Enlightened Economics

Economics for an Enlightened Age

Posts Tagged ‘debt’

• Proposed Healthcare Surgery Won’t Heal America

Posted by Ron Robins on May 30, 2011

By Ron Robins. First published May 18, 2011, in his weekly economics and finance column at alrroya.com

Yes, surgery is required for the US government’s Medicare (healthcare) program. But before the scalpel is used to control unsustainable costs, an understanding of what promoted the financial disease is required. Unfortunately, that understanding is almost totally missing in the American debate. The Medicare changes proposed so far will not heal America.

In “Short Term Gain, Long Term Pain”, I wrote “unacknowledged as key causes of most developed countries’ growing and unsustainable debt is their citizens’ lack of happiness and well being. This induces people to seek immediate comfort in material goods, drugs, and activities and lifestyles that eventually cause them, and their societies, great harm, ill health, and massive debt!” Additionally, consider the immense psychological distress and impact on individual lifestyle and chronic diseases when about half of all American marriages end in divorce and 29 per cent of all children live in single parent ‘families.’

Hence, for many tens of millions of Americans, this lack of happiness and well being inflicts significant psychosomatic (mind/body) based illnesses, accounting for 70 per cent or more of costly chronic lifestyle-based diseases.

Supporting the view concerning the negative effects of lifestyle-based diseases is Mark Bittman, writing in the New York Times on April 12. He said that, “for the first time in history, lifestyle diseases like diabetes, heart disease, some cancers and others kill more people than communicable ones. Treating these diseases—and futile attempts to ‘cure’ them—costs a fortune, more than one-seventh of our GDP… But they’re preventable, and you prevent them the same way you cause them: lifestyle. A sane diet, along with exercise, meditation and intangibles like love prevent and even reverse disease… ”

Mr. Bittman also quotes Dr. David Ludwig, a Harvard-affiliated paediatrician and the author of Ending the Food Fight, who says, “the magnitude of the [US government] deficit is small when you consider costs of nutrition-related disease; the $4 trillion that the Republicans want cut over a decade is about the same as the projected costs of diabetes over that same period.”

Hence, it is clear that what should be done is to put resources into proven cost-effective programs that promote improved psychological health and lifestyles. Unfortunately, the US Congress is probably too psychologically unstable to seriously consider incorporating such programs! Instead it will probably resort to changes in Medicare that mostly attempt to limit healthcare costs. However, changes to Medicare are unlikely to happen until after the 2012 Presidential elections unless Congressional action comes sooner due to a collapsing US dollar and/or bond market, or a miraculous bi-partisan bill that both Democrats and Republicans agree on.

The starting point in this debate is that the US is dealing with potentially mammoth unfunded Medicare liabilities of up to $125tn. over the infinite horizon, according to Boston University’s professor of economics, Laurence J. Kotlikoff. Funding that would require all 309 million Americans to each write a cheque to the US treasury for $405,000! Clearly, that is not about to happen.

President Obama revisited the Medicare cost debate on April 13, by saying the following: “Already, the reforms [to Medicare]… will reduce our deficit by $1tn… We will cut spending on prescription drugs by using Medicare’s purchasing power… We will change the way we pay for healthcare… with new incentives for doctors and hospitals to prevent injuries and improve results… we will slow… Medicare costs by strengthening an independent commission of doctors, nurses, medical experts and consumers who will look at all evidence and recommend the best ways to reduce unnecessary spending…”

“… the reforms we’ve proposed… [are] saving us $500 billion by 2023, and an additional $1tn in the decade after that… [and] I will not allow Medicare to become a voucher program that leaves seniors at the mercy of the insurance industry…” A ‘voucher’ program is at the heart of proposed Medicare reform by US House Budget Committee’s Chairman Paul Ryan. It is also favoured by Professor Kotlikoff.

Commenting on April 14, a CNN post on President Obama’s Medicare reform proposals and those of Mr. Ryan, Professor Kotlikoff made the following remarks: “This is simply a continuation of kick-the-can down the road, which leaves ever larger government bills for our kids to pay… Obama’s speech made no effort to find common ground with House Budget Chairman Paul Ryan’s plan to address Medicare… ”

Professor Kotlikoff also writes about his own plan, The Purple Health Plan (PHP), which shares many similarities with Mr. Ryan’s proposal. “The [PHP]… provides all Americans with vouchers each year to purchase a basic healthcare policy. Those with bad genes or bad luck receive larger vouchers. The vouchers are paid for by our taxes. We pay for a basic health plan of our choosing solely with the voucher. Insurance providers of the basic plan can’t turn us down… [spending is fixed at] 10 per cent of GDP… [the plan] also offer[s] participants financial incentives to lower their weight, stop smoking, take their meds, and otherwise improve their health.”

