Fiscal Policy: How Has Conventional Wisdom Changed?

The last five years have brought economic policies that I would not have thought were even remotely possible if you had asked me in, say, mid-2007. The Federal Reserve and other central banks of high-income countries would push their policy-target interest rates to near-zero, and hold the rates there for years on end, while printing money to buy government debt? I wouldn't have believed it. The U.S. government would run budget deficits of 10.1% of GDP, 9.0% of GDP, 8.7% of GDP, and 7.0% of GDP in consecutive years, raising the debt/GDP ratio over that time from 40.5% in 2008 to 72.6% in 2012? I wouldn't have believed it. An IMF staff team led by Bernardin Akitoby offers some thoughts on how conventional wisdom about fiscal policy has change in the last five years in a September 2013 Policy Paper, "Reassessing the Role and Modalities of Fiscal Policy in Advanced Economies."

What was the consensus view on fiscal policy back in the Stone Ages of 2007? The IMF report reminds us (as usual, footnotes and citations omitted): "The prevailing consensus before the crisis was that discretionary fiscal policy had a  limited role to play in fighting recessions. The focus of fiscal policy in advanced economies was often on the achievement of medium- to long-run goals such as raising national saving, external rebalancing, and maintaining long-run fiscal and debt sustainability given looming demographic spending pressures. For the management of business cycle fluctuations, monetary policy was seen as the central macroeconomic policy tool. Fiscal contraction was sometimes recommended during periods of economic overheating as a means of supporting monetary policy, for example to take pressure off the exchange rate in the face of persistent capital inflows. However, during downturns, it was deemed that there was little reason to use another instrument beyond monetary policy."

But when the Great Recession hit, this consensus wisdom went out the window in a hurry, not just in the U.S. economy but across the high-income countries of the world. Here's a figure comparing the usual rise in the debt/GDP ratio after a recession (the blue dashed line) with what has actually happened in advanced economies since the recession (the red line). The U.S. economy, with a rise in the debt/GDP ratio of just over 30 percentage points, is just about on the average of how high-income countries have expanded their government debt since the Great Recession.

What lessons have we learned about fiscal policy during this period? Here are a few suggested by the IMF:

1) Of course, one main reason that so many governments raised their debt/GDP ratios so much was that the Great Recession was so ferocious. Advanced economies are apparently more vulnerable to severe downturns than most would have believed five years ago. In particular, financial imbalances, asset bubbles, housing and credit booms, and other risks were more severe that expected. . They write: "The fiscal risks created by large  (relative to GDP), growing, and interconnected financial sectors were also underappreciated, partly  because of confidence in financial markets’ capacity to self-regulate and the
opacity of cross-border exposures."

2) "[T]here is a need for a more holistic approach to measuring public debt and determining “safe’’ levels of debt." During the financial crisis, it became apparent that many governments were offering various guarantees and support to their financial sector that would not have been counted as "government debt" back in 2007, but turned into government debt very quickly when the crisis hit. "For example, in the United
States, potential contingent liabilities stemming from the debt of government-related enterprises is
estimated to exceed 50 percent of GDP ..." Official measurements of debt also don't take into account future promises for funding government programs, like providing support to the elderly.

3) In some "safe havens (Japan and the United States, for example), markets can tolerate much higher debt ratios than previously thought, at least for a time."

4) In other advanced economies, high government debt can lead to a  harmful "soverign debt feedback loop." Within a given country, banks typically hold a lot of debt from the government of that same country. If the government piles up so much debt that it begins to look risky, then the banks of that country have a lot of assets that look risky. But if the government is to step in and rescue the banks, it will pile up more debt, which will make the banks look even riskier. See the recent history of Greece for how this story unfolds.

