Don’t miss Yuval Levin’s piece in the current National Affairs, “Beyond the Welfare State.”

The piece is interesting and important for many reasons, but not least because of its author’s background: a prominent Bush domestic policy staffer, Levin has spent a lot of time pondering the question: “What is/was compassionate conservatism?”

Based on his new essay, the answer seems to be: compassionate conservatism is kaput.

Instead of the old emphasis on government aid to faith-based charities — government tax support for the poor — and the expansion of government health insurance for the elderly, Levin’s new vision endorses the Paul Ryan idea of radical reductions in government’s social insurance function.

“Beyond the Welfare State” urges a new approach to conservative domestic policy based on 5 key ideas:

1) Lower and flatter tax rates — likely meaning a further tax cut from today’s top rate, along the lines proposed by the Ryan budget plan, with elimination of most deductions, credits, and tax expenditures.

2) Means-testing of all government programs, including retirement security for those under-55s. Again this follows the ideas in the Ryan budget plan, whereby most under 55s will over time lose their claim on most government assistance.

3) Means-tested subsidies to support health insurance for those who cannot afford the full cost, within a marketplace regulated by the states.

4) Radical reductions in domestic discretionary spending.

5) Radical reductions in the administrative power of the state — including its monetary policies, which would adhere instead to fixed and predictable rules.

Levin acknowledges that this program will be politically unpalatable:

It will require extraordinary sacrifices from today’s young Americans, who will need to continue paying the taxes necessary to support the retirements of their parents and grandparents while denying themselves the same level of benefits so their children and grandchildren can thrive.

And since these “extraordinary sacrifices” are joined to a tax cut for high-bracket taxpayers, it’s not difficult to imagine how the plan might meet resistance.

But let’s leave the politics aside and consider the merits:

What to think about such a program as the basis for a new kind of conservatism? What would it accomplish, where would it put us?

Yuval Levin founds his case against the welfare state on this description of the national mood:

It is becoming increasingly clear that we in America are living through a period of transition. One chapter of our national life is closing, and another is about to begin. We can sense this in the tense volatility of our electoral politics, as dramatic “change elections” follow closely upon one another. We can feel it in the unseemly mood of decline that has infected our public life — leaving our usually cheerful nation fretful about global competition and unsure if the next generation will be able to live as well as the present one. Perhaps above all, we can discern it in an overwhelming sense of exhaustion emanating from many of our public institutions — our creaking mid-century transportation infrastructure, our overburdened regulatory agencies struggling to keep pace with a dynamic economy, our massive entitlement system edging toward insolvency.

But these are mostly symptoms of our mounting unease. The most significant cause runs deeper. We have the feeling that profound and unsettling change is afoot because the vision that has dominated our political imagination for a century — the vision of the social-democratic welfare state — is drained and growing bankrupt, and it is not yet clear just what will take its place.

Supposing the first paragraph to be a valid description, is the second paragraph the most plausible explanation? I’ve met plenty of anxious people over the past three years. Many were beyond anxious: terrified and desperate. And what was the cause of their “unease”? Not the impending bankruptcy of Medicare. I know people who have seen their family incomes drop 80% or 90% over the past 3 years. I’m not going to mention names here, but if I did, I’d venture that Yuval Levin would recognize some of them. I know people who have been out of work for months. I don’t personally know anybody who has been foreclosed upon, but that is the accident of living in an area lightly touched by the mortgage disaster. So if somebody asked me, “What is the most significant cause of our mounting national unease?” I’d answer: “We have the feeling that profound and unsettling change is afoot because we are living through the worst economic downturn since World War II.”

And once you say that, your mind travels in a very different direction from that indicated by Yuval Levin’s essay, or at least my mind does.

Where did this crisis come from? Why was it not prevented? How can we minimize the suffering consequent to the crisis? How can we accelerate recovery from the crisis?

Perhaps I am speaking only for myself, but when I ponder those questions, I come to feel that the libertarian ideal championed these days by so many conservatives has become at least as drained as the social democratic idea.

I don’t believe that Yuval Levin, whom I know to be a compassionate person, deplores the existence of unemployment insurance and the ability of Congress to extend insurance payments during a serious crisis.

Are we sorry that the stimulus plan included aid to assist the unemployed with their COBRA payments to continue their health insurance?

Do we condemn food stamps?

Is it a national weakness that the now-substantial government/education/health/military sectors of the economy continued to provide some source of stable demand, unlike the situation in 1931?

When we think of the most immediately urgent failures of government, do we really think of the failure of government to adequately fund the Medicare needs in the next decade — or of the failure of government to act to prevent systematic misrepresentations by rating agencies in the past decade?

