Things are Looking Good but Can We Afford to be Complacent?

 

Everybody should read Tyler Cowen’s compelling new book, “The Complacent Class.”  As I have discussed in two recent posts, here and here, Mr. Cowen lays out the thesis that America has lost much of its dynamism in recent years because life has become so comfortable for so many people, especially the professional elites.


But now things are looking even better yet:

  • A global economic upturn is under way, especially in manufacturing.
  • The Federal Reserve is continuing to raise interest rates, confident that fundamental data on employment and inflation (see chart) is looking more and more positive.

  • Progress is being made on fixing the American healthcare system even if it’s not as good as it could be.
  • The Republican Congress and Trump Administration are united in their desire for corporate and business tax reform which will give the American economy a big boost when it gets done.

These trends auger well for the American economy in the immediate future. However there is one very dark cloud on the horizon:

  • Our national debt (the public part on which we pay interest) is now 77% of GDP, the highest since the end of WWII and is predicted by the Congressional Budget Office to keep steadily getting worse without fundamental changes in public policy. In fact, the debt limit, which had been suspended in November 2015, was reinstated by law on March 16. It will have to be raised in the next few months in order to avoid default by the federal government.
  • I fervently hope that the fiscal conservatives in Congress (such as the Republican Study Group and the Freedom Caucus) will insist on real fiscal restraint going forward as their price for voting to raise the debt limit.

Conclusion. We affluent Americans are so wrapped up in enjoying our good fortune that we lose track of a huge problem on the not so distant horizon. Our prosperity is being heavily financed with borrowed money and we will soon have to pay the piper, unless we are willing to bite the bullet.  Do we have the political will to do this?

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Corporate Tax Reform and the Border Tax

 

Most informed observers of the U.S. economy agree that the Corporate Income Tax of 35% is too high and should be lowered to a rate which is more competitive with other developed countries. Republican Congressional leaders and the Trump administration have agreed that a 20% rate is about the right level.
Now the question is how to make up the tax revenue lost to the federal government from a lower tax rate.  One idea is to impose a Border Adjustment Tax on imports into the U.S. but exempting exports from such a tax.  Since the U.S. trade deficit is currently running at about $500 billion per year (see chart), a 20% tax on imports offset by a 20% tax credit for exports would raise the necessary $1 billion per year.


This week’s Barron’s points out several disadvantages of a BAT:

  • Economic theory predicts that a 20% BAT would mean that the dollar would rise in value by 20%, offsetting the higher costs of imports. But if this happens, then other industries, such as U.S. tourism, would take a big hit.
  • Other countries could retaliate in ways that would be unfavorable to us and cause a “Trump slump.”
  • If a BAT leads to an increase in exports and a decrease in imports, the $500 billion trade deficit will shrink and so the BAT will bring in less revenue than the predicted $100 billion per year.

The Barron’s article suggests much better ways to make up the $100 billion in tax revenue (on a static basis) which would be lost to a corporate tax rate cut to 20%. For example:

  • A corporate tax rate cut of this magnitude would be revenue enhancing (on a dynamic basis), easily raising an additional $50 billion in tax revenue.
  • The CATO Institute recently compiled a list of corporate welfare programs in the federal budget totaling $100 billion. Eliminating just half of this would save an additional $50 billion.

Conclusion. Cutting the corporate tax rate to 20% from its current level of 35% will contribute significantly to faster economic growth. It should be quite possible to keep such a tax rate cut revenue neutral by cutting back on crony capitalism.

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The Necessity of Fixing Medicaid

 

As I have discussed in previous posts, here and here, the American Health Care Act, the GOP replacement for the Affordable Care Act, is a step in the right direction.


