Research Reports – 12/25/1950
Book Review Readings in the Social Control of Industry, Selected by a Committee of the American Economic Association
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Medicare-For-All (M4A) is gaining some steam. Two prominent Democratic candidates for the presidency, Senators Elizabeth Warren and Bernie Sanders, support it, and several polls show that the idea is supported also by a majority of Americans.
In recent days, two academics from U.C.-Berkeley have even argued that a transition to M4A from the current system would dramatically cut taxes for the majority of workers by replacing all insurance premiums with taxes based on ability to pay.
That outcome sounds great until you ask how we will pay for it. According to a new study by the Urban Institute, M4A will cost $32 trillion over ten years. This estimate is in line with that of my colleague Charles Blahous. That’s more than the federal government will be projected to pay over the coming decade for Social Security, Medicare, and Medicaid combined, according to the most recent Congressional Budget Office projections. According to Urban, you could reduce the damage down to $16 trillion with some cost sharing and some limits on benefits. Either way, that’s a lot of money.
As Brian Riedl notes recently, one of the ideas floating around is that we simply need to come up with a $35 trillion tax to pay for it all (I am not kidding). He writes, “Proponents [of M4A] assert that the $35 trillion that families and businesses are currently projected to pay over the next decade in health premiums, out-of-pocket expenses, and state taxes to fund Medicaid would all be replaced with a $35 trillion federal ‘single-payer tax….”
Yet we have no details of how that would work in practice, and no one who supports M4A so far has offered an actual plan for the elusive $35 trillion replacement tax. Riedl writes, “Congressional Budget Office data show that raising $35 trillion would require a payroll tax increase of 39 percentage points, or a value-added tax of 91 percent – an enormous burden even for families no longer paying premiums.”
The scale of the tax hike it would require probably explains why no one wants to talk about it seriously. During the last Democratic debate, Senator Sanders acknowledged that it would require raising taxes on the middle class. He said, “At the end of the day, the overwhelming majority of people will save money on their health care bills. But I do think it is appropriate to acknowledge that taxes will go up.” But he has failed to give us any details about which taxes will go up and by how much and his campaign has only pointed out some options to pay for part of this extra government spending.
Meanwhile, Elizabeth Warren has vehemently refused to say if the middle class would see its taxes go up to pay for M4A or how she would pay for this. As the Wall Street Journal reported, for instance, during the debate Ms. Warren, the new leader in the polls, was given at least six chances to answer yes or no. She ducked every time. “Will you raise taxes on the middle class to pay for it, yes or no?” asked one of the media questioners.” The Journal continues, Ms. Warren replied: “So I have made clear what my principles are here, and that is costs will go up for the wealthy and for big corporations, and for hard-working middle-class families, costs will go down.” Later on she added, “Costs are going to go up for the wealthy,” and “costs will go down for hard-working, middle-class families.”
Got it; costs will go down for some and costs will go up for others. Yet we still have no clue just who will pay for what and how much the bill will be. Even those Berkeley professors won’t tell us how to pay for it. They have mentioned having a plan for some taxes as replacement of the cost of the employer side of insurance premiums. But, if this was even doable, it may raise between $10 trillion to $18 trillion (depending on how you measure it) of the $32 trillion.
While Warren doesn’t want to talk about, we can still do the calculation for her. For one thing, she has been open about paying for all her new spending ideas with a wealth tax on the rich, a corporate surtax, an increase in the estate tax, and the elimination of President Donald Trump’s tax cuts. Her wealth tax would raise, she claims, $2.75 trillion over ten years. Reversing the tax cuts would raise revenue by another roughly $2 trillion over ten years. You can add to that another $3 trillion that her campaign says she will raise through other taxes on the rich.
However, once you spend $32 trillion on M4A, $1.07 trillion for universal childcare, $610 billion for free college, $640 billion for eliminating student debt, $100 billion to combat the opioid crisis, and some other smaller programs, you are still left with a $30 trillion gap.
That’s 30,000,000,000,000 over ten years. It also ignores the deadweight losses of all this spending and new taxes on top of their inability to truly raise as much revenue as planned.
The bottom line is this: while M4A is getting a lot of favorable attention these days, proponents will continue to tout the benefits of a reform that lowers costs for some, while staying as far as they can from actually proposing a way to pay for it. But as PJ O’ Rourke famously said, “If you think health care is expensive now, wait until you see what it costs when it’s free.”