Do we truly regret that the Federal Reserve had discretionary power to create new money after October 2008? Wouldn’t it make more sense to regret that the Federal Reserve did not use its discretionary power to crack down on predatory lending activity in 2003?

If anything, as we review the record of the past three years, I’m moved to revise my own opinions of a lifetime and adapt the words of Yuval Levin’s mentor, Irving Kristol to say: “two cheers for the welfare state.”

I doubt that Yuval Levin would disagree with very much of what I wrote in the second post in this series. I expect that most Republican politicians and voters would agree too, in actions if not in words.

Republicans have repeatedly voted to extend unemployment insurance. Paul Ryan’s plan preserves Social Security. Yuval Levin’s own 5 principles for reform contemplate a healthcare system in which “the poor and the old would still have heavily subsidized coverage and much of the middle class would still have moderately subsidized coverage.”

So is this perhaps just a discussion of more vs. less? In the 1990s, federal spending as a share of GDP was reduced below 20% of national income. The crisis and the Obama response have pushed spending up to 25%. Could we translate Yuval Levin’s essay as a call to return to the old proportion?

Yes and no. Yes he’s certainly calling for spending less. (In that, I agree with him — although I doubt we’ll get back below 20% anytime soon.)

But Yuval Levin is engaged in something more than hype when he says that his plan goes “beyond the welfare state.” Here’s the key line:

essentially all government benefits — including benefits for the elderly — should be means-tested…. Americans below 55 or so … should expect public help only if they are in need once they retire. Means-testing should, to the extent possible, be designed to avoid discouraging saving and work. And private retirement savings should be strongly encouraged and incentivized, so that people who have the means would build private nest eggs with less reliance on government.

In other words: You might get some degree of state help if you need it. But you had better not count on it. And it will be delivered in ways that will open larger and larger differences between those who receive state aid and those who do not. In short: Medicaid for the old.

In other words, what we are contemplating here is not the end of the “welfare state” as most Americans use the term, a state that aids poor people. What is contemplated is the end of social insurance, at least as it applies to healthcare for retirees: a state to which all contribute on more or less equal terms and from which all draw benefits on more or less equal terms.

Interestingly, it was neoconservative thinkers like Irving Kristol, James Q. Wilson, Daniel Patrick Moynihan, Gertrude Himmelfarb, and others who most searchingly indicted the kind of welfare state presented in Yuval Levin’s argument.

They noted that welfare programs aimed at the poor alone create three kinds of problems:

1) They intensify poverty because they impose huge costs on the exit from poverty.

Imagine a world in which everyone who earns less than $20,000 a year qualifies for Medicaid and nobody who earns more than $20,000 does so. What incentives do we present to the person now earning $19,999? One more dollar, and boom, there go your medical benefits.

This problem can be mitigated by phasing out benefits gradually — but that gets very expensive. (e.g., Today, we have states where people qualify for some Medicaid benefits all the way up to 400% of the poverty level.) Except when times are very flush, governments end up living with a situation in which it becomes simply irrational for poor people to work harder to escape poverty. The barriers to poverty exit are surely one reason that poverty rates have remained stuck at around 13% since 1965 even in boom times.

2) Welfare programs aimed at the poor compel governments to police the behavior of the poor.

Yuval Levin’s 5th principle argues: “we should reduce the reach of the administrative state, paring back all but essential regulations and protections and adopting over time an ethic of keeping the playing field level rather than micromanaging market forces, and of preferring set rules (in regulation, in monetary policy, and elsewhere) to administrative discretion.” Hear, hear. [Bolding added.]

Yet programs for the poor-only demand higher levels of administrative discretion. It’s easy to determine who qualifies for Social Security old-age pensions, not so easy to determine who qualifies for the Earned Income Tax Credit. Since qualification is uncertain, fraud is tempting — and fraud must be policed.

3) Welfare programs for the poor alone induce the poor to think of themselves as a community apart from the rest of society. It’s not just a matter of dependency, which is a severe and inescapable cost of any government program. (See e.g. the American grain farmer.) Worse is the development of alienated subcultures and anti-social folkways: the adversary culture as it has been called.

For these reasons and others, Irving Kristol always favorably contrasted Social Security and Medicare to means-tested programs for the poor.

I’m writing a lot about Yuval Levin’s National Affairs article precisely because it is so rich and thought-provoking. And it poses this challenge to conservatives who can’t follow Yuval Levin in the direction he indicates: If not the Ryan vision of the future, what then should be the conservative response to the fiscal crisis of the American state?