5) "While debate continues, the evidence seems stronger than before the crisis that fiscal policy can, under today’s special circumstances, have powerful effects on the economy in the short run. In particular, there is even stronger evidence than before that fiscal multipliers are larger when monetary policy is constrained by the zero lower bound (ZLB) on nominal interest rates, the financial sector is weak, or the economy is in a slump ..Earlier research often assumed that the impact of fiscal policy was similar across different states of the economy, but a number of recent empirical studies suggest that fiscal multipliers may be larger during periods of slack. ...The crisis has not offered conclusive lessons regarding the relative size of revenue and
government spending multipliers. Some recent studies suggest that spending multipliers are larger than revenue multipliers, while others reach the opposite conclusion ... "

6) Fiscal policy operates through automatic stabilizers and through discretionary policy. The automatic stabiliizers come into being because when an economy contracts, the reduction in  economic activity automatically leads to lower tax revenues and to more people eligible for government spending support--without any new legislation. (For more detail on automatic stabilizers, see here.) Discretionary fiscal policy consists of the additional tax cuts or spending increases that required new legislation. Here's the division of automatic and discretionary policy across some high-income countries. In the US, for example, automatic stabilizers were about 2/3 of the deficits in 2009-2010, and discretionary policy was the other third.

7) "The fundamental challenge facing policymakers today is to reduce deficits and debt levels in a way that ensures stability but is sufficiently supportive of short-term economic growth, employment, and equity. ...As mere promises to undertake fiscal adjustment later may not be persuasive, gradual consolidation needs to be anchored in a credible medium-term plan.

The US Transportation Sector

The transportation of people and goods is in many ways a necessary evil. You rarely hear any person outside of car company advertisements bemoaning that their commute to work is too short, or that they wish it took a little longer to pick up bread and milk at the grocery. You never hear a business exalting that getting some parts or inputs from a distant location took especially long or required an especially high cost. Of course, there are sensible reasons why not all economic activity happens at one location and most people do not live immediately beside where they work; in effect, transportation is the cost we pay for the benefits that arise from this diversity of locations.  Clifford Winston writes "On the Performance of the U.S. Transportation System: Caution Ahead," in the most recent issue of the Journal of Economic Literature (51: 3, pp. 773–824). (Full disclosure: The JEL is a sibling journal of the Journal of Economic Perspectives, where I work, both published by the American Economic Association. The JEL is not freely available on-line, but many in academia will have access through library subscriptions or through their AEA membership.)

Winston summarizes some facts about the sheer size of the US transportation sector in 2007 an eye-opening paragraph (as usual, footnotes and references are omitted for readability):

"[C]onsumers spent $1.1 trillion on gasoline and vehicles commuting to work, traveling to perform household chores and to access entertainment, and traveling for  business and vacations, and spent an astronomical 175 billion hours in transit, which averages out to about 100 minutes per day for each and every American,valued at some $760 billion. Firms spent $1 trillion shipping products using their own and for-hire transportation, while the commodities that were shipped absorbed 25 billion ton-days in transit, valued at roughly $2.2 trillion. Local, state, and federal government spending on transportation infrastructure and services contributed an additional $260 billion,  bringing total pecuniary spending on transportation up to 2.4 trillion, or 17 percent of  GDP in 2007, which is as much as Americans spent on health care, and total annual money and time expenditures to more than $5 trillion! Finally, transportation looms large in American life because both the public and private sector have made huge investments in the transportation capital stock, which (after deducting depreciation) is valued by the U.S. Department of Commerce at nearly $4 trillion ..."

Many of these costs are not immediately apparent. After all, the transportation costs of firms are not costs that most of us see directly, but instead costs that are wrapped into the final cost of goods and services. The costs of time spent in traffic are not monetary costs. The link from transportation capital stock paid for in is government budgets and the tax revenues that ultimately support such spending is not especially clear.

