Reports from the Economic Front

a blog by Marty Hart-Landsberg

Monthly Archives: February 2009

Dealing With Health Care

Our health care system received considerable attention from President Obama in his recent “State of the Union” speech to Congress.  And for good reason–our privately run health care system has been a disaster.  It is doing a poor job keeping us healthy—as individuals and as a country. 

The failings of our health system on a personal level are well documented.  According to a 2007 study by the Commonwealth Fund:

“Despite having the most costly health system in the world, the United States consistently underperforms on most dimensions of performance, relative to other countries. . . . Compared with five other nations—Australia, Canada, Germany, New Zealand, the United Kingdom—the U.S. health care system ranks last or next-to-last on five dimensions of a high performance health system: quality, access, efficiency, equity, and healthy lives.”

The failings of our health system on a national level are also well documented.  As President Obama noted in his speech, rising health care costs are one of the main drivers of our alarming projected federal budget deficits.  If we want to contain the deficit we are going to have to transform our health care system. 

The Center for Economic and Policy Research has created a Health Care Cost-Adjusted Deficit Calculator which allows us to see what would happen to our federal deficit if we had the same per person health care costs as do some 30 other countries (all of which have longer life expectancies than the United States).  Go here to see the calculator – pick another country and then watch our federal deficit just melt away when we match its per person health care cost. 

So, we need a new health care system, and badly—but what kind of system?  The California Nurses Association, along with many other groups of health care professionals, strongly advocates adoption of a Medicare-for-all single payer system.  Besides offering better care, to more people (right now some 47 million people have absolutely no health care coverage—that is 14% of the population), and for less money, the CNA also finds that such a system will have broad economic benefits.  In particular, its research (based on an  econometric study) finds that moving to a single payer system “predicated upon full Medicare benefits” would generate some 2.6 million new jobs.

The next move belongs to President Obama. To his credit he appears committed to building a health care system that will offer universal coverage.  Unfortunately, he also appears committed to allowing the private insurance industry to play a major role in running it.  As long as our elected leaders continue to avoid single payer strategies, their efforts at meaningful health care reform are likely to produce only limited gains.

Time to Talk about Nationalization

Even the Federal Reserve Board [Fed] is beginning to acknowledge that we are in a serious economic mess.  The Nobel Prize winning economist Paul Krugman quoted the following statement found in a summary of the minutes of a recent Fed meeting:

 

“All participants anticipated that unemployment would remain substantially above its longer-run sustainable rate at the end of 2011, even absent further economic shocks; a few indicated that more than five to six years would be needed for the economy to converge to a longer-run path characterized by sustainable rates of output growth and unemployment and by an appropriate rate of inflation.”

 

Translation: we are not only far from seeing the end of the recession, we are also not confident that there will be any meaningful recovery after it finally ends.

 

This brings us to the financial system and the need to nationalize several of the big money center banks.  Most of our top economic policy makers do not believe in nationalization—they believe that only private interests pursuing private profits can produce desirable outcomes.   For example:

 

  • Timothy Geithner, Treasury Secretary: “We have a financial system that is run by private shareholders, managed by private institutions, and we’d like to do our best to preserve that system.”

 

  • The Washington Post reports that Mr. Geithner and Lawrence Summers (President Obama’s top economic adviser) “think governments make poor bank managers.”

 

And they say these things with a straight face after our privately run, profit making banks have basically steered our financial system into ruin.  Most analysts believe, and I see no reason to disagree, that several of our major money center banks–like Citi Bank and Bank of America–are now technically bankrupt.  They own various assets tied to the housing bubble that have lost most of their value.  And they have made other loans that are no longer yielding returns because of the recession.  As a result, the market value of their assets is now below the dollar value of their liabilities.

 

Unwilling to declare these banks bankrupt, the government has been pouring hundreds of billions of dollars into them—but with little to show for it.  We bought stock without voting rights and we bought some of their toxic assets, but the banks have used the money to pay out dividends, bonuses, and even buy other financial institutions.

 

If we keep this up, their death spiral will drag us all down.  So—there is only one real answer—nationalize the banks that are technically bankrupt.  If we take them over we can actually figure out how bad the mess is, and develop a plan to deal with it.  We can ensure that the new managers we put in are paid a reasonable rather than exorbitant salary, and most importantly we can direct the banks to start making the loans that are needed to support the stimulus plan and get the economy going.

 

This is no radical call—actually there is a growing chorus for nationalization.  As the New York Times recently editorialized:

 

Rescue measures have so far prevented a system-wide meltdown, but they have not reversed the downward slide or revived bank lending. . . . Done right, a takeover would be a once-and-for-all fix. The government would examine the banks’ holdings to get a realistic assessment of the toxic assets that are crippling the banks — and how much capital each bank needs, not only to survive but to begin lending again.  Institutions that are healthy enough to raise the needed capital from private investors would remain in shareholders’ hands. Those that are too weak would be taken over by the government and recapitalized with taxpayer money. . . . Taking over big failed banks will be very difficult politically. But technically it could be easier than many of the elaborate rescues that have been tried and proposed.

