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In June I wrote several blog posts pertaining to increasing U.S. income inequality, and then my last post in October briefly (remember Twitterization?) tried to assess what was then a skeletal Republican tax reform proposal.  We now know much more about the Republican plan, in which curiously the word ‘reform’ is now frequently being replaced by the more straightforward term ‘cut.’  So it’s time for an update.  If you’re in a hurry my title above subtly hints at the bottom line – it’s even worse than I thought.  Oh and yes, I’m a fan of alliteration, but not of hyperbole.

Let’s review a few income distribution facts:

• The United States has the most unequal income and wealth distributions in the developed world, and they have become significantly more unequal over the past 40 years.
• In 2015 the bottom 50% of U.S. households earned only 12% of total national income and owned only 1% of the nation’s wealth.
• At the same time the top 1% earned 25% of total income and owned 40% of our total wealth.
• The richest 1% own more wealth than the bottom 90%.
• Between 1965 and 2015 inflation-adjusted wages in the nation’s  largest companies increased a total of 10.3%.
• Over the same period inflation-adjusted CEO compensation for these same companies increased by 941%.

As noted in previous posts, there is NO moral rationale and NO rational economic justification for this scale of inequality.  In addition, history establishes pretty clearly that gross social inequalities are not sustainable over time without substantial societal unrest.  Immoral?  Irrational?  Sure seems that way.

But wait!  There’s allegedly hope in sight, in the form of the current Republican tax plan.  None other than President Trump recently told reporters that “It’ll be the largest tax decrease in the history of our country for the middle class,”  and “the rich will not be gaining at all with this plan.”  Boy, what a relief!

You may recall my prediction in the last ‘twitterized’ post that “rich guys will win” from the proposal, but Trump now says just the opposite.  Who’s right?  We now know enough about the plan to render an objective judgment, even with some details still missing (Hint:  this is where the ‘Inaccuracy’ label comes in.)  We could look at Fox News or MSNBC for “evidence,” but since objectivity is the goal lets rely on the analysts at the nonpartisan Tax Policy Center.  Their predictions:

• Nearly 75% of the tax savings from the Republican plan will go to the top 20% of earners – those households making more than $149,000.
• More than 50% of the tax breaks will go to the top 1% – those making more than $732,800.
• By the 10th year of the plan, more than 80% of the savings accrue to the top 1%.
• While the average middle class household will get an immediate tax break, estimated at a not inconsequential $940, that saving is dwarfed by the $146,470 average savings for a top 1% household.
• Impact on the U.S. budget deficit?  Don’t even ask.

The Trumps of the world will not be gaining at all from the plan?!  Seriously??  And where are the great middle class benefits?  It turns out that most are speculative, dependent on the alleged job expansion and economic growth that will be unleashed bigly and trickle down when we give rich folks $150,000 more to spend.  Quick but fascinating digression:  when I just typed ‘bigly’ as a cheap attempt at satire, even my simplistic autocorrect function recognized that it is not a word and corrected it to ‘bigot.’  Coincidence?  I think not.

Here’s the thing – the rich and the corporations that are the primary source of their wealth are ALREADY awash in cash, so why hasn’t this trickle down miracle already happened?  Haven’t we heard this song and dance before?  As I noted in my previous entry Toto, Are We Still in Kansas?, trickle down supply-side theory is snake oil economics.  It has never worked effectively but is always used by Republicans to justify tax cuts at the top.  So ‘inaccurate?’  That’s putting it mildly.  Denial of reality?  Closer.  Lying?  Absolutely.  Moore 1, Trump 0.

There is of course a real danger in this charade.  It’s called plutocracy – government by and for the wealthy.  Many in the middle class may be satisfied with an additional $900 in crumbs, even if it erodes away in a few years and exacerbates the national debt.  But the CEO who gets the $150,000 tax break under the plan ALREADY earned 300 times more than his/her average employee BEFORE the tax cut, up from 20 times more in 1965.  One might reasonably ask how such an economic perversion could even be contemplated in a representative democracy.  The answer may lie in the premise.

 

 

 

 

 

I have no idea whether ‘twitterized’ is a word or not, but if not it should be.  Breaking with my own blogging tendency toward verbosity, I will present here everything you need to know about the Republican tax reform ‘plan’ in 140 (or so) words.

The plan:

• Reduce the number of tax brackets and the rate applied to each.
• Drastically lower the corporate tax rate
• Increase the standard deduction
• Reduced tax rate for pass-through businesses (look it up;  I’m running out of words)
• Eliminate the estate tax
• Eliminate many personal deductions and business tax breaks

Winners and losers?  It’s of course impossible to say without the details.  But here’s what can be said more or less unequivocally:

• Four of the six components noted above will definitely benefit affluent Americans disproportionately.  Only the doubling of the standard deduction will clearly benefit lower and middle classes disproportionately.
• The tax cuts would reduce federal revenue by somewhere between $3.5 trillion and $7.8 trillion over 10 years (Tax Policy Center).

Fundamental takeaways (cutting through all the inevitable political rhetoric to the contrary):

• The overall ‘plan’ will be highly regressive (rich guys win)
• It will significantly exacerbate the national debt.  

What’s not to like?

In the August 7 issue of The NY Times, economist Paul Krugman asks the question posed in my title (ok, I stole it, but added cool alliteration).  He provides two answers grounded in pragmatism rather than idealism (not always Krugman’s strong suit).  One of his arguments is that the US health care system should be reformed by improving Obamacare a la the Netherlands rather than pushing for a single payer solution like Australia’s.  His other is that Progressive policy should focus on children and families, e.g., paid family leave policy, universal pre-k, subsidized day care, etc.

I agree, reluctantly on the first argument and enthusiastically on the second.  As I’ve written previously there is overwhelming evidence that a single-payer, Medicare-for-all system is the best policy alternative for the US.  But that doesn’t mean that this solution is politically feasible in the current environment.  Enhancing the Affordable Care Act, hopefully with a public health care option, is much more so.  As for expanded children and family policies, Krugman notes that our current spending on families is 1/3 the average for advanced nations – disgraceful!  Improvements are a no brainer and would be politically popular.

