The Submerged State

1. The submerged state hides government action beneath market mechanisms.

Our government is integrally intertwined with everyday life from health care to housing, but in forms that often elude our vision: governance appears “stateless” because it operates indirectly, through subsidizing private actors.

Invisible governance structures. The "submerged state" refers to a massive network of federal policies that operate beneath the surface of market institutions and the tax code. Instead of directly providing public services through visible government agencies, the state uses indirect tools like tax breaks, subsidies, and loan guarantees to incentivize private organizations and households. This design makes public benefits look like natural market outcomes, hiding the government's hand.

Key hidden mechanisms. These indirect policy tools have quietly proliferated over the last few decades, fundamentally reshaping how Americans experience public support:

• Tax expenditures (or "tax breaks") that reduce tax liabilities for specific activities.
• Government-guaranteed loans funneled through private banks.
• Public services contracted out to private businesses and non-profit organizations.
• Tax-free employer-provided benefits, such as health insurance and retirement plans.

The stateless illusion. This setup creates a powerful illusion of a "stateless" society where the market operates independently of government intervention. For example, a student taking out a bank loan or an employee using employer-provided health insurance rarely realizes that these benefits are heavily subsidized and guaranteed by federal policy. Consequently, citizens fail to recognize the government's vital role in their daily lives, mistaking public support for pure market success.

2. Invisible policies disproportionately benefit the wealthiest Americans.

This pattern of upward redistribution is repeated in numerous other policies of the submerged state: federal largesse is allocated disproportionately to the nation’s most well-off households.

Upward wealth redistribution. Unlike traditional social welfare programs that target low-income populations, the submerged state primarily showers its benefits on the most affluent citizens. Because many of these policies are structured as tax deductions, their value increases with a household's income and tax bracket. This regressive design quietly exacerbates economic inequality while draining federal revenues that could otherwise fund visible, progressive programs.

Regressive policy examples. The distribution of benefits across major submerged policies reveals a stark upward bias that favors high earners:

• The Home Mortgage Interest Deduction (HMID), where the wealthiest 15% of households claim nearly 70% of the benefits.
• Tax-free retirement savings accounts, which disproportionately benefit those with high disposable incomes.
• The exclusion of employer-provided health insurance, which provides larger subsidies to those in higher tax brackets.

The luxury home paradox. Consider the Home Mortgage Interest Deduction as a prime example of this inequality. A low-income family receives no benefit because they do not itemize deductions, whereas a wealthy family buying a million-dollar mansion can save tens of thousands of dollars in taxes. This artificial incentive inflates housing prices, making homeownership harder for lower-income families while quietly subsidizing the lifestyles of the rich.

3. Submerged policies create a highly unequal and degenerative politics.

Its policies inculcate in interest groups a steadfast attention to the issues, the habit of staying in touch with elected officials year in and year out, and readiness to mobilize when the provisions they favor are under attack.

Asymmetric political mobilization. The submerged state fosters a highly imbalanced political landscape by concentrating benefits on powerful industries while keeping the public in the dark. Industries like finance, real estate, and insurance thrive on these hidden subsidies and invest heavily in political capacity to protect them. This creates a self-reinforcing cycle where vested interests grow stronger and more defensive of the status quo.

Vested interest dominance. The political power of these industries is maintained through highly sophisticated and well-funded strategies:

• Massive campaign contributions distributed to politicians on both sides of the aisle.
• Intense lobbying efforts that dwarf those of public interest groups.
• Grassroots mobilization of industry employees and local businesses.
• Cultivating deep, bipartisan relationships with key congressional committee chairs.

A quiet oligarchy. This dynamic leads to a "degenerative politics" where policy battles are fought entirely among elites, far from public view. While the general public remains passive and oblivious, trade associations like the National Association of Realtors or private student lenders stand ready to block any reform. This quiet dominance of organized interests undermines democratic accountability, making the state highly responsive to the wealthy and unresponsive to ordinary citizens.

4. Citizens often oppose government spending while actively relying on it.

The problem is not simply the typical policy complexity that alienates the public; rather, policies of the submerged state obscure the role of the government and exaggerate that of the market, leaving citizens unaware of how power operates, unable to form meaningful opinions, and incapable, therefore, of voicing their views accordingly.

The anti-government paradox. The invisibility of the submerged state creates a profound psychological disconnect among American voters. Many citizens who benefit directly from federal social policies do not realize they are using government programs. This allows them to enthusiastically embrace anti-government rhetoric and demand smaller government, completely unaware that they are calling for the destruction of their own safety nets.

Unrecognized public benefits. Survey data reveals that a shocking percentage of program beneficiaries claim they have "never used a government social program":

• 60% of Home Mortgage Interest Deduction beneficiaries.
• 53% of federal student loan recipients.
• 44% of Social Security retirement beneficiaries.
• 40% of Medicare beneficiaries.

Keep hands off my Medicare. This confusion was perfectly captured during the raucous town hall meetings of 2009, when a protester famously told his representative to "keep your government hands off my Medicare." Because these benefits are delivered through private doctors or earned-right framing, citizens view them as personal entitlements rather than public programs. This cognitive dissonance leaves voters easily manipulated by political campaigns that frame progressive reforms as dangerous "government takeovers."

