Businessweek Archives

Rewriting The Social Contract


Cover Story

REWRITING THE SOCIAL CONTRACT

Imagine a world where children care for their aging parents, neighbors look in on neighbors, and churches and charities aid society's neediest. Picture business helping to weave local safety nets for the poor. Envision farmers--freed from government constraint--planting what they want. And think of individuals and companies paying lower taxes to a shrunken federal government.

Now, imagine a world where the elderly no longer enjoy the financial and emotional security of Medicare's subsidized health insurance. Instead of having Social Security, Americans would have to save for themselves--or do without in old age. Poor children would be forced to rely on cash-strapped charities for food and shelter. Family farms would wither in the face of subsidized foreign competition. And should almost anybody fall on hard times, they would be responsible for picking up the pieces themselves.

Jeffersonian utopia or Social Darwinist hell? Each is possible under the new social contract that House Speaker Newt Gingrich (R-Ga.) and his band of Republican revolutionaries propose to write for the nation. In their world, no one would automatically be entitled to aid from a stripped-down welfare state. An entitlement, in Washington speak, is a guaranteed government check based on legal eligibility. And this year, nearly $900 billion will go to everyone from seniors to farmers to welfare mothers. That social contract--which has been the hallmark of Washington's obligation to the people since FDR's New Deal--would be torn up and redrawn. Under the GOP compact, Americans would be weaned from handouts and pushed to self-reliance. It's only appropriate that in an era of scaled-back government, Gingrich's rallying cry might be an abbreviated version of John F. Kennedy's credo: "Ask not."

Largely lost in Washington's current squabbles over balanced budgets and debt ceilings, this rewriting of the social contract may be the Republican revolution's most sweeping legacy. The welfare state would be replaced with an Opportunity Society based on the idea that nothing is guaranteed save the chance to prosper. "You cannot make this country work if you wander around telling everybody they're a victim, they're entitled," argues Gingrich. Adds University of Texas journalism professor and conservative author Marvin Olasky, an influential social policy adviser to the Speaker: "Ending the concept of entitlement is a revolution."

The Nov. 7 election, which the GOP tried to turn into a referendum on its reforms, suggests that many voters fear Republicans have gone too far, too fast. Still, while Gingrich will never get all he wants, he has already brought the days of 1960s-style Big Government to an end. And that will have profound economic as well as social consequences. Less spending and smaller deficits would lower interest rates and boost the economy. But in periods of recession, government's reduced ability to automatically pump new cash into people's pockets could slow recovery. That could hurt some government-dependent states and businesses badly.

It is no surprise that the GOP is targeting poverty programs. But Gingrichite true believers also are aiming at business and middle-class subsidies. While a coalition of Democrats and moderate Republicans have succeeded in toning down some of the more dramatic changes this year, the hard-liners insist they're unbowed. Indeed, GOP pledges to balance the budget and rewrite the tax code will force it to strike corporate and middle-class entitlements in future years.

A MATTER OF TIME. The Clinton Administration's willingness to accept the direction--if not the scope--of this assault makes fundamental change that much more likely. No longer do Washington insiders ask if these changes will come. They only question how many and how soon.

Although GOP firebrands captured the public imagination by calling for an end to deficit spending, money isn't the real issue. Even if the U.S. balances its budget, the GOP reformers would still try to eliminate entitlements, which they see as morally bankrupt. Indeed, their first round of reforms won't cut outlays at all. While the share of federal spending on the poor would remain at about 20% through 2002, the elderly would enjoy a big increase, from 34% to 41%.

That's why it's crucial to look beyond today's budget debate. Already, GOP reformers are on the way to giving states responsibility for welfare, food stamps, and medical care for the poor--with the likely result that federal social spending will fall $20 billion below levels needed to maintain current benefits. But that would be just the leading edge of the assault on entitlements. Next to take a hit: middle-class benefits, such as Medicare and college loans. Both will be trimmed somewhat this year but could face dramatic restructuring should the revolution continue. Corporate entitlements won't be immune either. Guaranteed payments to farmers will be cut by about $13 billion by 2002 and could well be abandoned after that. Corporate tax subsidies--the other form of entitlement--will also be trimmed this year. And they face radical change should the GOP follow through on its promise to rewrite the tax code.

