Short term economic fix

The economy sputters on. Meanwhile, our elected leaders debate what to do about it, in fact, much of the ongoing midterm campaign centers on it.

The Democrats, being in power, have already played their hand. The stimulus package of early 2009 was a grab bag of spending and tax cuts. [Not really the point of this post, but I’m so tired of the counterargument that “the stimulus failed, because they promised that unemployment would peak at 8%.” Any thinking person understands that the meaning of that presentation back in those days was that the stimulus package would lower the peak unemployment rate by about 1.5%. At the time, they estimated it would peak at 9.5% if no action was taken; hence, the stimulus would lower the peak rate to 8%. Instead, the recession proved to be much more severe, and so it peaked at 10%, versus 11.5%. Either way, every economic analysis supports the contention that about 3 million more Americans would be out of work today without it. Every counterargument I have ever seen is ideological, not economic.]

Republicans, being the minority party, have played the role of critic. As far as I can tell, the only policy prescription they have supported is the extension of the Bush tax cuts for the wealthy. There is also a lot of talk about “cutting spending” and “balancing the budget,” but I severely discount that talk. I discount it because: (1) cutting spending will weaken the economy in the short run. Spending discipline is a crucially necessary solution for the long term, but harmful in the short run — why, after all, do people think Congress never cuts spending? Because all the benefits are long term and all the short term impact is negative; and (2) I have watched the Republican party increase federal spending every time they have held power over the past 30 years, so, yeah, I don’t believe it. Anyway, that leaves the Republicans with tax cuts as their sole credible policy option.

Into this policy debate wades the intrepid CBO. They have analyzed 11 separate policy prescriptions. Of the eleven, extending the Bush tax cuts ranks dead last in terms of short term economic benefit. Why is this? Because tax cuts for the wealthy are a supply-side solution. The current weakness in the economy is based on low demand: people just ain’t buyin’ stuff. Tax cuts for the wealthy have little impact on consumption, because they tend to save the additional money, not spend it.

Think about it this way. The Republican argument is that economic growth depends on small business; that is where jobs are created. True enough. But why exactly does a small business owner hire the next employee? Because his tax rate is lower? No. Because he has more customers to serve. Period. I myself started a business in 2003, and now it has about 1000 employees. I can tell you that never once did we set our hiring plans around federal tax policy. “Hey, Bush cut my personal taxes… let’s go hire a few more people.” Nonsense. We hire whenever demand for our services outpaces the capacity of our current team to meet it. So, you fix the economy by creating more customers. Tax cuts for the wealthy fail to do that, so that is why it scores so dismally on the CBO analysis.

Back to the March 2009 stimulus package. Every Republican out there campaigning that the stimulus failed, and arguing instead for tax cutting policies, needs to explain why the $250 billion in tax cuts provided by the government in the stimulus package failed to work, and why more tax cuts would work the next time. Personally, my conviction is deep that the stimulus did exactly what it was supposed to do. Find me the maintstream economist who says otherwise.

 

The cost of healthcare

Those who are prone to inside-the-Beltway thinking have already drawn hard and fast battle lines over the emerging healthcare legislation in Congress. Mind-numbingly predictable congressional Republicans are barking about the cost of the program, the inevitability of tax increases, and how it is an unforgiveable overreach of federal government. Mind-numbingly predictable congressional Democrats are incapable of articulating any coherent defense for the fiscal responsibility of their ideas, or why a public solution is preferable to market or other private reforms. And this new president of ours, whom I supported and whom I trust, continues his pattern of cool detachment from the workings of legislation in Congress.

Here is a rough outline of how the Democrats should be countering the Republican attacks. Say this, over and over and over again: “You, the American people, already are footing this bill.” Firstly, the 47 million uninsured Americans are not denied healthcare, they (merely) lack insurance. We pay for their healthcare now. We pay for it every time a hospital treats an uninsured patient and cannot collect the bill; those costs are spread to those who can pay. We pay for it every time an uninsured American ignores the nagging pain until he lands as an advanced case in the cancer ward. The cost of healthcare to the uninsured was calculated at $125 billion per year way back in 2004, and surely is much higher now [http://www.commondreams.org/headlines04/0511-07.htm].

The CBO calculates a net federal budget burden of $60 billion per year for the legislation being considered, and estimates that about 20 million Americans would gain health insurance coverage [http://www.cbo.gov/ftpdocs/104xx/doc10431/07-02-HELPltr.pdf]. That seems right about in line with what we have now, roughly the same cost per person as we currently lose providing uninsured care.

The point is, we already pay for this healthcare. The debate is, or should be, about how we do so. Do we want to keep paying as we do now, with clumsy and inequitable mechanisms of hospitals and doctors being forced to provide charity care, and passing along the costs to your insurance plan and mine? Or do we want to shift to a coherent, orderly, public insurance-based system?

We, the American people, already are footing this bill.