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You Can Never be Too Rich or Too Thin

We can recognize the outlines of the privation state even now. It will be a society of prisons rather than universities; of endless waits in the emergency room foyer instead of regular trips to the clinic. It will be a society infinitely rich and painfully thin.
Jason Myers

Issue #36, February 1998

The Well Runs Dry

wel°fare (wel'fâr'), n.1. the good fortune, health, happiness, prosperity, etc. of a person, group, or organization; well-being.

Who in America today can be unaware of the fact that we must cut back on welfare, that we can no longer afford the extravagances of well-being?

We live in a society that has spent beyond its means. We are in debt, and we must cut back. There was a time, once, a long time ago now, when a vast, visionary social experiment was embarked upon: we would eliminate poverty and misery, we would see to the welfare of American society as a whole — and we would use the scope and strength of the state to do it. But on that dark day sometime around 1981 when the numbers were handed out (You remember, don't you? Good numbers have to go to Wall Street and trade junk bonds, or rack up frequent flier miles merging and acquiring corporate entities; bad numbers have to line up for blocks of government cheese) the end was already in sight. The party had gone on too long. Soon enough, not even a block of poorly-aged cheddar could be given away for free.

de°pend°ence (di pen'dens), n.1. the state of relying on or needing someone or something for aid, support, or the like. 4. the state of being psychologically or physiologically dependent on a drug. 5. subordination or subjection.

We are an independent nation of independent people. But the experiment, the Welfare Experiment, preyed upon our kind, weak hearts. The state was only supposed to give us a quick boost, help out the poor. It was only temporary. It was meant to be for just the one time. But we went back for more. We took the easy way out. We got hooked. That double-dealing government hooked us all on its welfare-dope. And not just the inner-cities, not just the minorities; the stuff went all the way to the heartland. Just look at the poor people of Fargo, North Dakota:

The Federal Government is deeply embedded in the local economy in thousands of ways. In Cass County, home to 102,000 people, Washington spends more than $529 million a year on everything from dispersing nettlesome blackbirds to scrambling F-16 fighters. That amounts to $5,186 for every man, woman and child. Directly or indirectly, federal dollars support the local symphony, pay for potato-blight research and underwrite most of the county's roads, bridges and sewer projects. They support schools, the local airport and health care for the poor and elderly. Uncle Sam pays the salaries of post-office workers, Air Force officers and hundreds of Agriculture Department employees. "We have a web of dependence that's been woven over a long period of time," says Marvin Duncan, an agricultural economist at North Dakota State University. (Time, May 22, 1995, p. 38)

Yes, we got hooked on that good federal junk and now we're going to have to kick. We're going to have to cut back.

Why? Why now? Because there simply isn't anything left. We're borrowing from our grandchildren, everyone knows it. The people of Fargo know it. They know we have to cut back:

"Regardless of what happens, we're going to deal with it," says Larry Akers, 40, a red-bearded construction foreman sipping a screwdriver at a Fargo tenpins alley called The Bowler. "It's going to hurt. But we're borrowing from our grand children. And it's got to stop somewhere." (Time, May 22, 1995, p. 36)

Ex-President Reagan, in his capacity as the senile grandfather of the nation, tried to warn us. "Every child in America arrives on this earth owing $16,000 for the Government's profligacy," he said, (New York Times, June 10, 1992). A horrible image, though, isn't it? Federal agents bursting through bedroom doors to confiscate the piggy banks of each and every American child until their personal $16,000 is paid. No, we will not let it happen. Americans are stronger than that. We will make the necessary sacrifices to see us safely through this crisis:

Willard Filley, 76, and his wife Lillian, 70, say they would be willing to take a 10% cut in their $660-a-month Social Security checks to help the government through hard times. (Time, May 22, 1995, p. 38)

It is not only the government that has fallen on hard times. Corporate America, too, is struggling to stay alive. Levi Strauss' layoff of more than six-thousand U.S. factory workers in November is just the latest in a long wave of mass layoffs and factory closings. Like Hormel in the mid-1980s, which moved its production lines to Mexico, Nike is forced to manufacture abroad: soccer balls in Pakistan and shoes in Vietnam. And again, we have ourselves to blame, our own extravagance. American wages are uncompetitive. American labor demands too much: too many health-care benefits, too much time off, too much money. Too much well-being.

