A Budget Process Hijacked by Selfish Interests

By Steven Pearlstein
Friday, February 27, 2009

Yesterday was Budget Day in Washington, that glorious day each February when the federal city comes alive as the political agenda for the coming year is set. Suddenly everyone -- members of Congress, federal employees, contractors, lobbyists, the think tanks and associations -- begins to mobilize for and against the thousands of policy decisions and proposals embedded in the president's fiscal plan.

In the coming months, a noisy and messy process will unfold as various regions, classes, industries and occupational groups pursue those policies they consider to be in their own best interests. To a group of political scientists known as pluralists, there has always been a belief that, in the end, this competition produces a pretty good approximation of the public interest.

Among the best-known of the pluralists were David Truman and Robert Dahl, writing in the 1950s and '60s, a time when Americans harbored few doubts about the superiority of their political system. And while pluralism has since fallen out of favor among many, it remains the model that best describes the approach taken to policymaking here in Washington.

When farmers mobilize to protect their subsidies or labor unions vow to block any changes in the tax-free status of employer-paid health insurance, their arguments essentially boil down to: "What's good for me is good for America." They don't admit the possibility that what is good for America might not be good for farmers or union members. Their role, as they see it, is to push hard for their own interests, allow others to do the same, and leave it to the political marketplace to sort out the competing interests and produce the best outcome.

It's hard not to see the parallel between the magic of this political marketplace and the "invisible hand" of the economic marketplace as described centuries ago by Adam Smith.

"It is not from the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest," he wrote famously in "An Inquiry Into the Nature and Causes of the Wealth of Nations."

"By pursuing his own interest, he frequently promotes that of the society more effectually than when he really intends to promote it," he wrote.

For more than 200 years, Smith's insight has provided the intellectual foundation for free-market capitalism -- and, in particular, the more extreme version of that view that came to dominate policymaking since 1980, which held that any attempt by government to interfere with the invisible hand will inevitably produce a less-than-optimal outcome.

Now, however, all that is beginning to change as our faith in both of these markets has been shattered.

In the economy, a series of financial booms and busts, dating back 20 years, has brought on the worst crisis since the Great Depression. Even defenders of free markets have come to acknowledge that markets can be manipulated or overwhelmed by investors, lenders, consumers and borrowers who act on the basis of emotion or incomplete information or act as part of an irrational herd.

And politics, a process that has come to be dominated by competition among narrow special interests has, for most of the past 15 years, produced stalemates on the country's most pressing domestic issues. Political markets, we now know, can be easily manipulated by money and legislative redistricting and parliamentary rules that thwart the will of the majority. And these markets have trouble resolving issues in which the benefits of doing something are widely shared but the costs are highly concentrated.

The essential insight of Barack Obama has been to see that these problems are inextricably linked. While his budget incorporates bold proposals to rescue the financial system, stabilize the auto industry, jump-start the economy, reform the health-care system and eventually bring down the federal deficit, he knows he's unlikely to win any of it if he cannot change the way business is done in Washington.

It's not simply a matter of toning down the partisan rhetoric, putting aside the reflexive ideology and getting people together at cocktail parties at the White House, though all of those are important. The bigger challenge is to get Americans and their representatives in Washington to take a broader view of their own self-interest -- to see that the benefits they'll get from finally balancing the budget or reforming health care or weaning the economy off its carbon addiction are so great that they will more than offset the sacrifices they might have to make in terms of paying higher taxes or losing a subsidy or accepting some increase in government regulation.

Judging from the reaction to his budget on Capitol Hill and K Street yesterday, it would seem that Obama's got a long way to go.

Steven Pearlstein is moderator of a new Web site, On Leadership, at http://washingtonpost.com. He can be reached at pearlsteins@washpost.com.

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