Beyond Big Government
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  By Donald F. Kettl | Barack Obama campaigned as the candidate of change. He’s not going to have any choice about meeting that pledge. Thanks to the financial meltdown, we’re in the middle of as big a change as we’ve had in a very long time.

As the race for the White House entered its final stretch, most experts still hoped that the crisis would be nasty, brutish, but short. The Bush administration infused hundreds of billions of dollars into financial markets with the hope that the economy would right itself. That hasn’t happened. The meltdown has been even nastier and more brutal than most people feared, and it’s now clear that government’s role in restructuring the economy is going to last far longer than anyone wanted. Indeed, we’re likely to come out the other side of the tunnel with what may amount to a new and very different social contract.

The core problem is simple on the surface: banks lent money to people who couldn’t pay it back. Down in the weeds, though, the predicament is extraordinarily complex, and no one really knows how best to fix it. We have good mortgages nested with toxic loans, troubled banks going under while stronger ones struggle to restore confidence, and a financial system that is calling for more help even after the giant infusions of taxpayer funds.

The federal government now has major ownership stakes in Fannie Mae, Freddie Mac, American International Group, and Citi. We’re debating major government investment in the auto companies, aid to strapped homeowners, and new regulations to prevent a repeat of the meltdown.

What’s more, our government isn’t the only one that has recently taken on a bigger role in steering the economy. The British government flooded the Royal Bank of Scotland with cash in exchange for a majority ownership stake and a requirement that the bank increase lending. The governments of Spain, Ireland, and Denmark injected cash into their financial systems. Meanwhile, central banks around the world have pushed interest rates close to zero.

Our history is that once we make big moves, we rarely roll them back. The federal government did shrink its involvement after bailing out Chrysler in 1979, and after rescuing the troubled savings-and-loans industry in the early 1990s, but this time the problems are far bigger, the government’s intervention is broader, and the effects are likely to be lasting. The Obama administration is not just trying to stave off rising unemployment. Like it or not, the new president is reshaping government’s role in society, and one of his toughest challenges will be defining just what market capitalism will look like in the future.

In recent years, public debate has frequently centered on the notion of privatizing the public sector, through strategies ranging from contracting out government services to creating individual Social Security accounts. But the terms of that discussion have disguised what may prove to be a more important trend. In fact, we have steadily governmentalized the private sector, by weaving government’s role ever more deeply into corporations and families.

The public role in private transactions is often subtle and unnoticed. I remember talking with a pharmacist who railed against “big government” as he filled a prescription for my father-in-law, who received prescription drug benefits as a retired Air Force colonel. The pharmacist never stopped to think that, as he was criticizing government, he was simultaneously acting as a government bureaucrat—the front-line administrator for a federal program serving a retired veteran who had navigated 47 missions in a B-17 bomber during World War II.

Similarly, many of us have bought homes thanks to a mortgage pool deepened by Fannie Mae and Freddie Mac at the behest of the federal government—which also offers income-tax breaks on mortgage interest and property-tax payments, a policy that amounts to a $100-billion-a-year subsidy for homeowners.

Now the federal government has ownership stakes in major banks, is stepping in to help people who can’t pay their mortgages, and is steering a rescue for the auto industry. The governmentalization of the private sector has reached a threshold that few could have imagined just months ago.

As we work through this process, one big puzzle will be whether our governmental institutions are up to the job. The legislative branch, in particular, has struggled with the mega-crisis. When the House of Representatives rejected the first phase of the bailout last September, the stock market lost $1 trillion in a single day. Congress couldn’t find an answer to saving the auto companies in December, and the Inauguration Day target for passing a stimulus package went by without a bill.

Meanwhile, power has slipped down Capitol Hill to the Treasury and the Fed, which are now in a tight partnership that Franklin Roosevelt and his reformers could hardly have imagined. Democrats in Congress chafed under former Vice President Dick Cheney’s campaign to strengthen the executive branch, but Congress’s struggle to keep up with the punishing pace of the economic meltdown has done more for Cheney’s campaign than Cheney himself. Unless Congress finds a way to step up effectively, the implications for the balance of power in our system could be deep and lasting.

A second big puzzle will be how to hold a vastly empowered executive branch accountable. So far, the record gives cause for worry. We’ve poured hundreds of billions of dollars into banks without knowing what they did with the money (and, in fact, without many of the banks feeling that they needed to do anything with it). The government simply hasn’t figured out how to exercise the new muscle that comes with partial ownership. It has to balance the demand to maximize the return to taxpayers against the need to avoid pushing more companies over the cliff. It has to steer private decisions without destroying private markets, and it has to right the American economy in a world where missteps are instantly and globally punished.

With Obama’s victory, we elected a candidate who was able to sail through the economic meltdown without capsizing. The “no drama Obama” approach, even if it sometimes gets mired in wonkiness, has the potential to provide a stabilizing calm. But the new president has to figure out how to right the economy without radically damaging the future of capitalism, how to make Congress a partner without losing his head of steam, how to supply trillions of stimulus dollars without crushing the next generation under unbearable debt, and how to make the entire system accountable to all of us.

These dilemmas easily rise to the level of those faced by Roosevelt. How best can we face them?

Where government institutions are concerned, Congress in particular needs to become more nimble in responding to fast-changing problems. Members must push some of the partisanship aside—a tall order, for sure—to focus on the pressing economic issues. And it needs to put a much higher priority on oversight, so it can track what is happening with the trillions of dollars we are spending and hold everyone—the executive branch and private companies—accountable for the results, or lack of them.

Accountability is also a thorny issue. Problems are changing far too quickly for us to rely on our usual tools of laws, rules, and reports. We need an accountability system that moves from process to information. The crucial imperative is to gather real-time data on what’s happening with all this cash, and use it to drive an ongoing debate about the new social contract we’re writing.

Those are two big steps—shifting Congress from sharp-elbowed lawmaking to results-focused oversight, and moving the money trail from the shadowy back rooms to the bright light of transparency. I like to think of these as the steps that the always-pragmatic Benjamin Franklin would take if he woke up today to tackle the crisis.

In Franklin’s time, and at other moments in American history, the federal government’s relationships with the private sector, with state and local governments, and with the rest the world have shifted like tectonic plates. Not since the Depression have all three of these plates shifted at once. So if it feels like an earthquake, that’s precisely what’s happening. While such temblors are scary, American democracy has proved resilient so far. Obama’s challenge—and ours—is whether we’re smart and nimble enough to tackle the current earthquake by forming the next government of the United States.

Donald F. Kettl is the Robert A. Fox Leadership Professor and a fellow at the National Academy of Public Administration. He is the author of The Next Government of the United States: Why Our Institutions Fail Us and How to Fix Them (W.W. Norton, 2009).
   
  ©2009 The Pennsylvania Gazette
Last modified 3/03/09