I’ve been thinking very hard about this question for a long time. I’m not done thinking about it either. But here’s my own current working answer. It has 5 points.

1.) Don’t panic.

Doom is not hurtling rapidly upon the United States. The reason the budget looks so very bad is the Great Recession. As the recession ends, the budget picture will improve. Deficits will not vanish on their own, but they will shrink. The long-term debt outlook will remain ugly, but it will also remain long-term.

Conservatives often say: “We do not have a revenue problem, we have a spending problem.” Let’s go to the tape. In 2007, the US government had receipts of $2.568 trillion. In 2009, it had revenues of $2.104 trillion. The disappearance of $460+ billion of income sure looks like a revenue problem to me.

You see equal or even more extreme collapses in revenues at the state and local level.

Yet the economy will recover. The wars in the Middle East will end. Fewer people will require assistance. When that happens, the fiscal gap to bridge will shrink of itself.

2.) Fix healthcare.

The US does not have a (serious) spending problem. It has a (serious) healthcare problem. The problem affects both public sector and private sector. No administration will get public spending under control until such time as a cost-control revolution is unleashed on the healthcare sector is.

This cost-control revolution need not compromise patient outcomes. Most other democracies spend much LESS on healthcare than the US while gaining significantly BETTER outcomes. Runner-up Switzerland spends 4 points of GDP less than the US (equivalent to getting the US defense budget for free), even as the average Swiss lives almost 3 1/2 years longer than the average American.

But the cost-control revolution will mean that the traditional practices of healthcare providers will come under extreme pressure — just as the retail revolution led by Wal-Mart put pressure on the practices of other stores.

Republicans and conservatives are deeply internally conflicted about healthcare. Conservatives can denounce attempts to save money within Medicare as “death panels” — even as they endorse Paul Ryan’s plan to cut Medicare spending by 70 percentage points below the level necessary to provide tomorrow’s seniors with the same benefits as today’s.

This issue has to be resolved, and if you want taxes low and incomes rising, it must be resolved in the direction of efficiency and cost-saving.

3.) Public Insurance, Private Provision

What Yuval Levin is criticizing is not the welfare state. It’s the social insurance state: a state that taxes all to provide benefits available to all.

That does not mean all of us receive benefits all the time. We collect unemployment insurance only when we lose our jobs, Medicare only after turning 65, ditto Social Security.

Nor do all receive equal benefits. People who pay more into Social Security receive more. The sicker elderly receive more from Medicare than the healthier elderly.

Still, the system is defined by its universality and comprehensiveness.

Yuval Levin proposes to rescind that definition. We’ll move into a future where state aid is recognized as something to be received only by the dependent few, not the providing many.

I’ve raised some qualms about such a future. Here’s one more. America being as it is, such a future will inevitably be color coded. Not everybody in the receiving group will be darker-skinned, not everybody in the paying group will be lighter-skinned, but the tendency will be there. Even today, when government social spending goes overwhelmingly to white over-65s (the US spends 3x as much on social services for the elderly as for the young, and the over-65s are more than 85% white), the talk about “takers vs makers” cannot escape a racial tinge. Imagine how politics will be argued 10 years from now, if we do things Yuval Levin’s way, in a country where the recipients of most Medicare benefits are disproportionately black and poor — and where today’s better-educated white 30-somethings will be paying heavy taxes through their peak earning years for benefits they themselves will never see. That will give Rush Limbaugh a lot of minority targets to fulminate against in his declining years.

Yet it’s possible to imagine a universal social insurance state that is both less expensive and less statist than the social insurance state of today. If we can unleash the dynamics of competition on American healthcare, there is no reason that Medicare must forever continue to cost more per recipient. If we’re wasting one health dollar in four right now, as the international comparisons suggest, then there is scope actually to reduce Medicare costs per recipient.

As John Stuart Mill pointed out 150 years ago in the context of schooling, state financing need not mean state provision. Chile and Singapore manage it for pensions and health care through a combination of forced individual saving and subsidies for those in need.

In the US context, Yuval Levin’s own preferred financing form — a universal health care tax credit — if made generous enough, could form the basis for such a system. Or it could be done in the way Mitt Romney outlined in Massachusetts: mandates plus subsidies.

The point is: you can have social insurance, even universal social insurance, without government administration. You can avoid dependency without consigning millions to go without coverage — or alternatively subjecting even more millions to the stigma of being branded recipients of health welfare, shabby exceptions to the normal expectation that all must provide for themselves. In the context of health care, after all, very few will be able to provide for themselves. Means-testing Medicare will not mean very much less dependency. It will mean a lot more contempt for the very many Americans who will find themselves as dependent as ever.

