Investment and Exports Explain Why the economy Isn’t Taking Off Like a Rocket

President Donald Trump’s huge tax cut, signed into law in December 2017, was supposed to make the economy take off “like a rocket ship.” As the foislowing chart shows, it hasn’t worked out that way. Instead, the growth trend has turned down since the tax cut went into effect. The advance estimate for the second quarter of 2019 year shows growth of just 2.1 percent.

What went wrong? First, let’s see what happened and then speculate about why.

What: Weak fixed investment

Backers of the big cut in corporate tax rates promised an investment boom. Companies were supposed to use the money they saved in taxes to build new plants and buy new equipment – what government statisticians call “fixed investment.” That didn’t happen.

Trends in the Distribution of Weath Are Even Scarier Than Trends in Income

“We have an economy in this country that is not working for working people,” says Sen. Kamala Harris, a Democratic candidate for President. It is a common refrain. As the following chart shows, when adjusted for inflation, average hourly earnings of ordinary U.S. workers have grown just 15 percent over the past 30 years. Weekly earnings of full-time employees have grown even less, just 10 percent.

 Meanwhile, the pay of top earners has soared. According to a study from the Economic Policy Institute, in 1989, the pay of corporate CEOs was 59 times as high as that of production workers. By 2016, it had risen to 270 times higher than workers’ pay.

No wonder a lot of Americans are feeling left behind by a booming economy. But wages are not the whole story. Would you believe, there are other data that make the “left behind” narrative look even worse?

It’s not the wages, it’s the wealth

The trend that is even scarier than that of wages is the trend in wealth. “Wealth,” in this sense, means net worth, that is, total assets minus total debts. It’s not what you own that matters, but the difference between what you own and what you owe.

It's Time to Phase Out Employer Sponsored Health Insurance. Here's How.

A few month ago, I wrote a post explaining why employer sponsored health insurance (ESHI) has been called the original sin of the U.S. health care system. This post now turns to some ideas for escaping the ESHI trap.

Close to half of all Americans receive health insurance coverage through their jobs. In no other major country is health care coverage tied as closely to employment as in the United States. American-style ESHI has three major unintended consequences.

• “Job lock” makes workers afraid to move to a more suitable job, to become self-employed, or to start one’s own business for fear of losing insurance coverage.
• ESHI is severely inequitable. Health insurance benefits are tax-deductible, but the deduction is of greater value to people in higher tax brackets, and higher-paid workers are far more likely to get health benefits to begin with. Those in the top fifth of the wage distribution are estimated to get ESHI benefits that are nine times higher than those of the bottom fifth.
• The existence of thousands of ESHI plans, some of them quite small, adds to the fragmentation of the U.S. health care system and contributes to high administrative costs.

Any worthwhile strategy for health care reform needs a strategy for escaping the ESHI trap.

The Non Sequitur in Sanders' Case for Medicare for All

During June’s Democratic debate, moderator Lester Holt asked Bernie Sanders a question about Medicare for All. Sanders replied:

Lester, I find it hard to believe that every other major country on Earth, including my neighbor 50 miles north of me, Canada, somehow has figured out a way to provide health care to every man, woman, and child, and in most cases, they’re spending 50 percent per capita what we are spending.

Taken at face value, the statement is close enough to pass for true by the standards of contemporary political discourse. But as a defense of Medicare for All, it is a non sequitur.

The reason: No other major country offers a plan that is anything like Medicare for All.

Here is a chart, based on data from the Commonwealth Fund, that compares the United States with 10 other major countries in terms of heath care spending and health care performance.

Yes, all countries shown have better health care outcomes than the United States, and all spend less (although more than half as much). But how closely do their health care systems resemble Medicare for All? How broad is their coverage? How centralized are they? What role do they assign to private insurance? What do they require by way of premiums and cost-sharing? Here are some answers, starting with the three top performers. (See here for the full health system profiles of each country.)

Medicare for America: A Health Care Plan That Deserves a Second Look

Last December two Democratic representatives, Rosa DeLauro of Connecticut and Jan Schakowsky of Illinois, introduced a health care reform bill called Medicare for America. At the time, it got relatively little publicity, but now that it has been reintroduced as H.R. 2452, it deserves a closer look.