But why stop there?  If the objective is to win mid-term elections and then displace the amateur hour crew currently occupying the White House, pragmatism and political feasibility should dominate throughout a coherent alternative policy agenda.  And at the risk of  losing my cherished liberal card, I respectfully suggest that this new Progressive agenda should not be dictated by the Sanders/Warren wing of the Democratic Party.  In my ideal world and maybe yours, our nation would recognize the importance of providing health care, pre-k to 14 education, a living wage, social justice, etc., as universal rights guaranteed by our government and funded disproportionately and voluntarily by those privileged citizens who don’t need the guarantees, i.e., the very wealthy.  But in the immortal words of Allen Iverson when asked to hustle at basketball practice, ‘that ain’t happenin’ anytime soon.’

So what should be emphasized in a pragmatic Progressive platform, and what should not?  Just as ‘single payer’ is desirable but politically impractical for now, let me humbly suggest three other areas to deemphasize in the interest of coalition-building.  Issue #1 to avoid is gun control.  Of course the Founders could not envision today’s frightening array of killing machinery.  Of course they did not in all likelihood intend to establish a right to bear anything close to a personal arsenal; in fact they probably were not envisioning a personal right at all.  And of course America’s fascination with guns is irrational, perversely obsessive and unique among civilized societies.  But none of this matters.  It’s political suicide to aggressively go after guns in this country.  Accept this fact, Progressives, and move on to issues that will move the needle in your direction.

I tread very cautiously on the second issue that I believe Progressives should deemphasize – abortion.  As it turns out Rep. Ben Ray Lujan, Democratic Congressional Campaign Committee Chair, recently made this very same argument in asserting that Democrats will not withhold financial support for candidates who oppose abortion rights.  According to Lujan, Democrats need to cast a wide net and build broad coalitions in order to win the 24 2018 seats required to reestablish a Democratic House majority.  And abortion rights were also notably absent from the Democrats new policy primer, A Better Deal, presented last week.  But understandably this party pragmatism has also received substantial criticism and pushback.

I fully support a woman’s right to choose, but I also understand that this is a deeply personal, emotional and moral issue for most women (and hopefully most men as well).  I know a number of rational, socially sensitive women whose personal moral compass simply does not permit them to support abortion or abortion rights candidates.  They are not mindless ultra-right evangelical zealots, but they are numerous and they vote.  Like with gun rights, I don’t understand their moral calculus or support their position.  But once again, that doesn’t matter.  

Finally Progressives, find a way to support human rights for all without obsessing on identity politics.  No black/white/ blue/muslim/elite/poor, etc. lives matter – we ALL matter.  I understand the temptations, especially given American history in an immediately post-Charlottesville period, but ultimately identity means exclusion and division rather than inclusion.  That’s not a political winner – nor should it be.

None of this is to suggest that Progressives should abandon initiatives to achieve sensible gun regulation, pro-choice policies or improvements in the lives of disadvantaged groups.  I’m simply suggesting that these efforts should not and need not be the centerpieces of the Progressive agenda going forward, nor should they be litmus tests for entry into what needs to be a more inclusive tent.

Elizabeth Warren recently ridiculed the moderate wing of her political party while proclaiming that liberals “are not the gate-crashers of today’s Democratic Party.  … . We are (its) heart and soul.”  In spirit, yes, but in practice, it’s more complicated.  Within days of Warren’speech, the Democratic Party released A Better Deal.  It identifies three goals:  job creation/wage increases, cost-of- living containment for families and education/ training.  It’s a short document, not a full-blown Party platform, but nevertheless there’s no mention of guns, abortions or any lives mattering more than others.  Progressives need Warren and Sanders to provide heart and soul.  But they need A Better Deal to win.

For more than 65 years I have ‘resided’ in public (i.e., governmental) or private (non-governmental) communities/institutions.  I attended very good public K-12 schools, a private undergraduate college, and a public graduate university; was employed for almost 30 years at public universities, for five years at a private university and a final five years at national universities abroad.  For the last seven years we have resided in a private community on whose board I now sit.  All in all a fairly broad spectrum of experiences with private and governmental entities as a consumer/student, employee, administrator and board member.

I was reminded of this when I read the latest predictable Trump tirade on “the steady creep of government bureaucracy that drains the vitality and wealth of the people.”  Try as I might, I couldn’t think of much creeping and draining in my more than half century of experiences.    While neither would receive stellar marks in my grade book, I have in fact seen remarkably little difference between the public and private sectors when it comes to vitality and efficiency.  Of course the notion that government can do no right and the private sector no wrong has long been a conservative mantra, probably expressed most memorably by the infamous Reagan inaugural address invective that “government is not the solution to our problem; government is the problem.” I called bullshit then, as I do now.

Are there examples of wasteful government bureaucracies?  Absolutely.  The U.S. Congress comes first to mind, ironically so since its bodies are supposed to be closest to the people and therefore most incentivized to act responsibly and responsively.  But then again, mention just about any private airline or cable TV company, for example, and similar ‘wtf?’ examples of inefficiency and indifference to customers come to mind.  Since this anti-government, pro-private sector narrative is currently being regurgitated by the Trump administration, let’s take a brief look for evidence at two of the central rhetorical tenets of the Trump campaign:  “Drain the swamp!” and “Repeal and replace!”

In its Trumpian manifestation, “Drain the swamp!” clearly suggests a war on deep pocket lobbying and special interest influence.  It also means, according to Trump’s Director of Management and Budget Mick Mulvaney, “making the government more accountable to you, more effective and more efficient,” presumably by replacing wasteful bureaucratic processes and personnel with the magic of private sector-inspired systems and acumen.

Since no previous President has had more business experience or less government experience than Mr. Trump, it’s especially appropriate to ask after six months – “How’s the transformation going under the preeminent capitalist?” Answer?  Not well.  First the crackdown on lobbyists.  During the campaign Trump said he would ask Congress for a five-year ban on lobbying for former members of Congress and top staff.  To date – no ask and no ban. The total number of lobbyists is actually up over the same point in time for the Obama administration.   And though Presidential appointments are occurring at an alarmingly slow pace (more on this below), a recent analysis by the New York Times concluded that those completed reflect a dangerous bias toward former lobbyists, lawyers and consultants who in many cases will be overseeing and regulating the same industries in which they recently earned a paycheck.  Trump apparently has mistaken ‘double down’ for ‘crackdown.’