The health-care industry has learned what to do, how to cure this profligate spending disorder that has driven us into the poor-house. It's called managed care, simple household budgeting:

Prodded by large companies fed up with rising medical costs, the new medicine's entrepreneurs have turned health care into a corporate battlefield increasingly governed by the promise of stock market wealth, incentives that reward minimal care and a brand of aggressive competition alien to front-line doctors for whom dressing for success still means wearing khakis and a lab coat. No one disputes that managed care has at last put the brakes on medical spending, or that it has provided an effective vehicle for rationing health care, a profoundly sensitive subject in a culture raised on the notion that even the most expensive and esoteric treatments should be available to all. (Time, Jan. 22, 1996, p. 45)

Health care is a scarce resource; it must be carefully managed. And here, apparently, is a fight we are winning. The number of dollars available for medical research decreases while the number of those without health insurance of any kind increases. Extravagance has been brought under control. Scarcity is a reality that our culture will have to adapt itself to.

U.S. Statistics in Brief

In constant 1992 dollars (that is, adjusted to account for inflation), the U.S. gross domestic product rose steadily from $6,139 billion in 1990 to $6,739 in 1995. And it continues to grow. Between January and June of 1995, some $673 billion of new investment was poured into the stock market. And the stock market also continues to grow. As of December, 1997, the Dow Jones index had topped the 8,000 mark, a record-breaking level at the end of a long string of broken records. The U.S., in statistical terms, is awash in money. As a nation, we are richer than ever, and getting richer still.

Those figures, of course, are composites, representing the total national income and the overall value of publicly held stock rather than any individual firm's gains or losses. Some firms are up, others are down. No doubt, those struggling companies saddled with the high wages and exorbitant benefit packages demanded by Big Labor are barely staying afloat. Why else would they fire American workers and take their businesses overseas? Why, indeed, when the images of scarcity projected by the unceasing wave of mass layoffs seem paradoxically at odds with the well-being of many of the firms doing the downsizing. Levi Strauss, for example, had revenues of $7.1 billion in 1996. And while the American production workers stitching those 501s and Dockers took home between $5.50 and $7.50 an hour, the company found itself able to pay a single executive, retiring president Tom Tusher, over $100 million in stock options as well as a $21.5 million 'tax offset bonus', to defray the cost of the taxes on the stock transaction.

We are a rich nation of rich corporate enterprises, but do we not also have a large and growing population? Between 1990 and 1995 the resident population of the U.S. grew from 248.7 million to 262.8 million. More people, more demands on the health care system, more strain on existing resources. Yet, out of those 14.1 million more persons, won't some dependable percentage be trained as doctors? Of course. Of that nearly $7 trillion in national income, couldn't some portion be spent on new clinics and hospitals to serve that expanding population? Surely. That's what we once would have expected of a rich and growing society, that economic growth would improve things all around; that, as the pie grew larger, so would all of the slices. Managed care suggests otherwise, that there is all too little to go around. Well-being must be meticulously rationed, like the last box of crackers in a life-boat at sea.


Water, Water Everywhere...

How can we explain this paradox? How is it that we as a society can be simultaneously so affluent and yet so destitute? This illusory condition of scarcity, the expanding pie with shrinking slices, would seem to be, at its root, an economic problem. And since mainstream economists are so fond of providing open access to their knowledge in easily consumed and digested textbooks, let us consult a few of them.

Robert A. Lynn's Basic Economic Problems (New York: McGraw-Hill 1965) offers up a key to the solution almost immediately:

Economics is the study of man's effort to satisfy his unlimited wants by utilizing his limited resources. (p. 5; emphasis in orig.)

All other economic problems and the most complex economic relationships, Lynn assures us, can be traced to the nexus between these two axiomatic principles: wants are unlimited, resources are scarce. How, then, do needs and wants ever manage to meet one another? The bourgeois economist has the answer ready at hand:

Most things are scarce; they require work to produce or gather them. They are therefore limited...Again the big question of choice between various possible goals must be made. If we use all our time, equipment, and materials to make houses, we shall have nothing left over to use for making furniture and everything else...Choice involves striking the right balance, and in most economies this is where the price system enters the picture. Wants are measured by willingness to pay, scarcity is reflected by cost, and value is given by the price in the market. (p. 7)

Markets are mechanisms for the allocation of scarce resources. Markets cope with the basic, unalterable, universal fact of scarcity.

