Conservative economic theory
Insurance, China, and taxes
What do they have in common?
July 31, 2005
The American economy has remained resilient despite Bush economic policy, not because of it. And although the past few years have seen economic growth, there are some very real structural problems we face that won't be solved by reductionist ideology or catch phrases. A bell curve written in crayon on a napkin, or Adam Smith taken out of context are not going to solve our budget deficit and health care problems. Nor will pretending these aren't real problems.
And all evidence to the contrary, conservatives will stick to their taut ideologies through thick and thin. Here are some examples.
MYTH: The United States doesn’t have a health insurance crisis — that is just more liberal propaganda
One problem with the 43-45 million uninsured Americans figure is the fact that the statistic is dynamic, not static. "[T]he uninsured population is fluid, with many people gaining and losing coverage," reported the Congressional Budget Office on May 12, 2003, in a brief on Americans who lack health insurance coverage. "Between half and two-thirds of the people who experienced a period of time without insurance in 1998, for example, had coverage for other portions of the year." Thus, the 40-odd million uninsured people in December of a given year are mostly a different group of people from the 40-odd million uninsured from the previous January. ...
Another problem with the statistic is that it tells us how many uninsured Americans there are, but not who they are. This is an important distinction. A 70 year old with multiple medical problems who lacks health insurance is obviously in a much direr situation than a healthy 20 year old who lacks health insurance. ...
In discussions about the uninsured, there appears to be a tendency…to regard "health insurance" and "access to healthcare" as synonymous. Not having health insurance obviously curtails one's ability to obtain certain medications, office visits, and procedures for fractions of their actual cost since the cost is not defrayed by the premiums contributed by thousands of other policy-holders. But it is inaccurate and misleading to equate health insurance with access to nominal or even emergency medical services. ...
At my own practice, we frequently see uninsured or "private pay" patients. Some of these patients are working people whose employer does not offer health insurance coverage. A fair number of these patients are small business owners. If asked, most of these people would say that they cannot afford health insurance, but this is simply another way of saying that it makes no financial sense for them to pay an insurance company hundreds of dollars per month in premiums so that the charge for a $55.00 office visit can be reduced to a $25.00 co-pay. While the private pay approach to healthcare carries the obvious risk of great personal financial hardship due to medical expenses in the event of developing a serious medical condition or sustaining a major injury, the unlikelihood of this happening must be weighed against the absolute certainty of having to repeatedly pay out insurance premiums to cover likelier and less costly medical services whose monthly or annual totals will most probably exceed the cost of paying out of pocket for the same services.
-- Bob Newbell, “About Those Uninsured Americans,” TechCentralStation, 7/25/05
REALITY
Okay, when was the last time that a trip to the doctor’s office only cost $55? Did we somehow get transported back to 1975? I don’t think so. An uninsured, student friend of mine recently went the doctor with a rash of some kind. The doctor did nothing but look at the rash and discuss nutrition with him for the remainder of the visit. The bill? $175. Makes the $25 co-pay look like a dream, huh? Dr. Newbell is right about this—just because a person lacks health insurance, doesn’t mean people lack access to health care. It just means they may have to spend the rest of their lives paying off the credit card debts they used to fund their health care, because they could not afford the $175 office visit. This is the reality of the un- and underinsured in this country. It is often easy for people who enjoy rich health insurance benefits from their employers to understand what it means to be un- and under-insured in the United States.
According to a Current Population Report from 2002, 15% of the population of the United States lacked health insurance, which was up from 2001. Also, the percentage of the population covered by employer-based health insurance plans dropped in 2002. In addition, almost 12% of America’s children are uninsured. Again, these numbers do not take into account the portion of the population that is underinsured. These are people who may have catastrophic insurance plans, for extreme medical situations, but who are not able to see a doctor if they fall ill with the flu. Everybody in the United States should have access to preventable health care. Men and women, at the very lest, should have access yearly doctor exams.
