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What’s on the Mind of the "Radical Middle"?





MR. WATTENBERG: Hello, I'm Ben Wattenberg. The presidential campaign is finally over and Washington is all abuzz with talk of the new administration. But the payoff of politics is policy, and of that we hear much less. Today, Think Tank puts politics aside, and talks to two policy wonks, actually super wonks, what is on their agenda.

We are joined by two co-authors of 'Updating America's Social Contract: Economic Growth and Opportunity in the Next Century,' Isabelle Sawhill, a senior fellow with the Brookings Institution, and Rudolph Penner, a senior fellow at the Urban Institute. The topic before the house, the radical middle, this week on Think Tank.

Washington is known for partisan warfare from the right and left wings of the political spectrum. It is often said that sound policymaking falls victim to such partisanship. The authors of 'Updating America's Social Contract,' although they come from somewhat different political backgrounds, agree with that diagnosis. Together, they lay out an agenda for the radical middle. They argue that America's political system is not performing as well as its economic system, and that politicians are more interested in a symbolic victory than in working to find common ground on substantive issues.

MR. WATTENBERG: Belle Sawhill, Rudy Penner, thank you again for joining us, both of you.

Let's begin with this phrase, Social Contract, this is the book, 'Updating America's Social Contract.' Ever since I came to Washington, and that goes back almost three-and-a-half decades now, I've heard that term, social contract, social contract. What are we talking about? Belle, you want to start?

MS. SAWHILL: I think it's never been entirely clear what the term means, it's used in so many different ways. But to me it means, what are the reciprocal relationships between government and the people. In other words, what does the government owe to the public, and what does the public, in turn, owe back to the government.

MR. WATTENBERG: Do you buy that?

MR. PENNER: Yes. But I think it is fairly clear with regard to the compact between the generations. For generations, it has been understood that the younger people would turn over some of their income to older people.

MR. WATTENBERG: Since the advent of Social Security at least.

MR. PENNER: Well, no, I mean even before that within the family, and what government did in the 1930s was to take over that family role.

MR. WATTENBERG: The social contract, as it is used generally speaking, and particularly here in Washington, that does not refer to a family contract, but, as Belle said, a contract between government and people. Is that right?

MR. PENNER: Well, maybe we differ a little. I interpret it more broadly than that.

MR. WATTENBERG: More broadly, that it might be intergenerational within a family, excluding government.

MR. PENNER: Yes, and more than that, that government has taken over many of the obligations that used to exist primarily within the family.

MR. WATTENBERG: Okay. Now, you come from different backgrounds. Belle is a Democrat who has worked in the upper reaches of the Carter and Clinton administrations.

Rudy, you have worked for President Nixon and President Ford, and you were director of the Congressional Budget Office, appointed by Congress at a time when there was a split Congress, Democrat and Republican.

So, I've got the players right. Is it fair to say that on a given political spectrum, you would be somewhat liberal, and you would be somewhat conservative, would you buy that?

MS. SAWHILL: I'd put the emphasis on 'somewhat.'

MR. WATTENBERG: Right. You would put the emphasis on 'somewhat' too?

MR. PENNER: Very much so, yes.

MR. WATTENBERG: Okay, so we have two somewhats, but you're not in the same place.

MS. SAWHILL: We're the radical middle.

MR. WATTENBERG: Well, that's what I want to ask. What exactly is this idea of a radical middle?

MS. SAWHILL: I think part of what we're arguing is that people who have the more centrist kind of views that we do need to argue as strenuously for their point of view as the far right and the far left have a tendency to do. We're not sure that our views of the world have gotten as much emphasis or visibility. It's not as much fun on a lot of talk shows or in the political arena, or in the press, to talk about people who are in the center. Everybody wants to focus on the disagreements between the left and the right.

MR. WATTENBERG: All right. You pick out in your work three specific issues, is that correct, productivity, Social Security and Medicare, and inequality and poverty. Now, let's go through those. What is your view of, as you put it, rising inequality and poverty, where do you come together. You a somewhat conservative, and you a somewhat liberal, and I will underscore the somewhat.

MS. SAWHILL: I think we probably would agree, first of all, on the facts, which are that over the last 30 years or so, there's been some increase in inequality.

MR. WATTENBERG: Meaning the rich are getting richer faster than the rest of the --

MS. SAWHILL: The rich are getting richer, and the poor are getting poorer, if you want to put it that way. There are widening gaps between the bottom and the top.

MR. WATTENBERG: Well, you can have a widening gap with everybody going up.


MR. WATTENBERG: Which is one way of looking at the data.

MS. SAWHILL: Right. And people certainly have moved up some. And in recent years, maybe the last four or five years, that trend has leveled off. But we still have a degree of inequality in our society that is greater than we have had in the past, and is greater than most other industrialized countries.