Yet, according to Mr. Lynn's account of the facts, there would seem to be another type of scarcity known to stalk the economic wilderness, one quite different from the natural and ever-present variety. This would be a sort of artificial scarcity, and Lynn reveals it in the course of what is now a fascinating 'period piece' comparison between the U.S. and the Soviet Union:

In practice the outstanding feature of Soviet central economic planning is the diversion of resources from consumer goods and services into other things...The Russian's productivity is undoubtedly high enough so that his work should yield him more in terms of a standard of living. The purpose sought by Russian planners, however, is to keep consumption down and other things up. Observers in the Soviet Union repeatedly have told of how crude and poor the wiring of hotels is, how the toasters function unsatisfactorily, and how the finest car (the Zil) is basically a copy of the American Packard of about 1940. By this economizing on resources used by consumers, the Soviets divert resources into investments in plant and equipment, into military forces, and into the space effort. The average Russian must substitute satisfaction in the exploits of Soviet cosmonauts for satisfaction of his own desire as a consumer. (p. 205-6)

The scarcity of consumer goods in the former USSR was artificial because it had been produced through the diversion of resources to the military. Soviet society as a whole was far richer than one would have ever known by examining the wiring in Soviet hotels or trying to make toast in Soviet toasters.

Scarcity in the midst of plenty, however, sounds suspiciously similar to our condition in the U.S. today, distant as we are from the world in which there was an alternative — any alternative — to the market. If, in the former Soviet Union, resources such as health care were allocated through central planning, the contemporary American system of managed care would seem to be the opposite: allocation of health care resources by the price mechanism, by the free operation of supply and demand. And markets, we have already ascertained, are designed to cope with scarcity, not to create it. Could it be that artificial scarcity is hidden somewhere within the free enterprise system? Let us examine the operation of managed care to search for a trace of this disorder:

Health Net is typical of "network-model" HMOs that contract with large medical groups and networks of provide the actual medical care. New subscribers choose or are assigned to a particular medical group, and in turn choose a "primary care provider" or "gatekeeper" who controls access to other services and outside specialists...The company pays its medical groups and some hospitals a set monthly fee for every subscriber assigned to their practices or likely to be admitted to their wards — a system known as capitation. Typically the doctors' groups hold back a percentage of this revenue to cover their operating costs and produce a profit. They in turn pay their primary-care physicians a set capitation fee and further negotiate capitation contracts with an array of specialists...Every time a capitated doctor performs a service or admits a patient to the hospital, it cuts into his income. If he spends less than the capitated rate, he pockets the difference; if he spends more, he eats the losses... (Time, Jan. 22, 1996, p. 47; emphasis added)

Observe carefully the slight of hand here: it is the creation of artificial scarcity. Within the Health Net system, is there what could reasonably be thought of as a shortage of doctors or hospitals? No. So what causes health care resources to be rationed, held back? The simple economic mechanism through which doctors and hospitals in the system balance their own incomes against the provision of heath care. But wait, you might say, don't patients pay for the services of those doctors and hospitals? Doesn't a market mechanism imply that going to the doctor puts money in the doctor's pocket, just like going to the barber means contributing to his rent and upkeep? No, not here. The miracle of managed care is the creation of a market within a market. Customers purchase the service by paying their insurance premiums — already, the first principle of market economics has been satisfied: supply and demand, willing buyer and willing seller have met one another and negotiated a price. But once the customer comes to collect his or her service, another market is waiting. Now the unlimited wants of the doctors and hospitals will be set against the limited resources of the insurers' capitation fee pool. Health care resources may be, in the most general sense, 'scarce', in that some upward limit exists on how many people can be treated in how many ways for how many conditions. But managed care has contrived to create scarcity within scarcity; to take the existing capacities of the health care system and re-allocate them, converting them into profits for the HMOs and their stockholders.

Could this sort of market-induced artificial scarcity lie at the bottom of the contemporary American privation state? The paradox with which we have been grappling is that of scarcity in the midst of plenty. But it is scarcity of a particular kind: a scarcity of public goods. Public goods are those things that markets seem incapable of providing, as even the most hard-nosed capitalist economist will usually admit. Edwin Mansfield's Economics: Principles, Problems, Decisions (New York: Norton 1980), for example, offers up an age-old example:

An obvious example of a public good is a lighthouse. There might be general agreement that the cost of building a particular lighthouse would be justified by the benefits (saving of lives, fewer shipwrecks, cheaper transportation). Nonetheless, no firm or person would build and operate such a lighthouse because they could not find any way to charge the ships using the lighthouse for the service. Nor would any single user gain enough from the lighthouse to warrant constructing and operating it. Moreover, voluntary contributions are very unlikely to support such a lighthouse because each user is likely to feel that his or her contribution will not affect whether or not it is built, and that he or she will be able to use the lighthouse whether or not he or she contributes. Consequently, the lighthouse will be established and operated only if the government intervenes. (p. 84-5)

There are also those public goods, like health care and education, which the market is capable of providing, but only with a massive inequality in distribution. The rate of profit for elite private schools and hospitals may be tremendous, but for universal education and health care it may be non-existent. Thus, general education and health care — the general well-being of the society — are necessarily public goods, supplied by the state or not at all.