Our public conversation about transportation policy often boils down to a claim that more government spending is good: fix and expand the road system, fix the bridges, build more mass transit, and so on. The transportation legislation that emerges from Congress every few years is perhaps the classic case of pork-barrel spending, usually with juicy tidbits for almost every legislative district. As one might expect, Winston takes a disciplined perspective: how can we set up institutions so that the transportation system works more efficiently, and so that additional infrastructure spending occurs when benefits are balanced against the costs, in a way that makes society more likely to focus on projects that have a higher payoff.  Some of the possibilities that go beyond pouring more concrete include:

• Cars should be charged for driving during times when traffic is congested. When you drive during a time when congestion is high, you of course experience the costs of having lots of other drivers on the road. But you also play a role in imposing those costs of time and delay on others. 
• Most big cities charge too little for street parking, at least during peak times For economists, when street parking is all taken for blocks around, and people are cruising the streets looking for a spot, it seems clear that the quantity of parking demanded is exceeding the quantity supplied at the existing price--and so the price should rise. 
• "The gasoline tax that truckers are charged for highway travel does not adequately account for their damage to pavements because that damage depends on a truck’s weight per axle (for a given weight, trucks with more axles inflict less pavement damage) and for their stress on bridges, which  depends on a truck’s total weight." Higher charges would provide an incentive to use trucks with more axles, which would save wear and tear on roads and bridges. 
• "The charge that an aircraft pays public airports to land (they are not charged to take off) is based on its weight and generally does not  vary by time of day. But the volume of aircraft traffic, which determines the length of time that a plane must wait on the ground or in the air, does. Efficient takeoff and landing (marginal cost) congestion charges that vary by time of day could significantly reduce air travel delays, generating a $6.3 billion annual welfare gain, accounting for the time savings to travelers and reduced operating costs to airlines ..."
• "[U]sers of urban bus and rail transit pay fares that are set by transit authorities below marginal cost, some even ride at discounts from those fares, and some federal employees ride free. As pointed out later, such subsidies are hard to justify on distributional grounds because transit users generally live in households with incomes that are above the national average ..."
• "Most highways in major metropolitan areas operate under congested conditions during much of the day, yet highway design standards are based on free-flow travel speeds. Policymakers could therefore reduce the cost of delays by expanding the range of alternative highway designs that, for example, could raise speeds during peak travel periods by increasing the number of lanes, although speeds during off-peak travel periods may be slower because lanes and shoulder widths would be narrower. Technology exists to install lane dividers that can be illuminated so that they are visible to motorists and that can be adjusted to increase or decrease the number of lanes that are available in response to traffic volume."
• "[I]nvestments in highway durability—that is, pavement thickness—should minimize the sum of initial capital and ongoing maintenance costs. They determined that building roads with thicker pavement at an annualized cost of $3.7 billion would generate an annualized maintenance saving of almost 4 times as much—$14.4 billion—for a net annual welfare gain of $10.7 billion. Roads could also be made more durable by implementing innovations such as tack coats between pavement levels and thicker bottom layers of asphalt to avoid buckling, both of which can extend the functional life of a highway at little extra cost. But state departments of transportation award construction contracts on the basis of the minimum bid, not on the technological sophistication of the contractor ..."

For many economists, suggestions like these sound obvious. For many non-economists, they sound near-heretical, because they don't involve large government spending programs to pour concrete, lay railroad track, expand seaports and airports, and the like. Winston is by no means opposed to additional infrastructure spending, but he seeks to turn the conversation toward how the existing transportation grid can be used more efficiently, and how the all-too-real costs of potential infrastructure expansions can be fairly evaluated along with the potential benefits. After all, we know that government involvement in the airline industry led over many decades from the 1930s up through the 1970s to a strangling of competition, high profits for airlines, and high fares for consumers. We know that government management and ownership of many mass transit systems around the country has led to systems that are not covering even their marginal costs, and seem to require ever-higher subsidies. We know that the existing government methods of funding repair of roads and bridges has allowed many of them to fall into serious disrepair. The US transportation sector is the outcome of a large number of decisions about building and pricing, many of the them either made for short-term political reasons or just unexamined. It needs a conceptual shake-up. 

