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I’m just asking because that’s what the Washington Post told readers in an article on the 2019 Social Security and Medicare Trustees reports. The piece noted that the Medicare program is first projected to face a shortfall in 2026. It would take an increase in the payroll tax of 0.91 percentage points (0.455 percentage points on both employees and employers) to fill the projected gap. The piece tells readers this is “a measure that could hurt business development and growth.”
It’s not clear why it would have such a negative effect on business development and growth. The conventional view in economics is that the worker pays this tax out of their wages, so essentially it means that after-wages will be 0.91 percent lower with the tax increase. While that will moderately reduce the incentive to work, most studies show this should have little effect on employment.
We have seen much larger tax increases in prior decades, for example the payroll tax rose by 4.8 percentage points from 1959 to 1969, with little obvious negative effect. It is also worth noting that the slower pace of health care cost growth over the last decade has slowed or even reversed the rise in the percentage of compensation going to health insurance. This means that wages have risen more rapidly than if health care costs had continued to grow at their prior pace. In its impact on the labor market this is equivalent to a cut in the payroll tax. The impact of this slower health care growth over the last decade has been considerably larger than the 0.91 tax increase that is projected to be necessary to fund Medicare after 2026.
I’m just asking because that’s what the Washington Post told readers in an article on the 2019 Social Security and Medicare Trustees reports. The piece noted that the Medicare program is first projected to face a shortfall in 2026. It would take an increase in the payroll tax of 0.91 percentage points (0.455 percentage points on both employees and employers) to fill the projected gap. The piece tells readers this is “a measure that could hurt business development and growth.”
It’s not clear why it would have such a negative effect on business development and growth. The conventional view in economics is that the worker pays this tax out of their wages, so essentially it means that after-wages will be 0.91 percent lower with the tax increase. While that will moderately reduce the incentive to work, most studies show this should have little effect on employment.
We have seen much larger tax increases in prior decades, for example the payroll tax rose by 4.8 percentage points from 1959 to 1969, with little obvious negative effect. It is also worth noting that the slower pace of health care cost growth over the last decade has slowed or even reversed the rise in the percentage of compensation going to health insurance. This means that wages have risen more rapidly than if health care costs had continued to grow at their prior pace. In its impact on the labor market this is equivalent to a cut in the payroll tax. The impact of this slower health care growth over the last decade has been considerably larger than the 0.91 tax increase that is projected to be necessary to fund Medicare after 2026.
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Jim Tankersley had a piece in the NYT yesterday on the cost per job saved of Trump’s tariffs on Chinese washing machines. According to the study, the cost per job saved was $817,000. While that is a steep tab, there are a few points that should be added to this sort of analysis.
First, if the point of the tariffs is to benefit workers, part of this $817,000 cost is going to higher pay to workers who would have jobs with or without the tariff. The study doesn’t look at the impact on wages of workers in the industry, but if the goal is to help workers who make washing machines, then this should be factored into the assessment.
The second point is that this is a partial equilibrium analysis. It doesn’t look at the overall effect on the economy of a reduction in the money we spend on importing washing machines. While this can be hard to assess, since imports of washing machines from China are a very small part of the total economy, other things equal we would expect that less money spent on imported washing machines would translate into a higher-valued dollar. (We are reducing the supply of dollars on world markets, thereby raising the price of dollars.)
This effect is almost certainly very small, but suppose that the reduced payments for imported washing machines raised the value of the dollar by just 0.01 percent. If this rise in the dollar were fully passed on in lower import prices (it isn’t), that would translate in a reduction in the cost of imports to US consumers of $320 million, more than 20 percent of the cost of the tariffs estimated in this study. Even if it would be hard to get any sort of precise numbers, the point is that this is an offsetting effect which could be large relative to the estimated cost of the tariffs.
The third point is that tariffs can sometimes make sense if they allow an industry breathing space to reorganize and regain competitiveness or serve some other goal (e.g. persuading a country to raise the value of its currency). In 1983, Ronald Reagan imposed tariffs on Japanese motorcycles in order to help out Harley Davidson. In 2006, when President George W. Bush wanted to tout the virtues of free trade, he visited a Harley Davidson factory in Pennsylvania which was a major producer of motorcycles for exports. It is unlikely that Harley Davidson would have been exporting motorcycles in 2006 without the tariffs that allowed it some breathing space in 1983.
