What Hillary’s Campaign Missed

What Hillary’s Campaign Missed

November 15, 2016

Last week’s election should be dubbed the revenge of the neglected. The outcome would have been different if Hillary’s strategists had taken to heart James Carville’s famous quip in 1992, “It’s the economy, stupid.” I remember it well, because I pulled together Bill Clinton’s economic program for the 1992 campaign. Of course, today’s economic problems are different from those of a quarter-century ago. But the political manifestation is virtually the same – tens of millions of Americans justifiably dissatisfied with their economic conditions and prospects.

As regular readers of this blog know, I’ve spent several years tracking what’s happened to the incomes of Americans of different ages, races and ethnicities, educational levels and gender, as they grew older. The Brookings Institution published the first results in 2015 covering the period 1980 to 2012. I sent that report to Hillary and Bill Clinton and as many of those who worked for them as I knew. The results refuted the left’s claims that incomes of average Americans have stagnated for two generations – across every category, median household incomes rose at healthy rates, year after year, through the presidencies of both Bill Clinton and Ronald Reagan.

But the results also showed tectonic income changes from 2001 to 2012 as this steady income progress ended. Hillary was particularly struck by the study’s darkest finding: The median income of households headed by people without college degrees — which covers nearly two-thirds of all U.S. households – fell as their household heads aged from 2001 to 2012.  This unprecedented development, of tens of millions of families losing income as they aged from their thirties to their forties, or from their forties to their fifties, held across race, ethnicity and gender, and for all age groups except millennials.

For example, the real median income of households headed by high school graduates ages 35-to- 39 in 2001 fell from $54,862 in 2001 to $49,800 in 2012. (All income data here are in 2012 dollars.) So, these Gen Xers earned $5,062 less at ages 46-to- 50 in 2012 than they did when they were 35-to- 39 years old in 2001. Their counterparts a decade earlier – households headed by high school graduates ages 35-to- 39 in 1991 – saw their real median incomes rise from $51,645 in 1991 to $63,614 in 2000, for gains of nearly $12,000 (about 20 percent) as they aged from their later-thirties to their later-forties.

Baby boomer households headed by high school graduates who were 45-to- 49 years old in 2001 suffered even larger income losses than the Gen Xers: From 2001 to 2012, their real median income slumped from $63,534 to $51,002, falling $12,532 or some 20 percent as they aged from their later-forties to their later-fifties.

Households headed by college graduates didn’t lose income as they aged over the following 11 years, but only barely so. The median income of those households headed by people ages 35-to- 39 in 2001 inched up from $97,470 in 2001 to $100,771 in 2007, and then fell back to $98,845 in 2012, when they were 45-to- 49 years old. Compare that to the 1990s, when households headed by college graduates ages 35-to- 39 in 1991 saw their median income rise from $81,742 in 1991 to $106,454 in 2000, gains of $24,712 or about 30 percent I calculated that about half of all working-age households lost substantial ground as they aged through that decade, and another quarter of Americans treaded water. This was an economic turn the United States has never seen before. It gave meaning to Donald Trump and Bernie Sanders’ claims that the economy is rigged, and it bred the broad anger that ignited their campaigns.

Hillary’s campaign didn’t ignore these developments. But her strategists, intent on reprising President’s Obama winning coalition, focused instead on the special problems of young, minority, and female voters. The campaign offered the Hispanic community a new path to citizenship for undocumented workers, and promised pay equity for women. It called for larger Earned Income Tax Credit checks for working-poor families, and debt relief for recent college graduates. All of these initiatives have merit. But none of them directly addressed or even acknowledged the structural forces squeezing out income gains for much of the country.

Hillary pressed me to explain the long income slump. I told her the truth: These income problems did not bubble up from the trade deals of the 1990s and the offshoring of manufacturing jobs, which happened mainly in the 1970s and 1980s. The fault lay mainly in forces much harder to demonize, namely technological advances and the way globalization and the Internet affect how companies price their goods and services.

Americans love the entertainment and social networks fostered by information technologies and the Internet. But these technologies also restructured the operations of virtually every office, factory and storefront. As that happened, anyone without the skills and confidence to work effectively in an IT-dense workplace saw his or her “labor value” erode and wages fall. College graduates avoided the worst of the income slump, because virtually everyone who earned a bachelor’s degree in the last 15 years is IT literate.

The other major culprits for the recent income squeeze are the Internet and, yes, globalization. Again, manufacturing job losses are not the heart of it. Rather, the Internet and globalization both intensify pricing competition, and businesses facing those strong competitive pressures often find themselves unable to pass along any rising costs in higher prices. So, as energy and employer healthcare costs rose sharply, especially from 2000 to 2008, many U.S. companies were forced to cut other costs. The data show that those cuts started with jobs and wages.

All of these downward forces took hold throughout the 2002-2007 expansion, and the financial crisis and deep recession that followed only amplified them.