At Least It's Not Still 59 Cents

Back when I was in college in the late 1970s and early 1980s, it was typical to hear that women earned 59 cents for every $1 earned by men. The figure below, taken from the September 2013 Census Bureau report on "Income, Poverty, and Health Insurance Coverage in the United States: 2012," by Carmen DeNavas-Walt, Bernadette D. Proctor,and  Jessica C. Smith, shows why 59 cents had such force. Looking back for 20 years through the 1960s and the 1970s, the ratio of median earnings for a full-time female work to that of a full-time male worker had hovered at around 59 cents--despite what seemed to be enormous changes in the role of women in the workforce during this time.

A standard explanation for the seeming stability of the 59 cents during the 1960s and 1970s was that there were two opposing patterns at work as women entered the paid workforce in large numbers. The labor force participation rate for women rose from 38% in 1960 to about 51% by 1980. Many women were gaining experience and credentials in the paid workforce, which should have tended to push up the ratio of female/male wages, but many of the women who were entering the paid workforce for the first time were taking low-paid entry-level jobs, which tended to pull down the ratio of female/male wages. During the 1960s and 1970s, these factors largely offset each other.

I can report that this argument was not a popular one for a male economics major to make during  his college days in the early 1980s. (And yes, I was careful to point out that the story of counterbalancing forces had no particular implication for how much gender discrimination continued to exist.) But the story did have a testable implication: after the process of women entering the paid workforce for the first time had largely run its course, then the effect of women having more experience and credentials should dominate and the female/male wage ratio would rise. Indeed, the female/male earnings ratio did start rising right around 1980, and now stands at 77%.

Thus, the good news in terms of pay equity is that at least it's still not 59 cents for every $1. The ongoing issue is how to explain the remaining wage gap, and there's considerable controversy on this point. For example, if one adjusts for the industry in which people work, or the kinds of jobs they do, the female/male wage gap looks smaller. But what if those industries and jobs and the pay levels in those industries and job choices are themselves, at least to some extent, the result of patterns of unequal treatment by gender?

It does seem clear that a substantial share of the remaining gender gap is due to women's taking a greater share of responsibility for children in particular. For example, here's a 1998 article  by Jane Waldfogel in the Journal of Economic Perspectives (where I've been the managing editor since 1987) looking at this "family gap."  Of course, this then leads to an argument over the extent to which women are choosing these responsibilities and the extent to which these responsibilities are being forced upon them. Perhaps scarred by my college exposure to these issues, I'll duck that question here, and just note that other countries have far more extensive parental leave rules than does the United States. The evidence on the female/male wage gap seems consistent with an overall pattern that outright discrimination by employers in labor markets has diminished, and today the larger reason underlying the female/male wage gap are social expectations and pressures from both men and women about industry and job choices, and about how the tasks of child-raising will be divided.

One statistical  note here: The figure shows the ratio of median wages, not average wages. For the uninitiated, the median is the number where half have more and half have less. If those at the top of the income distribution get more, while everyone else remains the same, then the average income level will rise, but the median will not. The median is often more useful for getting a sense of the "typical" worker in the middle of the overall income distribution, which is why it is used here, but it would be incorrect to look at the median and conclude that average wages have not risen. Indeed, I assume that men substantially outnumber in the top 1% or the top 10% of the earning distribution, and so the focus here on median earnings will in that way understate the amount of gender inequality remaining.

Shipping the Good Apples Out

A couple of years ago, I found myself standing in a grocery store in Boston, waiting for the person behind the counter to make me a cheesesteak hoagie. I noticed that I was near the meat section of the grocery, and as a Minnesota person, I wandered over to sightsee the seafood. The seafood was quite reasonably priced by Midwestern standards, but when I looked more closely at the labels, the scallops and shrimp and a lot of the fish it had been imported from China and the far East.

