for efficient allocation of resources and incentives to work, invest and take risk. However, history provides ample proofs of the uneven benefits of capitalist development—and indeed, abuse of workers and the disadvantaged. Simply stated, economic theory was never as one-sided as advocates now claim in arguing that the “freer the market, the better.” Finally, empirical studies show no verifiable relationship between big government and slow economic growth—or between big government and fast growth. Economies grow in their own ways, and the size of government does not seem to matter much. In truth, there are no pure examples of rapid economic growth without serious government intrusion, from the development of laws to protect private property to investment in education and protection of the poor.
What is important is not to change your way. America seems to be in the midst of doing that. In the past, it grew at remarkable rates based on a partnership between private markets and public oversight and investment. This administration seems notably intent on discarding that relationship.

A new social contract will recognize a few important principles. A nation will not simply grow without attention to the production and distribution of public goods. Most economists agree that the theoretical argument for public goods is sound. Education provides benefits for all of society, not just the individual being educated, so society itself should invest, or investment will be inadequate. The same is certainly true for public health, communications and transportation.
Meanwhile, economies change: workers can no longer depend on landing a good job that provides employment security, healthcare benefits and a long-term pension. Increasingly, they will have to switch jobs, and often careers, becoming more like independent contractors who need ongoing education to sharpen skills and remain abreast of market demands. Two-worker families need flexible hours and early childcare. In short, since new needs created by economic adjustments in the workforce are unlikely to be resolved in the marketplace, government attention and intervention are essential.
And if government oversight and investment are critical to growth, they are also critical to political equity and national optimism. People work harder, invest more in themselves and their children, and participate more in the political process when they feel they are being treated fairly and being heard. These too have been critical to economic growth. But, most important, they are the essence of America’s contribution to history.

A new social contract would have two main pillars. One is inclusiveness—an old American ideal. Everybody should be included in the economy and be brought up to speed so they have equal access to opportunities. This is clearly not happening now. Funding of America’s public education system remains highly unequal. More than 40 million Americans have no health insurance, and many others have inadequate coverage. The costs of education, quality daycare and healthcare tend to rise more rapidly than median family incomes—even as the costs of VCRs and computers fall. The middle is increasingly feeling squeezed. People of color are still seriously discriminated against and democracy itself is increasingly oriented toward those with enough money to buy their congressman’s attention.

The second leg of a new social contract will emphasize change. Throughout our nation’s history, new institutions have always been created as times changed. Nonprofit organizations, as institutions for change, are critical in this history as well. The sector is both stimulant and by-product of the nation’s public goods. It fills the many gaps neglected or created by the private market. It is the conduit for public investment and private beneficence. And it is the foundation of social capital.
Let me say one last thing. Not all of us are cut out to do business. Not all of us want to become outrageously rich. Business people can often do both—the old saw about doing good and doing well. Some of us get satisfaction out of emphasizing doing good—though not as a matter of altruism in the abstract, but as a view of life and, perhaps, as a result of a set of talents. The functions performed by such people are critical to a decent and optimistic society, and, I would argue, a fast-growing economy. The nonprofit sector channels these talents, supplies these opportunities, and contributes centrally to the American way of life, as well as to its superior economic performance. Private contribution alone is not sufficient; the nonprofit sector must work in concert with both government and business.

As a People, we instinctively believe that our destiny is manifest in an ineluctable, even optimal path. This is not true. On the contrary, we seem to be rejecting the many proud lessons of the past for a narrow and stridently ideological view of our nation and its place in the world. Thus far, the depth and scope of public discourse has not proven adequate to the challenge. Yet history is always upon us and, by virtue of a long democratic tradition, we do possess the power to stop the tide—the question is do we possess the will? The jury’s still out on this one, but “We the People” seem right now to be looking the other way.

Online Resources

Center on Budget and Policy Priorities (www.cbpp.org/)
OMB Watch (www.ombwatch.org/)
Economic Policy Institute (www.epinet.org/)
The National Priorities Project (www.national priorities.org/)

About the Author

Jeff Madrick is a contributing economics columnist to The New York Times and editor of two journals published by M.E. Sharpe of Armonk, New York: Challenge Magazine and Indicators. He is an adjunct professor at both Cooper Union and The New School University.  His latest book is Why Economies Grow, published by the Century Foundation and Basic Books.