Crunching the numbers on health care reform

The latest from the Economic Policy Institute:

During another week of intense debate over the affordability of health care reform, EPI economists analyzed original and publicly available data and found that the proposed House health reform bill would pay dividends for small business and other groups, and that costs incurred by the federal government would help reduce total health spending over time.

In Health Care Reform: Big Benefits for Small Business, EPI’s director of health policy research Elise Gould and economist Josh Bivens note that only 35% of businesses employing fewer than 10 workers offer health insurance, and those that do usually pass on a higher share of the cost to workers than do larger businesses. A key problem is that small businesses typically pay more for health insurance because of the way policies are sold. The authors conclude that reforms that would create more competition among insurers and reduce their administrative costs would significantly reduce the cost small businesses incur providing health insurance. An independent analysis by the Lewin Group of EPI’s Health Care for America plan — which closely resembles the House reform bill — finds businesses with fewer than 10 employees that provide health insurance would save about $3,500 per worker.

In a related piece, Small Business and Health Reform, Gould challenges the assumption that the proposed surcharge on high incomes contained in the House health reform bill would discourage entrepreneurial activity, and cites research from the Joint Tax Committee finding that nearly 96% of taxpayers who report business income would not be affected by the surcharge.

And, in Seeing the Big Picture in Health Reform and Cost Containment, Bivens shows why a federal government investment in health care reform could produce big savings in total health costs over time. Cost analyses that focus strictly on the cost of health reform to the federal government, he argues, are misguided. “Fundamental health reform is worth doing even if it does not pay off in big federal budget savings,” Bivens writes. “Health care is an area where the more costs are loaded up on the federal government, the more efficiently care tends to be delivered overall.” Politico quoted Bivens explaining why the main focus of health reform needs to be on reducing total health spending over time, since health spending is currently rising faster than gross domestic product.

T. D.C.o.t.E (xiii): Flexibility Fundamentalism

The Dull Compulsion of the Economic (xiii)

A series of blog postings by D&S collective member Larry Peterson

Flexibility Fundamentalism

Recently The Financial Times featured an analysis of the US labor market entitled End of the Line. The piece was interesting inasmuch as it hinted that the fragility–to put it charitably, indeed–of the US social safety net may foster social tensions that could, in turn, have a negative impact on the flexibility of the US labor market (by leading to greater job protection, etc.). The unquestioned assumption throughout the piece, of course, was that the flexibility of the US labor market has been a good thing, or has had nothing much to do with the county’s current economic and financial woes.

In fact, the article refers to two prominent economists, Austan Goolsbee and Robert Reich, for tributes, of varying degrees of enthusiasm, to labor market flexibility. Goolsbee, now an adviser to President Obama, wrote in 2007 that “[W]e may be best poised to take advantage of the coming changes on a global scale precisely because we are so good at adjusting. The world economy may be tough on your industry but look on the bright side: you could be French.” And former Secretary of Labor Reich, who should know better, was quoted in the article as saying “The US labor market is extraordinarily flexible, [which] in normal times is a great asset.” He then goes on to add the following caveat, though: “When you have an economic downdraft like this, that same flexibility can become a severe detriment.”

Goolsbee’s crass triumphalism looks ludicrous now, as the FT points out. It notes that France and Germany now have lower unemployment rates than the US (though both started with higher rates before the crisis began). But what does Reich mean by “normal”?

It is now clear that the labor flexibility characteristic of the last few years was, far from being the product of, or reflecting “normal” conditions, made possible by the fostering of not one, but several different anomalies or imbalances. As is well known, median real wages, which had begun to reverse a marked slowdown from the 1970s on by the late ‘nineties, were vigorously clawed back after the .com crash, and languished well behind sterling productivity gains until the middle of the next century’s first decade, when, again, they began to creep upwards–only to be stopped dead in their tracks by the onset of the financial crisis. The wage contribution to GDP fell sharply as well, and here, as is again well known, real wage gains were captured only by the very, very wealthy. Meanwhile, benefits were falling sharply, especially as healthcare costs (high due to the existence of the dysfunctional US healthcare system, which, while doing little where vital statistics are concerned, contributed to labor market flexibility by making workers more dependent on the boss for healthcare benefits) skyrocketed. The mortgage bubble was enabled by these shortfalls, as a substitute for falling incomes, and as a means to maintain consumption in the face of falling pay packets (not to mention savings).

And the consumption surrounding the housing boom played no small role in ballooning current-account deficits. Investment followed this consumption overseas, with US foreign investment tending to trump domestic investment. And foreign investment in the US increasingly became the province of state investors (who tended to purchase US Treasury and agency–Fannie Mae, Freddie Mac, etc–debt) rather than private ones: by the latter part of the decade, the old adage that the US’s current-account deficit was a sign of strength–that foreign investors were expressing thereby a vote of confidence in the competitiveness of the US economy, and of its famously flexible labor markets–was becoming something of a joke, though the fact that so many foreigners had invested instead in the US mortgage market revealed that the joke could well end up being on them. But, back to the original point, productive investment did not respond vigorously to productivity gains in the US in the first decade of the twenty-first century, even with the Bush tax cuts to encourage them, or given the vast amounts of cheap borrowed money that were made available to investors as the Fed put the economy on steroids post 9/11.

