How Bad Was the Debt Deal for the Middle Class?

John Boehner says he got 98% of everything he wanted. That's a bad sign. More concretely, the Economic Policy Institute estimated that between the cuts in the deal, and the expiration of two stimulative measures that could have been renewed as part of the deal, the country will lose 1.8 million jobs in 2012 alone. Hint: those won't be high-finance jobs.

If EPI is too left-leaning for you, J.P. Morgan (via Calculated Risk) estimates the “fiscal drag” on the economy from federal fiscal policy to be 1.5% of GDP in 2012. That's a big deal. Economic growth is critical for the middle class.

Going forward, Mitch McConnell (“the most honest man in Washington,” according to Ezra Klein) says that taking the debt ceiling hostage will now be the norm. There's also the budget resolution vote coming up in September, with the possibility of a government shutdown. Lots of hostage taking opportunities lie ahead.

Then there's the “Super Congress” tasked with determining another $1.5 trillion in deficit reduction. Since the six Republicans on that committee will reject any revenue increases, that means $1.5 trillion in cuts. Remember, Y = C + I + G + (X – M), so that's another $1.5 trillion hit to GDP over the next 10 years, ignoring any multiplier effects.

If this committee cannot reach agreement and Congress does not pass a balanced budget amendment (“the worst idea in Washington,” again according to Ezra Klein, and he is absolutely right), we get $1.2 trillion in cuts anyway. Social Security and Medicaid are exempt from budget slashing, but Medicare is on the table, perhaps with the self-inflicted wound of the President's offer to raise the eligibility age from 65 to 67. As has been pointed out by Sarah Kliff, doing this hurts the health exchanges by putting relatively expensive 65- and 66-year olds into the pool, driving up rates for everyone else and giving the healthy more incentive to drop out and game the system.

Supposedly, about half of the $1.2 trillion will come out of the Defense Department, but I think Markos Moulitsos might be on to something when he predicts Republicans will turn around and offer a separate bill to cancel those cuts, and accuse the Democrats of “not supporting the troops” in an election year.

Bottom line: bad for middle-class jobs, bad for Medicare, bad for health care reform. We're likely to be in recession again come the 2012 elections. This is not the time to get discouraged: the stakes are much higher in the 2012 elections, where we've got to elect a lot more people attuned to middle-class needs or a lot worse things will happen than were in this debt deal.

Good Stuff from Yglesias and the Center for American Progress

Matt Yglesias has a good post up on how the debt ceiling debate has obscured the fact that the big driver of increased federal expenditures into the future is due to the growth of health care costs.This pairs well with my last post, which shows the same thing in a comparative perspective.

He writes, “The thinking here, which drove administration policy during its first 30 months in office, is based on the reality that high projected government spending is driven almost entirely by the rising cost of health care.” He then goes on to describe some of the health care aspects of the deficit reduction plan developed by his colleagues at the Center for American Progress.

For now, though, I'd like to pivot to some other aspects of the plan. CAP's plan aims to balance the budget by 2030, and it has several important tax provisions that would help the middle class. It institutes a flat 15% tax rate on income up to $100,000 for joint returns, raises the top bracket back to the 39.6% it was under the Clinton Administration, and it adds a 5% surtax on millionaires until the budget is balanced.

In addition, it incorporates a financial transactions tax (often called a “Tobin Tax,” after its early proponent, Nobel Prize-winning economist James Tobin). Beyond Tobin's idea of a tax on foreign currency transactions, the CAP proposal would apply as well to stock, bond, and derivatives sales. This proposal would simultaneously raise revenue and reduce the financial speculation that contributed to the 2008 crisis.

These are definitely reforms worth pursuing, and the CAP link above gives you multiple options for how deeply you want to follow up on them.

