The Affordable Care Act, aka Obamacare, has dramatically expanded access to healthcare in the United States. But it has done nothing to lower the cost of healthcare which now exceeds 18% of GDP and is steadily increasing.
Warren Buffett, the Oracle of Omaha, refers to medical costs as “the tapeworm of American economic competiveness.”
An excellent plan for improving the ACA, “Transforming Obamacare” has been put forward by the medical economist, Avik Roy. It has five main features:
Repeals the individual mandate and proposes universal tax credits for acquiring catastrophic insurance and setting up health savings accounts.
Repeals the employer mandate and sets up a capped standard deduction for employer sponsored coverage.
Reforms Medicaid by migrating the current system into the above universal (and refundable) tax credit plan
Reforms Medicare by migrating the current program into the same universal system.
Other reforms for veterans, medical innovation, hospital monopolies, drug pricing and malpractice litigation.
According to Mr. Roy, the American Health Care Act, recently passed by the House of Representatives, does a good job in relaxing many of the ACA’s onerous regulations. However it falls down badly by including a flat tax credit rather than a means-tested credit based on income. Such an approach means that millions of low-income Americans, either near retirement or just above the Medicaid cutoff, will be priced out of the insurance market. This is what the Senate bill needs to fix.
Conclusion. Mr. Roy’s plan will not only expand overall healthcare access beyond the level achieved by the ACA but will also dramatically cut the cost of healthcare in the U.S. and even goes a long way towards achieving a balanced budget. Let’s hope that the Senate gets the AHCA proposal back on track.
The annual shareholders meeting of Berkshire Hathaway Inc. was held this weekend in Omaha. More than 40,000 people attended. Yesterday CEO Warren Buffett and vice chairman Charles Munger held a five and one-half hour question and answer session for the attendees.
Says Mr. Buffett as reported by the Omaha World Herald:
“We’ve got a big appetite for wind and solar projects.” BH Energy “borrows at taxable rates and Nebraska in terms of wind is not that much different than Iowa. We’re selling electricity in Iowa at lower rates than exist in Nebraska (with public power).”
Should BH keep working with Brazilian investors 3G Capital, known for slashing jobs at companies it invests in? Replied Buffett, “The gains in this world have come from gains in productivity. … This is why we live so well. … Government can put in place policies and programs that help workers left behind by economic shifts.”
“Trade, export and import, massive trade, should be and is enormously beneficial to the U.S. and the world.”
Medical costs are the “tapeworm of American economic growth. … Corporate taxes aren’t crippling but medical costs continue to rise. … The problem seems to transcend political party.”
Conclusion. Just these few remarks, among many others from the meeting, touch on several broad economic themes which I discuss on this blog. Private enterprise is a powerful and efficient method of generating wealth for humanity. Government should intervene to help those hurt by progress. Renewable energy is profitable and here to stay. Healthcare costs have a significant effect on business growth and need to be controlled. Neither political party has a monopoly on the truth.
Almost everyone agrees that faster economic growth would be beneficial. It would provide more new jobs as well as bigger raises for the already employed. It would also bring in more tax revenue which would help greatly to shrink our large annual spending deficits.
My last two posts, here and here, present first an optimistic and then a very pessimistic view about the chances of speeding up growth. In particular, the banker Satyajit Das, thinks that even the fairly anemic 2.1% average growth of the past few years will be impossible to maintain in the years ahead.
My next few posts will focus on exploring several specific ways in which growth could be speeded up. First of all, I refer to a report from Babson College, “The State of Small Business 2016” which is the basis of a recent article in USA Today by Warren Buffett and others, “To grow the economy, grow small business.” Key points are:
Capital. Securing financing remains a major barrier to growth. Small business owners overwhelmingly rely on banks for funding but banks face more stringent regulatory requirements. The median funding request for small businesses is $100,000 but businesses typically secure jus $40,500.
Regulation. The typical small business owner spends 200 hours per year on regulatory compliance. Streamlining approval processes would help immensely.
Skills. 70% of small businesses find it difficult to hire qualified employees. Furthermore there are currently 5.8 million job openings in the U.S. This reflects a mismatch between company needs and applicants’ skills. School districts and community colleges could help alleviate this problem.
Technology. Accessing better technology is perceived as costly and requires skills that many businesses lack. Cybersecurity and protecting intellectual property are two significant areas of exposure for small business, which 40% are ill-prepared to address.
Small businesses create over 60% of net new private-sector jobs. Helping them expand is one of the best ways to support economic growth.
“I could end the deficit in 5 minutes. You just pass a law that says anytime there is a deficit of more than 3% of GDP, all sitting members of Congress are ineligible for re-election.” Warren Buffett, 1930 –
Mr. Buffett made this quip in a recent interview with CNBC. Since the economy has historically grown at a rate of about 3%, Mr. Buffett is saying that we’ll be alright as long as economic growth exceeds deficit spending. This is generally correct but, as Mr. Buffett well knows, the situation is more complicated than this. A very good, and nontechnical, discussion of this whole subject can be found in the newly published book, “The Death of Money: the coming collapse of the international monetary system” by the financier James Rickards. Look at Chapter 7, “Debt, Deficits and the Dollar.”
Simplifying Mr. Rickards’ approach a little bit, and keeping it in Mr. Buffett’s framework, for a stable economy we need to have
G > D
where the nominal growth G = real GDP + I (I is the rate of inflation) and the deficit D = S – T (S is spending and T is tax revenue). I have included interest paid on the debt as part of total spending. As long as the left hand side is greater than the right hand side, the economy is growing faster than the deficit and the accumulated debt will shrink as a percentage of GDP. Notice that the rate of inflation affects the left hand side of the inequality while the interest rate is part of the right hand side.
Negative inflation is deflation which is clearly undesirable. The Federal Reserve’s current target for inflation is 2%. The challenge for the Fed is 1) to keep inflation high enough and interest rates low enough so that G > D, while at the same time, 2) to make sure that inflation does not grow so high as to destabilize the markets.
Given our underperforming economy with low real GDP growth, and huge deficits, Mr. Rickards is pessimistic that the Fed can continue successfully “in the position of a tightrope walker with no net … exuding confidence while having no idea whether its policies will work or when they might end.”
Thus the gloomy title for his book.