Let us now recall the way our first economist, Mr. Lynn, described the nature of artificial scarcity in the former Soviet Union. It was, in his understanding, the diversion of social resources into the hands of a few: the military and the space program. But as we have seen in the case of managed care, markets, just like central planners, are fully capable of being complicit in the production of artificial scarcity. And this is precisely what we face in America today: the diversion of public resources into private hands through marketization. Government budgets for public services are diverted into private accumulation through simultaneous cuts in both social spending and the capital gains tax. Corporate downsizing converts community well-being into capital accumulation through a merciless pursuit of the cheapest labor available on Earth. Managed care HMOs siphon off insurance premiums — as well as their patients' own health and well-being — to pay executive salaries and stockholder dividends. The market thrives while society shrivels.

But as much as we face the genuine, tangible realities of public scarcity (the elimination of food stamps and the gutting of AFDC, the stagnation of public education, the lack of even basic universal health care), we face also the illusion of scarcity. We are, as a society, swimming in money. Yet we are always on the brink of poverty: we must cut back on welfare, we must cut back on wages, we must get heath care spending under control. Scarcity is an illusion, but the illusion itself provides justification for the cutbacks which are its true source. The government is billions of dollars in debt. Corporations are threatened by cheap labor overseas. Health care is strained to the breaking point. Won't you help out? Won't you cut back? Just to see us through hard times...

From the Welfare State to the Privation State

There was once a time when certain observers of politics could look across the landscape of advanced industrial capitalism and declare that its ugly growing pains and adolescent struggles were over. Seymor Martin Lipset's Political Man (New York: Doubleday 1963), for example, made the archetypal claim that, "the fundamental political problems of the industrial revolution have been solved: the workers have achieved industrial and political citizenship; the conservatives have accepted the welfare state" (p. 442-3). The welfare state was, with capital's approval, a means through which to build social peace and well-being. Prosperity allowed for such an investment, and the welfare state itself would help assure the conditions under which prosperity would continue. Listen to Lyndon Johnson in 1964:

For a century we labored to settle and to subdue a continent. For a half century we called upon unbounded invention and untiring industry to create an order of plenty for all of our people. The challenge of the next half century is whether we have the wisdom to use that wealth to enrich and elevate our national life, and to advance the quality of our American civilization. Your imagination, your initiative, and your indignation will determine whether we build a society where progress is the servant of our needs, or a society where old values and new visions are buried under unbridled growth. For in your time we have the opportunity to move not only toward the rich society and the powerful society, but upward to the Great Society.

No Democratic or Republican today could deliver such a speech. Today, the private accumulation of wealth by a few is clearly and unapologetically regarded as the highest goal that our society can achieve. Today, American citizens must substitute satisfaction in the exploits of corporate entrepreneurs and Wall Street investors for satisfaction of their own basic needs. The Great Society is not to be.

There are those, of course, who will say that we have already tried to achieve the goals of social upliftment, that we tried and failed. And so, having spent far too much on a failed experiment, we came to our senses and got back to the business of doing business. Nothing succeeds like success, they will say. What this retelling of the welfare state's end forgets to mention — what Lyndon Johnson's account of the Great Society conceals — is that the welfare state was never a benevolent experiment so much as it was a concession, a concession wrenched from the state and from capital by the power of organized working people. This is what all of the old rhetoric about social peace was meant to convey: that a deal had been struck between capital and labor, mediated by the state. The contemporary transition from the welfare state to the privation state would never have been possible without the crippling of organized labor and the disorganization of the American Left. There can be no escape from the conditions of artificial public scarcity without these two fundamental forces.

We can recognize the outlines of the privation state even now. It will be a society of prisons rather than universities; of endless waits in the emergency room foyer instead of regular trips to the clinic. It will be a society infinitely rich and painfully thin.

Jason Myers is a Ph.D. Candidate in the Department of Political Science at UC-Berkeley.

Copyright © 1998 by Jason Myers. All rights reserved.