Where the US Overspends on Health Care

Dylan Matthews at Ezra Klein's blog put up a nice chart showing where the US spends its health care dollars compared to other rich countries that are members of the Organization for Economic Cooperation and Development (OECD). What we find is that the US spends more on hospitals and other providers, drugs, and administration than other rich countries, with the biggest dollar gap in spending on providers. This means that controlling health care costs in the future will have to focus on this category.

You can find the underlying data for this chart (except the OECD average, which in this case appears to have been computed by Matthews himself) at OECD Statistics. The category referred to by Matthews as “hospitals” is called “curative and rehabilitative care” by the OECD, which includes outpatient service by doctors and other providers such as occupational therapists and physical therapists. As Matthews says, “The U.S. spends nearly three times as much on hospital care and almost five times as much on administration.” As his chart shows, the US also spends about twice as much on drugs and other “medical goods dispensed to out-patients” the specific OECD term. One other important point for interpreting the OECD data is that the US does not break out “ancillary services” such as out-patient lab and diagnostic work from “curative and rehabilitative care,” whereas most of the other countries listed do, so we should add these two categories together when making comparisons.

We can make this more concrete by comparing the US and Canada. Overall, the US spent $7960 per capita on health care in 2009 versus Canada's $4362.6, or $3597.4 more.

Providers + Ancillary Services: US $5278.8, Canada $2199.2. US + $3079.6

Nursing Care: US $446.7, Canada $602.6. US - $155.9 (Denmark, the Netherlands, and Norway all spend over $1000 per capita on nursing home care.)

Drugs, etc.: US $1069.7, Canada $859.8. US + $209.9

Prevention and Public Health: US $271.6, Canada $303.2. US - $31.6 (Canada is the only country that spends more than the US in this category.)

Administration: US $531.5, Canada $153.3. US + $378.2 (due to fragmented, for-profit insurance)

Not specified by function: Canada $20.5

Capital formation by provider institutions: US $361.7, Canada $224.0. US + $137.7

As we can see, then, higher payments to providers equal 85% of the extra cost in the US. Preferably sooner rather than later, high costs here have to be the main focus of health care reform. That isn't to say that reforms to insurance and covering the uninsured aren't necessary; they are matters of basic justice. But the long-term solvency of Medicare depends on controlling spending on providers, and that's a political fight that goes well beyond the “doc fix.”

(By the way, the OECD Statistics website is a gigantic treasure trove of information that can be configured in a variety of ways. If you are interested in taxes, education, GDP, or just about any political economy topic, the OECD has the definitive data for the industrialized countries.)

It's Gotten to Where I Can't Turn on the TV

Or the radio, or look at news on the Internet. The reason, of course, is the debt ceiling “negotiations.” I think Calculated Risk is correct that the debt ceiling will get raised on time, but I don't think it is inconceivable that the Tea Partiers in the House could screw things up.

I know Paul Krugman is right that negotiations are in la-la land where the negotiators are talking about cutting government spending when the economy needs more demand. How do I know this? Because elementary macroeconomics tells us so. It's the most basic equation in macroeconomics: Y = C + I + G + (X-M). In English, national income (gross domestic product) equals private consumption plus investment plus government spending plus net exports. If you reduce government spending, you reduce GDP, all other things equal. And right now, with companies sitting on trillions of dollars in cash, government spending is not crowding out private spending and investment, so cutting government spending really will reduce GDP.

The losers from those government spending cuts will be middle class and poor people. With Social Security, Medicare, and Medicaid all potentially on the chopping block, the cornerstones of middle class economic security are under assault (and it's a self-inflicted wound for Democratic negotiators, starting with the President, to allow this). Reduced GDP means that unemployment will go up even faster than it already is. It's a multidimensional defeat for the middle class unless, by some miracle, a clean debt ceiling increase passes.