The data also show that conditions shifted again in 2013, when energy prices collapsed, Obamacare started to slow employer healthcare premium increases and, with wages and salaries depressed, hiring became an attractive proposition again for companies. The latest data show that incomes have been rising since 2013 across virtually every group. For my friend Hillary, it was too little, too late: A few years of modest income progress have not offset a decade of painful losses.

But Trump’s success as president will depend on sustaining those income gains for four more years. As I’ve said here before, the economy needs a good dose of stimulus, and Trump’s deficit-defying tax cuts should jump-start growth in late-2017 and 2018. But his tax plans are so excessive economically, they could set the Federal Reserve on a course of multiple interest rate increases that slow growth by 2019. Beyond that, the economic challenge that Hillary also would have faced is that income progress ultimately requires healthy productivity gains, but productivity growth have slowed dramatically for few years now. If Trump and the GOP Congress fail to nudge up productivity, they could face their own populist revolt in 2020.

Halloween Special: How Hillary Can Handle Scary Interest Rate Hikes

October 31, 2016

Looking past this weekend’s kerfuffle over Huma Abedin’s emails, Hillary Clinton’s success in her first term as President will depend in large part on whether the incomes of most Americans keep rising. As readers of this blog know, my studies tracking people’s incomes, year to year as they aged, found that the median household incomes of millennials, Gen Xers and boomers all grew at healthy rates in 2013, 2014 and 2015. Moreover, this income progress reached across gender, race and ethnicity, and educational levels. That’s why consumer confidence and President Obama’s approval ratings are now so high.

The catch is that for most households, these gains came after a decade of income losses from 2001 to 2012. Hillary’s first challenge is to avoid a recession that could overwhelm most people’s recent gains — and her opportunity is to provide four more years of income progress that could well make most Americans optimistic again.

The challenge could start between Hillary’s election and inauguration, in December when the Federal Reserve’s Open Market Committee (FOMC) next votes on raising short-term interest rates. At the FOMC’s last meeting in September, its members voted seven to three not to raise those rates; but most Fed watchers expect the Committee to reverse this stance in December. Based on the Fed’s history, that decision will be followed by a long succession of additional interest rate hikes over the next three years. If that happens, growth and income gains could stall or worse as the costs for businesses to invest, and for consumers to buy a home, a car or a major appliance, all rise.

Traditionally, the Fed raises interest rates when the economy threatens to overheat and pump up inflation. But this time, there is little evidence of such a scenario. Inflation has risen at an annual rate of less than two percent for 51 consecutive months, and growth this year has been modest.  Moreover, based on long-term interest rates, U.S. and global investors expect low weak inflation to persist for years.

The only evidence that inflation hawks can cite is the recent strength of job creation. From January 2013 to September 2016, U.S. businesses added an average of 204,000 net new jobs per month. That’s nearly the pace last seen under Bill Clinton, when business created an average of 219,000 net new jobs per month from January 1993 to December 2000. Worrying about inflation may make sense once we reach full employment, since when that happens, competition for workers pushes up wages that are passed on in higher prices.

But the United States is not at full employment today, or close to it. Large numbers of people continue to work part time and not by choice, and labor force participation by prime age Americans remains abnormally low.

 The Fed’s only real argument for raising interest rates is strategic — higher rates create the room for the Fed to cut them in the next downturn. But even with 2.9 percent growth in the third quarter, the economy has expanded at a rate of less than two percent this year, and fixed investment has declined four quarters in a row. In this economic environment, a succession of rising interest rates over the next two years could trigger that downturn. And as the Bank of England has noted, if an economy begins to decline while short-term rates remain near zero, central bankers can still use quantitative easing to stimulate demand.

 It’s worth noting that near-zero interest rates carry risks of their own. With yields on government bonds so low, large investors have shifted to riskier investments with higher yields. That’s why commercial real estate is rising, why there’s a bubble in art markets, why prices for agricultural land and junk bonds are historically high, and why the price-to-earnings ratio for U.S. stocks is now 30 percent above its historical average.

These risky investments could pose a threat to the economy and people’s incomes, if a substantial jump in interest rates triggers a large decline in the U.S. stock, real estate and junk bond markets. Moreover, much like the run-up to the 2008-2009 crisis, the big financial institutions may not have paid enough attention to the risks in their high-yield investments. To be safe, Hillary should call on the Treasury and the Fed to audit those institutions through a new round of “stress tests,” and then ensure that any major institution with a shaky portfolio takes steps quickly to reduce its exposure.

If, as now expected, the Fed goes ahead and raises interest rates, the economic fate of most Americans will rest in the new President’s hands. Hillary’s best response will lie in fiscal policy.  Her first budget should call for more spending on infrastructure, new grants to the states to begin their transition to free tuition at public institutions, bigger Obamacare subsidies to offset the fast-rising premiums expected in 2017, and expanded support for research and development. On the tax side, new incentives for business plant and equipment also are in order. Hillary should cast all of these measures as an investment agenda for long-term growth, and not wave the red flag of “stimulus” in the faces of congressional Republicans.

