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State of the Union: Why Do We Act Against Our Own Self-Interest?
It's time to speak hard truths. The U.S. is the richest country on earth. But the way we spend our money makes us one of the poorer.
The State of the Union Address President Obama Should Have Given:
Mr. Speaker, Vice President Biden, Members of Congress, Distinguished Guests and Fellow Americans.
Let me begin with a cautionary note. I'm not here tonight to deliver a pep talk. If I'm interrupted with standing ovations I'll know you're not listening.
I'm here to offer some hard truths. The vast majority of you may not want to hear them. Many will reject them out of hand. Some may feel like rising out of your seats and shouting, "You Lie!" But I hope that in the days and weeks ahead as much light as heat will be generated from the conversations spurred by my remarks.
Let me begin with a statistic that, if viewed alone, would bring this audience to its feet. America is the richest country on earth, measured by per capita income (aside from a handful of small oil or gas-rich nations). But money is a means to an end, not an end in and of itself. What are the ends? A more secure and contented and fulfilling life. With these ends in mind, how do we measure up to other nations? We find we're no longer number one. We're not even in the top ten.
Since most of us spend the majority of our lives at work let me begin by comparing the security and comfort of the average worker in the United States and Europe.
American workers earn about as much annually as their counterparts in France and Germany and Denmark, but work almost three months longer.
We are the only advanced economy that does not guarantee at least some paid vacation. In fact, about a quarter of US workers in the private sector receive no paid vacation at all.
We are one of only a handful of nations that does not guarantee paid sick leave. Almost half the private sector workforce has no paid sick days.
The US has the dubious distinction of being virtually alone among the planet's 173 countries in not guaranteeing some form of paid maternity leave.
And if you lose your job in the United States, unemployment benefits pay a much smaller fraction of your wages here than in most countries in Europe and are paid for many fewer months.
And what about life outside of work? How do we measure up on promoting a secure, contented and fulfilling life?
In the United States day care is expensive. Pre-school programs for parents without means are few and far between.
In Europe almost all countries offer low cost or free childcare and pre-school programs. In France, for example, almost 100 percent of three-, four-, and five-year-olds are enrolled in free full-day schools staffed by teachers paid good wages.
For most of us, a primary non-work concern is access to affordable health care. Here the United States stands out. We are the only industrialized nation that doesn't make access to health care a basic right.
Does Generosity Undermine Competitiveness?
I know what many in this audience are thinking. The extensive and handsome social benefits offered by other countries to their workers and citizens may enhance their quality of life in the short term, but in the long term their cost undermines their competitiveness. What we think is self-evident turns out to be empirically false. European economies are as competitive as ours. Their worker productivity is about as high. Their trade balances are usually better. And their per capita income is similar.
The evidence is clear. Treating ourselves with dignity and generosity enriches our lives without reducing either our economic output or our economic competitiveness.
Indeed, it is America's paucity of social benefits that may be undermining our own economy. Consider the costs of our lack of access to health care.
People stay on jobs they detest out of fear they will lose health coverage, a situation that depresses productivity and innovation. Collectively we spend billions of hours a year appealing to a private health insurer to cover a medical procedure or bill, a stupendous waste of time that is all but non-existent in other countries.
For U.S. corporations trying to compete internationally, health care costs constitute a major handicap. For state and local governments trying to balance their budgets, health care costs constitute the fastest growing component.
The sobering truth is that we spend more than any other industrialized country on health care but on virtually any health measure-infant mortality, longevity, morbidity-we rate very poorly.
One yardstick for measuring the relative merits of health systems is to answer the question, if I have a heart attack in which country are my chances for survival better? According to the American Heart Association the United States ranks 22nd in the world for men and 23rd for women.
Dr. Christopher Murray, Director of WHO's Global Program on Evidence for Health Policy offers this blunt assessment of U.S. health care. "Basically, you die earlier and spend more time disabled if you're an American rather than a member of most other advanced countries."
The bottom line is that social generosity doesn't hurt; it helps. Why then, in the face of such evidence, do we continue to act against our own self-interest and more often than not choose to shrink the social sector?
It is not that we lack the money. Collectively we have more money than those countries that offer their citizens so many more basic services.
Why Do We Act Against Our Own Self-Interest?
Perhaps it is because we are guided by a different set of values than the reset of the world? Certainly a key characteristic of American culture is the belief that anyone can make it if they work hard enough. Recent public opinion polls here and abroad have found that Americans are twice as likely (60 percent) as Europeans (29 percent) to believe that the poor can get rich if they only try hard enough.
