by Steven R. Weisman, Peterson Institute for International Economics
Op-ed in the Fiscal Times
December 28, 2010
© Fiscal Times
In his valedictory speech before leaving the muddy field as President Obama's economic wingman in December, Lawrence Summers could not resist a final obscure digression. With a warning to his successors, the departing director of the National Economic Council talked of the problem of future budget deficits and debts—and then mentioned the importance of the "Moynihan corollary" to "Baumol's disease."
Summers, who is returning to teach economics at Harvard, was citing an important domestic policy debate of the 1990s that bears major implications for the budget battles to come. Baumol's disease is the name of a theory of a New York University business school professor, William J. Baumol, suggesting the near impossibility of imposing airtight cost controls on labor-intensive services. The Moynihan corollary holds that it is an even harder challenge in services supported by government. Federal budget-balancing, he suggested, will be all the more difficult as a result.
Summers's digression was especially noteworthy because it came amid hope of a renewal of the bipartisan spirit next year that surfaced from time to time in the final days of the lame duck Congress this month. But in addition to looking at Baumol's disease, it is worth looking at the extraordinarily gifted politician who introduced the corollary—Senator Daniel Patrick Moynihan of New York, who was an apostle of bipartisanship throughout his career, indeed until his death in 2003. His legacy of bipartisanship also bears lasting relevance to the tortured political era of today.
The example often cited by Baumol and Moynihan is that it takes the same number of musicians to play a symphony as it did two centuries ago, but the costs of an orchestra have risen exponentially without any gains in productivity along the way. The corollary, promoted by Moynihan during the healthcare debates of the Clinton years—that it is particularly hard to curb costs in services delivered by the government—continues to resonate.
Healthcare Debate—Stand and Deliver
There can be no solution to curbing federal spending without controlling healthcare costs driving the two mega-entitlement programs related to health, Medicare and Medicaid. Moynihan's record is also relevant, however, to the possibility of compromise on the entirety of budget issues in the next two years.
My own engagement with the issues raised by Moynihan derives from my role in editing a volume of his private letters and diaries published in the fall of 2010. From more than 10,000 pages of private letters, I put together a book (Daniel Patrick Moynihan: A Portrait in Letters of an American Visionary) that tracks the trajectory of Moynihan's career and his many battles while serving four presidents (from Kennedy to Ford) and as a member of the Senate, where he worked and tangled with four more presidents (from Carter to Clinton). Among other things, the letters convey the fraught relationship between Moynihan and the Reagan administration, and between Moynihan and both Bill and Hillary Clinton in the fractious 1990s.
Moynihan was never a fan of the Clinton healthcare legislation, and although one can only speculate as to what role he might have played in the Obama and Democratic leadership plan enacted last March, it is safe to say he would have raised some of the same concerns. He argued repeatedly in the 1990s that it was bad strategy and bad politics to expand an entitlement and force those satisfied with their own healthcare to pay for it.
Once on Meet the Press, hosted by his former aide Tim Russert, Moynihan declared that despite the White House's insistence, there was no healthcare crisis and the administration's numbers were dubious. His comment brought a rebuke from the White House, and the Senator's ties with the Clintons never recovered. Even before Clinton was elected, in the spring 1992, Moynihan wrote an explanation of his corollary to then-senator George Mitchell of Maine, the Senate Democratic majority leader: "Now then. It is characteristic of 'stagnant services' to drift into the public sector. Why? Because there's little or no money to be made….This means that the public sector will continue to grow. Baumol estimates that by 2040, education and health will require 55 percent of GNP. He insists there is no guilty party here. The cause is to be found in the nature of the technology services."
Moynihan was a crucial player because he became chairman of the Senate Finance Committee when Clinton took office (after the new president recruited the incumbent chairman, Senator Lloyd Bentsen of Texas, as his first Treasury Secretary). The Clinton-Moynihan relationship was damaged early on, after a column in Time magazine quoted an anonymous White House aide that Clinton would "roll over" Moynihan at the finance panel if necessary.