Her first budget also should include measures to directly support income progress by working people, including the increase in the minimum wage, pay equity guarantees, and the expansion of the earned income tax credit. Finally, she can pay for all of these measures, as promised, by ending carried interest, closing corporate loopholes, and raising taxes on wealthy households.  She can also ensure that these tax changes don’t slow a fragile economy by phasing them in starting a year or two down the road.

The Federal Reserve is a very powerful force in the American economy. But so is the President — and a determined President Hillary Clinton can protect the incomes of Americans even if the Fed prematurely raises interest rates.

Republicans Maintain Hard Opposition to Obamacare at Their Own Political Peril

April 2, 2014

The political struggle over Obamacare has reached a critical inflection point as real events have overtaken its opponents’ basic arguments. That opposition has always drawn on doubts about the public’s real interest in a federal guarantee to health insurance and their tolerance for a mandate to enforce it. After the program’s fitful start, it is now clear that large numbers of Americans are prepared to spend considerable time and money to sign on. The Rand Corporation estimates that 9.5 million people who had no coverage a month or a year ago now do, thanks to the Affordable Care Act (ACA).

In my analysis of the data, I found that the newly-insured number at least 7.8 million and as many as 10.9 million. And if the governors and legislatures in 24 states had not inexplicably turned down the ACA’s Medicaid expansion — a decision three of those states are reconsidering — the number of newly insured today would range from 11 million to 14 million.

These numbers create a political inflection point, because the program’s demonstrated appeal renders it simply impossible to repeal. Arguing against a new federal benefit is an easy political challenge for conservatives. By contrast, withdrawing a benefit that millions already depend on is a, at best, herculean task. Just try to imagine any future Congress or President actually withdrawing practical access to medical coverage from millions of moderate-income families, millions of young adults covered by their parents’ policies, and millions of more people with preexisting medical conditions.

Moreover, this political inflection point will strengthen not only as more people enroll, but also, and even more important politically, as Obamacare generates benefits for everyone else. To begin, surveys show that several million people would like to change jobs, but stay where they are, out of concerns about losing their healthcare coverage. Now, they can do as they like — and the enhanced labor mobility should help the economy.

More important, by enrolling large numbers of previously-uninsured people, Obamacare should slow increases in everyone’s insurance premiums — or even lower premiums. As countless studies have shown, most people without coverage get their medical care in emergency rooms.  Since they usually cannot pay the bills for that care, hospitals pass along those costs through higher charges on everyone else, which in turn leads to higher insurance premiums. The ACA not only will relieve some of those direct pressures on premiums; its mandated coverage will also generate more income for insurers, further easing upward pressures on premiums.

This would be very good news for the American economy. Over the last decade, healthcare coverage has been the single, fastest-rising cost for most U.S employers. But as globalization has intensified competition, many of those employers have found themselves unable to pass along their higher healthcare costs by simply raising their prices. Their only recourse, as I have written many times, has been to cut other costs — beginning with jobs and wages. In the end, therefore, the ACA could contribute to broader gains in employment and incomes — and that could produce a political inflection point that could support political realignment.

How a Grand Bargain on the Deficit Could Erode Social Security

March 13, 2013

Paul Ryan’s new budget blueprint released this week — details to follow, as usual — will only intensify the partisan warfare over the deficit. In truth, the deficit is just a cover story here, since the real debate is over the scope and role of government itself. Ryan at least is more upfront about it than most – he includes large new tax cuts as well as draconian spending reductions in what is ostensibly a plan to “balance the budget.”  In his fervor to miniaturize Washington’s domestic role, however, he cannot provide the resources to maintain the core commitments of Social Security and Medicare.

The ideological core of this debate also explains why most of the proposals and agreements of the past year have paid so little heed to the needs of the economy. There is no doubt that the spending cuts and tax hikes of the last six months have weakened economic growth — and as a result, deficits actually could be larger over the longer-term than they otherwise would have been. The additional spending cuts contemplated for the next six months under the sequester — and under most of the grand bargains being floated to supersede the sequester — would inflict more damage. In this regard, Ryan stands at the extreme with a plan that would drive us back into recession.

Nonetheless, a major deal that includes entitlement reforms and tax-loophole closings remains possible. In the politics that could determine the relative weights of those two factors, Republicans will have less maneuvering room on taxes than Democrats will enjoy on entitlements. That’s because primary challengers from the far right already have taken down a number of conventional Republicans, heightening the GOP’s resistance to more revenues. By contrast, there have been no successful attacks so far on centrist Democrats for supporting the cutbacks in federal programs now in place. This political difference suggests that more of the burden in any grand bargain will likely fall on entitlements than on revenues. The next question is, what entitlement changes could Democrats accept and still preserve the essential missions of those programs.

Let’s consider Social Security and its core guarantee of basic economic security for more than 40 million retirees (plus nearly 9 million people with disabilities). Unfortunately for Ryan and his fellow supporters of austerity for the elderly and disabled, no change that would trim the benefits of all Social Security recipients is compatible with the program’s central mission. To begin, while countries such as Germany, France and Italy provide monthly pension checks equal on average to 75 percent or more of a person’s average monthly wages over a lifetime, this “replacement rate” for Social Security is only about 40 percent. That translates into an average monthly benefit of $1,230, or less than $15,000 per-year. Moreover, these bare benefits comprise at least 90 percent of the total income for more than one-third of all current Social Security recipients.