Well OK, but surely there is by now ample evidence of new efficiencies under the swamp-draining Trump Administration.  If efficiency means simply hiring less, spending less, and/or regulating less (in short, doing less) then they deserve pretty high marks, but efficiency is usually defined in terms of doing better rather than just doing less.  What about the increasingly important management of sensitive national security information for example?  According to a Senate report released last week the Trump Administration is encountering an unprecedented wave of national security leaks that far surpass those experienced under either of the two previous administrations.

How about managing the Trump policy agenda?  In spite of Republican majorities in both houses of Congress, each of their three most important policy reform proposals – in health care, taxation and immigration – has been mishandled and mismanaged through the legislative process to such an extent that all three are in danger of failure without major revision. Or let’s look at the previously-mentioned fundamental task of any new administration – appointments.  There are 557 key presidential appointments that require Senate confirmation. As of early July only 176 of those have even been formally nominated by President Trump, and only 46 of those nominees have been confirmed by the Republican-controlled Senate.  By any objective measure this is a deplorable record for both the Senate and the President.  For those scoring at home, Swamp 1, Trump 0.

The grossly mismanaged “Repeal and replace!” initiative is also based on the same core belief – that a ‘market-based’ private health care system will be far superior to one that’s excessively government-tainted.  Not only does virtually all the international evidence contradict this fantasy, but so even does our domestic experience.  Quick personal anecdote.  My medical insurance is provided by Medicare, supplemented by United Healthcare.  My prostate surgery six years ago was covered fully and efficiently.  My spouse relies on the United Healthcare (UHC) family policy as she is not yet 65 (cradle robber, I know).  Her recent bout of diverticulitis required hospitalized treatment and monitoring due to her chronic clotting disorder.  Bottom line:  a $15,000+ bill from the hospital was miscoded and subsequently denied for coverage by UHC.  The denial occurred more than four months ago, since which most of her time has been spent attempting to just speak to a human being at either the (private) hospital or the (private) insurance company.

Of course two incidents do not justify a conclusion, but the broader evidence does.  A comprehensive 2002 Commonwealth Fund survey of almost 3,500 randomly selected adults found that Medicare beneficiaries were significantly more likely than enrollees in private plans to rate their insurance as excellent, less likely to report negative experiences with their plans, and more likely to report being very satisfied with the care they received.  In addition, numerous recent studies have estimated Medicare’s administrative costs in the 3-5% range, while private plans fall into a broader but much higher span of 11-30%.

So yes, Republicans since Reagan have spewed the rhetoric of reducing government and unleashing the private sector.  And yes, evidence shows that this is often simplistic or just plain wrong.  But here’s the more profound truth – they often don’t even practice what they preach.  They’ve consistently favored tax cuts for the affluent and reduced support for the poor, but NOT a reduced government stance on military or homeland security spending, corporate bailouts, debt or religion- and privacy-based policies.  This is not principled libertarianism or populism; it is deceitful subterfuge.  And the problem is not too much government; it is too much hypocrisy.

I grew up in Iowa and attended undergrad and grad school in Nebraska (Go Big Red! – sorry, couldn’t resist).  In The Great Gatsby many literary scholars have suggested that Nick’s Midwestern upbringing symbolizes qualities like truth, honesty, purity, wisdom and decency, and I certainly encountered much of that while growing up.  There were of course exceptions, such as when all but one of my high school’s cheerleaders became pregnant in a single year when I was in junior high.  Or in 1970 when Nebraska’s distinguished Senator Roman Hruska, speaking in support of a Nixon Supreme Court nominee, brilliantly opined:

“So what if he is mediocre?  There are a lot of mediocre judges and people and lawyers.  They are entitled to a little representation, aren’t they?”

But overall the Midwest was still a model of 20th century propriety, common sense, dignity and reason.

And then there was Kansas.  Comprised of more than 82,000 barren square miles, it’s basically Nebraska without the excitement.  The only tourists you see there are either in search of the world’s second largest ball of twine, immortalized in National Lampoon’s Vacation, or on their way to Colorado.  New York City is in New York; Oklahoma City is in Oklahoma; Kansas City chose Missouri.  You get the picture.

In his 2004 best-seller What’s the Matter with Kansas?, historian Thomas Frank describes the state’s slow transition from 19th century left-wing Populism to 20th century social and economic ultra-conservatism (spoiler alert:  the Wichita-based Koch Brothers were involved).  The latest manifestation of that conversion has been the tragically failed fiscal experiment of Governor Sam Brownback.  Elected in 2010 vowing sharp cuts in both taxes and state spending, except for education, he promised with evangelical zeal that these policies would create economic growth and jobs so boundless that the state’s tax coffers would suffer no harm and might actually grow.

Astute observers, a description befitting all three or four of my regular blog readers, will recognize the Brownback template as yet another effort to sell the oft-refuted snake oil known as supply-side economics to a gullible but hopeful public – hopeful because we all prefer getting more (prosperity and social progress) for less (taxes), no matter how counter-intuitive.  There is, however, no objective evidence that this theory has ever worked as predicted. None.  It didn’t work under Kennedy.  Or Reagan.  Or Bush II.  Our most prosperous decade since WW II occurred in tandem with the tax increases of the Clinton administration.  In the carefully nuanced words of Paul Krugman: “Supply-side economics never had any evidence behind it;  it never had any support in academic research;  . . . It was and remains crank economics pure and simple, with nothing going for it except political convenience.”

But cut taxes and spending Brownback and his legislative cronies did; a cumulative tax cut for example estimated at $3.9 billion between 2013 and 2019 that benefits the affluent disproportionately.  Alas the rest of the supply-side script did not follow.  While the nation’s annual economic growth rate of roughly 2% since 2012 is consistently described by Republicans as ‘anemic,’ Kansas grew at less than half that rate.  ‘Sub-anemic’ presumably.  Private sector employment in Kansas grew about 4% in total over this period, compared to 8% nationally.  Even more tragically but predictably, state personal income tax revenues fell by almost $700 million between 2013 and 2016, resulting in a $570 million depletion of the state’s General Fund; indefinite postponement of numerous infrastructure projects; significant cuts in state education spending that was supposed to be off-limits, to such an extent that the State Supreme Court in March ruled that state-level school spending was unconstitutionally low; and two reductions in the Kansas bond rating.  Other than that, the experiment in fiscal conservatism worked like a charm.

