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Reform ‘Reform’

It is a time for bold initiatives that disrupt the status quo.

May 17, 2010, Vol. 15, No. 33 • By MATTHEW CONTINETTI
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In 1955, the historian Richard Hofstadter gave the title The Age of Reform to his book on the Populists and Progressives. Somebody really ought to write a sequel. We’ve been living in another age of reform since at least 1986, when President Reagan and a divided Congress passed a landmark tax bill that closed loopholes while lowering rates. A decade later, President Clinton and a Republican Congress linked welfare benefits to work, and the welfare rolls shrank. These were both major achievements. But the Washington reform machine was just warming up.

Reform ‘Reform’

Over the last decade, President Bush and a Republican Congress expanded the federal role in education and created a new entitlement to prescription drugs. In March, President Obama and a Democratic Congress overhauled the health care system. In April, Obama said Arizona’s “misguided” anti-illegal immigration measure demonstrated the need for “comprehensive immigration reform.” Two weeks ago the Senate began considering new, far-reaching financial regulations. When it comes to rule-making, Washington isn’t broken. It spits out new reforms at a furious rate.

At some point, though, the meaning of “reform” changed. The tax and welfare bills sought to end free lunches by eliminating special privileges and fostering individual responsibility. But the “reforms” of the last decade have largely been predicated on the idea that you can have something for nothing. The reforms of the last decade, and especially the last year, have given birth to new special privileges. They’ve increased dependency. They’ve handed out money the federal government doesn’t have.

The tax and welfare bills disrupted the status quo. They left a lot of stakeholders feeling burned. Favored constituencies lobbied to maintain their special privileges. Some businesses said tax reform would make them less competitive. The welfare lobby screamed that work requirements would increase poverty and crime. But all these insiders were wrong. Imaginative thinking and dramatic restructuring worked better than expected.

Today’s reforms are different. They don’t upset the established order—they codify and embed it. They don’t address the underlying problems—they magnify them with perverse incentives.

For example, take the health bill. Three things are behind the dramatic increase in health care costs: an aging population, innovations in medical technology, and a third-party payment system that encourages the consumption of health services. Longer life spans and new treatments are wonderful. But third-party payment is an unfortunate relic from World War II that has distorted health care economics. Does Obamacare address this distortion? Not at all.

Or take “comprehensive immigration reform.” During the 2000s, American demand for cheap labor, an unpoliced southern border, lax enforcement of immigration law, corruption and a lack of economic opportunity in Mexico, and the immigrant’s understandable desire to better his condition all contributed to a surge in migration to the United States. America, a nation of immigrants, is a welcoming and inclusive place. Immigrants improve economic growth and increase cultural vitality. But the dramatic influx of illegal immigrants has also worsened inequality, depressed wages, and heightened ethnocultural tensions.

President Bush twice attempted to change immigration law by creating a guest worker program and issuing an amnesty. He failed. Obama most likely will fail too, because an enforcement-free amnesty bill only incentivizes further illegal immigration. If Obama were serious about changing these incentives, he’d finish building the border fence and crack down on employers who hire and often exploit illegals because they’re cheap, docile, and undocumented. But he doesn’t seem eager to do either.

Finally, look at the bank bill. It contains sensible measures, including additional capital requirements and an exchange for complex derivatives. It shines some light on the unregulated shadow banks that made shady bets with money they didn’t have. But the bill does not go far enough. The ratings agencies that gave their blessing to trashy mortgage-backed securities go untouched. Freddie and Fannie, who take public money for private profit, go untouched. The big banks, who use their Too Big to Fail status to borrow cheaply and whose political power distorts the system, go untouched.

It’s time to reform the concept of reform. It’s time to return to the bold initiatives that strip power from insiders and upend the established order. The Kaufman-Brown amendment to break up the big banks would have done just this, so obviously the Senate defeated it. A few other proposals do justice to the idea of reform, in ways ranging from the radical to the incremental, like Paul Ryan’s Roadmap for America’s Future, Jeffrey Anderson’s Small Bill for health care, and Oliver Hart and Luigi Zingales’s market-based trigger for the resolution of large and complex financial institutions. If only there were more. The lack of political entrepreneurship these days makes us want to reach for the Xanax.

—Matthew Continetti

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