MR. WATTENBERG: Okay. So what do you do about inequality?

MS. SAWHILL: Well, I think one of the things you do is, if you're deciding, for example, on a tax cut, you try to make it broad-based, you try to make sure that everybody benefits from it, and that the bulk of the proceeds don't end up just in the top of the income distribution.

MR. WATTENBERG: Just hold on a moment. You talked about tax reform, and then you talked about the bottom one-third. The bottom one-third of the American income distribution are really not paying any federal taxes any longer, are they?

MR. PENNER: They are paying a very big payroll tax to support Social Security.

MR. WATTENBERG: Right. But they are not paying an income tax as such.

MR. PENNER: No. In fact, many of them have a negative income tax because of our earned income credit that rewards work.

MR. WATTENBERG: Right. So how would you through tax policy help people who aren't paying taxes?

MS. SAWHILL: Well, let's take Bush's idea of doubling the child tax credit, for example. If you're part of this group that doesn't owe any income taxes, you're not going to get any benefit from the fact that each child now gets $1,000 tax credit instead of the old $500. But if you were to make that that refundable so that people with incomes of, say, $20,000 a year, but two or three kids, could get the --

MR. WATTENBERG: That would be sort of added on to their earned income tax credit, or something.

MS. SAWHILL: Well, it would be added on very simply to the proposal to double the child tax credit. And except that it would make it available to this group as well as to those with positive tax liability.

MR. WATTENBERG: Do you approve of that?

MR. PENNER: Yes, in general terms. I think the really important point is that this is one place where the social contract has changed. Welfare reform is very important, I think, because it says that the poor do have an obligation. It's not just giving them money. They do now have to do some work. And that means, in turn, that we have to modify the tax system and other programs so that we don't punish work.

MR. WATTENBERG: So the position of the radical middle is that it was good to diminish the role of welfare and push people into work, but having done that we have to give greater rewards to work at the lower end of the income distribution, would that be --

MS. SAWHILL: Precisely. Precisely.

MR. WATTENBERG: Okay. Now, what about the Social Security and Medicare situation? How do you all agree on that?

MS. SAWHILL: I think we both agree that the current path is unsustainable, that we've made commitments out into the future to the elderly for their retirement and their healthcare that we cannot afford. So something has got to be done, either to raise taxes, or to reduce benefits.

MR. WATTENBERG: Belle, you know, for the last ten years or so, people -- at least, people have been talking about this impending crisis. And yet it seems, at least to an outside observer, that every time you look at the numbers they're delayed another three or four or five or seven years. There are even some people who are now saying, you know this crisis we've been talking about is not going to be a crisis. Have you been following that, I assume?

MR. PENNER: Yes. But I think there are a couple of really important points that should be made here. First of all, the problem doesn't start until 2010. That's when the baby-boomers start retiring.

MR. WATTENBERG: That's when the very first of them.

MR. PENNER: That's right. And between 2010 and 2030, the number of retirees will go up about 70 percent.

MR. WATTENBERG: Seven zero?

MR. PENNER: Seven zero as opposed to the labor force that may be growing 4 or 5 percent. So the labor force will essentially be stagnant between 2010 and 2030. It's going to be an enormous burden on workers.

And, granted, some people say, well, economic growth will bail us out of that. Economic growth is very helpful, no doubt about that, but the Social Security promise depends on a person's wages, wages go up faster with economic growth. So the value of the promise we've made out there goes up as economic growth goes up.

MR. WATTENBERG: So, you say promise, we could interpret that as contract, social contract?

MR. PENNER: Exactly.

MR. WATTENBERG: America's promise, just so we know what we're talking about.


MR. WATTENBERG: And it is your belief, both of yours, that this crisis may have been delayed for a few years, but it's still impending.

MR. PENNER: No. Well, I think you have to be careful by what you mean by the crisis. The important point really is the size of the benefit outflow relative to the size of the economy, and that starts to go up right after 2010.

MR. WATTENBERG: Okay. So what is the solution of the radical middlists? What do you propose to do about that?

MS. SAWHILL: Well, I think you've got to do something about benefit levels, and one popular proposal is to increase the retirement age.

MR. WATTENBERG: Now, that is not something that we all go around saying that Social Security is not the third rail of American politics, but that particular aspect of it is still very third railish, isn't it?

MS. SAWHILL: I think less so than even two or three years ago. I don't know what Rudy thinks.

MR. PENNER: I'm not sure of that, Belle. I think part of the problem is people don't understand what we wonks mean when we talk about increasing the retirement age. They think they'll be forced to work longer. That is not the proposal. The proposal is simply to reduce the level of benefits at any particular retirement age, like 65.

MR. WATTENBERG: Well, that's even more politically dramatic, to say, we're going to cut you -- so you're saying, we're not going to reduce the age at which you can retire, we're just going to cut your benefits.