Have you ever found yourself in an area which is well-known for some local product, but that local product--at least in its highest quality version--doesn't seem available in local stores or restaurants? Here's an economic explanation for that phenomenon taken from the World Trade Report 2013 from the World Trade Organization, based on the effects of per-unit transportation costs. The report discusses:

The mysterious case of the missing delicious red apples

"Before it became associated with corporate behemoths like Amazon, Boeing, Microsoft and Starbucks, as well as the cultural phenomenon that was grunge music, the US state of Washington was famous for its apples. To some irate state residents though, it appeared that only the small and old-looking ones remained in the state, while all the red and delicious apples were being shipped out of state. To the state residents who wrote to their local newspaper the Seattle Times expressing their disappointment, it was a mystery that had no obvious explanation.

However, the answer to this mystery had long been part of the lore in the economics department at the University of Washington and was even part of classroom discussions and exams. The answer to the mystery relied on the fact that a per unit transportation charge applicable to both high-quality and low-quality products lowers the relative price of the high-quality product at the point of destination. This leads consumers at the destination to purchase a greater proportion of the high-quality product than consumers in the place of origin. The explanation provided by the economists of the University of Washington to the readers of the 28 October 1975 edition of the Seattle Times is reproduced below:

“Suppose, for example, a good apple costs 10 cents and a poor apple 5 cents locally. Then, since the decision to eat one good apple costs the same as eating two poor apples, we can say that a good apple in essence costs two poor apples. Two good apples cost four poor apples. Suppose now that it costs 5 cents per apple (any apple) to ship apples East. Then, in the East, good apples will cost 15 cents each and poor ones 10 cents each. But now eating two good apples will cost three, not four poor apples. Though both prices are higher, good apples have become relatively cheaper, and a higher percentage of good apples will be consumed in the East than here. It is no conspiracy, just the law of demand.”

The reference to "economists at the University of Washington" refers to an 1978 article by Thomas E. Borcherding and Eugene Silberberg, “Shipping the Good Apples Out: The Alchian and Allen Theorem Reconsidered," which was published in the Journal of Political Economy (February, pp. 131–38). As their title implies, Borcherding and Silberberg were drawing on a classic examples from the 1964 University Economics textbook by Armen Alchian and William Allen. That book offers a parallel example of high-quality grapes at 10 cents per pound, low-quality grapes at 5 cents a pound and a shipping cost of 5 cents per pound. The overall hypothesis is that when a fixed cost (like a per unit transportation cost) is added to two substitute goods, the user will tend to substitute toward the higher-quality good. (In the jargon, adding the fixed cost to both goods means that the opportunity cost of consuming the high-quality good, expressed in terms of the low-quality good, is lower.)

This thesis has been good fodder for argument ever since. For example, good restaurants in Boston do have excellent lobsters. Borcherding and Silberberg argued that this tends to support the Alchian and Allen hypothesis, because "it does not matter if the goods are shipped to the consumers or the consumers are shipped to the goods." The key distinction here is whether natives and those buying at roadside stands or local groceries typically end up with lower-quality lobsters than those eating at restaurants that cater to tourists.

If you're interested in delving into the more recent research literature here, a useful starting point is the paper by David Hummels and Alexandre Skiba, "An Empirical Confirmation of the Alchian‐Allen Conjecture," published in the December 2004 issue of the Journal of Political Economy (112:6, pp. 1384-1404).

Further Notes on the Declining U.S. Labor Share

I've posted a couple of times recently about the fact that the labor share of total income has declined in recent years, both in the U.S. economy and around the world. But interest in the topic seems strong, and there's an intriguing new paper out on "The Decline of the U.S. Labor Share," by Michael Elsby, Bart Hobijn, and Ayşegül Șahin in the latest issue of the Brookings Papers on Economic Activity.  Here, I'll list some of the overall themes that come up both in this paper and in previous posts, together with new insights from this paper.