Of course, none of this means that Trump’s washing machine tariffs are a good idea. If they are in fact part of a well-crafted trade and industrial policy strategy, he is managing to keep this strategy secret from just about everyone. It looks mostly like the main effect will just be that we pay more for washing machines, even if the story may not be quite as bad as advertised.
Jim Tankersley had a piece in the NYT yesterday on the cost per job saved of Trump’s tariffs on Chinese washing machines. According to the study, the cost per job saved was $817,000. While that is a steep tab, there are a few points that should be added to this sort of analysis.
First, if the point of the tariffs is to benefit workers, part of this $817,000 cost is going to higher pay to workers who would have jobs with or without the tariff. The study doesn’t look at the impact on wages of workers in the industry, but if the goal is to help workers who make washing machines, then this should be factored into the assessment.
The second point is that this is a partial equilibrium analysis. It doesn’t look at the overall effect on the economy of a reduction in the money we spend on importing washing machines. While this can be hard to assess, since imports of washing machines from China are a very small part of the total economy, other things equal we would expect that less money spent on imported washing machines would translate into a higher-valued dollar. (We are reducing the supply of dollars on world markets, thereby raising the price of dollars.)
This effect is almost certainly very small, but suppose that the reduced payments for imported washing machines raised the value of the dollar by just 0.01 percent. If this rise in the dollar were fully passed on in lower import prices (it isn’t), that would translate in a reduction in the cost of imports to US consumers of $320 million, more than 20 percent of the cost of the tariffs estimated in this study. Even if it would be hard to get any sort of precise numbers, the point is that this is an offsetting effect which could be large relative to the estimated cost of the tariffs.
The third point is that tariffs can sometimes make sense if they allow an industry breathing space to reorganize and regain competitiveness or serve some other goal (e.g. persuading a country to raise the value of its currency). In 1983, Ronald Reagan imposed tariffs on Japanese motorcycles in order to help out Harley Davidson. In 2006, when President George W. Bush wanted to tout the virtues of free trade, he visited a Harley Davidson factory in Pennsylvania which was a major producer of motorcycles for exports. It is unlikely that Harley Davidson would have been exporting motorcycles in 2006 without the tariffs that allowed it some breathing space in 1983.
Of course, none of this means that Trump’s washing machine tariffs are a good idea. If they are in fact part of a well-crafted trade and industrial policy strategy, he is managing to keep this strategy secret from just about everyone. It looks mostly like the main effect will just be that we pay more for washing machines, even if the story may not be quite as bad as advertised.
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In keeping with accepted standards in debates on economic policy, we are now getting a debate on Medicare for All that is doing a wonderful job of ignoring the relevant issues. The focus of this debate is what Medicare for All will pay hospitals. As The New York Times tells us, if Medicare for All pays hospitals at Medicare reimbursement rates, many will go out of business.
The reason why this is a bizarre way to frame the issue is that the payments to hospitals are not going to buildings. They are going to pay for prescription drugs (close to $100 billion a year), for medical equipment and supplies, for doctors and other health care personnel. They also pay for hospital administrators, and in the case of for-profit hospitals, some of the money goes to profits. Also, in recent years a growing chunk of the money has gone to buildings, as many hospitals have sought to attract high-end patients by making themselves more upscale than a facility that exists primarily to provide health care.
Anyhow, a serious discussion of payments to hospitals should focus on the costs that hospitals face. There are enormous potential savings on prescription drugs and medical equipment and supplies if the government were to pay for research upfront and allow these items to be sold at free market prices, rather than granting patent monopolies that allow manufacturers of these products to charge prices that are tens or hundreds of times their cost of production.
We could save close to $100 billion a year if we allowed free trade in physicians services (i.e. remove the barriers that prevent qualified foreign doctors from practicing in the United States). We could also save some money on the high pay received by hospital administrators, especially if we reformed the corporate governance structure so that seven and eight-figure salaries were less common. A Medicare for All system also would presumably not be reimbursing hospitals for lavish facilities.
Anyhow, if we are going to have a serious debate on what Medicare for All would pay hospitals then it must focus on the prices and wages that hospitals pay for goods and services. Debating what the government pays hospitals without asking about the cost of these inputs is entirely pointless.