Will business accept these cuts? Well, to a point. Says Gordon M. Binder, CEO of Amgen Inc.: "Pure subsidies are wrong and generally aren't successful." Yet he says the GOP should go slow in its effort to eliminate a tax break that helped him to build a plant in Puerto Rico two years ago: "Government ought to keep its promises," he argues.

The final GOP target may be Social Security. Republican crusaders are flirting with privatizing the heretofore sacrosanct program. And even some moderate Democrats, including Nebraska Senator Bob Kerrey, want to steer Americans off the federal pension system by shifting a portion of payroll taxes into private investments. Argues House Majority Leader Richard K. Armey (R-Tex.): "We can allow younger workers to begin directing some of their money to private accounts under their own control."

All this is far more change than Americans are usually willing to accept. But deep economic insecurity combined with a powerful distrust of Washington may make the public more open to the GOP's reasoning. Even President Clinton has been moving in that direction--though far more slowly. The Administration allowed 35 governors to design their own welfare-to-work programs. And it has tentatively endorsed the idea of ending the federal entitlement to welfare. But the Clintonites have also pushed for new entitlements, such as job training and education. And they insist the GOP's new social contract is a mistake.

"Are we an economy in which the social glue binding us is little more than the business we transact with each other?" asks Labor Secretary Robert B. Reich. "Or are we still a society with strong obligations to ensure that each one is adequately protected and has a fair shot at success?"

Nonetheless, even moderate Democrats are troubled by what's happened to the modern safety net. "There's a responsibility to help needy people but not give them a legal entitlement," says Will Marshall, president of the centrist Progressive Policy Institute. "The politics of entitlement is unsustainable--ethically, morally, and financially."

In fact, conceding that many entitlements have failed, Democratic moderates are searching for a middle ground that protects the truly helpless but ends automatic benefits for business and individuals able to help themselves. Says Urban Institute scholar Isabel Sawhill, ex-associate director of Clinton's Office of Management & Budget: "Republicans are going much too far. But there's some responsibility to be borne by Democrats. We promised to solve these problems--crime, poverty, and education--but never had much to show for it." This soul-searching comes as the public believes too many beneficiaries are getting something for nothing. "The American ethos is about individualism and the work ethic," says Barnard College political scientist Judith Russell. "In the case of welfare, the perception is that nobody works, nobody earns these things."

"CHEAP GRACE." Still, most Democrats contend that the GOP has turned the 1994 election into a misguided mandate to unravel the safety net. "We've had a federal contract with low-income people, and that's being broken," says Budget Director Alice M. Rivlin. Indeed, a BUSINESS WEEK/Harris poll conducted on Nov. 2-6 found that while respondents showed greatest support for middle-class entitlements, a majority of Americans want Washington to guarantee minimum levels of health care, child care for low-income working mothers, and even jobs for those willing to work (page 138). Such numbers are an ominous warning that the reformers may have overreached. They are pressing ahead, however. One reason: Entitlements already account for 61% of the federal budget and will explode to 80% by 2005. So a GOP balanced budget is impossible while protecting corporate and individual entitlements.

Moreover, Republican ideologues argue that the welfare state destroys families, communities, and the work ethic itself. Entitlements, says Olasky, offer "cheap grace" that lets the middle class shift social obligations to the government. "It's gotten us to believe we haven't got any responsibility for our neighbors," says Representative James M. Talent (R-Mo.).

When it comes to open-ended public assistance, many Americans seem to agree with Talent. "Too many people rely on the welfare system," says Joyce Norwood, a 63-year-old Dallas apartment manager. "Years ago, people took care of their own, and we seemed to manage."

Perhaps. But skeptics warn that ending this national obligation could produce dangerous side effects. For farmers such as Ken Dalenberg, who grows corn and soybeans in Mansfield, Illinois, it means leaving him unprotected in an era of tough international competition: "I feel uncomfortable giving up entitlements without a show of good faith in the area of trade," he explains.