One of the best features of the GOP bill is its provisions to revamp the Medicaid program.  The problems of Medicaid are well described by the healthcare expert, Avik Roy, here and here:

  • Medicaid was established in 1965 and now provides healthcare benefits for individuals and families with incomes up to 133% of the federal poverty level.
  • The states pay 40% of the costs on average while only controlling 5% of how the program is operated.
  • The federal Medicaid law mandates a laundry list of benefits which the states must provide. States cannot charge premiums and copays and deductibles are minimal.
  • Medicaid is the largest or second largest line item in nearly every state budget. The only tool states have in controlling costs is to pay doctors and hospitals less than private insurers pay for the same care. This means that fewer and fewer doctors are accepting Medicaid patients.
  • Thus Medicaid enrollees have poor access to healthcare. In fact, their health outcomes are typically no better than for those with no insurance at all.
  • An able-bodied adult on Medicaid receives about $6000 a year in government health-insurance benefits. Yet CBO estimates that five million Americans won’t sign up for Medicaid if the ACA individual mandate is repealed as proposed by the AHCA.
  • AHCA block grants will give states more flexibility to manage Medicaid’s costs in ways which increase access to doctors and other providers. It would also decrease federal outlays for Medicaid by $880 billion in its first decade.
  • AHCA’s goal is to ultimately merge Medicaid for able-bodied low-income adults into the system of tax credits which the AHCA proposes for those above the poverty line.

Conclusion. The AHCA will make Medicaid into a much more efficient, flexible and effective program for serving low-income individuals and families. This represents a first step in the entitlement reform which the U.S. so badly needs.

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The GOP Can Do Better on Healthcare Reform

 

The Congressional Budget Office has just released its analysis of the GOP Healthcare Reform Bill, the American Health Care Act, designed to replace the Affordable Care Act.  The Committee for a Responsible Federal Budget has summarized its main features as follows:

  • The AHCA would reduce federal deficits by $337 billion over the next ten years.

  • CBO estimates that there would be 24 million fewer Americans with health insurance under the AHCA as compared with the ACA by 2026, with 14 million fewer Medicaid beneficiaries (see the above chart). The decrease in individuals with employer coverage would result from dropping the employer mandate. The decrease in individual coverages would result from smaller subsidies under the AHCA.

I have previously summarized the AHCA pointing out its strengths and weaknesses:

  • Strengths: discards mandates, fewer regulations, turns Medicaid into block grant program to states.
  • Weakness: huge discrepancy between lavish tax treatment of employer-paid care (no upper limit on tax exemption) and much stingier tax credits for individuals

The U.S. now spends 18% of GDP on healthcare, both public and private, almost twice as much as any other developed country. Such high costs are a big drain on government revenue as well as a drag on economic growth.  The AHCA should take a much bigger step towards controlling the cost of healthcare.  Block granting Medicaid to the states, and giving the states more flexibility in implementation, definitely helps, but it is not enough.
But basic fairness as well as fiscal responsibility requires a major cutback in the tax exemption for employer provided care.  This is essentially a subsidy to employees.  It should have no greater value than the refundable tax credit provided to individuals who purchase health insurance on their own.

Conclusion. A free market healthcare system allows more individual choice and delivers more medical innovation. But our current system is too expensive to be sustainable for much longer.  Either the GOP fixes this problem or a single-payer system will be the inevitable result.

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Beating the High Cost of Higher Education and Student Debt

 

This blog addresses America’s too biggest problems:

  • Slow economic growth averaging just 2% since the end of the Great Recession in June 2009. Faster growth means more jobs and better paying jobs.
  • Massive federal debt now 77% of GDP (for the $14 trillion public debt on which we pay interest) and predicted to continue getting worse without a change in policy. As interest rates go back up to normal historical levels the interest payments on this debt will increase greatly and be a huge drag on the federal budget.

As I have reported recently, college costs are growing much faster than healthcare costs which are growing faster than the cost of living in general.  The excessive costs of education and healthcare are, in turn, holding back economic growth.


Regarding the student loan debt problem:

  • For every increased dollar of student aid, college tuition increases 60 cents.
  • Outstanding student loan debt has risen from $200 billion in 1996 to $1.3 trillion today.
  • The highest default rates on student debt occur for community college students (23%) and for-profit college students (18%).