In keeping with accepted standards in debates on economic policy, we are now getting a debate on Medicare for All that is doing a wonderful job of ignoring the relevant issues. The focus of this debate is what Medicare for All will pay hospitals. As The New York Times tells us, if Medicare for All pays hospitals at Medicare reimbursement rates, many will go out of business.
The reason why this is a bizarre way to frame the issue is that the payments to hospitals are not going to buildings. They are going to pay for prescription drugs (close to $100 billion a year), for medical equipment and supplies, for doctors and other health care personnel. They also pay for hospital administrators, and in the case of for-profit hospitals, some of the money goes to profits. Also, in recent years a growing chunk of the money has gone to buildings, as many hospitals have sought to attract high-end patients by making themselves more upscale than a facility that exists primarily to provide health care.
Anyhow, a serious discussion of payments to hospitals should focus on the costs that hospitals face. There are enormous potential savings on prescription drugs and medical equipment and supplies if the government were to pay for research upfront and allow these items to be sold at free market prices, rather than granting patent monopolies that allow manufacturers of these products to charge prices that are tens or hundreds of times their cost of production.
We could save close to $100 billion a year if we allowed free trade in physicians services (i.e. remove the barriers that prevent qualified foreign doctors from practicing in the United States). We could also save some money on the high pay received by hospital administrators, especially if we reformed the corporate governance structure so that seven and eight-figure salaries were less common. A Medicare for All system also would presumably not be reimbursing hospitals for lavish facilities.
Anyhow, if we are going to have a serious debate on what Medicare for All would pay hospitals then it must focus on the prices and wages that hospitals pay for goods and services. Debating what the government pays hospitals without asking about the cost of these inputs is entirely pointless.
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The New York Times told its readers that the government plans to spend $37.2 million (“nearly $40 million” in first sentence) on two new tent cities for migrants coming over the border and applying for asylum. Most readers probably have no idea how much money this is to the federal government. If the paper was actually trying to provide information, it would have told readers that this is equal to approximately 0.0008 percent of spending this year.
The New York Times told its readers that the government plans to spend $37.2 million (“nearly $40 million” in first sentence) on two new tent cities for migrants coming over the border and applying for asylum. Most readers probably have no idea how much money this is to the federal government. If the paper was actually trying to provide information, it would have told readers that this is equal to approximately 0.0008 percent of spending this year.
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Neil Irwin had a New York Times article warning readers of the potential harm if the Fed loses its independence. The basis for the warning is that Donald Trump seems prepared to nominate Steven Moore and Herman Cain to the Fed, two individuals with no obvious qualifications for the job, other than their loyalty to Donald Trump. While Irwin is right to warn about filling the Fed with people with no understanding of economics, it is wrong to imagine that we have in general been well-served by the Fed in recent decades or that it is necessarily independent in the way we would want.
The examples Irwin gives are telling. Irwin comments:
“The United States’ role as the global reserve currency — which results in persistently low interest rates and little fear of capital flight — is built in significant part on the credibility the Fed has accumulated over decades.
“During the global financial crisis and its aftermath, for example, the Fed could feel comfortable pursuing efforts to stimulate the United States economy without a loss of faith in the dollar and Treasury bonds by global investors. The dollar actually rose against other currencies even as the economy was in free fall in late 2008, and the Fed deployed trillions of dollars in unconventional programs to try to stop the crisis.”
First, the dollar is a global reserve currency, it is not the only global reserve currency. Central banks also use euros, British pounds, Japanese yen, and even Swiss francs as reserve currencies. This point is important because we do not seriously risk the dollar not be accepted as a reserve currency. It is possible to imagine scenarios where its predominance fades, as other currencies become more widely used. This would not be in any way catastrophic for the United States.
On the issue of the dollar rising in the wake of the financial collapse in 2008, this was actually bad news for the US economy. After the plunge in demand from residential construction and consumption following the collapse of the housing bubble, net exports was one of the few sources of demand that could potentially boost the US economy. The rise in the dollar severely limited growth in this component.