The flip side of the coin that says that if you work hard you can get rich is the American belief that if you are poor it is your own fault and help would be counterproductive, breeding idleness rather than fostering initiative.
The Preamble to the U.S. Constitution may state, "We the people of the United States, in Order to...promote the General Welfare". But the term "welfare" has always been viewed with hostility and suspicion.
Our economists have elaborated complex mathematical models to prove the counterintuitive proposition that helping our neighbors undermines the economy and results in all of us ending up poorer. To offer but one example of how successful their sales pitch has been, consider that the minimum wage in the United States, in real terms is now lower than it was in the 1950s.
America is the land of opportunity we are taught. We invented the Horatio Alger stories about poor boys who by dint of persistence and industry become rich. Anyone can make if they want it bad enough is our motto.
The irony is that we continue to believe this long after the period of relatively easy upward mobility in American history stopped being true. Pulling oneself up by one's bootstraps is harder in the United States today than in many European countries. If you are born into a poor family your odds of ending up in a poor family are far greater in the United States than in other countries.
The same models that purportedly "prove" that assisting the poor undermines the economy also "prove" that taxing the rich, however modestly also undermines the economy and results in all of us becoming poorer.
John Kenneth Galbraith once remarked on the inherent and self-serving contradiction in these two conclusions. If we help the poor we undermine their initiative we are told. We presume that poverty spurs enterprise. If we reduce the income of the rich we also undermine initiative we are also told. But here we presume that being poorer does not foster greater resourcefulness.
This unusual way of thinking has led us to be one of the most miserly countries when it comes to helping the needy while being one of the most generous when it comes to elevating those with more than enough. The result is concentrations of wealth of biblical proportions.
The combined wealth of the 400 richest Americans is a record-breaking $1.25 trillion, about the same amount of combined wealth held by the 57 million households who make up half the U.S. population. America boasts almost 400 billionaires while 37 million people have incomes below the poverty line.
From 1993 to 2007, the wealthiest 1 percent of Americans captured half of the overall economic gains. From 2002 to 2007 their share rose to two thirds.
Meanwhile, the average wage of Americans, adjusting for inflation, is lower today than it was in the 1970s.
We all rightly applaud the remarkable gains made by the stock markets this last year. But we should not assume that these gains will be widely shared. The richest 10 percent of Americans who own about 98 percent of all financial securities will benefit. For the rest of us, the extent to which most Americans have any assets at all their net worth is mostly in their homes, and most of those homes are still worth considerably less than they were in 2007.
Franklin Delano Roosevelt summed up the ethical sentiments that guided US public policy for more than a generation. "The test of our progress is not whether we add more to the abundance of those who have much; it is whether we provide enough for those who have too little."
Today any politician that expressed such sentiments would be widely attacked, as I can attest from personal experience. When I was running for President I observed, "I do think at a certain point you've made enough money". I added, "I think when you spread the wealth around, it's good for everybody." Wow, was I ever raked over the coals for those remarks. They became the basis for many fundraising appeals by Republicans. They thought, and perhaps they were right, that they had an issue that would resonate with the general public. How dare I tell Americans that a billion dollars, or even a hundred billion dollars, is enough! How dare I declare that taking a little money from billionaires and using it to care for the common welfare could prove beneficial!
Warren Buffett, a billionaire who does not believe it wise public policy for him to be taxed at a lower rate than his secretary, has observed, with his tongue firmly in his cheek. "I'm making $80 million a year-God must have intended me to have a lower tax rate." A number of his brethren, unfortunately but instructively, have expressed the same sentiment without a trace of self-mockery. Wall Street billionaire Charles Munger, for example, informed the nation, "You should thank God" for bank bailouts. But he made it clear that broader government intervention to help others would destroy the country. "Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all of the individuals instead of telling them to adapt, the culture dies." People in economic distress, he advised, should, and I quote, "suck it in and cope".
When the Democratic Party tried to close a loophole in the tax code that allows billionaires to pay taxes at half the rate their chauffeurs and secretaries do, multi-billionaire Stephen Schwarzman exhorted his colleagues on Wall Street to battle, "It's a war. It's like when Hitler invaded Poland in 1939." Wall Street won that battle. The loophole remains.
Today the stark fact is that total Wall Street compensation is about equal to the combined deficits facing state and local governments. We are choosing to close down clinics and libraries and schools and lay off tens of thousands of public employees rather than ask millionaires and billionaires to make even the smallest sacrifice.
