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Economix Blog: Uwe E. Reinhardt: Health Care as an Economic Stabilizer

February 15, 2013 by Leave a Comment

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Uwe E. Reinhardt is an economics professor at Princeton. He has some financial interests in the health care field.

It has become customary to see our health care sector as a burden on society. In some ways it is. We have developed a complicated system of financing the sector – one guaranteed to put stress on the budgets of many households and governments at all levels.

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Furthermore, we have structured the system so that prices for virtually any kind of health care in the United States are at least twice as high as prices for the same things in other countries. It is the main reason that health spending per capita in the United States is about double what most other nations spend. (Earlier this week, the Congressional Budget Office reported a sharp slowdown in the growth of health care costs, leaving budget experts trying to figure out whether the trend will last and how much the slower growth could help alleviate the country’s long-term fiscal problems.)

From a macroeconomic perspective, the health care sector has functioned for some time as the main economic locomotive pulling the economy along. In the last two decades, it has created more jobs on a net basis than any other sector.

Oddly, not much is made of the job-creating ability of the health care sector in political debate over health policy, in contrast to discussions of military spending, where employment always ranks high among the arguments against cuts. In October 2011, for example, Representative Buck McKeon of California, the chairman of the House Armed Services Committee, made that point, among others, in a commentary in The Wall Street Journal, “Why Defense Cuts Don’t Make Sense”:

And on the economic front, if the super committee fails to reach an agreement, its automatic cuts would kill upwards of 800,000 active-duty, civilian and industrial American jobs. This would inflate our unemployment rate by a full percentage point, close shipyards and assembly lines, and damage the industrial base that our war fighters need to stay fully supplied and equipped.


Not surprisingly, in its “Defense Spending Cuts: The Impact on Economic Activity and Jobs,” the National Association of Manufacturers makes the same point.

For what it is worth, economists do not view “job creation” as an industry’s valuable output. Instead, when Industry A creates jobs and with them additional output, economists ask where the workers filling these jobs would have worked instead and whether the value of their output there would be smaller or larger than the output they produce in Industry A.

But health care has one additional feature I stumbled upon while writing a recent paper: from a macroeconomic perspective, it serves as an automatic stabilizer that offsets fluctuations in the growth of growth domestic product. Corporate and personal taxes and transfer payments such as unemployment benefits or additional enrollment in Medicaid are classic forms. They actually change countercyclically with changes in G.D.P., but health spending levels remain fairly stable as G.D.P. fluctuates.

The chart below presents the year-to-year changes in total national health spending, in total private fixed investments and in the rest of the G.D.P. from 2000 to 2010. The second chart depicts the fraction of year-to-year changes in G.D.P. accounted for by year-to-year changes in national health spending, a component of G.D.P. In that chart, no column is shown for 2009, because from 2008 to 2009 private investment plummeted by $421 billion and total G.D.P. fell by $353 billion, while health spending rose by $107 billion.

The health spending data in these charts comes from Table 1 of the Centers for Medicare and Medicaid Services publication “National Health Expenditures,” which provides national health spending data for the years plotted in the graph. The data on G.D.P. and fixed private investments come from the President’s Economic Report 2012, Tables B-1 and B-18.

It can be seen that total private investment fluctuates considerably over booms and busts. By contrast, health care spending remains fairly stable over time. It does tend to growth less rapidly in times of deep recessions, but it has not declined in the United States.

The next chart depicts the fraction of year-to-year changes in G.D.P. that is accounted for by year-to-year changes in national health spending, a component of G.D.P. In that chart, no column is shown for 2009, because from 2008 to 2009 private investment plummeted by $421 billion and total G.D.P. fell by $353 billion while health spending rose by $107 billion.

One must wonder what would have happened in the presidential elections of 2004 and 2012 if health care had not buoyed G.D.P. in the recession of 2000-1 and the recession that began in 2008.

One does not have to be a blind devotee of the Yale economist Ray Fair’s economic model of presidential elections, which relies on only a few variables to predict vote shares, to believe that one or both elections might have had different outcomes, even though both Presidents Bush and Obama inherited the recessions over which they presided.

Article source: http://economix.blogs.nytimes.com/2013/02/15/health-care-as-an-economic-stabilizer/?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

Upward Revision in G.D.P. Hides Weakness in Economy

November 30, 2012 by Leave a Comment

The Commerce Department said Thursday that gross domestic product expanded at an annual rate of 2.7 percent in the three months ended Sept. 30, well above the 2 percent estimate it gave in late October. But the revision was driven by increased inventory accumulation and a jump in federal spending — factors unlikely to be repeated in the current quarter, economists said.