Who wins? Perhaps the biggest group is what Paul Krugman calls the “rentiers,” individuals “who derive lots of income from assets, who lent large sums of money in the past, often unwisely, but are now being protected from loss at everyone else’s expense.” These finance types benefit from low inflation, which maximizes the value of the interest they receive and the assets they hold, so they fight any policy which might increase inflation enough to expand the economy and reduce middle class debt loads. I'll have more to say about who wins and who loses from moderate inflation in a future post.

I hurt my head every time the debt ceiling gets discussed, from banging it against the wall. I wonder if I can self-nominate for the Order of the Shrill.

Wake me up on August 3^rd.

Wisconsin Subsidies Could Hire 12,000+ State Workers

As we reach the home stretch of the August 9 Wisconsin Senatorial recall elections, it's good to keep in mind just how much businesses there receive in subsidies from the state. To my knowledge, no one has ever made an estimate of total business support there, and so Wisconsin was not used in constructing my national estimate of $70 billion per year in subsidies by state and local governments nationwide.

In light of the upcoming election, I made a special calculation of subsidies in Wisconsin based primarily on the 2011 Summary of Tax Exemption Devices plus the five programs tracked by Good Jobs First in its report “Show Us the Subsidies”  This will give us some insight into the potential impact of business subsidies on state employment. As we will see, I estimate the giveaways could be redirected to create over 12,000 middle-class public jobs.

The tax exemption report gave helpful descriptions of the provisions, but certainly I would be able to do a more thorough job in identifying programs with the help of in-state budget experts. So, here I present a conservative estimate of the subsidies to business in Wisconsin.

What I count: I try to make my estimates internationally comparable, so my goal is to identify programs and tax provisions that would be considered a subsidy elsewhere in the world. In particular, I look for provisions that are specific to an industry, a region, a type of business (i.e., small and medium enterprise), or specific goals like R&D, job creation, or pollution control. European Union state aid rules are my model here.

I include, then, most of the state's corporate income and franchise tax exemptions (omitting a few smaller ones to save time), with the important exception of Net Operating Loss provisions, which apply to every corporation and hence are not specific. Wisconsin has a recycling surcharge, which has subsidies for small firms (exempt below $4 million in gross receipts) and for large ones (a cap of $9800 regardless of corporate income).

Sales tax exemptions are the most difficult to judge. When I first made a national subsidy estimate in my 2000 book, Competing for Capital, I counted a large number of these tax breaks as subsidies. I am now persuaded that many sales tax provisions are simply designed to prevent what's known as tax cascading: if businesses had to pay sales tax on all their raw materials and intermediate goods and services, the final consumer would be paying some multiple of the statutory sales tax when purchasing a final good. So now I only count sales tax breaks on machinery and equipment, which are designed to attract investment (pretty much every state does this, and it comes to a lot of money); and industry-specific sales tax exemptions. Thus, if legal services to businesses were exempt from sales tax, I would not consider that to be a subsidy; but, if legal services were only exempt for the banking industry, that would be a subsidy to banking and I would count it. Again, specificity is a key consideration.

Wisconsin presents one other conundrum with sales tax: personal property and supplies used in farming are exempt from the tax. Normally, I'd say that just prevents tax cascading, but if I read the 2009 Summary of Tax Exemption Devices (p. 58) correctly, this provision only dates back to 2007, which may argue for considering it industry-specific – or may argue that a similar provision for manufacturing is no longer a subsidy. I present the estimate both with and without this provision below.

Finally, Good Jobs First tracks five discretionary economic development subsidies, and I include that $37.8 million as well.

Subsidies in Wisconsin

Corporate income tax subsidies                  $128.1 million

Recycling surcharge tax subsidies              $ 38.4 million

Discretionary econ development                  $ 37.8 million

Sales tax exemptions excluding

personal property used in farming                $398.6 million

Total with personal property/farming            $602.9 million

Personal property/farming                           $187.6 million

Total with personal property to farmers        $790.5 million

Even excluding the iffy final category in the table, we're looking at over $600 million in subsidies to business per year, enough to hire 12,000 state employees making $50,000 annually in salary and benefits. While it is certainly possible that some of the support to business should be maintained, the large number of public jobs it is costing Wisconsin strongly argues for explicitly weighing which is the better use of the state's money.