MR. PENNER: Exactly.

MR. WATTENBERG: Does anybody run for office on that?

MR. PENNER: No. No one has run for office, but it used to be you couldn't even mention it. Now you do have some very courageous Congressmen and Senators who have actually put proposals and legislation that would reduce the -- it should be emphasized, reduce the growth of benefits, not the real value of benefits. This is a really important point, because the way the system works now, each successive cohort of retirees will have higher real benefits.

MR. WATTENBERG: Because they're earning more money?

MR. PENNER: Just because of the way the formula works, and the system works, yes, essentially because they're earning more money. There would be no problem whatsoever maintaining the elderly population at the current real standard of living that elderly people --

MR. WATTENBERG: That's with cost of living?

MR. PENNER: That's right, given the cost of living. The problem is that we've promised them ever-increasing real benefits.

MR. WATTENBERG: Now, how does this in the radical middle relate to this idea of the partial privatization of Social Security? Rudy, you're very much in favor of that, I understand.

MR. PENNER: Yes, I hate the term privatization, I'd prefer the term --

MR. WATTENBERG: Partial privatization.

MR. PENNER: Well, partial, but a partial move to individual accounts I think is a better way to do it.


MR. PENNER: Because this will only work if government plays a big role in administering these individual accounts.

MR. WATTENBERG: Right, but it would be -- I mean, the proposal that Senator Moynihan put forth, and I gather as President Elect Bush's proposal would be to take of the 14 percentage points that are put in by the employer and the employee, that 2 percent of that would go into an independent account?

MR. PENNER: They haven't even specified the number, but that's the one that's usually used, yes. It's 2 percentage of 12 percent.

MR. WATTENBERG: And you like that idea? I mean, in broad strokes?

MR. PENNER: In broad strokes I certainly do. The devil is in the detail. There are a lot of ways of doing it.

MR. WATTENBERG: I understand.

But now, Belle, in broad strokes do you like that idea?

MS. SAWHILL: In broad strokes I'm open to the idea. I would certainly want to see the details, and I have some concerns that relate to, first of all, making sure we pay for it. If you take 2 percentage points off the payroll tax, that's taking away from the pot of money that's being used to fund retirement benefits now or in the near future. So you've got to replace that somehow or other.

MR. WATTENBERG: And that would in theory be replaced by the surplus?

MS. SAWHILL: That's right. And then I have some concerns about making sure that there are adequate benefits for particularly lower income or less affluent people. And then I have some concerns about whether it's putting too much risk on the shoulders of individuals, and how we manage that in a way that doesn't lead to enormous administrative problems, and new bureaucracies and new costs.

MR. WATTENBERG: Couldn't there be some --

MS. SAWHILL: But, that said, I'm very open to it.

MR. WATTENBERG: What the partial privatization of Social Security, or the independent accounts would do, in effect, which you like, and you are open to is to say to the lower 50 percent of the American income distribution that just as now half the population owns equities, this would say everyone owns equities?

MS. SAWHILL: And, in fact, one of the things I like about it is that it does reduce payroll taxes for the people who they are most burdensome for, which is that bottom 50 percent. Now, it does it with a big string attached, which is that they're going to have to save that money. But, at least those are then assets that they can call their own, and they can feel they have a little more stake in our society.

MR. WATTENBERG: Does this seem to you all to be, given the demographic structure, an inevitable sort of process that we're going to have to get there in one way or another, sooner or later?

MR. PENNER: Well, one of the really interesting things about the evolution of these things in other countries is that the left in those countries have been big proponents of the idea, whereas in this country generally the left is adamantly opposed to that idea. And I can't really explain it.

MR. WATTENBERG: Yes, it's sort of turning over the means of production to the poorer people. I mean, that's --

MR. PENNER: Exactly.

MR. WATTENBERG: I don't want to call it Marxism, but you could call it Marxism. It's every man a capitalist. I often wonder about why the left is against that.

MS. SAWHILL: I think there may be more sympathy for this idea if people begin to talk about it in those terms, if people begin to understand that payroll taxes are very burdensome on younger and less affluent Americans, in particular, and that this would give them some relief from that, as well as creating some assets that they could call their own. I think that's very important.

MR. WATTENBERG: All right. Now, the third idea that you and your coauthor Timothy Taylor deal with is something that seems to have less of a connection to government, which is productivity growth. I mean, doesn't that essentially come out of the private sector?

MS. SAWHILL: I think that our coauthor Tim Taylor, who did a great deal of thinking about this, has emphasized throughout the book that the productivity of the American economy is primarily due to the efforts of the private sector. But, we would all agree that there are on the margins different places where government can have an effect.