The very arrogant Dr. Newbell pretty much writes that since most people only go without health insurance for part of the year, then the United States must not really have a problem, right? But think again about what he says, about the estimate that between 50-66% of people only lack health insurance for part of a year. What about the other 34-50% who lack insurance for the whole year? What are they to do? And what if during the time that the 50-66% do not have insurance, they get sick? What if they are in a car accident and require surgeries and hospital stays? How important is having health insurance all year then?
Aside from the moral imperative, the dysfunctional US health care system perpetuates vast economic waste because it is bloated with bureaucracy and inefficient. The same ideologues who rail against government anything, are defending private bureaucracies that make the DMV look streamlined. Big insurance companies, aside from reaping enormous profits, are less efficient than a single payer government system would be for many reasons. Paul Krugman recently commented:
The great advantage of universal, government-provided health insurance is lower costs. Canada's government-run insurance system has much less bureaucracy and much lower administrative costs than our largely private system. Medicare has much lower administrative costs than private insurance. The reason is that single-payer systems don't devote large resources to screening out high-risk clients or charging them higher fees. The savings from a single-payer system would probably exceed $200 billion a year, far more than the cost of covering all of those now uninsured.
Universal coverage would also reduce the backbreaking costs of healthcare faced by American businesses, while creating healthier, and therefore more productive workforce. In other words, contrary to conservative blather, universal coverage would add more wealth to the US economy than costs. Creamy-eyed libertarians aside, most serious economists recognize this. Even business leaders are advocating universal coverage.
Health care should be a right in the United States, not a privilege for the wealthy. One person without health insurance or access to reasonably prices health care is one too many. Universal coverage presents does not present a choice between doing the right thing and economic prudence, it presents a moral and an economic imperative. A child with no healthcare is a child, not a choice.
MYTH: China’s revaluation of its currency could have dire consequences for China and is a bad thing for the United States
As for the new, more discretionary China, it may well peg the value of the yuan to a dollar-dominated basket of currencies. There may be a bit more influence from the yen and the euro, but the best possible spin is that the peg will be dollar-based. This suggests currency stability and more non-inflationary growth for the Big Tiger. It also rules out a creeping appreciation of the yuan, which could cause deflation in China and inflation in the U.S. The currency-basket rule would also eliminate an Argentina-like crackup of the yuan, which would lead to a total loss of confidence by international investors. ...
In this sense the currency-basket rule would still reflect significant dollarization of the China and Pac Rim economies, a good idea for growth, trade, and even diplomacy. This model would maximize connectivity between the regions, and might also throw off positive benefits for political democratization and wartime cooperation. Free trade and dollarized currency connectivity could in theory lead to a more peaceful and prosperous world.
-- Larry Kudlow, “Currency Basket Cases,” National Review, 7/26/05)
The U.S. now participates in a huge trade program with China, with U.S. consumers benefiting from low prices on a broad range of consumer goods that come from that country. In exchange, the Chinese are accumulating dollars for future purchases of U.S. goods and services.
-- Thomas Nugent, “Knucklehead Economics,” National Review, 7/26/05
The Wall Street Journal’s Greg Ip lauded China’s decision last week to partially delink the yuan from the dollar. Ip surmised that the action would move “the global economy closer toward balance,” and for potentially making Chinese goods more expensive to U.S. consumers, would cause the “the U.S. to import less,” and as a result reduce “the trade deficit [that] has risen to record levels.” Ip’s reasoning defies recent history, and simple economics too.
REALITY
The National Review attempting to discredit an article written by The Wall Street Journal. Now isn't that special.