 

The Times is actually coming a bit late to the position–At the end of this post you will find links to a number of articles by economists who have been calling for nationalization.

 

But, now we get to a key point—the Times and most of the other economists want the government to right the banking ship and then put the newly recapitalized banks up for sale to the private sector.  And I think that is a mistake.

 

Here is my reasoning: We have an economy that is in need of restructuring.  One important way is to control where money goes and at what price.  In other words, we have good evidence that a banking system organized to maximize profits is not a system that automatically directs resources to the activities that we want to promote.  Now, imagine developing a government strategy that seeks to rebuild our economy along new more productive lines—for example giving priority to an expanded health care complex, mass transit system, sustainable and localized system of food production, alternative energy, green technologies, and companies that pay a living wage or respect labor and environmental rights.

 

And now imagine a credit system that would be responsive to those priorities.  Even imagine banks that offer credit cards with an interest rate ceiling of 8-10% rather than 20-30%.—think how many new depositors these banks would get  You get the picture.

 

There are lots of banks that do make reasonable returns doing reasonable business.  Well, why shouldn’t we own a few of the big ones, especially the ones that have proven that they cannot manage themselves—we could set best practices (like with credit card rates) and use the reasonable returns to support desirable social programs—this would have the added benefit of allowing us to reduce the budget deficit and/or taxes.  Owning businesses that generate reasonable profits doing the public’s business makes a lot of sense—at least to me.

 

Nouriel Roubini: Nationalize Insolvent Banks 2/12/2009

Dean Baker: The TARP Dog and Pony Show 2/12/2009

Naomi Klein: We’ve Got to Make Obama Do It! 2/6/2009

Nationalized Banks Are ‘Only Answer,’ Economist Stiglitz Says 2/6/2009

Jane Hamsher: Obama Financial Team to Taxpayers: You’ll Get Nothing, and Like It 2/3/2009

Paul Krugman: Bailouts for Bunglers 2/2/2009

A positive note on the economy—sort of

Arise ye wretched toilers in the education world—go forth and struggle proudly—

So the Obama stimulus plan is now being debated in the Senate.  Many Republicans and some Democrats say that the proposal is too big and needs to be cut—that there is too much fat—that spending needs to be focused on things that really stimulate and that means create jobs.

So—what are these political representatives thinking of cutting—mostly education spending.  According to the New York Times: “The proposed cuts, by various accounts, include $40 billion to help states (in large part with education budgets), possibly $14 billion for Pell grants, and $14 billion for other education programs (though late word from the Washington Post is that the Pell grants may have survived).”

Say what?  Education spending is not stimulus spending? Ridiculous.

Economists measure things like job creation using input-out tables based on government statistics.  Using these tables economists try to determine the employment effects of spending money on different goods and services, including direct, secondary and induced effects—outcomes differ because of differences in the wage rates, labor intensity, and import dependence of the relevant sectors.

Here are the results of a representative study (PDF) (presented to the House Committee on Education and Labor on October 24, 2008).  The study attempts to estimate the total job creation that would result from spending $1 million in six different ways—on educational services; public infrastructure; green investments; tax cuts for household consumption; military spending; and the oil and natural gas industry.  The category “public infrastructure” consists, in equal parts, of investments in transportation, water management, and institutional structures, including educational buildings. The category “green investments” consists of three areas of energy efficiency—building retrofits (40% of total); public transportation (20%); “smart grid” electrical transmission systems (10%)—and three sources of renewable energy, wind power (10%), solar power (10%), and non-food biomass fuels (10%). The study is based on the most recent 2005 input-output tables of the U.S. Commerce Department.

The results:

$1 million spent on educational services generates 23.1 jobs

$1 million spent on public infrastructure generates 17.2 jobs

$1 million spent on green investments generates 16.7 jobs

$1 million spent on tax cuts for household consumption generates 14 jobs

$1 million spent on military spending generates 11 jobs

$1 million spent on oil and natural gas generates 4.4 jobs

So, be proud—support education spending—wear buttons proclaiming that you are part of the solution not the problem.  And remember the more you get paid the more the economy gets stimulated.

How bad is the economy?

How bad is the economy?  According to a CNN report:

“With the national economy in meltdown, more Americans than ever are relying on the federal aid program to keep from going hungry. In October, more than one in 10 people — about 31 million — were using the food stamp program to get by, according to the U.S. Department of Agriculture”

That was in October—and things have only gotten worse.  And it is no simple thing to get food support.  To get food stamps—actually a special debit card for food purchases–a household’s net monthly income cannot be more then the (monthly) federal poverty level (for the relevant household size).  Moreover the household cannot have more than $2000 in countable resources (like a bank account).

The most a single person can qualify for each month is $176.  If the month is 30 days and one eats three meals a day that works out to about $1.96 a meal.  The food money cannot be used to purchase prepared food or non food items.  In fiscal year 2007 the average monthly benefit was $96 per person and $215 per family.

President Obama’s economic stimulus plan would, if approved as currently proposed, provide each family on the food program with an additional $79 a month.