Bare Necessities

One of the few advantages of austerity is that hard times demand hard choices.

In any institution, but especially government, good times usually cement the status quo. When the tide is high, there’s little incentive for officials to roil the water by challenging outdated programs and policies protected by entrenched constituencies. Tighter budgets, though, can prompt tougher questions. Reforms that might seem unthinkable in the fat years become indispensable in the lean.

Three recent developments suggest that this valuable process of renewal may be under way now. The first signal is the speech that philanthropist and Microsoft founder Bill Gates is scheduled to deliver to the Council of Chief State School Officers in Louisville, Ky., on November 19. His eponymous Bill & Melinda Gates Foundation has become a huge funding source for education reforms. But in his speech he’s expected to warn school officials that, for the foreseeable future, they will need to generate improvement with stagnant or even shrinking public budgets. And he’s set to unveil a provocative plan to free the resources to do so.

Gates argues that the single most important factor in raising student achievement is improving teacher quality, and that school officials must focus more on measuring, nurturing, and rewarding excellent teaching. To direct more money toward those priorities, he would challenge three pillars of the way teachers are now compensated. He’s expected to criticize the existing practices of paying teachers more when they accumulate seniority or obtain graduate degrees and to urge officials to look hard at the cost of teacher pensions. “If you don’t have rising budgets,” Gates said in an interview, “then those are three of the places that school boards are likely to look at it and say, ‘OK … if you put [some of that money] into rewarding the most effective teachers, that would be better for the students.’ ”

Gates doesn’t welcome tighter times; he says that school improvement “would be a lot easier” to achieve if budgets were rising. But that may not be true for ideas as bold as those he’s proposing. Few school administrators might volunteer to confront the teachers unions over restructuring their compensation systems unless they have no other choice. The best news for reformers like Gates is that tight budgets may leave administrators in precisely that position. Even the most sacrosanct spending can face skepticism if the budget collar squeezes tightly enough.

Sen. Mark Warner, D-Va., is applying similarly refreshing logic to the tired and stalemated debate over the federal tax cuts approved under President George W. Bush. Congressional Republicans want to extend the tax cuts on all earnings; President Obama and Democrats want to extend just the cuts on earnings of $250,000 or less.  

Warner says that Republicans are correct to argue that with the economy still sputtering this is no time to impose the $65 billion to $70 billion net tax increase that would result from letting the additional tax cut lapse for that top 2 percent of earners. But he persuasively questions whether the best way to spend that money is to continue the existing tax cuts. Certainly their track record offers little reason for confidence. In the nine-plus years since Bush signed his tax cuts into being in June 2001, both the median family income and the number of employed Americans have declined. That’s a decade-long record of economic futility unmatched since the Depression.

Warner’s solution is to continue the tax cuts for earnings below $250,000, as both parties are urging. Then, instead of extending the reductions for the wealthy, he would divert their cost into business-related tax cuts—potentially something such as a payroll tax holiday, meant to spur new hiring and growth. “Before we simply say it ought to go to the top wage earners,” Warner says, “maybe there is a better bang for the buck.”

With record deficits looming, it’s questionable whether the nation can really afford to extend all of the middle-class tax cuts, as Warner and most elected officials prefer. But he is wise to try to shift the debate from a theological argument for or against the Bush tax cuts toward a practical comparison of what mix of tax cuts would produce the most economic stimulus. The question, he says, should be “How can we best use this [money]?”

Setting priorities is equally central to the budget proposal released last week by Democrat Erskine Bowles and Republican Alan Simpson, the co-chairmen of Obama’s debt-reduction commission. To stabilize the long-term budget picture, they offered an array of kamikaze ideas, such as freezing salaries for federal workers; raising the gas tax; closing some foreign military bases; and linking the Social Security retirement age to increasing lifespan. Yet amid the grueling cuts, Bowles and Simpson also stressed the importance of funding investments in research, infrastructure, and education. Their plan is imperfect, but, like the Gates and Warner initiatives, it embodies a key insight: The more America uses adversity to accelerate reform and clarify priorities, the more it will benefit when the gloom finally lifts. 

This article appears in the Nov. 20, 2010, edition of National Journal.

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