In reading over some of the articles that have been written about China’s unpegging, or partial unpegging of its currency, the yuan, from the US dollar, I am met with abject confusion. The reasons for why this pegging is bad and should be halted just don’t add up. The columnist with whom I had the most problem was Larry Kudlow. Reading the first excerpt above, Kudlow suggests that the currency’s unpegging will cause China to have economic instability. That China will become the next Argentina (This is an entirely ridiculous statement in its own right. Argentina unpegged from the US dollar and devalued its own currency. That economy also used pesos and dollars interchangeably. All of the prices were set in dollars. Just imagine what happened when the prices were in dollars, but your pesos which used to be worth $1/peso were only worth $.70/peso. China does not have this situation. Of course this is just one example of the differences. Another, of course, is that Argentina owed debts to other nations and international organizations. However, especially in the case of the United States, China is the one doing the lending. Not the other way around). That reasoning just does not make sense. Right now, the Chinese currency is artificially undervalued. Pegging the currency to the US dollar allows Chinese exports to the United States to remain cheap. An increase in the value of the yuan will allow China to earn relatively more money for its exports. Of course, any Econ 101 student can tell you that an increase in the price of a good will probably lead to the quantity of the good demanded to decrease. Given the great dependence that the United States has on Chinese imports, it is hard to imagine that China’s exports will fall drastically, at least not in the short-term. And even if exports do fall, perhaps it will allow China to develop an economy that is not based on cheap exports to other countries. The country’s resources and people can turn to trades and industries that are not based on creating cheap underwear for Americans.
The best article that I have seen about this topic comes from Paul Krugman in The New York Times, in which he discredits Kudlow’s theory. It is really worth reading the entire article in ordering to get a clear picture of what China’s unpegging will mean for the United States. One particularly pointed and telling section is worth repeating here, as it gives a good indication of the likely outcomes from the unpegging:
An end to China's dollar-buying spree would lead to a sharp rise in the value of the yuan. It would probably also lead to a sharp fall in the value of the dollar relative to other major currencies, like the yen and the euro, which the Chinese haven't been buying on the same scale. This would help U.S. manufacturers by raising their competitors' costs.
But if the Chinese stopped buying all those U.S. bonds, interest rates would rise. This would be bad news for housing - maybe very bad news, if the interest rate rise burst the bubble.
In the long run, the economic effects of an end to China's dollar buying would even out. America would have more industrial workers and fewer real estate agents, more jobs in Michigan and fewer in Florida, leaving the overall level of employment pretty much unaffected. But as John Maynard Keynes pointed out, in the long run we are all dead.
Another article in the New York Times, published right after China’s announcement last week, states that “A more valuable yuan would make Chinese goods more expensive in the United States and American products cheaper in China; that should narrow the yawning trade gap between the countries.”
How is an increase of the United States’ manufacturing segment a bad thing? Since when is the Right more concerned about the welfare of China than the welfare of its fellow Americans?
MYTH: A flat tax would solve all of the United States’ fiscal problems
I believe the stage is now set and that conditions are more conducive than ever to the introduction of a flat tax in this country. Our prior belief in a 1950s "government knows best" high-tax approach has been replaced by widespread recognition that a flat tax which combines stark simplicity with a tax cut would generate more, not less, government revenue. ...
As our history chapter makes clear, Reagan's dramatic reforms were undone by subsequent administrations. Today President Bush is attempting to revive meaningful tax reform with his call in 2001 for elimination of the death tax, and two years later, a similar call for doing away with the dividend tax. He also ushered in a cut in the capital gains tax and allowed more expensing of investments for business. Yes, there have been roadblocks. The president's proposal for supersavings accounts was quickly dropped; the death tax expires in 2010 for just a year, to be reincarnated in 2011. And even the president's 2005 panel on tax reform, which was formed as I wrote this book, will base its recommendations on static analysis techniques (see chapter seven) believed by many experts to be highly inaccurate in predicting the impact of tax initiatives, especially tax cuts, on the economy. ...
That's why I wrote this book—to get beyond the sound bites, the political agendas that so often color day-to-day reporting and, instead, encourage a full and reasoned discussion of the issues during this critical period of national debate; to show in clear and compelling terms that the flat tax works.