Let’s do the math. The terms just described translate into an annual income of less than $16,300, which amounts to a very bare minimum. After all, the average cost today of a small apartment (rent and utilities) is over $7,000 per-year. Even if elderly people pay 20 percent less than the average, their rent and utilities still claim an average of $5,600 per-year or nearly 40 percent of all their income. Add to that at least $335 per-month for food at a poverty level ($4,000 annually) and another $310 per-month for Medicare Part B and Part D premiums and other out-of-pocket medical expenses ($3,700 annually). That leaves tens of millions of elderly and disabled Americans with about $130 per-month ($1,600 per-year) to cover all other expenses such as clothes, transportation, recreation, state and local taxes, and any unexpected expenditures.

These data suggest that any across-the-board benefit cut today is incompatible with Social Security’s essential mission. That takes off-the-table changes in the annual inflation adjustment or the retirement age. Given current benefits, the only reforms consistent with the program’s central commitment are ones based on means-testing. For example, Congress could apply a smaller annual cost-of-living adjustment to the benefits of the top tier of retirees. And if Congress is set on guaranteeing the system’s solvency for the next 75 years, in the same spirit they should think about applying the payroll tax to the capital income of the top tier of workers. Not that there is an enormous rush, given the actuaries estimate that the system’s solvency is secure for at least another quarter-century.

Much like George W. Bush’s proposal to privatize part of Social Security, the 2013 Ryan budget is simply uninterested in the missions that animate federal entitlement programs. Democrats would commit a grave mistake, as a matter of both social policy and politics, if they also sacrificed those commitments in search of Republican acquiescence to more revenues.

Dark Thoughts on the Coming Sequester

February 27, 2013

This week’s bout over federal spending pits Tea Party militants, conservative pundits and most Republican office holders against the President, his congressional allies and most economists who pay attention. But behind the politics, there is simply no economic basis for the immediate spending cuts that would follow the sequester — or immediate tax increases for that matter. The economy is still fragile enough that GDP went negative in the last quarter, when inventory purchases and federal spending both slowed more than usual. And just last weekend, Moody’s credit rating agency stripped the United Kingdom of its AAA rating — not because UK deficits are too high, but because Britain’s premature austerity policies are leaching away the growth required to make its deficits manageable. Moody’s decision only echoed recent warnings from the IMF and World Bank against just such precipitous moves to bring down cyclical deficits.

Back home, President Obama’s odds of prevailing on the sequester would be greater, if those who have made careers out of fetishizing a balanced budget were not receiving quiet support from much of Washington’s split-the-difference political pros, including a clutch of Democrats.  Looking out a few weeks, a chorus of self-described centrists and a few liberals could nudge the President into accepting a “compromise package” of substantial, immediate spending cuts and what Ronald Reagan used to call “revenue enhancers.” If it stops there, the economic damage will be contained. But the scenario could turn worse if, as seems likely, such a compromise also becomes embedded in a Continuing Resolution that will cover the rest of the fiscal year and create a new, lower baseline for 2014.

This premature austerity inescapably will weaken the economy, raising deficits even more down the line. Worse, such a bipartisan agreement could reinforce both parties’ natural resistance to contain Medicare spending and build up the tax base, especially over the long-term. And that could finally convince global financial markets that the United States has lost its way economically. The result would be higher interest rates, which in turn would mean even slower growth and higher deficits. What the markets want and have long expected from us is just fiscal common sense. That means, first, sidestep the sequester trap and instead increase federal investments in infrastructure, basic R&D along our technological frontiers, and access for all adults to upgrade their skills. Then follow it up with serious steps to contain long-term Medicare spending and expand the national tax base.

A New Progressive Economic Strategy, Part 2: Spending Reforms

April 14, 2010

You don’t have to be a Nobel economist to see that the United States needs a serious, new economic approach if we hope to restore what once seemed part of the American birthright — ample job opportunities, strong and widespread income gains, and broad upward mobility. Last week, we sketched a package of initiatives to equip businesses and workers with the resources and incentives that such a strategy requires. This week, in part 2, we turn to a more general condition for sustained economic progress, a plan to control long-term deficits and national debt.

Bringing down the trillion dollar-plus annual deficits now projected for the next decade is a straight-forward task conceptually — you raise taxes, cut federal spending, and do both in ways that promote faster growth, and so further increase revenues and further reduce spending. Moreover, serious steps to reduce these deficits, phasing-in a few years from now when the economy is stronger, should be a clear goal for progressives. Once the economy recovers from the neglect and mistakes of the last administration and those who ran Wall Street, the current trajectory of massive deficits will push up interest rates and slow investment, incomes and growth. Tolerating these long-term deficits would consign average Americans to another lost decade economically — and perhaps even worse, lay the toxic foundations for another crisis.