4.) Pay attention to revenues.

Gov. Mitch Daniels has a funny line about wanting a tax code that looks like somebody designed it on purpose. It’s a project worth considering.

Back in the 1980s, the top rate of tax was pulled down to 28% by the systematic elimination of deductions and credits. Within a decade, the top rate had climbed back to almost 40% — and new credits and deductions proliferated. A bad trade.

If a 25% top rate is wanted — and it certainly seems a good idea to me — isn’t the way to finance it the same way as was done in 1986? If base broadening alone does not do the job (and it will not), then find other revenues in ways that are socially useful: higher taxes on energy to spur efficiency, higher excise taxes on alcohol and corn-based sweeteners, a VAT if need be. (I’m surprised that we have got this far in the debate without any political figure proposing to legalize marijuana and then tax it heavily. I suppose that’s because the legalizers tend to be the same libertarians who oppose all taxes.)

But if you’re looking for a grand bargain, and if you’re a conservative seeking to hold down top tax rates, you don’t want a two-way bargain, Medicare vs. income tax cuts. You want a multi-point bargain that includes revenue increases so keenly desired by liberals that liberals will overlook those revenues’ non-progressiveness.

5.) Growth Acceleration

Brink Lindsey makes the important point that the US economy compensated for low per-capita productivity growth in the 1970s and 1980s by adding many more workers to the population. The baby boomers come of age, and American women hugely increased their labor force participation.

Some suggest that the trick can be repeated in the years ahead by increasing immigration even above current very high rates. This seems to me a very bad idea. Remember, the problem that we are trying to address is the fiscal crisis of the state. It is not a very good scheme to address a fiscal crisis by importing millions of very poor people who will need much more state aid than they — and very likely their children and grandchildren — will ever pay in taxes.

What we need to do instead is seek every way over the medium term to restore very high rates of growth of per-person productivity — so that slower population growth can nevertheless still translate into strong economic growth.

For example: There remains important work to do on the trade front. The US still collects surprisingly high tariffs on cheap goods, from tableware to sneakers. Abolish them all.

For example: Traffic congestion represents an important economic cost. Americans in most metropolitan areas waste an hour or more a day traveling to and from work. Al Gore was right back in 2000 to worry about traffic as a political issue, and it needs to return to the agenda again, with special emphasis on road improvements and telecommuting.

Recessions are periods in which firms correct inefficiencies. They can be the same for governments and societies.

In the interval since I started writing this response to Yuval Levin’s important piece in National Affairs, the Ryan budget plan has been approved by the House of Representatives on a near-total party line vote. Ideas like those endorsed by Yuval Levin are now the formal position of the Republican party. My guess is that the party’s presidential nominee will attempt to tip-toe away from that position in 2012, but who knows? Anyway, it will not matter. President Obama’s billion-dollar campaign will ensure that Republicans are thoroughly identified with it.

So Yuval Levin’s proposition is the proposition that Republicans will take to the country. Perhaps that is as it should be. Since the economic and electoral disasters of 2006-2009, Republicans have veered in a sharply libertarian direction. Why not put that new direction to the test of democracy? Perhaps Paul Ryan is right, and Americans (or anyway: voting Americans) have abruptly changed their minds during this economic crisis about their expectations from government.

I’ll admit: I’ve also changed my mind during this crisis, but in the opposite direction.

There’s an interesting rotation of ideologies here between Yuval Levin and me. Yuval Levin is one of the brightest rising stars in the intellectual tradition of Irving Kristol. Kristol famously championed a conservative welfare state, and especially programs of social insurance for the elderly.

I, on the other hand, got my political start urging a doubling-down on the economic libertarianism of the Reagan years. On the eve of the last Republican congressional triumph, 1994, I published a book urging ideas very similar to those now being urged by Yuval Levin and Paul Ryan and many others.

I won’t try here to explain why the conservative mainstream has turned so sharply to the right, although I have my theories.

As for my own turn away, that I can explain:

The radical free-market economics I embraced in the late 1970s offered a trade:

Yes, there would be less social provision. In return, Americans would receive an economy that was simultaneously more dynamic and also more stable.

There would be less inflation (because the Federal Reserve would have one job: price stability).

There would be fewer and milder recessions (because the Federal Reserve would no longer have to extinguish the inflation it did not create).

The financial sector could finance faster growth with less risk (because risks would be cushioned by diversification rather than prohibited by regulation).

Economic growth would accelerate (because the reduced tax burden would induce entrepreneurial innovation).