--Steve Forbes, “Americans Deserve Flat Tax,” Washington Times, 7/20/05)
REALITY
It is truly amazing how excited some conservatives can get about the idea of instituting a flat tax for the United States. One of the many big myths perpetrated by the flat earthers is that eliminating progressive taxation levels will simplify the tax system, and thus the complex burden of filing taxes. The complications in filing taxes have to do with the process - allowable deductions, taxable income and the like. You can still have many loopholes at a single level of taxation, or conversely, few loopholes at let's say, three different levels. Levels of taxation and the complication of the system are two different items.
The flat tax is one of the worst tax reform proposals on the table, for a number of reasons. For one, the flat tax is extremely regressive. Using the resources at Tax Foundation, in 2002, under the current US tax scheme, the top 25% of taxpayers earned roughly $4 trillion and paid $650 billion of income tax, which works out to a tax rate of roughly 17%. The top 1% of taxpayers earned about $1 trillion and paid $270 billion in federal tax, for a tax rate of a little over 27%. The bottom 50% of taxpayers earned $865 billion and paid $28 billion in taxes, for an average tax rate of just over 3%. As these numbers show, the current tax scheme in the United States is fairly progressive. What happens when the country institutes a flat tax like the 13% Russian flat tax or the 16% Romanian flat tax? If the US follows in the footsteps of Russia and institutes a 13% flat tax, which also happens to be the US' average tax rate in 2002, the top 1%, with their combined income of $1 trillion, would pay $130 billion in taxes, or half the amount they pay now, which are already relatively low as a result of Bush's dramatic tax cuts of 2001. The bottom 50% of taxpayers would end up paying $112 billion in taxes, roughly 4 times what that group is currently paying. How is this a fair, progressive tax system? It is good for the rich, but what about the average American? How are they supposed to cope with ever-increasing health care and education costs if they have a federal tax bill that is 4 times higher than it used to be?
A progressive vs. a regressive system is not just favorable merely to be fair to those who are not rich. It is better economics. Aside from the reduced revenues that will necessarily follow, starving the working class will decimate GDP by killing demand for goods and services, just as starving out investment in infrastructure (schools, transportation, etc) will deplete the foundations of economic growth. Gene Sperling, who served as a top economic advisor to John Kerry during the 2004 Presidential election, echoed this sentiment to The New York Times in January when he said that “every Republican flat-tax proposal lowers the rate on people at the top. Now, if you're raising less revenue from the most well-off, one of two things are going to happen. You're either going to raise more revenue from the middle class, or you're going to pass on more debt to our children.''
The other oddity inherent in the current manifestation of the flat tax debate is the source of the “evidence” about the brilliance and grand possibilities of the system. President Bush and the conservatives are using the former Communist states of Romania, Russia , Estonia , etc. as the models of the United States ' tax future. As Manuela Paraipan points out, “ in Romania, as everywhere else in the former communist countries the taxes imposed by the state were progressive in order to finance various social welfare measures. After the fall of communism in 1989, the Social-Democratic Party (PSD) continued to perpetuate the political and the economical legacy of the former communist party to a certain extent. Thus, it kept the progressive taxation system, based on five classical brackets. However this system has become less and less efficient, due to increases in taxation levels and widespread corruption. A centralized government controlled system as the one we have had in Romania in the last 15 years had by its nature to evolve into a sordid game of lobbying, bootlicking, favours granted and bribery, with its rewards going to the sycophants, the inept and the immoral in contrast to the free-market system of competition, that rewards skill, efficiency and productivity.” Americans' handling of their own tax burden has never had a stellar reputation and the use of loopholes to evade a portion of one's tax burden is fairly common, especially among the well-healed, but is the United States' situation that dire that we need to resort to a taxation tactic that is used by other countries to counteract widespread and long-running corruption? A quick glance at the profiles of many of these flat tax countries at The World Factbook on the CIA's web site will illustrate the striking differences between the US 's economic situation and the situations of the flat tax countries. What may help these countries extract more tax revenue from a greater portion of their populations is not what is going to help the United States.