5. Simple, transparent information can democratize public opinion.

By shifting the goal from “nudging” people to make sound choices as consumers to “revealing” governance to citizens, we can begin to revitalize democracy.

Empowering through information. While behavioral economists focus on "nudging" citizens to make better consumer choices, democratic governance requires "revealing" how policies actually work. Experimental research proves that when citizens are given clear, neutral information about the distributive effects of submerged policies, their opinions change dramatically. Providing transparent facts allows people to align their political views with their actual material interests and values.

Experimental opinion shifts. When survey respondents were shown simple graphs detailing who actually benefits from major tax expenditures, their support shifted:

• Support for regressive policies like the Home Mortgage Interest Deduction plummeted among low- and middle-income groups.
• Opposition to these upwardly distributive policies surged by over 30 percentage points.
• Support for progressive policies like the Earned Income Tax Credit (EITC) increased across all income brackets.
• The percentage of "don't know" responses was cut in half, enabling politically disengaged citizens to form opinions.

Democratizing the public square. This evidence shows that public apathy is not an inevitable trait of the electorate, but a direct consequence of policy design. When the submerged state is revealed, the traditional information gap between the wealthy and the poor shrinks, allowing for a more equal and democratic public debate. By educating citizens on who wins and who loses, we can build a more vibrant and representative democracy.

6. Dismantling the submerged state requires rare, crisis-driven opportunities.

In essence, like an exception that illustrates the rule, the demise of bank-based lending demonstrates that only under extraordinary circumstances is it possible to terminate key components of the submerged state, particularly given that the vast majority of citizens remain largely incognizant of the significance of such changes.

Overcoming entrenched interests. Terminating an established component of the submerged state is an incredibly rare political event. Because the industries benefiting from these policies are highly organized and politically connected, normal legislative processes are usually insufficient to defeat them. It typically takes a major systemic crisis to weaken these vested interests enough for reformers to successfully dismantle their privileges.

The student loan battle. The successful overhaul of the federal student loan program in 2010 serves as a prime example of this dynamic:

• The 2008 credit crisis decimated the private lenders' capacity to secure capital, making their system unsustainable.
• The Obama administration used the budget reconciliation process to bypass a Republican filibuster in the Senate.
• Reformers redirected $61 billion in bank subsidies to fund Pell Grants and community colleges.
• Student advocacy groups mobilized a targeted grassroots campaign to counter the lenders' lobbying.

A fragile victory. Despite the lenders being economically crippled and politically exposed, the legislative victory was incredibly narrow and hard-fought. Vested interests still managed to secure a compromise that allowed them to contract with the government to service the new direct loans. This shows that even under perfect storm conditions, the submerged state is highly resilient and resistant to complete eradication.

7. Reformers often expand the submerged state to secure political victories.

The complex new policy, however, is designed to operate as much through the submerged state as through its visible counterparts.

The path of least resistance. When direct, visible reforms are politically impossible, reformers often turn to the submerged state to achieve their goals. By structuring new programs as tax credits or private-sector subsidies, politicians can win bipartisan support and avoid charges of expanding the federal bureaucracy. However, this strategy ultimately reinforces the very system that hides government action and empowers private interests.

Compromised reform outcomes. The major legislative achievements of the Obama administration illustrate this reliance on hidden governance:

• The Affordable Care Act (ACA) expanded coverage by subsidizing private insurance companies and mandating private purchases.
• The 2009 stimulus bill dedicated over a third of its budget ($288 billion) to invisible tax cuts like the Making Work Pay credit.
• The American Opportunity Tax Credit expanded tuition assistance but did so through the tax code, favoring higher-income families.
• Private banks were hired to service the newly nationalized direct student loan program.

The invisible tax cut. This reliance on the submerged state can backfire politically. For instance, the Making Work Pay tax cut was delivered incrementally through reduced paycheck withholding so that consumers would spend it immediately. While economically clever, it was politically invisible; a year later, only 12% of Americans realized their taxes had been cut, while many mistakenly believed they had gone up.

8. Revitalizing democracy requires revealing the state through policy design.

For citizens to possess the political power to rule themselves, they need to understand their own relationship to government and the role it does and does not play in their lives.

Designing visible policies. To rebuild trust between citizens and government, reformers must prioritize policy designs that make the state's role explicit. When public benefits are clear and directly administered, recipients develop a stronger sense of government responsiveness and are more likely to participate in politics. Shifting from hidden tax expenditures to visible, direct programs is essential for a healthy, active democracy.

Strategies for transparency. Policymakers can use several practical tools to pull back the curtain on the submerged state:

• Structuring benefits as direct, visible grants rather than complex tax deductions.
• Sending annual statements to citizens detailing the federal subsidies they receive, similar to Social Security statements.
• Requiring clear, transparent labeling on tax forms and W-2s regarding government-subsidized benefits.
• Partnering with civic organizations and local governments to actively publicize and explain public programs.

Reclaiming the common purpose. Ultimately, the threat to American self-governance is not the size of the government, but its hidden, regressive form. By making the state visible, we can foster a more honest conversation about public resources and reduce the political influence of privileged industries. Only when citizens can clearly see how government supports them can they actively engage as equal partners in the democratic process.

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