Then there were all the wonderful financial innovations that “lowered the cost of capital” and made capital available to relatively untapped consumers for the first time. These put lots of dollars at consumers’ disposal, and enabled consumption to top 70% of national product, even as wages were stagnant (or, for some, even fell) and benefits became more expensive, or disappeared (many companies began to cancel 401K and healthcare programs as the decade wore on) altogether, and workers increasingly had to shoulder simultaneous burdens of saving for retirement, financing children’s education, and caring for elderly parents. The hugely inflated costs of the latter trio certainly whittled away at the cheapening effects of the dynamic duo of cheap foreign production and easy consumer financing.

Needless to say, practices in the subprime mortgage market topped this distinguished list, but the essential point here is that just about all of these means of maintaining consumer spending were part and parcel of a larger debt bubble, in which financial firms were betting huge amounts of other people’s money so they could increase returns on the much smaller sums they put forward (If I take a dollar of mine, and borrow nine of yours, and the investment appreciates by 50%, I get a $5 return, which is pretty good if I’ve only bet one dollar of my own money–even if I pay a generous rate of interest, or, more likely, high fees). But in reverse, this process becomes pernicious (if I lose 50%, I’ve lost much more than my $1; and if, being unregulated, I’m not required to hold any reserves, I can go bankrupt after losing my dollar, leaving my creditors holding the bag), and such deleveraging, as Julian Delasantellis has noted, probably has a long way to go before all the rot is purged from the system: “As opposed to today’s total government and private-sector debt load of almost $53 trillion, the 20-year period average is down at $43 trillion–that implies another $10 trillion of debt somehow disappearing, being written off, or (the most unlikely case) paid off. In the case of the solely “households and non-profit organizations credit and equity market instruments liability”, another $1.2 trillion, in addition to what has already been vaporized, has to be written off as well.”

So, getting back to the original point, it’s hard to understand how Reich can classify the situation of US labor in the last decade (at least) as anything near “normal.” As we have seen, not one, but several clearly unhealthy factors either enabled or redoubled an almost masochistic flexibility the core of which, anyway, Reich seems to want somehow to preserve. And we’ve only spoken here of aspects of flexibility that strictly concern pay and benefits: when one considers work practices, as well as things like public education policy, healthcare and all the other areas that can be collapsed under the umbrella of productivity-enhancers, I would venture that the cutbacks or simple nonperformance in all these areas, again all-to-often implemented or merely accepted in accordance with the gluttonous demands of flexibility, have become, in ever-expanding ways, seriously counterproductive, despite continuing gains to the bottom line (
as we shall see in a moment).

But the situation could get worse for labor, even if legislative or executive means to increase flexibility are avoided, as they most certainly will be, given the severity of the downturn: in the second quarter of 2009, companies were already cutting costs at furious rates to bleed the semblance of profit from the stone of labor cuts and tax breaks. This is reflected in some truly eye-opening productivity-related figures: for instance, as Goldman Sachs economist Andrew Tilton notes, total hours worked fell at about an 8 percent annual rate in the second quarter, Labor Department data shows. Meanwhile, Tilton thinks second-quarter gross domestic product fell at a more modest 1 percent rate. Tilton then goes on: “That’s a 7-point gap, and there have only been a few instances in the last 50 years when it has been that wide. It’s particularly unusual at a time when the economy is not growing.” Reuters then adds: “Indeed, the gap appears to have widened last quarter. In the first quarter, when GDP fell at a 5.5 percent annual rate, the number of hours worked fell at a 9 percent pace.”

Indeed, the situation has got so bad that economists are beginning to mix their admiration for US flexibility with fears that it has finally turned overtly pathological (i.e. that it threatens a level of aggregate demand sufficient for any sort of recovery). David Rosenberg of Glushkin Sheff (formerly of Merrill Lynch) claims that there is no evidence that profitability can be maintained on basis of cost cuts alone, and fears that when multiple sectors cut costs, it creates a snowball effect that in turn hurts everyone: “It’s one thing when one or two sectors are cutting costs. But when it happens in every sector, this ends up eating into aggregate demand.”

So far, the Obama administration has not done much to help workers affected by this sort of bloodletting, and with 1.5 million workers expected to exhaust their unemployment benefits by the end of 2009, one would think the situation could become truly explosive. One would hope that the left would be at the forefront of a vigorous effort to concentrate this casual attitude on the part of the administration; and an end to the mythology surrounding the endless benefits of flexible labor markets might constitute a small contribution to such an effort.