In practice, serious deficit reduction is always a difficult business, since who wants to ask people to pay higher taxes or accept fewer benefits? The challenge is to rethink and reconfigure federal spending and taxes, so we can channel spending and raise revenues in ways that reinforce job creation and income gains, and so help families and businesses prosper. This week, we focus on the spending reforms; and next week, we will rethink taxes.

Progressives should approach this challenge in three ways. First, end not only earmarks but their larger and more permanent version, the major subsidy programs for influential sectors. These subsidies arbitrarily tilt the economy towards companies with political clout and so reduce the jobs and wealth the economy is capable of producing. These industry entitlements range, for example, from much of the farm program which end up raising food prices, and export promotion efforts that give selected exporters artificial advantages without affecting the overall trade deficit, to below-market fees for mineral rights and other natural resources. Make a clean sweep of these ongoing taxpayer bailouts, and we could save between $100 billion and $150 billion per-year.

The second area involves the inescapable reforms of individual entitlements. Unlike industry subsidies, these programs serve clear and compelling social interests. Yet, as the boomers begin to retire, these programs in their current forms are simply and plainly unsustainable. Social Security reforms are the more manageable part, analytically and politically. Social Security’s long-term deficit would go away, for example, if Congress enacted three fairly modest adjustments: Shift the pension’s annual cost-of-living adjustment to reflect the actual inflation recorded by the Bureau of Labor Statistics for the elderly people who receive the COLAs; link increases in the retirement age to increases in life expectancy for those age 65 and over; and tax all of the benefits of retirees with incomes above the national average. And all of these changes reflect the progressive values of fairness.

Fixing Medicare and Medicaid is much tougher. As this year’s wrenching debate over health care reform demonstrated, nothing inspires more public anxiety than changes in the arrangements that people consider matters of life and death. Yet, the current arrangements are also plainly unsustainable, especially as boomers reach the phase of their lives when heart disease and cancers, the most common and expensive conditions to treat, become much more common. The general path is clear: We need reforms that go considerably beyond this year’s changes that can substantially slow the rates of increase for all health care costs.

By taking this broad approach, we can not only preserve Medicare, but also produce large economic dividends. First, smaller annual increases in health care costs will reduce pressures on businesses to hold down wages. That’s just what happened in the 1990s, when the shift to HMOs produced several years of much slower health care inflation, and average incomes grew more than 2 percent annually, after inflation. Moreover, slower health care costs also will help the overall economy. Since other advanced countries produce health care outcomes comparable to our own at less cost, our additional spending is flagrantly inefficient, stealing wealth and jobs from more economically-productive areas.

Happily, this year’s health care debate aired out a catalog of strategies to help contain these costs without compromising the quality of care; and the bill, as enacted, provides a credible beginning for a more extended process to control future increases. The insurance exchanges should reduce costs in the individual and small-group insurance market, and the investments in IT should help slow costs across the system. Both can be expanded and beefed up. The new law also begins to move the Medicare program from volume-based payments to reimbursements based on the value of the treatments. That can be substantially strengthened as well. This year’s reforms also create a new advisory board to propose new ways to cut Medicare costs, with a process to fast-track the recommendations through Congress. Eventually we can apply this kind of arrangement to all of health care.

Finally, both parties are going to have to accept the most difficult changes advanced by the other. Democrats will have to live with taxing a share of the value of employer-provided coverage, along with serious malpractice reforms. And Republicans will have to accept a public option, in order to introduce real competition for insurers in areas where one or two of them comprise an effective monopoly or duopoly.

Looking out several years, these reforms for industry and individual entitlements should be able to pare several hundred billion dollars per-year from our structural national deficits. And if that’s not enough, there’s still a third area of large, potential savings in defense spending. For a start, eliminate any weapon system that the Pentagon says it doesn’t need or want. These programs have become geographic entitlements, usually sustained to keep taxpayers’ dollars flowing to the districts of those who sit on the defense appropriations subcommittees. And that’s hardly a sufficient reason to weaken a broad plan with the promise of restoring real economic opportunities and prosperity for average Americans.

The President’s Reforms and the New Politics of Containing Health Care Costs

March 24, 2010

The health care reforms enacted this week are an unequivocal political triumph for President Obama. He turned back the most intense and dogged partisan campaign to stop a piece of legislation seen in this era, enhancing his own popularity and power until at least the next setback. More important, the reforms as passed constitute the most serious social-policy achievement in two generations. They not only provide a clear and secure route to insurance coverage for two-thirds of the Americans who don’t have it. The President’s reforms also end a sheaf of abhorrent insurance practices—most notably, preexisting condition clauses and lifetime coverage caps—which withhold payment for care when, as it happens, people actually need it most. The open question, however, is whether the reforms also will make the country’s health care system more sustainable by slowing its trajectory of cost increases.

Without reforms to do so, those prospects are at once scary and unsustainable. A few months ago, we calculated how much an average, middle-class family should expect to spend on health care in 2016: The answer is fully one-third of the family’s real annual income—a level that’s unsustainable both economically and politically.