Finally even the soulless Republican legislature had to stop the bleeding.  Earlier this year they passed $1.2 billion in tax increases that were not only unprecedented but also progressive, taxing high income Kansans at higher rates.  Slammin’ Sammie, now the second most unpopular governor in the nation (thank you, Chris Christie!), doubled down on stupidity by vetoing the legislation, but last week the legislature overrode the veto.

Why should any non-Kansan care about this unfortunate fiasco?  First, Brownback and many others saw the Kansas fiscal initiative as the highly visible grand experiment that would finally vindicate tax cuts and small government as the wave of the future.  What they got was vilification rather than vindication.  Optimists such as NY Times op-ed contributor Michael Tomasky even see a possible transformational return to fiscal sanity in a group of conservative Republicans raising taxes, given the Tea Party and ‘no tax pledge’ domination of the GOP over the last two decades.

But can the Republican leopard, especially with its amateurish and evidence-denying Washington leadership, really change its spots?   The two major economic initiatives of the Trump administration, tax reform and health care reform, suggest not.  The Republican tax reform plan is predictably entitled 2017 Tax Reform for Economic Growth and American Jobs (sound familiar?).  While all we have for now is a one-page outline, it’s bullet point content includes:  reduce the number of tax brackets and the top rate;  repeal the Alternative Minimum Tax  (which primarily affects only affluent Americans);  repeal the death tax (in all but Republican circles this is known less dramatically as the inheritance and/or estate tax, and it also primarily impacts only the affluent); drastically reduce the business tax rate to 15%;  repeal the 3.8% Obamacare tax that hits small business and investment income (that’s the  grossly disingenuous Republican description.  The 3.8% Net Investment Income Tax (NIIT) applies only to various earnings on investments above $250,000.  Small business indeed!).  And make no mistake about it, repealing the NIIT and Obamacare more generally would not only discontinue health insurance for 23 million Americans, it would generate $592 billion (CBO estimate) in tax cuts largely for the wealthy.  In short, replace 2017 in the Republican title with 2010 and American with Kansas and this is, in the immortal words of Yogi Berra, deja vu all over again.

Will they never learn, you say?  But that’s not giving Republicans enough credit, averse as I am generally to doing so.  All but the most myopic and ill-informed (ok, that’s more than a few but my point remains) know full well from Kansas and previously that supply-side economics is a fraud, and that repealing Obamacare will wreak havoc on the lives of many millions of largely underprivileged Americans.  But they don’t care, at least not enough to overcome their absolute obsession with tax cuts for the wealthy.  Thomas Frank’s book was of course always about more than Kansas; in fact when it was later published in Britain and Australia it was entitled What’s the Matter with America?.  How prophetic.  Rock Chalk, Jayhawk!

My previous post addressed Nebraska football, lotteries and the American Dream, but of course the core topic was US income inequality (I will often use the terms ‘income’ and ‘wealth’ interchangeably for simplicity of argument, even though they are not the same).  It drew four conclusions about the large and growing American underclass:  they have not shared in the nation’s prosperity over the last half century; that exclusion has not been due primarily to their own personal failings; their hopes for the American Dream’s upward mobility have rarely been fulfilled over this time period; and they are not content with this status.  But some might say, ‘So what?  Just another liberal espousing class warfare!’  Here I try to provide answers to a couple of ‘so what’ questions.

First, isn’t some inequality acceptable or even desirable?  The simplistic answer – – yes.  But the more important and elusive question is ‘how much?’  Since there is a vast literature on this topic one can find philosophical answers that range from ‘none’ (Gracchus Babeuf) to ‘unlimited’ (Ayn Rand).  But as a practical matter no one really advocates complete equality of economic results, not even Karl Marx.  Why not?  In a market-oriented economy it’s widely accepted that income inequality provides the necessary incentives for labor mobility, hard work, self-improvement and innovation that drive the system.  But by the same token, almost everyone (excepting a few modern day Republicans) recognizes the possibility that an unconstrained capitalist society may generate too much inequality.  Even Adam Smith, the 18th century moral philosopher and father of  modern economics, did not accept huge disparities in income as the necessary trade-off for prosperity.  In Smith’s free market system, pervasive competition and other preconditions simply precluded steep inequalities and excessive accumulations of wealth.

So let me simply assert a reasonable (but obviously not universally accepted) answer to the ‘how much is too much’ question:  Some substantial economic disparity is both necessary and desirable in the American capitalist system, but the current distributions of income and wealth are socially unacceptable and unsustainable.  A quick review:   Currently the bottom 50% of US households earn only 12% of the nation’s total income and own just over 1% of its wealth, while the top 1% of households receive 25% of our total income and own 40% of our wealth.  Put differently, the richest 1% in the US now own more wealth than the bottom 90%.

And these levels of inequality have both grown substantially worse in the last half century.  For example, from 1965 to 2015 average worker wages in the largest American companies increased a total of 10.3% adjusted for inflation, while average CEO compensation in these same companies increased by 941% over the same period!  That average CEO today ‘earns’ 300 times the corresponding average worker pay (roughly $15.5 million vs. $56,000), up from 20 times more in 1965.  Alarming.   Unacceptable.  Unsustainable.  Too much.

Why?  First the moral argument, short and sweet, with no need to cite Rawls, Kant, or Bentham.  Instead I rely on Moore’s Axiom:  There is no moral justification for paying ‘superiors’ 300 times more than ‘subordinates’, or for the richest 1% to have more wealth than the bottom 90%.  If you don’t agree then don’t bother to read on because your time would be better spent recalibrating your faulty moral compass.

There is also no compelling economic justification for such enormous disparities.  According to the neoclassical theory of marginal productivity, every individual is paid in accordance with his or her contribution to economic success.  Similarly, the agency theory of shareholder primacy asserts that corporate CEOs are compensated on their ability to enhance shareholder value.  In other words, disparities in income simply reflect disparities between rich and poor in productivity or performance.

