We Are Better Than This

What does a nation value? Edward Kleinbard argues that you can answer that question by following the money—government spending and taxes reveal a country's fiscal soul. In his powerful synthesis of economics, moral philosophy, and data, Kleinbard redefines fiscal policy as the institutional expression of collective values. Budgets are not technical documents but moral manifestoes that convey what you think human happiness requires.

He begins by restoring the moral vocabulary of economics that Adam Smith himself used before being miscast as a market fundamentalist. The Smith of The Theory of Moral Sentiments grounded prosperity in virtue, sympathy, and the impartial spectator, not in pure market freedom. Kleinbard reminds you that Smith saw public spending for "the happiness of society" as central to good government (a rebuke to today’s market triumphalism that equates the invisible hand with moral virtue).

This sets up the book’s major claim: that government’s proper economic mission is twofold — to insure against risks individuals cannot and to invest in shared goods markets underprovide. Everything that follows—tax reform, social insurance, education, or healthcare—traces back to this fundamental moral architecture of the fiscal state.

Government as Insurer and Investor

Kleinbard argues that viewing government as an insurer changes how you think about redistribution. Programs like Social Security, Medicare, and unemployment compensation are not charity; they are risk pools that convert uncertain adversity into manageable certainty. Universal participation solves the private market’s failures of adverse selection and incomplete coverage (for example, how the Affordable Care Act’s pooling rules fix health insurance markets). Likewise, when you buy national defense, you’re insuring against foreign peril.

As an investor, government supplies the capital markets undersupply: early education, research, and infrastructure. These raise productivity and happiness but do not yield immediate monetary returns to private actors. Kleinbard shows that many public investments have net positive returns rivaling private capital — citing the enormous measurable paybacks from preschool interventions, nutrition programs like WIC, and highway modernization (analogous arguments appear in Mariana Mazzucato’s work on the “entrepreneurial state”).

Welfare versus GDP

GDP, Kleinbard insists, is not the same as welfare. Roughly a quarter of productive activity—especially unpaid household labor and nonmarket public goods—never appears in GDP figures. When policymakers idolize GDP growth alone, they mistake market transactions for actual human well-being. As he notes pointedly, no increase in GDP compensates for deteriorating public health or crumbling bridges if those reduce life satisfaction. Fiscal policy, therefore, should aim explicitly at welfare maximization, not GDP fetishization.

Why Equality of Opportunity Is the Moral Test

The practical measure of a society’s fiscal soul is how it invests in children and the poor. Research Kleinbard cites shows poverty impairs cognitive bandwidth by the equivalent of 13 IQ points, early malnutrition cuts lifetime earnings by about 20%, and American school funding patterns favor affluent districts. A nation that ignores these facts, he says, fails its own creed of equal opportunity.

These empirical realities ground Kleinbard’s broader moral argument: fiscal decisions are not zero-sum thefts but collective bets on national well-being. Taxes finance insurance and investment that expand opportunity and resilience for everyone. If markets leave children unread or the sick untreated, moral failure—not fiscal prudence—is the result. Thus, the book reframes fiscal policy as an ethical calculus of happiness, justice, and sustainability, not as arithmetic about deficits.

Throughout the rest of the book, Kleinbard shows you how misunderstanding this moral mission—through neoliberal myths, narrow GDP benchmarks, or fear-driven austerity—has led the U.S. to underinvest in its people and infrastructure. But he also offers practical ways to rebuild a government that insures wisely, invests prudently, and measures success by human flourishing rather than slogans about small government.

To understand today’s fiscal impasse, Kleinbard says you must expose how neoliberalism distorted the moral vocabulary of economics. Neoliberal thinkers like Friedrich Hayek and Milton Friedman transformed Adam Smith’s prudential capitalism into a near-religion of market freedom, erasing Smith’s insistence on justice and sympathy. The resulting ideology—market triumphalism—casts collective spending as a moral hazard and treats taxation as confiscation rather than cooperation.

From Adam Smith to Market Theology

Kleinbard restores Smith’s full picture: markets thrive only within a moral and institutional framework that protects the vulnerable and fosters virtue. Smith’s own words on the impartial spectator remind you that you ‘dare not prefer the interest of one to that of many.’ Yet modern political rhetoric cherry-picks Smith’s “invisible hand” while ignoring his caution against selfishness without sympathy.