The economist Richard Vedder has made some excellent suggestions for addressing this whole problem:

  • Simplify the entire federal student air system. There should be only two programs, one grant program (Pell grants) and one federal loan program (Plus loans, tuition tax credits, work study, etc.).
  • Give educational vouchers directly to students to empower recipients to weigh costs more closely. These would be strictly limited to low-income students and would be accompanied by modest academic expectations.
  • Require schools to have skin in the game. Schools with abnormally high loan delinquency rates should have to pay a tuition “tax” to the government to help cover costs.

Conclusion. “Financial aid has caused tuition to skyrocket. If we can’t abolish it, we can at least simplify it.”

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The Strengths and Weaknesses of the GOP Healthcare Reform Bill

 

The American HealthCare Act, introduced in the House of Representatives on Monday, begins the process of looking for a replacement and improvement to the Affordable Care Act.  It moves in the right direction but also has some major shortcomings.


The Bill’s strengths are:

  • The Bill discards the ACAs web of mandates and regulations in favor of incentives to buy health insurance in a deregulated market.
  • The Bill replaces the ACA exchanges with refundable tax credits for individuals not covered by employer provided health insurance.
  • The Bill turns Medicaid into a block grant program for states with much flexibility for the individual states to run their own programs. This reverses the current system whereby the federal government matches each state’s spending on Medicaid and is thereby expensive for both state and federal government

The Bill also has major weaknesses:

  • There is no upper limit on the tax exemption for employer-paid premiums. This tax exemption amounts to a total drain of nearly $300 billion a year on U.S. tax revenues and is the biggest single reason why healthcare is so expensive in the U.S.
  • The inadequacy of financial support for the lowest income individuals and families. A $2000 annual tax credit for a minimum wage worker is simply not enough for her/him to be able to afford health insurance.
  • This huge discrepancy between the lavish tax treatment of employer-paid care and stingy tax credits for individuals is a matter of fundamental inequity as well as unsound tax policy. It would be much fairer to give all Americans the same equal tax credit roughly equivalent to the cost of catastrophic healthcare insurance.

Conclusion. The ACA increases access to healthcare insurance but does nothing to control costs. It is imperative for the Republican replacement plan to fix this glaring deficiency.

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The Dangers of Complacency

 

My last post, “What Ails America? I. Complacency,” lays out the thesis of the economist Tyler Cowen that American society has become much too complacent, i.e. self-satisfied, in recent years.  In particular:

  • Fewer Americans are moving.
  • Segregation (by income, education, social class and race) is increasing.
  • Americans have stopped creating. New business creation is down and monopolies are getting stronger.
  • Matching (i.e. assortative mating) is on the upswing.
  • Calm and safety above all is the predominant attitude.

These societal trends are normal and even desirable in many respects. But they can lead to stagnation.  Eventually needed social change will boil over in uncontrollable ways and America will undergo a “Great Reset.”


This will likely involve major events such as:

  • A major fiscal and budgetary crisis. Currently our public debt (on which we pay interest) is 77% of GDP, the highest since just after WWII. It will keep rising steadily without a major change in public policy. When interest rates return to more normal higher levels, interest payments on our debt will be a huge drain, without letup, on our tax revenue.
  • The inability of government to adjust to the next global emergency which comes along. When the financial crisis came along in 2008, debt was at the much smaller level of 38% of GDP. This allowed for temporary fiscal stimulus and larger deficits to ride out the resulting recession. With our currently high debt level, we’ll have far less flexibility when the next recession comes along.
  • A rebellion of many less-skilled men. The median male wage (adjusted for inflation) was higher in 1969 than it is today. In fact, the take-home pay for typical American workers has been falling since the end of the Great Recession in June 2009. To a large extent this explains the rise of Donald Trump.
  • A resurgence of crime. A new crime wave will probably be internet related. There are now tens of millions of identity thefts, phishing attacks and successful but fraudulent pleas for cash every year. Internet crime is calmer than traditional crime and less visible. But the next crime wave could badly damage internet commerce.

 

Conclusion.  Mr. Cowen paints a depressing picture for the future of American society.  Of course, it is possible to turn some or all of these negative developments around.  But will a complacent American populace have the political will to do it?

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