I actually disagree with Paul Krugman for once
This is an exiting day. I disagree with something Paul Krugman wrote.
In 2017, private insurance paid about a third of America’s medical bills — $1.2 trillion, or 6 percent of GDP. Having the government pay those bills directly, without a revenue offset, would therefore be a spending increase — a fiscal stimulus — of 6 percent of GDP.
Suppose — as MMTers tend to assume — that interest rates nonetheless didn’t rise. Then this stimulus would have a multiplier effect, probably raising GDP, other things equal, by 9 percent.
I have 2 objections. First the replacement of private insurance with debt financed single payer is effectively a tax cut not a spending increase (as indicated by the phrase “those bills”) as such, the direct effect on demand is less than 6% of GDP. Krugman likes to do two kinds of analysis IS-LM and New Keynesian.
In a standard new Keynesian model, the shift would have no effect on demand — ultra rational consumers would assume that they would have to pay the public debt eventually, so they would save the money that isn’t being paid as insurance premiums (which would presumably be paid as salaries instead).
In an IS-LM model, the incrase would be 6% times the marginal propensity to consumer. Going full Hicks (the orignal IS-LM model) that is 1-1/(the multiplier) = 1/3. To consistently apply the original IS-lm model, Krugman should calculate (multiplier -1)(the tax cut) = 3% of GDP.
Second Krugman writes “a multiplier effect” when he means “a multiplier greater than one”. I hate that. It does not follow from the definition of “to multiply” If I have to multiply a by something to get b, that doesn’t mean b is greater than a. Mutiplying by 0.9 is multiplying.
I insist on this, because anti Keynesians often play the 1=0 trick. When fiscal stimulus is proposed, they claim to prove that the multiplier is zero. When data is analyzed they claim to have been proven right, because there isn’t proof that the multiplier is greater than 1.
But the important point is that the correct calculation implies a 3% increase in GDP. Okun’s law (click the link) implies a 1.5% reduction in unemployment to 2.5% which would probably scare the Fed into raising interest rates, but which is a lot more possible than -0.5% as calculated by Krugman.
Now I don’t think that the marginal propensity to consume is 1/3, but that means that Krugman and I have to explain why estimate multipliers are only 1.5 and not much higher. I suspect this explanation would imply that MMTers predict a negative unemployment rate, so I suspect thaat, in the end, I would agree with Krugman’s conclusion.
But I find his calculation suspect.
Presuming the money not paid as premiums would, instead, be paid as salary is a very poor presumption.
Sorry; “Avery” should be “a very”.
In the purely hypothetical world in which a single payer bill passes Congress, I speculate that it would include a provision requiring employers to pay the money they used to pay to insurance companies to their employees so a minimum salary the year post bill equal to the previous year’s salary + the previous year’s insurance premium. Since wages are increasing, the rule that nominal unit labor costs not decline doesn’t prevent firms from saving money as a result of the bill.
It does have the feature that premiums are equal for all workers (this is required for employer provided health insurance not to be taxed) while a payroll tax will take more from higher wage workers. This means my purely hypothetical bill would automatically reduce inequality (at first).
But this is all silly, because it won’t happen. There is soft 60% public support (which can be pushed below 50% if the question is phrased with criticisms of single payer). That is nowhere near enough to take on the insurance companies.
Democrats had better declare for Medicare for all and define it as Medicare buy in. Private insurance companies can’t compete with the Center for Medicare and Medicaid Services. They can be driven out slowly. Single payer bills will not pass, so my ultra purely hypothetical proposed provision of such a bill is a silly waste of time of anyone unwise enough to read this comment.
“ultra rational consumers would assume that they would have to pay the public debt eventually, so they would save the money that isn’t being paid as insurance premiums”.
In other words – taxes would eventually have to rise. So why not just increase tax rates on the very rich now? Oh yea – the GOP would lionize this as SOCIALISM.
“Suppose — as MMTers tend to assume — that interest rates nonetheless didn’t rise.”
MMT again? Let’s see – we are near full employment and we pass another massive fiscal stimulus. What are the odds that the FED would not increase interest rates? Oh wait – there goes another Trump tweet. Never mind.
A few things going on here:
– There are no guarantees Medicare or Single Payor will cut the costs of healthcare unless it is written into both which is unlikely as Congress is beholden to healthcare contributions. Upton who guided the 21st Century Cures Act took in a few million just for it. This is not to say Dems do not do the same.
– Why Single Payor and who is going to write this into law? Congress is not knowledgeable about insurance (which single payor is). It will fall back on commercial healthcare to do so. Do you really want to pass all of this billing through the Gov?
– Medicare today is 50% funded by the Government. As it stands today, it does not include Vision ($100/month for two) , Dental (another $100/month for two), etc. For one “Average” person with Supplemental Insurance and Part D with an income less than $85,000 ($170,000 for a couple), the monthly cost is $300/month. You would need some hefty tax increases to fund the additions (Dental, Vision, etc.) and get the monthly costs down to where it is acceptable for a family of 4 or approximately $300/month. Medicare is also wasteful in expenditures and approves anything the FDA does.
– LTC was almost taken care of when Kennedy was still alive. The Public Option would have passed if the Senator from Aetna and today’s shill for the DeVos family had not wanted to do a Trump and close the Public Option down. LTC is a big and growing issue. 95% of Americans do not have coverage for LTC. Medicaid will take over if destitute.
– Do you think businesses are going to give up their 50% tax break for providing healthcare? And I do agree people will not want to leave an ESI plan for Medicare for All. Here again the rising cost of healthcare supplies, pharma, hospitals, etc. are an issue. Surprisingly doctors have not shared in the growth seen by the rest of the industry and have experienced a 1% annualized growth (more on this in my next post).
– Robert, what is Germany and Switzerland doing with healthcare? Germany, I know is a blend of both public and variations of private insurance with successful and quality outcomes for less cost than the US. Why not a blend?
Anyways, my $.02
“For once”? Didn’t you disagree with him not all that long ago?
Basically, the government would borrow (or print, if one prefers) $1.2T and spend it on health care eliminating the need for people to pay for their own insurance. Since most people get their health care through their employer, the main effect would improve corporate bottom lines. This would be great for the stock market. I’m guessing at least $600B would go to stock buybacks and dividends and the multiplier on that money would drive up the price of Manhattan penthouses, corporate ownership and name brand art.
I suppose there would be some increased demand in less rarified spheres thanks to decreased co-pays, assuming that this decreases co-pays. People buying their own insurance would benefit as well. Most of the money will wind up paying down debt, since most Americans are in hock up to their eyeballs. The debt repayment will probably wind up chasing the same goods as the stock buyback money as it drives down interest rates.
JackD seems to understand this. I’m not sure the MMTs or Keynesians (new or old) do.