“It’s a nice headline number,” said Nigel Gault, chief United States economist at IHS Global Insight, “but it exaggerates the underlying momentum in the economy. Sustainable improvements in growth are not driven by inventories.”

What’s more, the revised figures show that spending by businesses on equipment and software declined by 2.7 percent in the third quarter, the first decrease since the end of the recession in mid-2009.

Mr. Gault attributed the weak spending by companies in large part to growing uncertainty among executives about whether Congress and the White House can reach a deal before Jan. 1 that prevents more than $600 billion in automatic tax increases and spending cuts from going into effect early next year. “The No. 1 thing is the fiscal cliff,” Mr. Gault said.

The impasse in Washington has not only dominated the political debate since the election, but also become a leading worry for corporate America. President Obama met with business leaders on Wednesday to seek their support in negotiating a compromise, the second time he has sat down with prominent corporate chiefs this month, while Wall Street has wavered with each zig and zag of the debate.

The president and Congressional Democrats favor letting Bush-era tax cuts expire for top earners, while many Republicans have opposed any rise in tax rates and are pressing for greater reductions in federal spending.

Most observers expect a short-term compromise to be found that blunts the full effect of the tax increases and spending reductions, but economists say the risks to future growth are mounting. If a deal is not reached, the economy will grow at an annual rate of just 1.1 percent in 2013, according to a new forecast issued Thursday by Macroeconomic Advisers, with unemployment rising to 8.5 percent by the end of the year.

Unemployment now stands at 7.9 percent, still far above the level before the financial crisis and the recession, and it is not expected to come down significantly unless economic growth accelerates. For now at least, that seems unlikely.

“Over all, it was a disappointing report,” said Michelle Meyer, senior United States economist at Bank of America Merrill Lynch. The accumulation of inventories went from subtracting 0.1 percentage points from the initial estimate to adding 0.8 percentage points, she said.

“A lot of that inventory build was unintentional, which suggests a downside risk for the fourth quarter,” she said. “Businesses had expected stronger sales and consumer spending and were caught off guard.” Ms. Meyer said she expected the economy to grow by 1 percent in the fourth quarter of 2012.

The government also reported on Thursday that first-time unemployment claims dropped by 23,000, to 393,000, last week. But Ms. Meyer cautioned that these figures were much more volatile than usual because of the Thanksgiving holiday and Hurricane Sandy.

The weak underlying data in the report on third-quarter performance prompted Maury Harris, chief United States economist at UBS, to cut his projected estimate of fourth-quarter growth to 1 percent from 1.6 percent. “Part of this is Sandy and part of this is the inventories,” he said.

The uncertainty about what will happen in Washington is reflected in the sharp divergence of views among economists about growth in the first quarter of 2013. While Mr. Harris sees growth rebounding in early 2013, to an annual rate of 2.1 percent, Ms. Meyer estimates the rate of expansion will be less than half of that at 1 percent.

The Commerce Department data suggests that in spite of the caution about the future, the overall picture for companies remained healthy, with United States corporate profits reaching a record in the third quarter.

The increase from the second quarter was entirely a result of stronger business performance at home. Profits received from American-owned businesses abroad fell slightly in the third quarter, which may not be surprising given the recession in Europe and the slowdown in China.

There were signs of optimism in Thursday’s data. Residential fixed investment rose 14.2 percent, a sign that the housing recovery was gaining steam. A separate report from the National Association of Realtors showed pending home sales rose to a two-and-a-half-year high.

Indeed, not all economists took a pessimistic view.

“Just because the private sector is going into neutral doesn’t mean we have to automatically have a recession,” said Michael Gapen, senior United States economist and asset allocation strategist at Barclays. “Households are deleveraging, corporate balance sheets are strong, and business isn’t overextended.

“Short of a policy mistake in Washington, it’s tough to get a recession right now,” he said.

The new estimate of growth represents a substantial increase in the level of the second quarter, when the economy grew at a rate of just 1.3 percent. It also marks the fastest rate of expansion since the fourth quarter of 2011, when the economy grew at a 4.1 percent annual pace.

This was the second of the government’s three estimates of quarterly growth. The final figure is scheduled for Dec. 20.