This mistranslation legitimized decades of policy that stripped the public sector of moral purpose—from supply‑side tax cuts to the starvation of welfare programs justified in the name of liberty. Kleinbard’s examples, like Harvey Golub’s “I earned it” op‑ed, show how success narratives erase the social infrastructure that enables wealth.

Consequences of Market Triumphalism

By treating market allocation as inherently moral, neoliberalism twists policy priorities. It downplays structural failures—underfunded education, uninsured health risks, externalities like pollution—and portrays taxes as moral theft. The result is a weak fiscal capacity and a cultural allergy to collective action. Real liberty, Kleinbard reminds you, depends on functioning public institutions that make freedom meaningful—roads, courts, clean air, and basic opportunity.

Kleinbard’s challenge is direct: argue for small government if you wish, but do so honestly about who will build the roads, insure the sick, or educate the poor. Once you confront that question, you see that markets and morality are not enemies but partners, and that the best societies use government to perfect—not replace—the market’s reach.

Kleinbard grounds his moral argument in empirical evidence. His “report card” on the U.S. reveals an economy rich in average income but poor in shared prosperity. Wages for median male workers have stagnated since the 1970s; median family wealth fell nearly 40% in the Great Recession; food insecurity afflicts one in seven households; and early childhood malnutrition still touches hundreds of thousands of American children. These are not isolated data points—they show a system that privileges wealth over welfare.

Understanding the Numbers

Kleinbard walks you through the metrics: official inequality measures (Gini, S90/S10, P90/P50) place the U.S. at or near the top of rich-country inequality. Yet even these indices can mislead if you ignore pre-tax/after-transfer differences, top-coding, or missing capital gains. He synthesizes analyses from the IRS (Piketty–Saez), the CBO, and surveys to show that while measurement nuances matter, the trend is plain—the very top has pulled away dramatically.

Mobility Myths and the Great Gatsby Curve

Americans often console themselves that inequality can be offset by upward mobility. Data demolish that belief. Studies by Miles Corak and others reveal that the steeper a country’s inequality, the less intergenerational mobility it enjoys. Geography amplifies the problem: a poor child in Atlanta faces sharply worse odds of escaping poverty than one in Boston. Education spending remains the decisive variable explaining those differences.

Kleinbard’s lesson from the numbers is clear: the United States has chosen a smaller and less redistributive government than its peers, and that choice directly translates into weaker social mobility. His “report card” thus becomes a moral audit: low investment in people and public capital has measurable human and economic costs.

The most enduring policy myth, Kleinbard jokes, is belief in the “Growth Fairy”—the idea that trimming taxes on the wealthy automatically yields faster growth that will pay for itself. He dissects this illusion with both theory and data, separating real economic effects from faith-based politics.

How Taxes Actually Affect Work and Investment

Economic theory distinguishes between income and substitution effects: higher taxes can lead some to work more (to restore income) or less (because leisure becomes cheaper). Empirically, for most workers, labor supply is inelastic—their hours or effort hardly change. The same is true for saving and entrepreneurship; people don’t stop innovating because their top bracket ticks upward a few percentage points. Martin Feldstein’s “elasticity of taxable income” largely measured shifting income into tax shelters, not genuine declines in work or output.

False Efficiency Fixations

Kleinbard explains that tax-induced inefficiency—so-called deadweight loss—depends less on rate levels than on loopholes. Complex deductions and exclusions encourage avoidance, reducing effective rates without spurring growth. For example, the U.S. corporate headline rate once sat at 35%, yet effective rates averaged closer to 12%. Without base broadening, rate cuts merely enrich existing distortions.

Evidence and Judgment

Reviews from the CBO, the IMF, and studies like Romer & Romer show mixed growth effects from tax changes—sometimes positive, often modest, always assumption-sensitive. The key lesson: macro models produce outputs as good as their inputs. Kleinbard’s pragmatic takeaway is not anti-growth—it’s pro-reality. Growth matters, but not if achieved by gutting high-return public spending that supports long-term productivity (education, health, infrastructure). Without specifying which programs you'd sacrifice, “tax cuts for growth” remains a slogan, not a strategy.

Kleinbard’s prudence aligns with economists like Larry Summers and Paul Krugman: focus on demand, public investment, and human capital, not magical supply-side effects. The data show growth comes from educated, healthy people using modern infrastructure—exactly what taxes make possible.