Faster growth would raise incomes for all (because a rising tide lifts all boats).

More opportunity in the private economy would abundantly offset the curbing of welfare benefits (because the best social program is always a job).

More opportunity would end the caste-like isolation of the poorest of the poor by drawing them out of the underclass into paid employment (because all human beings respond more or less rationally to positive incentives).

This was the trade, and it was engineered jointly by Republicans and Democrats: in fact some of the most important elements of the trade were adopted during the Clinton years.

Some of the terms of that trade were honored. From 1983 through 2008, the US enjoyed a quarter-century of economic expansion, punctuated by only two relatively mild recessions. In the late 1980s, the country was hit by the savings & loan crisis, the worst financial crisis to that point since the 1930s — and although the S&L crisis did deliver a blow, the country rapidly recovered and came up smiling. New industries were born, new jobs created on an epic scale, incomes did improve, and the urban poor were drawn into the working economy.

But of course, other terms of the trade were not honored.

Especially after 2000, incomes did not much improve for middle-class Americans. The promise of macroeconomic stability proved a mirage: America and the world were hit in 2008 by the sharpest and widest financial crisis since the 1930s. Conservatives do not like to hear it, but the crisis originated in the malfunctioning of an under-regulated financial sector, not in government overspending or government over-generosity to less affluent homebuyers. Fannie Mae and Freddie Mac were bad actors, yes, but they could not have capsized the world economy by themselves. It took Goldman Sachs, Merrill Lynch, AIG, and — maybe above all — Standard & Poor’s and Moody’s to do that.

In the aftermath of the catastrophe, the free-market assumption and expectation that an unemployed person could always find work somewhere has been massively falsified: at the trough of this recession, there were almost 6 jobseekers in the US for every unfilled job. Nothing like such a disparity had been seen since the 1930s. The young faced the worst job odds. But some of the most dismal outcomes were endured by workers in their 50s, laid off from middle-class jobs likely never to see middle-class employment again.

GK Chesterton once wrote that we should never tear down a fence until we knew why it had been built. In the calamity after 2008, we rediscovered why the fences of the old social insurance state had been built.

Speaking only personally, I cannot take seriously the idea that the worst thing that has happened in the past three years is that government got bigger. Or that money was borrowed. Or that the number of people on food stamps and unemployment insurance and Medicaid increased. The worst thing was that tens of millions of Americans — and not only Americans — were plunged into unemployment, foreclosure, poverty. If food stamps and unemployment insurance, and Medicaid mitigated those disasters, then two cheers for food stamps, unemployment insurance, and Medicaid.

Which does not mean that I have become suddenly indifferent to the growth of government. Not at all. Paul Ryan is absolutely right that the present trend is unsustainable and must be corrected. The free marketeers of the 1980s were right that taxes on enterprise must be restrained to leave room for private-sector-led expansion. Over-generous social insurance has all kinds of negative consequences. Private saving must be encouraged. Work must pay better than idleness. The job of designing the right kind of social insurance state is hugely important and hugely difficult, and the conservative sensibility — with its respect for markets and less sentimental view of human nature — is the right sensibility for that job.

Yet that same conservative sensibility is also properly distrustful of the fantasy that society can be remade according to a preconceived plan. We have to start from where we are, and we have to take people as we find them. Ronald Reagan liked to quote a line of Tom Paine’s, “We have it in our power to make the world new again.” George Will — although a great Reagan admirer — correctly complained at the time, “No, we don’t.”

I strongly suspect that today’s Ayn Rand moment will end in frustration or worse for Republicans. The future beyond the welfare state imagined by Yuval Levin will not arrive. At that point, Republicans will face a choice. (I’d argue we face that choice now, whether we recognize it or not.) We can fulminate against unchangeable realities, alienate ourselves from a country that will not accede to the changes we demand. That way lies bitterness and irrelevance. Or we can go back to work on the core questions facing all center right parties in the advanced economies since World War II: how do we champion entrepreneurship and individualism within the context of a social insurance state?

Those are words I would not have written 15 years ago. I write them now, conscious that I am very far from the first person to write them. Irving Kristol made the point most memorably at the very onset of the conservative ascendancy:

The idea of a welfare state is perfectly consistent with a conservative political philosophy — as Bismarck knew, a hundred years ago. In our urbanized, industrialized, highly mobile society, people need governmental action of some kind…they need such assistance; they demand it; they will get it.

Conservatism’s task is to shape that social insurance state, not repeal it.

Yuval Levin knew this truth when I did not. I’ll preserve it here in safe keeping for him and all his friends until they are ready to remember it again.