Submerged state + SOTU note

Suzzane Mettler's book The Submerged State is a attempt to explain how anti-health care demonstrators could yell "Get government hands of my medicare" and other equally delusional slogans. Here's an amazing graph from Mettler (via Ezra Klein) listing a number of Federal programs and the percentage of people polled who received aid from those programs yet told the poll taker that they had not received any government aid.
Like the right wing TV actor who told Glenn Beck that he had been so poor that he'd been on welfare and food stamps and he didn't get any government help, many Americans receive government social benefits yet don't or won't understand that they are from the government. Mettler points out that the largest social benefits, like the Mortgage Interest Deduction, student loans, and medicare are delivered in ways that make it easy to think of them as private. Many of her students were under the impression that their student loans were private loans - because of the way the funding is delivered. The obscure way these benefit programs works often hides the fact that they are grossly unfair - for example the mortgage deduction gives the biggest subsidy to wealthy people and student loans, until the Obama reform, were a direct subsidy of banks.


As Ezra Klein points out:
 Among the more mind-blowing facts about the health-care system is that the tax break we give to employer-provided insurance dwarfs the cost of the entire Affordable Care Act -- and, if you want to take the concept a bit further, this means those of us who don't get insurance from our employers are being forced, even mandated, to pay for those of us who are. But this break is largely uncontroversial in American politics, while subsidies to help people who can't afford health insurance are extremely controversial.
Mettler calls this system the "submerged state" because it is hidden from view. One result is that elites who benefit more from these submerged benefits are much more highly motivated to lobby and fund candidates to protect them than people who don't really understand how the system works. For example, the student loan program, for decades, was set up as a way of transferring tax money to banks. Banks made student loans, the government both subsidized the rate and paid if students defaulted.  But getting rid of this subsidy was a titanic struggle for the Obama administration, with clear political costs (for example Ben Nelson was permanently turned into an enemy of the Administration when his sponsors at  Nelbank lost their subsidy), and little payoff since the benefits were complicated and few people understood them.

Consider the very popular mortgage tax deduction which is so much more valuable to wealthy people  - essentially a tax on renters and low income homeowners to benefit the more affluent. If you are wealthy enough to be in the 35% bracket a 4% mortgage on a $1/2 million loan  you get $7000 back from the government and if you are in the 28% tax bracket with a $150,000 mortgage at the same rate you get back a less generous $1700.  Families earning over $100,000/year get nearly 70% of the benefit from this deduction.  If you rent, you just get to pay taxes for home owners. But imagine how popular it would be to end the mortgage deduction and replace it with a $2000 increase in the standard deduction!  In fact, the Bowles-Simpson deficit commission proposed replacing the mortgage deduction with a 12% tax credit, limited to first mortgages and mortgages under $500,000. The realtors lobby reacted strongly, the public ignored it.

So "submerged" government programs benefit well connected because if you have a DC lobbying staff watching legislation, you understand exactly how they work and how to benefit yourself, but for ordinary citizens the operation is hidden. As health reform and student loan reform were taken up by Congress, the insurance companies that live on the tax deduction for employer health insurance and on Medicare, marshaled huge forces to lobby and market their story. The banks, unusually vulnerable after the 2007 crash were not able to save their student loan subsidy, but it's impressive how close they came.  On the other hand, ordinary citizens were both repelled by the complexities of submerged state policies and unaware of how much the government was already involved.

The much maligned Deficit Commission did great work informing the public that tax deductions were "tax expenditures" and not, as the Right characterizes them "letting people keep their money". Tax deductions transfer taxes from the government to the beneficiary just as much as direct expenditures do.  But I think Mettler has a valid criticism of the Obama administrations limited success in communicating how government benefits work to the public. For example, the revamped student loan program still "looks like" a private program - even though it might have been possible and useful for make all applicants read and sign off on a single paragraph explaining how the program works.  Because that's the other side of Mettler's research. Through a number of experiments, she shows that short informative notes can significantly change the opinions of people about government programs. For example, just explaining that the major beneficiaries of the mortgage deduction are the wealthy significantly decreased support for the program among low and moderate income people - but increased support from wealthier people.

The State of the Union speech tonight featured the President hammering home the proposition that a tax cut for the wealthiest must be paid for either with greater deficits or by putting it on someone else's back. No wonder we saw some unhappy looks from the ridiculous Eric Cantor