Kleinbard’s teaching on budget politics is unambiguous: America’s fiscal crises are mostly self-inflicted. He wants you to replace panic with diagnosis. The so‑called debt emergencies of the 2010s stemmed from political choices—tax cuts, manufactured shutdowns, and arbitrary caps—not runaway spending.

How Real Deficits Work

Fiscal arithmetic is simple: deficits arise when receipts drop faster than spending. During the Great Recession, revenues fell to 15% of GDP, far below the historic 18–19% baseline. Automatic stabilizers—unemployment insurance and food assistance—did what they were designed to do: expand temporarily. Kleinbard calculates that forgone revenue accounted for more than $2 trillion of deficit buildup between 2008 and 2013, dwarfing the discretionary cost of the Obama stimulus (ARRA).

False Fiscal Crises

Political brinksmanship—like the 2011 debt‑ceiling showdown—turned accounting routine into economic sabotage. Kleinbard clarifies distinctions the media often miss: a shutdown happens when Congress fails to appropriate funds; a debt‑ceiling crisis happens when Congress forbids borrowing to pay bills it already authorized. Both are procedural failures, not macroeconomic imposers. He even entertained creative stopgaps like issuing registered Treasury "scrip"—a legal way to honor obligations without breaching the ceiling, modeled on California’s 2009 warrants.

Sequestration and Its Costs

The 2011 Budget Control Act’s sequestration experiment was, in Kleinbard’s phrase, “mutually assured destruction in fiscal form.” Across‑the‑board cuts lopped more than $1 trillion from discretionary spending over a decade, reducing Head Start slots and infrastructure repair even as debt interest grew. The IMF and CBO both found sequestration cut 2013 growth by roughly half a percentage point. The paradox: austerity saved accounting dollars while worsening long-term debt ratios by shrinking growth.

For Kleinbard, sustainable budgeting means integrating taxes and spending as one design problem: decide collectively what you want government to do—then fund it honestly. Anything else is fiscal narcissism—mistaking a low tax bill for virtue while ignoring its social cost.

Kleinbard’s most original fiscal contribution is his analysis of tax expenditures—what he calls America’s hidden welfare state for the affluent. About $1.2 trillion annually lies buried in deductions and exclusions that function exactly like spending programs but are disguised as lower taxes. The result: a “stealth government” that redistributes upward while escaping scrutiny.

What Tax Expenditures Are

These include deductions for mortgage interest, state and local taxes, employer-provided health insurance exclusion, and retirement savings incentives. The Joint Committee on Taxation counts around 250 such items, many larger than visible discretionary programs. The employer health exclusion alone costs roughly $250 billion per year and subsidizes premium-rich employer plans, not universal coverage.

Why They Distort and Who Benefits

Most tax expenditures are "upside-down"—their dollar value rises with your tax bracket. In 2013 the top quintile of households captured half of all major tax-expenditure benefits; the top 1% took 15%. These regressive effects counteract the progressivity of the visible tax code. Kleinbard therefore argues that eliminating or converting deductions to unified credits would both raise revenue and increase fairness without new top-rate hikes.

Practical Reform Path

His concrete proposal caps the tax benefit of deductions at 15%. That change equalizes incentives, flattens the upside-down subsidy, and—importantly—raises over $1 trillion in the next decade while reducing loophole-driven deadweight loss. It’s the book’s most politically feasible pay‑for. In Kleinbard’s words, calling tax expenditures “spending by another name” forces transparency: if you want smaller government, start by trimming its hidden half.

(Note: This argument later influenced academic debates on “fiscal illusion” and inspired bipartisan proposals in the 2010s for deduction caps.)

Kleinbard reframes tax reform around the whole fiscal system, not just rate schedules. He argues that societies reduce inequality most effectively when they raise adequate revenue and spend it wisely, not when they rely solely on steep top rates. The Nordic lesson is key: moderately progressive taxes, coupled with high overall revenues and generous social spending, yield more equitable outcomes than a highly progressive but revenue-thin U.S. model.

Beyond the Marginal Rate Obsession

Statistical studies (e.g., Diamond & Saez’s optimal-tax work) show there’s some room for higher top rates, but politics and avoidance quickly limit what’s achievable. Small elites alone cannot fund a modern state. That means reformers must broaden the base and pair progressive spending with sustainable, broad-based taxes. Kleinbard warns against the “pivot problem”: when top rates hit political ceilings, raising large new revenues tends to flatten the overall tax schedule unless base expansions support it.