Article source: http://www.nytimes.com/2012/11/30/business/economy/third-quarter-gdp-growth-is-revised-up-to-2-7.html?partner=rss&emc=rss

Filed Under: Economy News Tagged With: , ,

A Closer Look at Taxes on the Rich

August 16, 2011 by Leave a Comment

With the budget deficit growing and tax rates at a 60-year low, one question will remain near the center of the political debate in the coming months: Should the federal government raise taxes on the rich?

Warren E. Buffett, the billionaire investor known as the Oracle of Omaha, pushed the issue to the forefront this week by urging members of the new Congressional supercommittee on deficit reduction to stop “coddling” him and other affluent Americans and raise their taxes.

In an opinion article in The New York Times on Monday, Mr. Buffett said he paid just under $7 million in federal payroll and income taxes last year, about 17 percent of his income, a lower percentage than anyone else in his office.

Echoing comments he has made in the past, he called on Congress to make the tax system more fair by rolling back the so-called Bush tax cuts on people who earn more than $1 million a year and on income from capital gains and dividends. He would also close the loophole allowing hedge fund managers to be taxed at a lower rate.

Whatever the political viability, his proposal would put a significant dent in the nation’s budget shortfall. Based on projections by the Joint Committee on Taxation, the Congressional Budget Office and the Treasury, the tax increase on all three fronts would generate as much as $500 billion in new revenue over the next decade — about a third of what the Congressional committee is supposed to cut from the deficit.

“It’s not going to solve the long-term budget shortfall all by itself,” said Eric Toder, an economist at the nonpartisan Tax Policy Center. “The only way to do that is to have broader tax increases or reduce entitlements. But it could be an important piece of the puzzle.”

Because of Mr. Buffett’s high visibility and wealth — Forbes estimates his net worth at $50 billion, making him the world’s third-richest person — his comments brought a torrent of reaction. President Obama, who has fought unsuccessfully to increase taxes on the nation’s highest earners, cheered Mr. Buffett’s remarks during his Midwestern bus tour on Monday, saying that it was only fair that the spending cuts be balanced by tax increases on the wealthy.

Conservative bloggers and commentators brushed aside the proposals as grandstanding or as a gimmick to usher in a middle-class tax increase, and Pat Buchanan, a commentator on CNN, suggested that Mr. Buffett visit the section of the Internal Revenue Service Web site that accepts donations.

Republicans have been united in their opposition to tax increases, and gave Mr. Buffett’s proposals a chilly reception. All six Republican members on the committee have taken a no-tax pledge. Representative Kevin Brady, a member of the Ways and Means Committee and a Texas Republican, flatly rejected Mr. Buffett’s ideas.

“This is not a serious solution for deficit control or getting this dismal economy on its feet,” Mr. Brady said. “Economic growth does not follow a tax increase. So as much as I respect Mr. Buffett, his proposal fails on virtually every level.”

Despite the intense antitax sentiment that has helped the rise of the Tea Party movement since Mr. Obama took office, tax rates in the United States are at their lowest level since Harry Truman was president.

In 1950, the top income bracket had a 91 percent rate; today it is 35 percent. Mr. Buffett called for two new tax brackets for high earners — for income above $1 million a year and another above $10 million. While Mr. Buffett’s proposal did not suggest a rate, the Tax Policy Center has estimated that a 50 percent tax rate on income over $1 million would raise $48 billion over the next decade.

But one of the biggest factors reducing the comparatively low tax rates on investment income is the 15 percent for dividends, capital gains and “carried interest,” the money paid to hedge fund managers and private equity investors. Eliminating the carried interest provision alone would raise $21 billion over 10 years, according to the Congressional Budget Office.

And restoring capital gains and dividend rates to the levels before the Bush tax cuts — when capital gains were taxed at a top rate of 20 percent and dividends were treated as ordinary income — would bring the Treasury an additional $340 billion over the next decade.

Any of those measures would face intense lobbying and a battle in Congress. Indeed, Democrats were unable to roll back the carried interest tax break or the Bush tax cuts on the wealthy even when they controlled both houses of Congress. But with the prospect of severe spending cuts and another round of bitter deficit negotiations in Washington, proposals like Mr. Buffett’s call to raise taxes on the affluent are likely to become an increasingly urgent part of the discussion.

Article source: http://feeds.nytimes.com/click.phdo?i=ebef26c039e98d45ad317c73e7eff8d7

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