The other example given is when Nixon pressured then Fed Chair Arthur Burns to keep interest rates low to help his re-election in 1972. This was supposed to have worsened the subsequent inflation and then severe recessions in the 1970s and early 1980s. The economic damage of that era was mostly due to a huge jump in world oil prices at a time when the US economy was heavily dependent on oil.
While Nixon’s interference with the Fed may have had some negative effect, it is worth noting that the economies of other wealthy countries did not perform notably better than the US through this decade. It would be wrong to imply that the problems of the 1970s were to any important extent due to Burns keeping interest rates lower than he might have otherwise at the start of the decade.
It is also worth noting that the Fed has been very close to the financial sector. The twelve regional bank presidents who sit on the open market committee that sets monetary policy are largely appointed by the banks in the region. (When she was Fed chair, Janet Yellen attempted to make the appointment process more open.) This has led to a Fed that is far more concerned about keeping down inflation (a concern of bankers) than the full employment portion of its mandate.
Arguably, Fed policy has led unemployment to be higher than necessary over much of the last four decades. This has prevented millions of workers from having jobs and lowered wages for tens of millions more. The people who were hurt most are those who are disadvantaged in the labor market, such as black people, Hispanic people, and people with less education.
Insofar as the Fed’s “independence” has meant close ties to the financial industry, it has not been good news for most people in this country.
Neil Irwin had a New York Times article warning readers of the potential harm if the Fed loses its independence. The basis for the warning is that Donald Trump seems prepared to nominate Steven Moore and Herman Cain to the Fed, two individuals with no obvious qualifications for the job, other than their loyalty to Donald Trump. While Irwin is right to warn about filling the Fed with people with no understanding of economics, it is wrong to imagine that we have in general been well-served by the Fed in recent decades or that it is necessarily independent in the way we would want.
The examples Irwin gives are telling. Irwin comments:
“The United States’ role as the global reserve currency — which results in persistently low interest rates and little fear of capital flight — is built in significant part on the credibility the Fed has accumulated over decades.
“During the global financial crisis and its aftermath, for example, the Fed could feel comfortable pursuing efforts to stimulate the United States economy without a loss of faith in the dollar and Treasury bonds by global investors. The dollar actually rose against other currencies even as the economy was in free fall in late 2008, and the Fed deployed trillions of dollars in unconventional programs to try to stop the crisis.”
First, the dollar is a global reserve currency, it is not the only global reserve currency. Central banks also use euros, British pounds, Japanese yen, and even Swiss francs as reserve currencies. This point is important because we do not seriously risk the dollar not be accepted as a reserve currency. It is possible to imagine scenarios where its predominance fades, as other currencies become more widely used. This would not be in any way catastrophic for the United States.
On the issue of the dollar rising in the wake of the financial collapse in 2008, this was actually bad news for the US economy. After the plunge in demand from residential construction and consumption following the collapse of the housing bubble, net exports was one of the few sources of demand that could potentially boost the US economy. The rise in the dollar severely limited growth in this component.
The other example given is when Nixon pressured then Fed Chair Arthur Burns to keep interest rates low to help his re-election in 1972. This was supposed to have worsened the subsequent inflation and then severe recessions in the 1970s and early 1980s. The economic damage of that era was mostly due to a huge jump in world oil prices at a time when the US economy was heavily dependent on oil.
While Nixon’s interference with the Fed may have had some negative effect, it is worth noting that the economies of other wealthy countries did not perform notably better than the US through this decade. It would be wrong to imply that the problems of the 1970s were to any important extent due to Burns keeping interest rates lower than he might have otherwise at the start of the decade.
It is also worth noting that the Fed has been very close to the financial sector. The twelve regional bank presidents who sit on the open market committee that sets monetary policy are largely appointed by the banks in the region. (When she was Fed chair, Janet Yellen attempted to make the appointment process more open.) This has led to a Fed that is far more concerned about keeping down inflation (a concern of bankers) than the full employment portion of its mandate.
Arguably, Fed policy has led unemployment to be higher than necessary over much of the last four decades. This has prevented millions of workers from having jobs and lowered wages for tens of millions more. The people who were hurt most are those who are disadvantaged in the labor market, such as black people, Hispanic people, and people with less education.
Insofar as the Fed’s “independence” has meant close ties to the financial industry, it has not been good news for most people in this country.
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