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Industrial production fell 0.4 percent in September, following a 0.8 percent gain in August. The September fall is the second drop in three months. Over the past year, industrial production is down 0.1 percent. Total capacity utilization decreased 0.4 percentage points to 77.5 percent as capacity posted a 0.2 percent gain for the month.
Manufacturing output, which accounts for about 75 percent of total industrial production, fell 0.5 percent after rising 0.6 percent in August. Manufacturing output is also down in two of the past three months, resulting in a 0.9 percent drop over the past year (see bottom chart), the worst performance since 2016.
Mining output posted a 1.3 percent decline for the month while utilities output rose 1.4 percent in September. Over the past year, mining output is up 2.6 percent while utilities output is up 1.2 percent.
Manufacturing-sector weakness was led by a sharp fall in production of motor vehicles, primarily related to a strike at a major manufacturer. Total motor vehicle and motor vehicle–parts production was down 4.2 percent for the month as vehicle assemblies fell to 10.71 million at a seasonally adjusted annual rate from 11.26 million in August. Most segments of vehicles showed declines for the month with automobile assemblies falling to 2.57 million, light trucks falling to 7.77 million, and medium and heavy trucks holding at 0.37 million. Primary metals fell 1.6 percent while machinery production fell 1.4 percent. Over the past year, motor vehicle production is off 5.4 percent while primary metals were down 3.3 percent and machinery production is down 2.9 percent.
The drops in motor vehicle, primary metals, and machinery production dragged total durable-goods production down 0.7 percent while nondurable-goods production was off 0.2 percent for the month. Among nondurable-goods producers, chemicals (12.7 percent of total industrial production and 35.7 percent of nondurable goods) fell 0.5 percent while food-products production (11.3 percent of total output and 31.8 percent of nondurables) rose 0.2 percent. These two categories account for two-thirds of nondurable-goods output.
Measured by market segment, consumer-goods production was down 0.2 percent in September, with consumer durables off 1.9 percent and consumer nondurables up 0.3 percent. Business-equipment production fell 0.7 percent in September while construction supplies were unchanged for the month.
Materials production (about 46 percent of output) decreased 0.5 percent for the month and is up 0.2 percent from a year ago. The energy component has been a major source of volatility in this category, particularly following the collapse of energy prices in mid-2014. The non-energy component fell 0.6 percent for the month and is down 1.4 percent from a year ago.
Manufacturing-capacity utilization dropped to 75.3 percent in September, down 0.4 percentage points from 75.7 percent in August.
Housing construction activity was weaker in September as total starts fell by 9.4 percent and permits for future construction fell 2.7 percent. Total housing starts dropped to a 1.256 million annual rate from a 1.386 million pace in August.
The dominant single-family segment, which accounts for about three-fourths of new home construction, rose 0.3 percent for the month to a rate of 918,000 units, marking the fourth gain in a row (see top chart). Starts of multifamily structures with five or more units sank 28.3 percent to 327,000, pushing activity to the lower end of the 300,000 to 450,000 range that multifamily starts have been in for much of the last two economic expansions (see top chart). From a year ago, total starts are up 1.6 percent, with single-family starts up 4.3 percent and multifamily starts off 5.8 percent.
Among the four regions in the report, total starts fell in all four regions: The Northeast (−34.3 percent), the Midwest (−18.9 percent), and the South (−4.0 percent), and the West (−1.9 percent). For the single-family segment, starts fell in three regions but were up 7.1 percent in the South, the largest region by volume.
For housing permits, total permits fell 2.7 percent to 1.387 million from 1.425 million in August. Single-family permits rose 0.8 percent to 882,000 in September, the fifth monthly gain in a row (see top chart). Within the multifamily segment, permits for two- to four-family units were off 16.7 percent and permits for five or more units fell 7.5 percent to 470,000. Permits for single-family structures are up 2.8 percent from a year ago while permits for two- to four-family structures are down 14.6 percent and permits for structures with five or more units are up 20.8 percent over the past year.
Overall, single-family housing activity has posted a modest rebound over the last several months following a period of weakness from early 2018 through early 2019. The sharp drop in mortgage rates may be providing a bit of a tailwind, but there is little evidence to suggest a significant and sustainable acceleration in single-family housing activity in coming months and quarters. Activity levels remain at or below the typical levels during prior expansions over the past 35 years.
Multifamily housing remains generally robust, sustaining activity at levels consistent with the prior two economic expansions. However, given the high level, it’s unlikely that it can go much higher. Therefore, total residential investment is unlikely to be a significant and sustained source of growth for the economy.