1) The fall in labor share of national income in the last couple decades is quite a remarkable change, because for most of the 20th century, the labor share of national income could be thought of as pretty much a constant. Back in 1939, John Maynard Keynes was writing that the “remarkable constancy” of the aggregate labor share is “a bit of a miracle.” Paul Samuelson made a similar comment in a 1949 article. Nicholas Kaldor documented a similar result in the late 1950s. When I was first learning economics in the late 1970s and early 1980s, the labor share of national income was typically viewed as more-or-less constant, with some variation over the business cycle Indeed, I spent a certain proportion of time in my college years pointing out that the facts at that time did not support the claim that capital was receiving an ever-greater share of national income.

2) The seeming consistency of the labor share of national income up until the mid-1980s was actually the result of trends that counterbalanced each other. The shift from manufacturing to services tended to push down the labor share over time, but the growth of the health care industry tended to push up the labor share over tiem.

3) The decline in labor share is not the same as the rise in inequality of incomes. All of labor income is included in labor share, including what is earned by the top 1% as compensation for labor.  Elsby, Hobijn, and Șahin write: "[T]he labor share in the United States has in fact been buoyed up increasingly by the rising income shares of very rich workers, like CEOs for example. Thus, the decline in the labor share conceals, rather than exposes, most of the large increases in inequality that have emerged in recent decades."

4) The decline in the labor share of national income is occurring, but is also probably overstated in the commonly used statistics.  Elsby, Hobijn, and Șahin point out that the usual statistical approach has no easy way of estimating the income of those who are self-employed, and as a result an assumption buried in the data is to assume that the hourly compensation of payroll employees and the self-employed has changed in the same way over time. However, they believe that the pay of the self-employed has probably increased in the last couple of decades relative to the pay of payroll employees, and so the labor share is a little greater than the official statistics show. They find that "around a third of the decline in the headline measure   is a symptom of the method used to impute self-employment income."

5) One potential explanation for the declining labor share is that an increased rate of capital investment substituted for labor. However, Elsby, Hobijn, and Șahin find that the evidence does not support this explanation; specifically, the amount of capital/output wasn't rising over this time.

6)  Another possible explanation for declining labor share is the decline in private-sector unionization rates in recent decades. owever, Elsby, Hobijn, and Șahin find that the evidence does not support this explanation; specifically, the fall in labor share across industries doesn't seem much correlated with the changes in unionization rates in those industries.

7) Yet another possible explanation for the declining labor share is increased global competition.  Elsby, Hobijn, and Șahin write: "Our analysis identifies offshoring of the labor-intensive part of the U.S supply chain as a leading potential explanation for the decline in the labor share." More specifically, they document a close connection between which industries are exposed to greater import competition and which industries saw the biggest fall in labor share during the last 25 years or so.

The Affordable Care Act Falls Short

The slow phase-in of the Patient Protection and Affordable Care Act of 2010, widely known as "Obamacare," is supposed to kick into a higher gear on October 1 when open enrollment begins in the "exchanges" that are one of the tools for expanding the share of the U.S. population with health insurance.  As law comes into effect, it's perhaps useful to take a step back from the day-to-day kerfuffles over the mechanics of implementation and look at the big picture. Why was it so widely perceived that a major reform of the U.S health care sector was needed?

There have been two main concerns about the U.S. health care sector for the last few decades. First, tens of millions of Americans lacked health insurance, which in turn raised concerns that they were receiving too little health care, or receiving it too late, or receiving it at costs that led to severe household financial stress. Second, the cost of health care had been rising faster than the size of the U.S. economy for decades. In the private sector, firms paying more for health insurance meant that less money was available for raises in take-home pay. In the public sector, the rising costs of Medicare, Medicaid, and health care costs for retired government workers were creating pressure in all the other parts of public budgets.