According to Washington Post reporters Haynes Johnson and David S. Broder in their book The System, published in 1996, Moynihan tried to persuade the First Lady, who was in charge of health care for the administration, to pay attention to Professor Baumol of NYU. He and his wife, Liz, had a dinner for Mrs. Clinton at their home on Pennsylvania Avenue with the business professor. Thereafter, Johnson and Broder write, the Clintons tried to woo Moynihan by consulting Baumol on their proposals for healthcare cost containment. They sought to enlist the scholar to send memos to Moynihan that some of these schemes could work, but it was to no avail.
Evidently Moynihan felt that any cost containment would fall too heavily on New York's teaching hospitals and doctors. He wrote in some of his letters that he found the Clinton healthcare program "coercive" and oblivious to the complexities of the problem. This is the same argument heard today by critics of the Obama healthcare reforms, and they are bound to remain a matter of debate in the new Congress.
Social Security—Crisis and Compromise
In the end, of course, health care failed under the Clintons, though later they succeeded in expanding the program for children in one of the major achievements of that era. A far more successful example of Moynihan's engagement, equally relevant to the problems of today, occurred with a bipartisan legislative effort that produced the Social Security rescue package of 1983. This had as its midwife the famous National Commission on Social Security Reform headed by Alan Greenspan, before he became chairman of the Federal Reserve Board.
The compromise involved President Reagan and House Speaker Thomas P. (Tip) O'Neill, D-MA, agreeing to a package of savings—including extension of the retirement age and increasing Social Security taxes—to rescue the revered government retirement plan from insolvency. As part of the deal, Reagan had to drop his talk of privatizing Social Security, a dream of his dating from his early days as a conservative lecture circuit superstar.
Now in the wake of the tax deal approved by Congress just before Christmas, a faint hope is growing in Washington that the spirit of compromise from the Greenspan Commission might settle on congressional and administration leaders when they confront other looming budget issues, especially entitlements. Two budget panels—including the president's fiscal commission—laid out proposals this fall for reducing the deficit that won some support on both sides of the aisle earlier in the fall.
The 1983 Greenspan Commission has been hailed by scholars and politicians alike as a high water mark in American government. In a book based on their popular course at the Kennedy School at Harvard (Thinking In Time: The Uses of History for Decision Makers), Richard E. Neustadt and Ernest R. May declared that the participants in that compromise "accomplished something quite as notable in its way" as the work of those who spared the world of a nuclear conflagration in the 1962 Cuban Missile crisis.
Moynihan served as a member of the Greenspan Commission, and was hailed for his role by Neustadt and May. A few years later Moynihan observed that "if you really want to do these things, they are not that hard" and maintained that the members worked out their accord in only 12 days. But others took a different view, among them Richard G. Darman, then a top legislative strategist under Reagan, who wrote about the Social Security compromise in his own memoirs, Who's In Control: Politics in the Sensible Center. Darman, a brilliant and acerbic Washington hand who died in 2008, always maintained that the Greenspan commission had little to do with the Social Security deal. Rather, he said, it served as a useful front for negotiations that went on behind the scenes and that no one knew about until they were over.
"I didn't see this bit of history as quite as easy as Moynihan suggested," Darman wrote in his book, recalling that the deal was built on trust among the principals and a number of shenanigans. Among them was the White House reaching out to Robert Ball, the 70-year-old representative on the Tip O'Neill commission, who "had to sneak out the back of his house and across a neighbor's yard to avoid being seen by the press as he entered a White House limo for one of many secret meetings."
One is reminded of the secret negotiations this year between Vice President Biden and the Republican Senate leader, Mitch McConnell of Kentucky, leading to the tax package that was reviled by many conservatives and liberals but accepted by a broad spectrum in the center. The polls show that an overwhelming majority of Americans supported it, and these numbers suggest that compromise might yield similar political benefits in the future.
To the end of his days, Moynihan maintained that compromise had been possible on health care in the 1990s and that he and Senator Bob Dole were ready to work one out, until the White House objected and insisted on all or nothing. Moynihan could be prickly, and not always the easiest Senator for any White House to deal with. But I am convinced that if he were around today, he would be the first to recognize the inevitability of more compromises on budget issues in 2011 and 2012, if only both sides are willing to look at the numbers and the explanations behind them—Baumol's Disease, Moynihan's Corollary, and all.