Here’s how we figured it out. The Congressional Budget Office tells us that an average family will earn $54,000 per-year in 2016, when moderately-priced family insurance coverage will cost $14,700. Most people’s employers will pay much of that bill; but those payments come out of people’s wages, not the company’s profits. Taking this into account, a middle class family’s earnings in 2016 should come to $68,700 ($54,000 + $14,700), of which $14,700 or 21.4 percent will go for health insurance. That’s not all. Experts figure that their co-payments and other uninsured expenses, on average, will come to another $5,100 in 2016. They’ll also pay taxes to help cover other people’s health care—2.9 percent of their cash wages for Medicare ($1,566), plus perhaps $1,500 more in federal and state income taxes for Medicaid and for Medicare costs not covered by the 2.9 percent payroll tax and for the subsidies for the uninsured under the new reforms. Add up all of that, and it comes to $22,766 or 33.3 percent of the middle-class family’s adjusted income of $68,700.

As Harvard health care expert David Cutler and others have concluded as well, the new reforms provide a credible beginning for what will still be a long and arduous process to control cost increases. Here’s how. To begin, the insurance exchanges should reduce costs in the individual and small-group insurance market, while the investments in IT should help slow costs across the system. In the largest and fastest-growing part of health care, treating the fast-rising numbers of older Americans, the reforms also include significant cost reductions in Medicare. Perhaps most important, Medicare will move from volume-based payments to reimbursements based on the value of the treatments. In addition, the reforms create a new Medicare advisory board to propose new ways to cut costs or save expenses, tied to a process for fast-tracking the recommendations through Congress; and there are also cuts in overpayments for Medicare Advantage and other supplemental Medicare plans, as well as new measures to reduce Medicare fraud and abuse. Finally, there’s a new emphasis on prevention programs, which could significantly reduce future costs.

All of this will help, but it won’t reduce the share of our average family’s income going to health care by more than a percentage-point or two. To make a bigger difference, each party will have to accept much more difficult changes advanced by its rival. So, Democrats will have to live with taxing a good share of the value of employer-provided coverage—the only tax increase conservatives will swallow these days—along with malpractice reforms more far-reaching than the limited state-based “experiments” enacted this week. For their part, Republicans will have to accept a public option, the only way to introduce real competition for insurers in areas where one or two of them now constitute an effective monopoly or duopoly.

Happily, the passage of the President’s reforms this week will make such hard steps much more likely politically, if not any easier. The reason is that with these reforms, the federal government, for the first time, has accepted overall responsibility, and ultimately accountability, for the nation’s health care system. When costs continue to rise sharply, as they will, voters across the country will have Washington as a focus for their displeasure, and the next election as an effective way to express it. That political prospect will drive much more stringent steps to contain costs, as it has in every other advanced country in the world. Only it’s coming later here, which is why we now spend so much more than other countries on health care.

The Conundrums in Health Care Reform

August 12, 2009

The political furor over health care reform, and especially the media coverage, may be triggered by right-wing agitprop; but the cynical distortions – death panels! – fed by hard Republican partisans are not responsible for eroding public support. Health care reform will always be a tough sale. Three-quarters of Americans believe we need serious reform; yet two-thirds of those who voted in 2008 have insurance and say they’re satisfied with it. If the President is going to win this fight, he and his people have to unravel this conundrum – and economic logic can help.

People have plenty of complaints about their health care. They don’t like the waits they face to see their doctors, they really don’t like paying the world’s highest insurance premiums and co-payments, and they’re not insensitive to the plight of 50 million uninsured — and the possibility they someday might join them. Yet most of us are deeply risk-adverse about real changes in these arrangements, and the reasons are as basic as they get: We naturally place infinite value on recovering from some terrible, future illness or injury, and so far the current arrangements have kept most of us and our children alive and even reasonably well. So, if the critics’ outlandish claims contain even a small kernel of truth, many of us can (and will) imagine that under the right circumstances, it could cost us the care we might desperately need.

There’s another, equally powerful factor at work here. Health care places most people in the uncomfortable position that economists call “radical information asymmetry,” which means that one party knows much more than the other about something important to both. We feel sick but we don’t know what’s causing it or what to do about it – so we go to a doctor or hospital staffed with people who do have the precious knowledge and skills necessary to make us well again. This genuine sense of ignorance about a matter of potentially life and death importance greatly intensifies our risk adverseness about changing the arrangements under which those all-knowing doctors and hospitals now take care of us. And since we all know that some illness or injury will eventually threaten or end our lives, it’s not a hypothetical concern.

This information asymmetry complicates health care reform in other ways. We can’t shop for the best medical deal or make independent judgments about whether we need one procedure or two, so we have to depend on doctors we know, who have obvious incentives to “sell” us as many expensive services as their Hippocratic oath allows. That’s why proposals to end the tax deductibility of employer-provided insurance probably wouldn’t much affect rising costs: Even with greater incentives to shop for less expensive care, we still lack the knowledge to make intelligent choices.

The policy conundrum for the President is that unless he can reform these arrangements, the pressures that have been driving up health care costs for decades will end up denying care for many more of us. But there’s little reason for most people to support cutting health-care costs, since people know that cutting costs in most areas usually means getting less – and in this case, getting less could cost them their health.