Sure, there were other concerns about the health care sector, like making health insurance companies play nice, or providing support for medical education and biomedical research. But addressing those sorts of concerns didn't require sweeping legislation to shake up the health care sector. How is the Affordable Care Act likely to perform on the two main issues of covering the uninsured and constraining the rise in costs?

Since well before the passage of the Act, it has been clear that it would not provide universal health insurance coverage. For example,here's a White House announcement in September 2010 predicting that the act would reduce the number of Americans without health insurance from about 50 million to about 18 million.
The Congressional Budget Office estimated last spring that the implementation of the Affordable Care Act would reduce the number of Americans without health insurance from 55 million in 2013 to 31 million in 2016, with most of that drop coming from people signing up for the new insurance "exchanges" and some coming from an expansion of Medicaid. But by 2023, there would still be 31 million uninsured. Here's a recent Washington Post story about those 31 million. So after all the tumult and the shouting over the Affordable Care Act, both, during and after its passage, its supporters optimistically expected it to solve about 60% of the problem of Americans lacking health insurance, and in fact it now seems likely to solve about 40% of that problem.

Those lacking health insurance are not primarily the elderly, because they are covered by Medicare, and not primarily the poor, who are covered by Medicaid. They are also not primarily children, who are often eligible for coverage under programs like the Children's Health Insurance Program. Instead, the uninsured are mainly those in the 19-34 age bracket who don't get health insurance through an employer, aren't eligible for a public health insurance program, and either can't afford private health insurance or--given that many of them are relatively young and healthy--don't think it's worth the cost to buy health insurance. Here's a figure from
a recent Census Bureau report showing those who lack health insurance by age group:

On the subject of restraining the rise in health care costs, the bottom line is that when a piece of legislation is promising to expand substantially the amount of health care that people will be able to consume, it is going to increase costs, at least in the short run. Again, this was openly admitted by those who advocated the act. Their argument was that although health care costs would rise in the short run, various cost-controls built into the legislation would help constrain the rise in costs in the longer run. As one example of such claims, here's Jonathan Gruber making this case in 2010 in the New England Journal of Medicine. But while the Affordable Care Act does include many pilot projects and experiments that seek to hold down health care costs, the effect of these projects is not yet known. But not much is known along these lines so far. As a report earlier this summer from the Institute of Medicine at the National Academy of Sciences reports, "the ACA [Affordable Care Act] generated a thousand pilot demonstrations of new payment models. It is too early to know which of these models will prove to control health care costs and improve quality."

It does seem that the rate of increase in health care costs slowed down in the United States, and in a number of other countries around the world, starting in about 2003. But a paper just published in the most recent Brookings Papers on Economic Activity by Amitabh Chandra, Jonathan Holmes, and Jonathan Skinner asks "Is This Time Different? The Slowdown in Healthcare Spending." They "predict that health care costs
will grow at GDP plus 1.2 percent for the next few decades; lower than previous estimates but
still on track to cause serious fiscal pain for the U.S. government and employees who bear the
cost of higher premiums in the form of lower wages." Thus, even with the recent slowdown in health care costs taken into account, the most recent Congressional Budget Office report looked at future health care costs this way: "Although the growth of health care spending has slowed recently, CBO projects that spending per enrollee in federal health care programs will continue to increase at a faster pace than per capita GDP. However, the difference between those two growth rates will be smaller than its average of recent decades, CBO projects." Here are the estimates from the CBO projecting continued rapid growth in federal spending on health care programs as a share of GDP.





In short, the Patient Protection and Affordable Care Act is going to be only a partial success in expanding health insurance coverage and in constraining the rise in health care costs. As this reality becomes clear, the fallback case for supporting the legislation, and the disruption and uncertainty that it is creating, is that something needed to be done, the law was at least a partial step in the right direction, and because of political opposition from the Republicans, this plan was the only one on offer. This defense seems to me disingenuous. Yes, something needed to be done. But the Affordable Care Act was not the only health care proposal floating about. Indeed, President George W. Bush proposed a far-reaching health care reform in his State of the Union address back in 2007, and the Democrats who controlled Congress at that time were emphatically not willing to accept the argument that something needed to be done and it was at least a partial step in the right direction.