And probably the biggest and most important thing that government can do is to not absorb the savings that otherwise can be used for private investment. And we've been doing that up until fairly recently, because we've been running very large federal budget deficits.

MR. WATTENBERG: I just want to go back a step, which is let's define productivity, so we know what it is we're talking about. Rudy, do you want to take a shot at that?

MR. PENNER: Okay. It's not as easy as you're implying.

MR. WATTENBERG: I know it's not as easy, but because we're all talking about it I thought maybe there are some people like we who don't fully understand it.

MR. PENNER: Well, one can look at the official statistics. The official statistics try to measure the output per worker hour; that's labor productivity. There's also a broader measure of productivity that looks also at how productive capital is, as well as workers. Everyone would agree, however, that our measurements of productivity are very bad. They really don't take account fully of quality improvements in terms of what people produce.

MR. WATTENBERG: But, the idea is that if productivity doesn't increase you're not getting any real increase in wages or --

MR. PENNER: Exactly.

MS. SAWHILL: Standards of living are ultimately very dependent upon how productive we are.

MR. WATTENBERG: What Rudy and you are suggesting, as I sense that list that you just rattled off, that these are enhancements by the government, and a rules setting by the government to increase productivity in the private sector. It is not some sort of command economy?

MS. SAWHILL: Absolutely. I think the way we probably all think about it is that it's important for government to create an environment in which the private sector can do its job well.

MR. WATTENBERG: We quoted at the beginning of this show some views you express in this book about the horror show known as American politics. Do you think that politicians are standing in the way of these sorts of reforms, as you were suggesting? And as a second question, do you believe that, in fact, we have been suffering through this gridlock idea?

MR. PENNER: I would certainly not call what's going on gridlock, because in fact as the two parties have been competing evenly with each other, spending on discretionary programs has soared, without any rhyme or reason, I might say.

MR. WATTENBERG: So it's escalating gridlock.

MR. PENNER: It's escalating gridlock. We are on the verge of really important policy changes, prescription drugs and Medicare. I think that's inevitably going to happen; the patient's bill of rights. There are a lot of huge changes in policy that are just about to pop. So gridlock is the wrong word.

The problem is that these are all easy things to do. These are all giving things to people. What we have to consider are the really hard things.

MR. WATTENBERG: He sounds as if he thinks he knows better than politicians what to do for the American people. Is that an accurate description of either him or you?

MS. SAWHILL: I would hope not. I would say we're less constrained than the political class, if you will.

MR. WATTENBERG: Because you can say you have to lower benefits, or not raise them as fast, nobody is going to throw you out of the Brookings Institution, or the Urban Institute?

MS. SAWHILL: Right, exactly.

MR. PENNER: Well, it could happen.

MR. WATTENBERG: It could happen, but probably not for those reasons.

MS. SAWHILL: I'm actually optimistic right now, Ben, that we're moving into a period when we could have quite a bit of agreement or consensus around an agenda for the radical middle. I think that George Bush campaigned on doing business differently in Washington D.C. He campaigned on bringing people together. He is known for working in a bipartisan way. And so I think there is at least a prospect, I could be wrong of course, but at least the prospect, and I think we should all be optimistic and give it a chance right now, for the two parties to work together and really get something done.

MR. WATTENBERG: Do you buy that?

MR. PENNER: Yes, maybe I'm not quite as optimistic as Belle is. I think when the system worked well -- if you go back to the Eisenhower administration, he was horrified he had a deficit of $13 billion. He quickly got together with Sam Rayburn. They developed --

MR. WATTENBERG: Then the Speaker of the House, a Democrat.

MR. PENNER: Then the Speaker of the House, a Democrat, and they did some hard things, and they fixed it all up. I think that's what's so hard to pull off today.

MS. SAWHILL: Although, I like something that Senator Bradley once said about that, when someone asked him on his having left the Senate, wasn't that going to leave fewer moderates? His response was, 'No, because power is always in the center.' So if the center empties out, it will refill again.

MR. WATTENBERG: Yes, by definition the center has to exist, and it has to exist as the swing vote. I mean, whoever is the swing vote is the center. Sort of a moving center.

MS. SAWHILL: Well, of course, there was the comment by many on the left that the new center is where the old right was.

MR. WATTENBERG: Do you agree with that?

MS. SAWHILL: I think we've moved in that direction.

MR. WATTENBERG: You agree with that?

MR. PENNER: Absolutely, sure.

MR. WATTENBERG: Do you approve of that?

MR. PENNER: Yes, I basically approve of that, although it has its excesses.

MR. WATTENBERG: Do you approve of that?

MS. SAWHILL: Not entirely.

MR. WATTENBERG: Okay. That's what I figured.

Thank you, Rudy Penner, Belle Sawhill, and thank you.

Please, remember to send us your comments via email. For Think Tank, I'm Ben Wattenberg.


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