Medicare for America (or M4Am, for short) is increasingly seen as a pragmatic option for Democrats who want to stake out a slightly more centrist position than the party’s progressive superstars. For those with low incomes and chronic illnesses, M4Am, like Senator Bernie Sanders’ Medicare for All, would provide free first-dollar coverage for a wide range of medical, dental, and vision services. Unlike the Sanders plan, though, it would subject people with higher incomes and lower medical expenses to income-based premiums and cost sharing.

Here are some of the key features of M4Am, followed by some suggestions that could further improve its prospects for support from a broad range of the political spectrum.

Medicare for America and Universal Catastrophic Coverage

Medicare for America belongs to a family of health reform plans known generically as universal catastrophic coverage (UCC). The aim of UCC is to protect everyone against financially ruinous medical expenses though full first-dollar coverage for the poorest and sickest, while requiring income-based cost-sharing from those who can afford it. UCC posits a robust role for the government as a provider of social insurance where needed, while creating adequate scope for market mechanisms where they have the best chance of working.

The Economics of a Job Guarantee

A federal job guarantee (JG) is one of the hardy perennials of American politics. Such a guarantee would offer public-service employment (PSE) to anyone who wanted it, with government at some level or an approved nonprofit organization as the employer.

The idea of a job guarantee traces its roots to the Great Depression, when the federal government created thousands of jobs through programs like the Works Progress Administration and Civilian Conservation Corps. Later, in his 1944 State of the Union address, President Franklin Roosevelt put the right to a job at a living wage at the very top of his “Second Bill of Rights.” In the 1970s, a job guarantee was again proposed as part of the Humphrey-Hawkins Full Employment Act, although it was dropped from the draft before that bill was passed.

Today, the idea is undergoing a revival as part of the Green New Deal, introduced in Congress in 2019 with more than 100 co-sponsors. Some might find the timing odd, with the unemployment at a 50-year low. In reply, however, JG proponents point to three gaps that persist even when official data point to a tight labor market:

• A hidden unemployment gap: A gap between the number of people counted in the labor force and the number who would seek work if jobs were available at a higher wage.
• A pay gap: A difference between what people are now paid and the maximum that their employers would be willing to pay if necessary.
• A public service gap: A large, unmet need for labor-intensive public services that would generate benefits equal to or greater than the cost of providing them.

This three-gap model of the labor market will serve as a convenient device for organizing this commentary on guaranteed jobs.

Joe Biden Commits to Decarbonization but Not To a Carbon Tax

Joe Biden’s climate action plan is a passionate declaration of good intentions. Unfortunately, all the passion is undermined by his failure to openly support a carbon tax, the one policy that would most certainly deliver on his promises.

Politics should be about means, not just about ends. Ends-wise, Biden’s program is a veritable feast. He sets an overall goal of net zero carbon emissions by 2050, matching the goal set by the Green New Deal of his progressive rivals, and he makes a gazillion specific promises along the way:

• 100% electric cars
• advanced biofuels
• carbon free aircraft fuels
• more compact cities with higher-density affordable housing
• grid-scale storage at one-tenth the cost of lithium-ion batteries
• small modular nuclear reactors at half the construction cost of today’s reactors
• refrigeration and air conditioning using refrigerants with no global warming potential
• zero net energy buildings at zero net cost
• using renewables to produce carbon-free hydrogen at the same cost as that from shale gas
• decarbonizing industrial heat needed to make steel, concrete, and chemicals and reimagining carbon-neutral construction materials
• decarbonizing the food and agriculture sector, and leveraging agriculture to remove carbon dioxide from the air and store it in the ground
• capturing carbon dioxide from power plant exhausts followed by sequestering it deep underground or using it make alternative products. 

That’s not even the full list. All those ends are laudable, but the proposed means turn out to be just an ad hoc mix of executive orders, restoration of Obama-era regulations, research subsidies, and tax credits.

The trouble is that such a program lacks any way of balancing the costs of decarbonization among the various possibilities. Maybe there will be breakthrough on advanced biofuels that makes liquid-fueled cars just as clean as electrics, and cheaper to run. Maybe direct air capture of carbon will turn out to be more efficient than carbon capture from industrial smokestacks. Who will choose which paths to pursue and which to abandon?