The Better Base Case

His practical plan—the Better Base Case—restores Clinton-era revenue levels (~21% of GDP), repeals sequestration caps, funds infrastructure, and fixes tax anomalies. He would reintroduce pre‑2001 brackets, repeal the AMT, align dividends with capital gains rates, and revive moderate estate taxes while offsetting these with deduction‑reform savings. Together, they yield a balanced package combining fiscal responsibility with pro‑growth public investment.

Funding the Future

Kleinbard’s revenue blueprint includes a 35‑cent indexed gasoline tax to replenish the Highway Trust Fund (~$450 billion per decade), elimination of the Social Security payroll cap to restore long‑term solvency, and seed equity for a $200 billion National Infrastructure Bank to unlock public‑private financing. These modest, targeted moves demonstrate that real fiscal reform need not invent exotic new taxes—it must only realign funding with known public priorities.

The outcome of the Better Base Case is not utopia but a credible fiscal equilibrium: adequate revenue, honest accounting, and investment in high-return social goods. For Kleinbard, that combination embodies the civic maturity America once showed and can reclaim.

Among the biggest threats to fiscal sustainability lie not in deficits but in underinvestment in human capital—especially healthcare and education. Kleinbard shows how both sectors illustrate the central government roles of insurer and investor: correcting private‑market failures and generating long-term national returns that compound across generations.

Healthcare as Market Failure

The U.S. spends nearly 18% of GDP on health—far above peers—without commensurate outcomes. Fragmented private markets, employer‑based tax subsidies, and provider concentration all drive up costs. The exclusion of employer insurance premiums from taxation costs $250 billion annually and tilts benefits toward higher earners. Prices, not usage, explain most of the cost gap; procedures and drugs often cost many multiples more than in Europe. Because government already finances large shares through Medicare, Medicaid, and tax breaks, pretending the system is “private” is self‑deception.

Kleinbard argues that only a single‑payer model or equivalent national purchasing agent can solve this structurally: universal risk pooling reduces adverse selection; monopsony power constrains prices; and administrative simplicity cuts waste. (He notes the ACA improved solvency and efficiency but left the structural pricing problem unsolved.) Fiscal health reform is therefore the linchpin of any sustainable budget.

Education as Investment

In education, the diagnosis is similar: the U.S. spends heavily but badly. Local property tax funding creates vast inequities—per‑pupil spending ranges from around $7,000 to nearly $20,000 depending on district wealth. Early childhood programs yield the highest returns, yet receive the least funding. Studies by Chetty and Fernald show that language and cognitive skill gaps emerge by age two and that early‑quality schooling predicts lifetime earnings. For higher education, Pell Grants and targeted support lag behind tuition inflation, trapping students in debt and constraining entrepreneurship.

For Kleinbard, shifting resources toward early education, equitable K–12 funding, and affordable college access isn’t social engineering—it’s fiscal prudence. Education and health are not “cost centers” but engines of growth and equality. Investing there satisfies both moral and economic mandates of government’s fiscal soul.

Kleinbard closes where he began—with moral philosophy. Reconnecting Adam Smith and Jefferson, he envisions a civic republic that measures its success by the happiness and safety of all citizens. The government’s task is to invest where markets fail and insure where private actors cannot. Welfare and efficiency, he argues, converge more often than critics admit: secure, educated citizens are the true foundation of a productive economy.

Happiness as Measurable Outcome

Drawing on happiness research (Daniel Kahneman, Richard Easterlin, and UN surveys), Kleinbard notes that citizens of social democracies with universal insurance and robust public goods report higher life satisfaction even with higher taxes. Equality and security enhance not only fairness but perceived freedom—the freedom to take entrepreneurial risk and live without fear of ruin. In that sense, social insurance expands opportunity by increasing everyone’s “risk-bearing capacity.”

Against Fiscal Narcissism

His critique of “fiscal narcissism” frames the moral stakes: choosing one’s own small tax bill over investments that sustain the republic is civic myopia. Taxes are the price of a civilization capable of risk, decency, and progress. Fiscal debates, then, should weigh real tradeoffs—deadweight losses versus the social returns from public insurance and investment—not ideological reflexes.

Kleinbard leaves readers with a challenge reminiscent of Jefferson’s declaration: to govern for the safety and happiness of the people. The fiscal state is not the enemy of liberty but its guarantor. A society that invests wisely and insures compassionately will, in the long run, be richer not only in GDP but in the human welfare for which GDP is only a shadow measure.