Sounds good, except they don’t.  For example, despite theoretical and measurement limitations many studies have been undertaken to test the CEO ‘pay for performance’ hypothesis.  The results have generally been mixed and therefore inconclusive, but the most comprehensive recent (2014) analysis is noteworthy. Three professors from Purdue, Cambridge and the University of Utah reviewed 17 years of executive compensation and corporate performance data, and found that the more CEOs were paid the worse their companies performed over the next three years.  What about the CEO ‘superstars’ about whom so much has been written?  The negative effect on corporate performance was more severe in the 150 firms with the highest paid CEOs!  So not only is there no evidence that corporate CEOs are 300 times more productive than their production workers, but their compensation doesn’t seem to be linked that closely to their (or their firm’s) performance at all.

So with no compelling moral or economic explanation, America’s current income disparities are unjustified.  They are also unsustainable, for several reasons summarized by Nobel Prize-winning economist Joseph Stiglitz and many others.  First, growing inequality is the flip side of shrinking opportunity for many – the antithesis of a healthy economy.  Second, many of the distortions that lead to inequality – economic power, preferential political treatment of monied interests (Citizens United anyone?), perverted incentives, e.g., choosing careers in hedge funds rather than public service – undermine the efficiency of the society.  Third, as evidenced many times throughout history the have-nots eventually decide to fight back.  As former corporate CEO Peter Georgescu observed recently in the NY Times, 

“I’m scared.  . . . So are many other chief executives.  Not of Al Qaeda, or the vicious Islamic State . . . We are afraid where income inequality will lead.  If inequality is not addressed, the income gap will most likely be resolved in one of two ways:  by major social unrest or through oppressive taxes.”

Maybe most importantly, a healthy and sustainable nation often needs collective action and collective thinking.  It needs public investments in infrastructure, education, health, basic research and technology.  But as the nation’s wealth distribution becomes more lopsided many of the wealthy become more reluctant to spend money on societal needs.  Put simply, they can buy most of these things themselves.   There are notable exceptions (see e.g., The Giving Pledge campaign led by Warren Buffett), but they are just that – exceptions.

More generally we need thinking that sometimes gives preference to the ‘common good.’  In 1835 Alexis de Tocqueville first identified what he saw as a chief part of the peculiar American genius – what he called “self-interest properly understood.”  While everyone is motivated by self-interest, de Tocqueville recognized a broader mindset in 19th century America.  At that time we appreciated that addressing everyone’s self-interest, i.e. the common good, was in fact ultimately a precondition for individual well-being.  As Stiglitz describes the observed peculiarity:  “Those canny Americans understood a basic fact:  looking out for the other guy isn’t just good for the soul – it’s good for business.”  We’re not there now, and our very social sustainability may depend on a reemergence of  ‘proper understanding.’

I belong to an online University of Nebraska football discussion board because Husker football has long been one of my passions.   During the current off-season many non-football posts are allowed.  There are actually quite a few smart folks on this board, but also a disturbing number of pseudo-intellectuals who may understand the nuances of a spread offense but are incapable of a coherent thought on public policy.  Believe it or not a few days ago someone posted about  the recently released 2017 Report on the Economic Well-Being of US Households published by the Federal Reserve Board.  The poster focused on one particular troublesome survey conclusion:  44% of American survey respondents said they didn’t have enough savings to pay an unexpected $400 expense.  

I knew from previous non-football posts that the average poster on this board did not share most of my political views.  I view it as a digital extension of living in South Carolina!  But I still naively expected at least a moderately intelligent discussion on the limitations of an economic system that apparently denies almost half of its population the ability to pay a minor unplanned auto repair bill.  Much to my surprise the follow-up posts almost immediately turned to a narrative that I hadn’t even contemplated, and the Report itself failed to mention.  Here are two representative comments as brief examples:

“The really mind-boggling part of this is the number of people with jobs . . . who are part of this 44%.  A lot of people spend every dime they earn (or more) no matter how much they make . . . to show off.”

“I will never get why we teach high level math or other courses before teaching basic personal finance.  Teach them about taxes, budgeting, insurance, investments, etc.”

In other words, the almost unanimous explanation for why huge numbers of Americans don’t have $400 to spare was their own personal irresponsibility and/or ignorance, rather than the market system/income inequality cause that immediately came to my mind.  Since I know these folks are not morons (ok some are, but certainly not all), I was forced to contemplate what seems to be an increasingly frequent phenomenon:  widely divergent ideologically-based explanations (alternative realities?) for the same set of facts.

The underlying and frequently asked question here is why do so many Americans who seem to be consistently losing the economic game nevertheless strongly support the rules and results of the contest?  A 2011 series of articles in the New York Times asked it this way:  Why do Americans seemed relatively unperturbed about growing income inequality?  The answers seemed to fall broadly into two explanatory categories:

1. The have-nots are relatively content and still feel ‘rich enough’ to lead the kind of life they want, especially since (a)  the median US household has more income than about 95% of the rest of the world; and (b)  easily available credit permits them to live beyond their means anyway whenever they want (sound familiar?).
2.  Americans still believe in and value the American Dream of upward social mobility, especially what Arthur Okun refers to as the ‘jackpot prizes of making it big.’  In the NYT series Chrystia Freeland calls this ‘the lottery mentality.’  In her words “For many Americans, the nation’s rowdy form of capitalism is a lottery that has bestowed fabulous rewards on the Everyman.”

The first answer, relative contentment,  has been widely disputed.  When Okun wrote in the mid-1970s the richest 1% of US families owned about 1/4 of the country’s total wealth, but by 2012 that 1% owned more than 40%.  Over the same period the share of wealth owned by the bottom half remained relatively constant at – ready for this? – 1%!  Michael Norton and Dan Ariely recently found that most Americans are unaware of this degree of wealth inequality or its trend, and that given a preference they would opt for a much more equal distribution.  So the population may be uninformed but they are not content.

So let’s focus on the second – the validity of the American Dream today.  In a nutshell the Dream is not grounded in much reality, nor has it been for several decades.  In the most comprehensive recent study by Chetty, Hendren, Saez, Kline and Turner (2014) the authors found no real change in intergenerational mobility between the early 1970s and today.  That may sound like good news since the American distribution of income and wealth, as noted above, has become much more unequal over that time period.  But the odds of a child moving from the bottom income quintile to the top quintile has remained less than 10% for more than 40 years, and worse yet the odds of moving to the top from the second quintile actually fell from around 18% to 14%.