That’s why the action has been shifting from health care reform to insurance reform, by which Washington means new guarantees that insurers must maintain coverage for any serious condition any of us might face, and set premiums without reference to people’s current or past health. Most insurers are willing to go along, so long as Washington also requires all of us to buy their coverage. But their caveat presents another political obstacle ripe for demagoguery, since somebody would have to pay for the subsidies that tens of millions of us will need to afford that coverage.

Insurance reform may be the only change that almost everyone would welcome. But it also will increase costs further, which will eat away at coverage. Moreover, it does nothing about the major forces most responsible for driving up costs – the inexorable aging of the boomers, and the proliferation of new, very costly medical technologies to treat the common conditions that mostly befall older people, especially cancers and heart disease.

It’s obvious by now that there just aren’t any easy answers. The “public option” would probably force insurers to squeeze more efficiencies out of the ways they conduct their business, as could private, non-profit insurance cooperatives. But those efficiency savings would be one-shot deals that can only give us a few years of breathing room – like the shifts to HMOs and PPOs did in the 1990s – before the same problems reemerge.

As to the larger forces, we can’t do anything about the aging of the population, and the only way to control the costs of new technologies is to limit people’s access to them or slow down their advances. And no one is prepared to suggest that, since we all can imagine someday needing a recent breakthrough to preserve our health.

There is another option: Accept that we place unlimited value on gold-plated health care and be prepared to pay for it. Eventually, that will drive us to new, broad-based taxes to finance that gold-plated care for everybody. Since that’s not a topic which our politics can handle today, it looks like we all have to prepare ourselves for many more years of debates over health care reform.

Noticing and Solving the Problem with Jobs and Wages

July 22, 2009

America’s vaunted job-creating machine has been breaking down, and the administration is finally noticing.

It was in 2003 when I first asked myself whether the dynamics that normally produce lots of new jobs when the economy expands were changing in some fundamental way. I had noticed that job losses during the mild 2001 recession were five to six times as great as expected, given the modest drop in GDP. Then we saw that in 2004, two years after the recession ended, the number of employed Americans was still falling, compared to the two months it took for job creation to turn around after the 1981–82 recession and the 12 months it took after the 1990–91 downturn. The evidence that America’s labor markets were undergoing structural changes of a nasty sort continued to accumulate. Just as employment had fallen several times faster than GDP during the 2001 recession, so once job creation finally picked up in 2004, private employment gains remained weak. Over the same period that saw 14 million new jobs created in the 1980s expansion and 17 million new jobs created in the 1990s expansion, U.S. businesses in the last expansion added just 6 million new jobs. Manufacturing was hit especially hard: From 2001 to 2004, manufacturing lost more jobs than during the entire “deindustrialization” years from the late 1970s through the 1980s, and those losses continued throughout the entire 2002–07 expansion.

With job losses in the current recession already two to four times greater than seen in the downturns of the early 1980s, 1990s and 2001, these dynamics are finally getting broader attention. Late last week, Larry Summers, the President’s chief economic advisor, acknowledged publically that what’s known as Okun’s Law has broken down. Arthur Okun, JFK’s economic advisor, observed in the 1960s that employment during recessions regularly fell by about half as much as GDP, in percentage terms, which he attributed to the costs employers bear when they fire workers and then have to hire and train again once the downturn ends. Nobel laureate Paul Krugman also weighed in last week, positing that recessions triggered by bursting bubbles — that would be 2001 and this one — affect jobs much more than those triggered by tight monetary policies to fight inflation (the 1974–75 and 1981–82 recessions, for example). It’s an intriguing thought, but it doesn’t appear to really jive with the evidence. The IT-Internet bubble that burst in 2000 certainly helped trigger the 2001 recession, but the downturn’s job losses, and the subsequent delayed and slow job creation, swamped the direct and indirect declines in demand that followed from the implosion of so many Internet and IT companies.

It’s much more complicated than that — and consequently, will be much harder to address. To begin, the changes in the way our labor markets work also have affected everyone’s wages. During the 1990s expansion, productivity increased by about 2.5 percent per-year, and average wages rose accordingly by nearly 2.0 percent per-year. That’s the way free labor markets are supposed to work: As workers become more productive, employers become willing to pay them more (and which competition forces them to do). But in the 2002–07 expansion, even as productivity grew 3 percent per-year — the best record since the 1960s — the average wage of American workers stagnated. And the most popular political explanation, blaming U.S. multinationals for outsourcing jobs abroad, doesn’t hold up here: Over this period, the number of workers abroad employed by those multinationals hardly rose at all.

This change is also getting more official attention. Last week, President Obama reminded everyone that economic expansion isn’t enough — and we’re still quite a way from any real expansion — since most middle-class Americans weren’t doing well even before the crisis hit and the economy tanked.