One main aspect of Bush's plan was based on the idea that instead of having some people get health insurance tax-free, through their employer, while others need to buy insurance out of pocket, everyone who purchased health insurance would get the same standard deduction. As the plan was explained:

• Families With Health Insurance Will Not Pay Income Or Payroll Taxes On The First $15,000 In Compensation And Singles Will Not Pay Income Or Payroll Taxes On The First $7,500. 

• At the same time, health insurance would be considered taxable income.  This is a change for those who now have health insurance through their jobs.

• The President's proposal will result in lower taxes for about 80 percent of employer-provided policies.

• Those with more generous policies (20 percent) will have the option to adjust their compensation to have lower premiums and higher wages to offset the tax change.

The notion of Bush's was that treating health insurance as taxable income, while providing a limited the deduction, would tend to put downward pressure on more expensive "Cadillac" insurance plans. It would also mean that those who get insurance through an employer would not be favored over those who need to buy their own insurance. In addition, Bush's plan included a planned reallocation of federal income to states, so that states could subsidize health insurance for those with low incomes. At least by some admittedly partisan estimates, Bush's plan could have outperformed what the Affordable Care Act is likely to achieve in terms of reducing the number of uninsured and slowing the growth of health care costs. Here's an overview of what happened with the Bush proposal, which garnered supportive comments from some unexpected places like the Urban Institute and the Washington Post editorial board, but was pronounced "dead on arrival" by Congressional Democrats.

My point isn't to carry water for the Bush plan, which had its own set of issues, and probably would have had even more issues if it has been masticated by Congress. My point is that political obstruction on health care policy is a bipartisan habit. But for better or worse, America's efforts to reform its health reform system are in fact beginning with the Patient Protection and Affordable Care Act. Additional health care legislation is virtually certain to be needed; indeed, the air is already thick with waivers and missed and postponed timelines. My hope is that at least some supporters of the bill can admit that parts of it badly need changing or even expunging, and at least some opponents can admit that parts of it are worth keeping.

Marge Piercy on Why Work Matters

I sometimes struggle when teaching about unemployment to explain just why work matters. It's straightforward enough in  class about economics to note that elevated unemployment leads to loss of economic output, lower tax payments, and greater need for government welfare benefits. I can refer to evidence on  how unemployment is connected to social ills like bankruptcy, divorce, depression, and even suicide. But this listing of consequences, while a necessary part of teaching the economics of unemployment, doesn't touch the human heart of the issue. The poet Marge Piercy, in her 1973 poem "To be of use," gives a more concise and powerful sense of why useful work matters so much.

"To be of use"

The people I love the best
jump into work head first
without dallying in the shallows
and swim off with sure strokes almost out of sight.
They seem to become natives of that element,
the black sleek heads of seals
bouncing like half submerged balls.

    I love people who harness themselves, an ox to a heavy cart,
    who pull like water buffalo, with massive patience,
    who strain in the mud and the muck to move things forward,
    who do what has to be done, again and again.

I want to be with people who submerge
in the task, who go into the fields to harvest
and work in a row and pass the bags along,
who stand in the line and haul in their places,
who are not parlor generals and field deserters
but move in a common rhythm
when the food must come in or the fire be put out.

    The work of the world is common as mud.
    Botched, it smears the hands, crumbles to dust.
    But the thing worth doing well done
    has a shape that satisfies, clean and evident.
    Greek amphoras for wine or oil,
    Hopi vases that held corn, are put in museums
    but you know they were made to be used.
    The pitcher cries for water to carry
    and a person for work that is real.

Marge Piercy (1973)