In short, the American underclass (define that however you want so long as you exclude the top 5-10%) has not shared in the prosperity of the last 40 years, its status is not based primarily on personal failings (sorry Husker fans), most are not content with the status quo, and their hopes for the American Dream jackpot are very unlikely to come true.  As Chrystia Freeland notes “. . . the problem with lotteries is that there are only a few winners.  That is the story the numbers tell us about American capitalism today – – and unless that underlying reality changes, at some point all those folks . . . will realize that they live in a winner-take-all society, and that most of us aren’t winning.”

There are several important remaining questions – How much inequality is acceptable and/or desirable?  How much is too much?  Why is excessive inequality a problem?  And what can be done to lessen it?  But alas I’ve now exceeded my self-imposed word quota for this entry, so I’ll need to formulate a follow-up in the next few weeks.  For now, don’t forget ‘A Dollar and a Dream!’ (the old theme of the New York State lottery) and ‘Go Big Red!’

My initial effort at blogging was so ambitious (a 3-parter on health care policy that finally crossed the finish line at almost 4000 words) that I needed a month-long hiatus. Anyone reading it was probably thankful.  So I promised myself, and now you,  that this one will be much more succinct but no less important.

The topic is winners and losers, both in the economy and with public policy, a subject referenced briefly in the health care blog.  Google the central conservative tenet that “government shouldn’t pick winners and losers” and you’ll find a plethora of the usual Republican suspects, e.g., Paul Ryan, Mike Pence, Sarah Palin, Mitt Romney, etc., preaching the gospel, inevitably referring to some policy initiative of the Obama administration.  Curiously however, in the middle of my Google search I came across a clip from that ultimate news source The Daily Show with Jon Stewart dated 10/25/2012 in which Stewart demonstrates humorously as well as persuasively that every decision that government makes picks winners and losers.  Say what?

Turns out that Stewart is absolutely right.  Think of the government (federal, state or local – doesn’t matter)  as simply a conduit for dollars.  They flow in primarily in the form of taxes, and they flow out as government expenditures (whether those flows balance, and how much is lost due to inefficiency, are separate issues).  The government always chooses whom to tax and to what extent (the losers), and it always chooses the recipients and beneficiaries of its expenditures (the winners).  Put differently, every government action has redistributive (altering the winners and losers) consequences.  Sounds to me like a pretty universal process.  So the silly argument that government shouldn’t pick winners and losers is really tantamount to saying that the government shouldn’t exist at all, since that’s what all government programs do!

But then how does one explain the persistence of this misguided conservative mantra?  I can think of three possibilities.  One is simply superficial thinking, in this case a likely combination of two blissfully ignorant propositions: “if it’s government it must be bad” and “if you say it enough it will become true.”  Given the list of deep thinkers noted above this is certainly a plausible explanation.  But let’s give them the benefit of the doubt and consider the possibility that they know their claim is both misleading and meaningless.  What then do they really mean?

They often are actually saying that the winners and losers pre–government intervention, i.e., those of the unfettered private marketplace, are preferable to those created by the government action.  Yes, there are also winners and losers with no government involvement at all.  How are they determined in unregulated capitalism you ask?  Hint: $$$$.  Alternatively, what the right sometimes really means is that their form of government intervention is OK but others are wrong-headed.  Critics of Obamacare sometimes played the ‘government shouldn’t pick winners and losers’ card, but as quickly became clear their proposed alternative – the American Health Care Act or Trumpcare – also created winners and losers, just different ones.

Bottom line:  In a world of scarcity there will always be winners and losers, whether picked by a central authority or a decentralized marketplace.  The policy challenge in a capitalist democracy is to define the most appropriate ‘rules of the game’ where both markets (dollars define winners)  and government action (often corrective of market failure or excessive dollar inequality) must uneasily coexist.   There is in fact a vast literature in both philosophy and economics on this topic (see for example the work on distributive justice by John Rawls or Karl Polanyi).  Not surprisingly reasonable people disagree.  But at minimum the right question should be asked, and one thing is pretty clear – the disingenuous ‘government shouldn’t pick winners and losers’ mantra doesn’t help much, since it amounts to nothing more than saying ‘my winners and losers are better than yours.’

For me a logical perspective on the rules of the game has been summarized by economist Arthur Okun in his 1976 classic Equality and Efficiency: The Big Tradeoff.  Since I pledged brevity at the outset the reader will need to consult the original for his full argument, but here’s a sample:  

“I personally would not be greatly exercised about unequal prizes won in the marketplace if they merely determined who could buy beachfront condominiums, second cars, and college slots for children in the bottom quarter of academic talent.” (But it is unacceptable when capitalism) . . .  awards prizes that allow the winners to feed their pets better than the losers can feed their children.”

“The tyranny of the dollar yardstick . . . given the chance, would sweep away all other values, and establish a vending machine society.  The rights and powers that money should not buy must be protected with detailed regulations and sanctions, and with countervailing aids to those with low incomes.”

Translation:  Sometimes the government needs to pick winners and losers.

The context for our consideration of health care policy options is the central conclusions derived from Parts 1 and 2.  They are:

• The majority of Americans now support at least basic health care as a fundamental right to be provided universally without regard to ability to pay.
• Neither the marketplace for health care delivery nor for health insurance is meaningfully competitive.
• The US health care system currently constitutes a near-worst-case scenario, as we spend roughly 17% of our GDP on health care without universal coverage while the rest of the developed world spends 5-10% with universality.

Keeping this context in mind, I typically find it useful to consider public policy options on a continuum with the most centralized (largest role for government) at one end and the least centralized (largest role for private markets) at the other.  This will be useful here so long as one important distinction is made – that between health care delivery and health care funding.  Put simply, it is quite possible for health care delivery to be at a much different point on the public-private continuum than is health care funding.

Given this distinction, let’s consider four points along the public-private continuum (there are obviously further policy gradations between these points).  At one end is the public delivery-public funding policy option.  Here not only is the universal health care program funded publicly through tax dollars, but the health care services themselves are provided by government care providers in government facilities.   In spite of the overused and misused label “socialized medicine,”  this is in fact the only policy option that actually fits the description.  Few national health care systems around the world conform with this option, with the United Kingdom and Sweden being the closest.  Somewhat ironically the US Veteran’s Administration (VA) and armed forces health care sub-systems also fit the model.  Nevertheless, for purposes of this discussion we will assume for fairly obvious reasons that the public delivery-public funding model is not a good fit politically and ideologically in the US.