The administration’s agenda could go a long way to addressing these structural changes, if it’s done right. The most plausible explanation is that American jobs and wages are being squeezed by a combination of fierce competition created by globalization and our own failures to control health care and energy costs, two big fixed cost items for most businesses. The competition has made it much harder for businesses to pass along these higher costs in higher prices — an important reason why inflation has been so low for more than a decade, here and around the world. But that also means that when companies face higher health care and energy costs that they can’t pass along, they have little choice but to cut other costs. And the costs they’ve been cutting are jobs and wages.

The only way to ensure that the next expansion won’t be like the last one, but instead will create more jobs and bring higher wages, is to make medical cost containment the center of health care reform and make the development and broad use of alternative fuels, from biomass to nuclear, the center of energy and climate policy. That’s not where Congress seems headed. The House-passed climate bill will do little to drive alternative fuels for at least another decade, when a simple, refundable carbon tax could do the trick. And the most promising aspects of health care reform for cost-containment — a public insurance option and performance-based reimbursement — are both under serious congressional attack. If the President hopes to see more job creation and wage gains than under George W. Bush, these are the places where he should take his stand.

The Lessons of LBJ and Robert McNamara for Barack Obama

July 9, 2009

Robert McNamara died this week, but his life holds lessons for Barack Obama’s presidency. Arguably the leading light of JFK’s stable of the best and the brightest, McNamara’s work as an architect and prime executor of LBJ’s Vietnam debacle is well remembered by tens of millions of boomers who came of age during Vietnam, as well as the President. The caution for Mr. Obama and his advisors lies in the conundrum of how McNamara’s brilliance expedited the implosion of the most progressive presidency since FDR — and how the spectacular failure of the Vietnam policy and the deep domestic divisions it produced helped deliver a generation-long majority to Republican conservatives.

Mr. Obama came to his presidency at a moment of the greatest opportunity to reshape the nation since, well, LBJ and FDR. Fittingly, his agenda — economic revival, universal health care access, abating climate change, and restoring effective American power and influence in the world — is the most sweeping since LBJ and FDR. The core challenge he and his advisors face, however, involves their character more than their intellects, because the potential for greatness imminent in such moments can distort the decisions of the most brilliant leaders and advisors. The prospect of grabbing history’s golden ring seems to breed a powerful disposition for best-case scenarios, which brought down McNamara and LBJ and now could threaten their successors.

Vice President Biden confessed to it this weekend, acknowledging the now risibly-obvious optimism of the administration’s economic forecast. They are smart enough to recognize that after a year of real-life, worst-case scenarios which ultimately brought on the first systemic, cascading economic meltdown in three generations, it would be foolhardy to base the President’s program on a supposition of a quick, sharp recovery. It may be merely human to want to believe in such a miracle, because it might make everything else possible. And without that particular miracle, there will be little money for health care reform, at least without risking the nation’s credit-worthiness, and little public willingness to accept the costs of a genuine climate change program. Most important, without the real prospect of people’s incomes growing again, the American people could withhold the political support the President will need, again and again, to successfully deal with untold foreign crises and new domestic problems.

The issue here is not pragmatism, but realism. Here’s a dose to consider. The yet-unreported chatter among New York financial people is that commercial real estate loans with their securities and derivatives could be on the edge of the kind of crash we suffered last year from home mortgage-backed securities and derivatives. To make matters more dismal, the volume of commercial real estate securities and derivatives dwarfs last year’s home mortgage market. Moreover, commercial real estate lending and securitization are the business of not only Wall Street, but thousands of regional and local banks. So, if that market goes south, the economic carnage will begin on Main Street. The New York analysts who talk among themselves about thousands of banks going under in the next year may be suffering from their own kind of post traumatic stress. But if they’re right and the President and his brilliant advisors haven’t planned for it, the blame for the resulting national pain will fall on them; and the most progressive presidency since LBJ could be left in the sort of ruins that can drive a political party and its agenda from power for a long time.

Even if commercial real estate doesn’t melt down — and sovereign debt defaults don’t start springing up in Asia and Europe — a rosy forecast isn’t the only economic trap waiting for the president and his indisputably brainy advisors. During the last expansion, job creation fell by half even as GDP generally grew at healthy rates, and the strongest productivity gains since the 1960s didn’t stop average real wages from falling. President Bush and his less than brilliant economic advisors certainly mismanaged the run-up and onset of last year’s crisis, but we cannot pin these new structural problems on their mistakes.

Yet, the administration agenda seems to depend on some faith that decent growth and productivity gains in the near future — which both remain problematic — will drive healthy job creation and income gains again as they did in the 1990s. It’s time to put aside that best-case scenario, too, and focus on reforms that might make a difference for these dynamics. The President could get behind a proposal he supported as a senator, to make free computer and Internet training available to all American adults through community colleges. He also could redirect the early stages of his energy and health care programs to restraining those costs for businesses. For the last decade, the intense competitive pressures of globalization have prevented businesses from passing along those higher costs in higher prices — secret of our long, low inflation — forcing them to cut jobs and wages.

If the President and his advisors can live with less than best-case scenarios, they can still achieve their agenda over time, as the economy and people’s incomes come back. In that way, they can escape the trap that snared LBJ and Robert McNamara.