In American politics today the regrettable fact is that to pass legislation that gives a dime to those who need help we must include a measure that gives a dollar to those who most assuredly do not. Last month Congress was able to extend unemployment benefits to millions of workers living on the edge only after it agreed to maintain tax cuts for millionaires that will save them more money than the average American will make this year.
What Did the Election Results Teach Us?
As the dramatically new composition of this audience reflects, this country experienced a political earthquake this past November. I am as chastened as any Democrat by the results. Many view the election as a referendum on government. I think that is true in part. Certainly there are reasons to be angry with the government. We in Washington made a number of policy decisions that should have been upsetting to many.
Consider the requirement that everyone must buy health insurance. You may recall I opposed this mandate in the Democratic primary. So why is it in the law? Because the private insurance companies demanded it as the price for their acquiescence to the bill's passage. The mandate is will be enormously profitable to them, expanding their customer base by tens of millions, most of whom are healthy.
I agreed to the mandate in order to get a health reform bill passed. If Republicans want to delete only that part of the health reform bill, I will support that effort.
Our bailout of the financial sector also had major shortcomings. Remember, there were in effect two bailouts. One was intended to overcome a liquidity crisis that threatened to quickly grind the entire economy to a halt. That bailout was successful. The second was intended to shore up huge banks and insurance companies that were, in effect, bankrupt. Whether we should have done that second bailout at all is open to debate. That we did so without insisting on fundamental changes by the financial sector in return for the bailout is unconscionable. We never exercised our power to demand, for example, that the incentive structure that led to the financial collapse be changed. We asked, but never insisted, that the firms should restart their lending to businesses. We asked, but never insisted, that they modify their mortgages to slow the rate of foreclosures.
We did our policies come up short? Most observers would agree that it was a result of the inordinate influenced of big money and large corporations. But the fact of the matter is that the grassroots movement that arose a few months after I took office did not focus its anger on the abuse of self-serving power by private corporations but on the exercise of public authority intended to help the general welfare.
Recall that the Tea Party Movement was launched by a rant on the floor of the Chicago Mercantile Exchange against the federal government's effort to help people stay in their homes. "Do we really want to subsidize the losers' mortgages or do we want to buy houses in foreclosures and give them to people who can actually prosper in the future", roared Rick Santelli in February 2009. A few months later Michelle Malkin summed up the conservative thesis: "foreclosure ‘victims' (the word victims was in quotes) don't deserve an ounce of sympathy - or a cent of our money." The message was clear and classic. Those who were losing their homes were at fault. They deserve no help.
This message was repeated over and over again, even when we learned that only a generation ago banks routinely altered a mortgage for a customer in distress, even when we learned that most people who took out sub prime mortgages actually qualified for far better fixed rate mortgages but were deceived by mortgage brokers into signing a far riskier and more costly contract, even when we learned that many people were being thrown out of their homes not because they were behind on their mortgages but because they were behind in paying the exorbitant and unanticipated fees mortgage servicers imposed on them.
The facts weren't going to change our minds. To paraphrase Pogo, we knew who the enemy was. He was us.
That same message extended to the other major political issue debated over the past two years: health care. Speakers at rallies denounced the idea that the government should extend health care for tens of millions of Americans. To be sure, there was and should have been a vigorous debate about how we might do so. But these rallies opposed the very idea that we should try. And as we know, the first order of business for the new Congress has been to repeal the modest health reform we were able to pass last year.
Perhaps it's simply a coincidence, but a study cited in a recent issue of Scientific American comes to mind. The study finds that college students' self-reported empathy has declined since 1980 and there has been an especially steep drop in the last 10 years. We care about others much less than we used to and that is reflected in our rhetoric and our politics.
Europeans often use the phrase "social market economy" or "social capitalism" to describe their mix of economic and social policies. On this side of the Atlantic we label those who promote an expansion of the social sector socialists, a word that is perfectly acceptable in European discourse but is far outside the pale of American politics.
Defending the Public Good
Today the word "public", like the word "government", is under attack. We are witnessing a full-fledged assault on everything public: public television, public radio, public arts, public libraries, public employees in general, public services of all kinds.
The new code word is privatization. At every level of government, privatization is being seriously debated and often embraced. One would expect that in such a debate the burden of proof would rest on those who would sell public assets for it is a decision very difficult to reverse and it means relinquishing our control, usually over a basic service, to a corporation whose policies are made by owners located often thousands of miles away from their customers and driven by goals that do not put the needs of the community first.