At the opposite end of the spectrum is the private delivery-private funding model.  Here both the delivery of health care and its financing occurs in the private marketplace,  as in pre-1960s America.  This is mentioned only for symmetry given our conclusions in Parts 1 and 2.  Whether for moral, political and/or economic reasons this model has been rejected as unacceptable and unworkable around the world, and now in the US.

So not surprisingly the extremely centralized and extremely decentralized models will not work in the US, and in fact are found very rarely elsewhere.  So what’s in between? Most of the developed world actually, but let’s focus on two significant variations of the private delivery-public funding approach that are particularly relevant for America.

The first is Obamacare-like options.  Under this approach health care universality is achieved simply by mandating it to some combination of consumers, providers and/or insurers.  What could be more straightforward?  In practice of course attempting to impose mandates on a largely private delivery system is fraught with complications.  As Nobel laureate Paul Krugman notes, such efforts are essentially “a matter of redistributing from the lucky to the unlucky,”  and they come with both direct and indirect costs.  For example, mandating that health insurers must cover preexisting conditions or dependent family members to age 26 means higher premiums for healthier and dependent-less individuals.  It also creates perverse incentives (for dependents to stay at home and for everyone to remain uninsured until sick), which shrinks the risk pool and drives premiums even higher.  So you must also mandate participation, which in turn requires providing both penalties to non-participants and subsidies paid for by taxes for those who can’t afford the premiums.

This complex system is the essence of the non-Medicaid part of Obamacare, and it is based on the typically unspoken premise that the private health care marketplace can still provide universal health care efficiently if only the right combination of mandates, penalties and subsidies can be found.  But we’ve already observed that these markets are not competitive to begin with, and that they have resulted in exorbitant costs without corresponding health care quality.  And yet we are supposed to believe that extensive but largely experimental government regulations will cure this very sick patient (sorry for the predictable metaphor)?

Fortunately there is another private delivery-public funding option that makes much more sense – the single payer approach.  This policy option can have many variations, but the principles are straightforward.  There is ample evidence that the high health care costs in the US are significantly related to the fragmented and noncompetitive US marketplace still dominated by private health insurers.  Therefore simple logic, as well as much accumulated experience from other nations, suggests that achieving affordable and universal health care requires replacing the fragmented private insurance system with a single payer fund to pay for the health care costs.  While the single payer fund can be controlled by any agency, it is typically organized and overseen by the government. According to the World Health Organization more than half the industrialized countries in the world have some form of single-payer system of universal health care.

Why would a single payer system be better for the US?  Put simply, as compared to our current disjointed private-public system it would result in equal or better health care at a much lower cost.  The cost advantage occurs for several basic reasons.  First, to make a profit private insurers must screen out high-cost unhealthy customers, spending large sums of money on what’s called underwriting to deny coverage and limit benefits.  Public single-pay insurance systems, which by definition cover everyone, avoid these costs. Further administrative cost savings are possible because with less fragmentation there is much less paperwork imposed on health care providers.  As a result public systems typically spend 2-4% of their resources on administration, while private insurance companies spend 10-15%.  In addition, a large single payer such as the US government has much greater bargaining power in negotiating lower prices with suppliers, especially pharmaceutical companies. This is one of the primary reasons why US residents not covered by Medicare, Medicaid or the VA pay much higher prices for prescription drugs than do those of most other industrialized countries.

Why has the US been so reluctant to adopt what most of the developed world has seen for decades as a superior model for universal health care provision, especially since we basically already have a form of single payer for low-income, elderly and active duty military/veterans?  The criticisms fall into two basic categories – political and financial.  On the political front opposition has come from predictable sources – private insurance companies, some health care providers who benefit from the current dysfunction, and ideological conservatives who fear ‘socialized medicine’ no matter what the cost of the market-dominated status quo.  While these special-(self)interest groups continue to have and exert considerable political power, they simply don’t have much credibility when their views are weighed against the evidence.

The financial criticism is also predictable, albeit incomplete – a single payer system is expensive and will require substantial tax increases to fund.  True and true.  But if the current system results in exorbitant overall costs and a single payer system will lower those costs, the overall new system costs should be substantially lower.  Yes, but lower system costs will not equate to lower costs for everyone.  As with any public policy, including the market solution, there are winners and losers.  

For example, the relatively generous Bernie Sanders “Medicare for All” proposal is estimated by the Sanders camp to cost $1.38 trillion annually.  Ouch you say!  BUT they also estimate that the plan will cost over $6 trillion LESS over the next ten years than the current system. The winners under this plan would include the currently uninsured or under-insured, lower and middle income Americans whose taxes wouldn’t go up but whose out-of-pocket health care costs would go down, and those employers whose employee health insurance savings would exceed the new  plan’s proposed employer tax.  The losers under the proposal would be some employers, some health care providers, insurance companies, pharmaceutical firms and the wealthy (>$250,000 in annual income) whose marginal tax rates go up under the plan.

So maybe we’ve finally identified the often unspoken core of our infatuation with an outmoded,  dysfunctional and outrageously expensive health care system: it imposes disproportionate costs on the least powerful (the sick, the uninsured or under-insured, low and middle income Americans) while rewarding powerful insurance companies, large health care providers, pharmaceutical firms and the wealthy.  And of course a meaningful universal health care system would essentially reverse these winner and loser categories.  So we can’t avoid the dreaded (especially in the US) R word – redistribution. But political power and narrow self-interest are not forces limited to the US.  They have been overcome elsewhere and recent experience suggests that the stars are aligning here as well.

President Trump recently noted that health care reform is “complicated.”  Yes and no.  The details can be mind-numbing.  And reasonable people can disagree about the merits of a redistributional public policy that imposes higher overall costs on society, as they sometimes do.  But that’s not the case here.  When the result would almost certainly be much lower social costs with equivalent or better care it should actually be a no-brainer.