Instead, as we know, the Walker administration pushed even more tax breaks through the legislature earlier this year, further exacerbating the state fiscal crisis. This highlights the importance of the August 9 recall elections, as well as the probable recall of Walker himself next year.

(I'd be interested in your feedback on the procedure I used to make this estimate, as well as the political issues involved. If you would like a copy of the full calculation, please contact me.)

Krugman shows us Heritage mendacity on health care

Paul Krugman points us to a link on the legislative and policy history of health reform. The points we need to take away are two: the main ideas behind the Affordable Care Act (individual mandate, community rating, subsidies so everyone could afford insurance) are present in a  1989 Heritage Foundation report by Stuart Butler; and Heritage now pretends that this report has no resemblance to the Affordable Care Act. Why am I not surprised?

At least Heritage has not scrubbed the report off its website (as of 10:30 AM July 27).

Heritage Tries to Mislead Us on How Swell Poverty Is

A little late getting to this (I've had unexpected travel), but Matt Yglesias makes an important point I wanted to expand upon. That is, just because you can afford a number of modern conveniences doesn't mean you're not poor. Similarly, people don't go bankrupt because they can't afford a TV, but because of medical bills (62% in 2007) or job loss.

Yglesias: The Heritage Foundation is out with the latest version of its annual poor people aren't poor because electronics are cheap report.....A serious person would follow this up with a discussion of relative prices. Over the past 50 years, televisions have gotten a lot cheaper and college has gotten a lot more expensive. Consequently, even a low income person can reliably obtain a level of television-based entertainment that would blow the mind of a millionaire from 1961. At the same time, if you’re looking to live in a safe neighborhood with good public schools in a metropolitan area with decent job opportunities you’re going to find that this is quite expensive. Health care has become incredibly expensive.

How much more expensive? For higher education costs, the College Board presents this table of how far above the general inflation rate college costs have grown. Remember, these are tacked on top of the general inflation rate. Thus, over the 30-year period public four-year universities have gotten 3 1/2 times as expensive in real (inflation-adjusted) terms, for example.

	Tuition and Fees				Tuition and Fees and Room and Board
	Private Nonprofit Four-Year	Public Four-Year	Public Two-Year		Private Nonprofit Four-Year	Public Four-Year
1980-81 to 1990-91	5.1%	4.2%	3.9%		4.3%	2.3%
1990-91 to 2000-01	2.6%	3.3%	3.2%		2.2%	2.3%
2000-01 to 2010-11	3.0%	5.6%	2.7%		2.8%	4.2%

Average annual rate of growth of published prices in inflation-adjusted dollars over a 10-year period. For example, from 2000-01 to 2010-11, average published tuition and fees at private four-year colleges rose by an average of 3.0% per year beyond increases in the Consumer Price Index.

View Notes and Sources

Let's now compare overall inflation with health care inflation (inflation tables are at: http://data.bls.gov/cgi-bin/surveymost?cu). The CPI-U (consumer price index – urban) for all items was 225.722 in June 2011, compared to 37.8 in January 1970 (1982-84=100), meaning that urban prices were 5.97 times as high as 41 years earlier. By contrast, the CPI-U for medical care rose to more than 12 times as high over the same period, from 32.7 to 399.552. No wonder health care costs have caused problems for so many people.

To sum up, the economic problems facing poor or middle-class people aren't related to spending on frivolities, which are largely low-cost. Instead, they come from what one's health insurance company will or won't pay for, whether you have a job or not, and whether you can afford the housing and education to give your children a better life. The Heritage folks, while giddily pointing out that the poor in America see doctors, also support deep cuts (“entitlement reform”) to the programs that make that possible in the first place. Have they no shame?