Some fear de-entitlement will exacerbate racial and class polarization, asking: Will the separatist rhetoric of Louis Farrakhan or David Duke thrive if social obligations extend only to neighborhood boundaries? Still others worry about a return to Dickensian privation. "The people who do this will go to their graves in disgrace," fumes Senator Daniel P. Moynihan (D-N.Y.). "In five years time, you'll find appearing on your streets abandoned children--helpless, hostile, angry, awful--in numbers we have no idea."

Even supporters of the GOP initiatives are troubled by their improvisational nature. "In fact, [Republicans] are simply cutting aid for the poor.... Slow-motion defunding of the welfare state isn't an answer," charges James P. Pinkerton, an aide in the Bush White House. And concedes pollster Frank I. Luntz, a Gingrich adviser: "Republicans are still one step short. They have ended the Great Society and challenged the New Deal, but they have not yet replaced it with the Opportunity Society."

In the interim, Gingrich has decided to let the states, now dominated by GOP governors, handle the details. Republican state officials are thrilled: "We're convinced there is some compassion and intelligence left in Texas. It hasn't all gone to Washington," says state Health & Human Services Commissioner Michael D. McKinney.

But with this newfound freedom comes a gigantic responsibility: Ending entitlements would cap federal contributions to the states. Extra expenses will be the sole responsibility of governors, who lack Washington's ability to print money. If health costs soar or a recession hits, states will be left holding the bag.

If past experience is any guide, more money will be squeezed from education. Since 1989, spending on Medicaid and prisons has climbed from 13% of state budgets to nearly 20%, while education spending has fallen from 49% to 43%. Hard-pressed states are also sure to take money away from cities--just as they are being asked to shoulder more responsibility. "There's some scary stuff coming down," says John Clemons, chief of governmental relations for Los Angeles County's Public & Social Services Dept. "This isn't reform. It's just a cost shift."

Welfare reform poses a further complication. The transition to new state-run programs will cost--not save--money, experts say. In Virginia, Culpeper County officials are experimenting with a promising pilot program to get welfare mothers into jobs (page 122). But to make sure the program works, Richmond has given the county twice its usual welfare funding. Nationwide, it could cost $15 billion to provide the child care and job training needed to get welfare moms to work.

Another key question: What happens in a downturn? During the 1990-91 recession, automatic federal spending hikes let many governors maintain the safety net without cutting programs or raising taxes. According to the Center for the Study of the States in Albany, N.Y., states enjoyed a 34% increase in federal welfare and related payments and only had to raise taxes 9% during the slump. But without entitlements, says Director Steven Gold, "when we have a recession, the money's not going to be there."

Economists David and Christina Romer of the University of California at Berkeley estimate these fiscal stabilizers boost growth by one-third in the first year after a recession. So in jettisoning entitlements, Washington might also be throwing away that cushion. "You'll see some vicious negative cycles, where states are trying to make up for falling revenues and cover higher benefit costs at the same time," says Harvard University economist Lawrence F. Katz.

Ironically, the biggest losers could be the very states where the GOP is now making strong inroads--relatively poor states in the South and elsewhere that rely most on federal aid. Without that largesse, these states will be forced to either cut services or raise taxes--and will fall even further behind in the race for economic development (map, page 123).

Even critics of the status quo question shifting responsibility to states. Robert Woodson, president of Washington's National Center for Neighborhood Enterprise, which focuses on local economic development, would rather "devolve beyond government to individuals and civic institutions." Woodson believes that churches, local charities, and community organizations can best care for their own disadvantaged, in part because they are more flexible and caring than government.

The model for this new system, explains Olasky, is the late 19th century social reform movement, built around private charity, work, and morality. Says David Boaz, vice-president of the libertarian Cato Institute: "The current social contract has created a world of single parenthood and crime. There really is a spiritual poverty, a breakdown of family, community, and neighborhood."

HISTORY LESSON? But many academics insist that applying 19th century solutions to today's problems reflects a flawed reading of history. Says Michael Katz, a social historian at the University of Pennsylvania: "Read the records. The degree of deprivation under which people lived was just staggering." Yet Olasky counters that private charities still improved the lot of the poor: "I'm not saying they were able to bring about a pleasant situation, but given the degree of difficulty they had, they did remarkably well."