In Part 1 of this blog entry I made the case that American society has finally accepted the proposition that at least basic health care should become a right.  By definition this means that health care distribution should not be determined primarily by the marketplace, and that the federal government has a necessary role to play in guaranteeing the universality of the right.  It’s tempting now to jump right to the obvious policy question, i.e., what is the best public policy model to employ to achieve universal and affordable health care?  Sorry, but that’s the topic for Part 3!  In order to consider that question intelligently it’s first necessary to review briefly the nature of the US health care marketplace and the insurance that dominates its transactions.

Let me start with the bottom line – the marketplace for health care in the US, or any other nation for that matter, is not and cannot become meaningfully competitive.  This proposition was established convincingly more than a half century ago by Nobel laureate economist Kenneth Arrow in his immensely influential 1963 paper entitled Uncertainty and the Welfare Economics of Medical Care.  We’re all familiar with the basic economic principle that competitive markets benefit both consumers and society by meeting buyer needs, encouraging efficiency, spurring innovation and lowering prices.  For these competitive forces to be truly effective, numerous powerless buyers and sellers who all possess relevant market information must interact in a free marketplace uninhibited by restrictions on entry, exit or resource mobility.  No one, including Arrow, disputes this principle.

But it’s also widely accepted that market imperfections in the real world frequently lessen or even eliminate these beneficial effects.  Arrow, and many other commentators who followed, argued persuasively that health care delivery deviates in fundamental ways from effective competition, and that therefore government intervention is necessary to improve results.  In brief, some of the most significant health care marketplace imperfections identified by Arrow and others are:

• Market Power – Instead of ‘numerous powerless buyers and sellers,’ big hospital chains, provider groups and insurers dominate many local markets (economists call this phenomenon bilateral oligopoly).  A common result is fewer patient choices and higher prices.
• Asymmetrical Information – The buyers of medical services (patients) know far less about medical care than the sellers (physicians, PAs, nurses, etc.).  Beneficial competitive outcomes require that buyers possess the relevant information to make an informed consumer choice.  Ironically, at the same time patients know much more about their own health than do insurers.
• Idiosyncrasies of Payment – Because patients don’t see the bill until after the non-refundable medical care has been provided, and because they are often given little information about costs or prices, patients are typically unable to shop around for a medical service based on price or value.  Sometimes, of course, the urgent nature of the care need also precludes comparison shopping.
• Unpredictability – Unlike our need for food, clothing or most other commodities and services, our health care needs are largely unpredictable.  But when needed the care can be urgent and very expensive.

For these reasons health care cannot be bought and sold like milk or tennis lessons.  These fundamental characteristics of the health care marketplace violate almost every requirement for effective competition noted earlier.  And permeating them all is a further complication.  In health care markets there is a third major player besides patients and caregivers that also frequently possesses market power and asymmetrical information.  As a further payment idiosyncrasy, this third party actually ends up paying most medical bills.  And the uncertainty and risk inherent in health care create the classic conditions for this third party to emerge.  Of course I’m referring to health insurance and its providers.

The basics of all insurance are pretty straightforward.  Insurance is a form of risk management or risk sharing used to hedge against an uncertain loss.  It involves pooling funds from many insured entities (the risk pool) to pay for the losses of a relative few.  Insured entities assume a relatively small but certain loss (premium payments into the fund) in return for promised compensation for a larger uncertain loss.  With health care insurance the uncertain loss is the cost of medical treatment for the covered array of illnesses and injuries (ignoring preventive care coverage).

Health Insurance may be provided by private insurance companies, either directly to insured individuals or indirectly through e.g. employers, or by government programs. Unfortunately, many of the same imperfections such as market power and asymmetrical information that pervade the health care market also exist in the marketplace for individual health insurance.  And there are others, such as adverse selection, free rider, biased selection and moral hazard problems.  The curious reader can read up on these imperfections in private health insurance (see e.g. The Economics of Health Insurance and the Health Care Market:  Econ 101 at aneconomicsense.org 1/27/14).  For our purposes it’s sufficient to note that all these imperfections permit a major market player or players (patients, medical professionals, insurance providers) to game or exploit the system.

So we return to the bottom line – the US health care marketplace is not and cannot become meaningfully competitive.  It follows that this marketplace cannot generate the many private and social benefits that a more competitive environment would assure.  Is there evidence to support this?  Absolutely, in abundance, and widely reported even if selectively comprehended.  Here’s just a brief sample.  According to the International Federation of Health Plans the 2012 average daily hospital room (not treatment) charge in the US was $4,287, while the comparable rates for six other developed countries (Canada, Spain, Switzerland, South Africa, France and Chile) ranged from $429 and $1,472.

This same report did similar comparisons for 28 different health care services. For example, the average US charge in 2012 for an angiogram test was $914, while the other countries’ averages ranged from $35 to $378; US average angioplasty charge = $61,649, average range for other countries = $2,851 – $14,636;  US average charge for hip replacement = $87,987, average range for other countries = $3,365 – $27,810.  And so on.  The US ranges from high to low were also much greater than the counterpart nations.  These are not cherry-picked examples, as  you can see for yourself (see International Federation of Health Plans, 2012 Comparative Price Report  at static.squarespace.com).

Of course it’s possible that, instead of market failures, our health care costs are so high because our health care quality far exceeds that in other countries.  Possible, but not true.  For instance the Organisation for Economic Co-operation and Development (OECD) compiles measure for health care quality across nations for many medical conditions.  In their most recent compilation the US ranked 5th for colorectal cancer, outside the top 25 for breast cancer, 19th for cervical cancer, 7th for heart attacks and 16th for hemorrhagic strokes. According to the World Health Organization the US life expectancy in 2015 (79.3 for both sexes) ranked 31st in the world, behind such pinnacles of health care innovation as Iceland, Luxembourg, Malta, Slovenia, Cyprus and Chile.  But we did beat Cuba by one slot in the rankings!

So our current private-public health care distribution patchwork,  still based even with Obamacare on the erroneous assumption that market forces will deliver superior outcomes, in fact currently results in pretty much the worst case scenario – exorbitant costs and disappointing quality.  Surely there must be a better way!?  There is but not in this post, which I’m certain has already exceeded some attention spans.  Stay tuned for Part 3 – the long-awaited public policy discussion!