Unfortunately, even tragically, the burden of proof often does not rest on those who would privatize but on those who would defend the public.
That is regrettable for many reasons, not the least of which is that the arguments in favor of privatization are singularly unpersuasive.
Some argue for privatization as a way to spur competition. The argument is disingenuous. The vast majority of public services do not lend themselves to competition. If we sell our public water company to a private firm we don't end up with two water companies. We still have a monopoly.
Some argue the private sector is more efficient. There is little empirical evidence to back up this claim if by efficiency we mean getting more productivity per employee rather than cutting an employee's wages and benefits.
Sometimes privatization is promoted as a desperation measure; a way to inject urgently needed cash into municipal or state coffers. But as with most actions driven by desperation, these may bring short-term benefits but almost always result in high long-term costs. Which is to be expected. Private investors demand a high return on their investment.
Often privatization is a way for politicians to avoid making hard decisions. Rather than raise fees or taxes to maintain or upgrade basic infrastructure, they sell the infrastructure to private firms who then raise the rates. In the long term we pay a high price for such cowardice. But it is a price we will continue to pay so long as a politician gets thrown out of office for proposing to raise taxes but is warmly supported when he advocates privatizing a service that will result in a huge increase in rates.
These are difficult times. We no longer act as if we are in this together. We are losing faith in our ability to collectively address our problems. Even more tragically, a growing number of us no longer believe we even should.
Changing the Future, Facing Hard Truths
These are sobering thoughts, but the future need not be so gloomy. Alexis de Tocqueville, the Frenchman whose insights into the American character in the early 19th century continue to resonate, once remarked, "The greatness of Americans...is in their being able to repair their faults."
I propose that we undertake this repair. The first step is to accept the need for repair. Here again we might be guided by an insight offered by Franklin Roosevelt. "We have always known that heedless self-interest was bad morals", he told the nation some 75 years ago, "now we know that it is bad economics".
Consider but two examples that prove his point.
In the 1960s, the US and Canada were home to very similar health systems. We were spending similar proportions of our respective gross domestic budgets on health care. That decade Canada did away with private profit making health insurance companies. Today Canada has a single insurer, or more accurately, 12 Provincial insurers that share several core principles.
The United States has continued to rely on hundreds of private, profit making insurance companies.
Canada is now spending about a third less on health care than the US. Much of the difference is a consequence of the enormous administrative cost from having hundreds of insurance companies and thousands of individual and extraordinarily complex health policies. As much as 30 percent of our health dollar is spent on paperwork and administration alone.
Other countries have adopted different structures for universal health coverage than Canada. All have universal coverage. All are significantly less expensive than ours.
When the economic crisis hit, Germany responded not by laying off workers but by encouraging employers to reduce their hours with two-thirds of the lost wages being made up by a social fund. German workers do not experience a precipitous drop in income. Companies were able to keep workers on, retaining their institutional memory and skills that will be needed when the economy improves. Germany's unemployment rate never soared and remains significantly lower than ours.
The United States created no comparable mechanism. Private companies laid off millions of employees. Foreclosures soared, as did personal bankruptcies. Domestic violence rose. And now as an economic recovery begins, US companies are largely hiring temporary, not permanent workers to shield them against the risk of a new downturn.
This might be the time to face some hard truths.
The hard truth is that the best era for the middle class in this country was from 1950 to 1973, a time when a single wage earner could earn enough to buy a house and send the kids to college. That was also an era in which the percentage of the work force in unions was almost 4 times what it is now. And the top income tax rate never dropped below 70 percent, double today's rate.
The hard truth is that inequality is economically as well as socially harmful. Stark inequality breeds stress and social isolation and sickness. Growing evidence indicates that inequality was a key driving force behind the latest financial and economic collapse. And the historical evidence is clear: inequality undermines economic growth.
The hard truth is that we are interdependent and social investments that help our neighbors almost always end up helping us as well. Ask your father and mother what social security means to them or how their lives changed when Medicare began shielding them and their parents from catastrophic medical bills.
"The good we secure for ourselves is precarious and uncertain until it is secured for all of us and incorporated into our common life", Jane Addams, the first American woman to be awarded the Nobel Peace Prize once remarked.
This is a moment for us to relearn this basic truth.
Thank you for listening. I'm grateful and frankly, pleasantly surprised that so many of you remain in your seats. I know this has been a very unusual State of the Union Address. But then this is a very unusual moment in American history.
I look forward to the vigorous, but I hope civil, debate that will inevitably follow.