These days, private charities--especially in big cities--are terrified that they'll be unable to survive de-entitlement. In Boston's tough Roxbury neighborhood, Sojourner House has been providing shelter for homeless families for 14 years. About 70% of its $350,000 budget comes from Massachusetts, the rest from private givers. The home already turns away three to four families a week because it lacks the resources. Less government involvement will only add to that demand. "I don't think the community will step up and pick up the slack," says Executive Director Anastasia Lopopolo.

Nor will many corporations, whose gifts have actually fallen in the past two years, while overall private giving has been flat at about $125 billion. Lotus Development Corp., for example, gave $2 million to private charities in 1995, down nearly 18% from 1994, due to declining profits. Explains Michael P. Durney, director of philanthropy and community affairs: "There has been this belief in Washington that there are substantial untapped resources in the private sector that will swing into place if the federal safety net is diminished. That is not true." Adds Holly Tennyson Hands, who chairs the donations committee at retailer Neiman Marcus: "The private sector will do a lot. But we're already doing a lot."

Even charities with strong private support aren't immune. PUENTE Learning Center in East Los Angeles teaches 2,000 mostly Latino students in a facility built with private funds. Mattel Inc. Vice-President Glenn Bozarth calls it "a model that demonstrates that the void can be filled by a partnership between corporations and communities." Still, PUENTE's director, Sister Jennie Lechtenberg, frets about reduced social services in Los Angeles County. "All these cuts mean more problems, more parents out of work," she says.

Some Republicans argue that expanded charitable work may require more than good will. To give the idea a boost, Senator Dan Coats (R-Ind.) and others would provide generous new tax breaks for individuals doing good works, such as providing home care for the needy. Still, the reformers are attempting an uphill battle to change history. Despite the Right's romantic lore, Americans have been hooked on guaranteed cash payments for more than 200 years (table). As far back as the Revolution, the fledgling nation promised pensions to soldiers in the Continental Army. And Civil War pensions grew into a massive retirement program that by 1893 provided benefits to nearly 1 million elderly.

But those payments came in exchange for service. Even in the New Deal, the safety net was offered as only temporary aid from the hardships of the Depression. In 1935, President Roosevelt himself worried about "continued dependence upon relief." And he warned: "To dole out relief in this way is to administer a narcotic, a subtle destroyer of the human spirit." Says William Galston, a former domestic policy adviser in the Clinton White House: "The New Deal bargain was based on the proposition that upstanding people who wanted to take care of their families had been prevented from doing so by circumstances beyond their control."

By the 1960s, though, the ties between work and government aid had become far more tenuous. Critics began to worry about the creation of a perpetual underclass. Now, in cities such as Cleveland and Atlanta, at least half of all children are on welfare. "The perception is that there's a breakdown in society, that people playing by the rules aren't getting rewarded," says Anne Cammisa, visiting scholar at Radcliffe College.

That's certainly what Daniel Burnett, an Easthampton (Mass.) product design engineer, believes. "I'm not against providing aid" to the needy, he maintains. "But they have to make an effort to go out and search for work. If you're getting a dollar from the state--and I'm paying it--you should repay it."

If public assistance to the poor has failed to end poverty among children, entitlements for the elderly have been a roaring success--though at enormous cost to taxpayers. In 1966, nearly one-third of all people over 65 lived in poverty. Today, it's barely 12%. Urban Institute senior fellow C. Eugene Steuerle calculates that a typical couple turning 65 this year could get a staggering $460,000 in Social Security and Medicare benefits before they die--far more than they paid in taxes.

For now, that social commitment will remain largely in place. But as baby boomers age and their benefits begin to swallow more and more of the federal budget, pressure to scale back even those entitlements will grow. One possible outcome: tying Medicare and Social Security payments more directly to income. America's current crop of seniors, naturally, isn't thrilled by the prospect. "I guess they have to cut somewhere because otherwise it will be our grandchildren who suffer," says Asako Kadoya, 81, a widow living in East Los Angeles. But, she frets, the GOP cuts "will be a hardship on senior citizens."

Yet the current debate over alternatives to Washington handouts transcends whether graying boomers will be able to keep their BMWs into their platinum years. The future of Republicans' decades-long quest for majority status is also at stake. Roosevelt guaranteed Democratic domination of American politics for a generation by establishing government's role in caring for those who had fallen on hard times. President Johnson expanded the federal obligation by creating long-term entitlements for those who did not work--sowing the seeds for the current collapse of Democratic influence.

Gingrich, by his own admission, is taking a risk at least as great. If GOP reformers can design market-based incentives that really do move people from welfare to work, contain health costs without sacrificing quality, and prod individuals and companies into playing a bigger role in fighting poverty, Republican realignment will become a reality. More important, America may return to its bedrock principles of individual initiative. But if the GOP Revolution veers off into a war of retribution against largely unprotected Democratic constituencies, the New Wave social reformers will have failed both as political visionaries and as social engineers.

The War On Entitlements

THE CURRENT BATTLEGROUND

ISSUES: THE SAFETY NET FOR THE POOR

The GOP would turn welfare, Medicaid, and food stamps back to the states.

Washington's role would be limited to funding a decreasing share of the programs.

PROS

Reformers claim these programs can be run far more effectively by states, cities, and even private charities.

CONS

Critics fear a radical erosion in aid to the poor.

THE NEXT TARGETS

ISSUES: MEDICARE

The $200 billion health insurance program for retirees faces some benefit cuts and premium hikes this year. But deeper cuts and a possible restructuring will be needed down the road.

PROS

Even with this year's likely changes, Medicare is still in dire financial straits, which will only get worse as baby boomers retire.

CONS

No one knows whether proposed changes, such as shifts to HMOs, will really save money.

ISSUES: FARM SUBSIDIES

House Republicans tried to end guaranteed farm payments but will probably be stifled by the Senate--this year. With budget-slashing suburbanites dominating the party, these guaranteed price supports may be doomed in a few years.

PROS

Critics says the payments are giveaways to agribusiness and raise food costs for consumers.

CONS

Agricultural interests say the payments are needed to preserve family farms against subsidized foreign competitors.

ON THE HORIZON

ISSUES: SOCIAL SECURITY

By far the biggest entitlement. It's off the table for now, but exploding costs--$500 billion by 2002--make it a future target.

PROS

Individuals need to increase their own savings rather than having Washington save for them.

CONS

Allowing the wealthy to opt out could destroy the system.

DATA: BUSINESS WEEK

Entitlements: Then And Now

-- 1778: In the first entitlement program, wounded Revolutionary War soldiers are granted pensions. At first, only officers and the disabled are eligible. By 1818, any vet who could prove poverty was entitled.

-- 1862: President Lincoln offers the promise of postwar pensions to spur Civil War enlistments. By 1893, the program becomes the first widespread federal income security program, serving nearly 1 million elderly and absorbing 41% of the federal budget.

-- 1932: In the depths of the Depression, World War I veterans march on Washington, demanding immediate payment of $1,000 bonuses promised to all vets. Congress refuses.

-- 1935: The New Deal spawns Social Security for retirees and Aid to Dependent Children--the forerunner of today's welfare program. Later, President Roosevelt pushes other entitlements, such as unemployment insurance.

-- 1965: As part of his Great Society agenda, President Johnson creates Medicare, which provides near-universal health coverage for the elderly.

-- 1983: Congress and Ronald Reagan agree on a package of reforms to the troubled Social Security system. They increase payroll taxes, boost the retirement age, and tax benefits of high-income pensioners. Still, spending grows.

-- 1994: Republicans sweep Congress on the strength of their Contract With America. After taking power, they vow to end entitlements for welfare, food stamps, and Medicaid.

DATA: BUSINESS WEEKBy Howard Gleckman in Washington, with Mark Maremont in Boston, Eric Schine in Los Angeles, Ann Therese Palmer in Chicago, Jeff Hoffman in Dallas, and bureau reports


Tim Cook's Reboot
LIMITED-TIME OFFER SUBSCRIBE NOW
 
blog comments powered by Disqus