Professor Kotlikoff’s PHP is partly based on the healthcare systems of Germany, The Netherlands, Switzerland and Israel, who the OECD ranks as having some of the most cost-efficient and effective healthcare systems. American per capita healthcare spending is around 50 per cent greater than in those countries, yet with frequently poorer outcomes. The PHP has great credentials, being supported by five Nobel Economics’ Laureates: George Akerlof, Edmund Phelps, Thomas Schelling, William Sharpe and Vernon L. Smith.

Surgery to America’s healthcare system, Medicare, is coming around again. The changes that eventually gather the most support may well centre around Professor Kotlikoff’s PHP, utilising a voucher system and limiting government spending. His plan also incorporates some financial incentives to promote improved health. But the PHP, as with any of the other plans being proposed, need to include a major emphasis on psychological health too. Without such an emphasis, the proposed changes to Medicare will not solve the massive problem of psychosomatically induced diseases—which are the bulk of chronic health problems and with which are associated most of the huge mounting costs.

Thus, none of the proposed changes to Medicare offered as yet by President Obama, US House Budget Chairman Paul Ryan, or by Professor Kotlikoff, will really heal America.

Copyright alrroya.com

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Posted in Consciousness/Psychology, Economics, Labour Issues | Tagged: , , , , , , , , , , , , , , , , , , , | Leave a Comment »

• Eliminate Corporate Taxes and Spur Economic Growth

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published April 7, 2011, in his weekly economics and finance column at alrroya.com

What should overly indebted developed country governments do to spur economic activity and reduce deficits and debt? Should they spend more, or less? Should taxes be increased, or lowered? A number of recent studies collectively suggest that government stimulus spending provides no stimulus at all beyond the amount spent. But where there are large deficits, spending should be cut. However, the best way to stimulate the economy is through lower taxes—and especially to cut corporate taxes! But what a political bombshell these policies would be in many countries.

Increased government spending, say numerous economists trained in traditional Keynesian economic theory, should have a ‘multiplier’ effect that increases overall economic activity by an amount larger than the sum spent. However, some recent empirical research disputes that assumption.

In a prestigious US National Bureau of Economic Research (NBER) study, Identifying Government Spending Shocks: It’s All in the Timing, by Valerie A. Ramey, published in October 2009, she found that, “… none of my results indicate that government spending has multiplier effects beyond its direct effect.” That is a dollar of government spending contributes only about a dollar to economic activity.

Furthermore, the same conclusion was noted by Harvard University’s Economics Professor Greg Mankiw while reviewing new research in his blog post, “Spending and Tax Multipliers” on December 11, 2008. He stated “…Bob Hall and Susan Woodward look at spending increases from World War II and the Korean War and conclude that the government spending multiplier is about one: A dollar of government spending raises GDP by about a dollar.”

So, these studies indicate that increasing government spending does not increase economic activity by anything more than the original sum spent.

By contrast, cutting taxes may have a much larger economic multiplier effect. Quoting Professor Mankiw again, he says, “…research by Christina Romer and David Romer looks at tax changes and concludes that the tax multiplier is about three: A dollar of tax cuts raises GDP by about three dollars…” (Incidentally, Christina Romer was chairman of President Obama’s Council of Economic Advisers in 2009-2010.)

Furthermore, Professor Mankiw adds that, “…these findings are inconsistent with the conventional Keynesian model. According to that model, taught even in my favourite textbook, spending multipliers necessarily exceed tax multipliers… How can these empirical results be reconciled? One hypothesis is that compared with spending increases, tax cuts produce a bigger boost in investment demand. This might work through changing relative prices in a direction favourable to capital investment–a mechanism absent in the textbook Keynesian model.”

Reviewing the spend and tax empirical data for most developed countries suffering from large deficits and debt is this study, Large Changes in Fiscal Policy: Taxes Versus Spending, by Alberto F. Alesina and Silvia Ardagna—another NBER paper, dated October 2009. They state, “we examine the evidence… of fiscal stimuli [stimulus] and in… fiscal adjustments [reducing deficits] in OECD countries from 1970 to 2007. Fiscal stimuli based upon tax cuts are more likely to increase growth than those based upon spending increases. As for fiscal adjustments, those based upon spending cuts and no tax increases are more likely to reduce deficits and debt over GDP ratios than those based upon tax increases. In addition, adjustments on the spending side rather than on the tax side are less likely to create recessions.”

So if cutting taxes gives the best boost to economic activity, are there particular taxes to cut that provide the most economic stimulus? The answer is yes, according to the OECD study, Tax Policy Reform and Economic Growth, November 3, 2010. The reviewers say that, “…corporate taxes are the most harmful type of tax for economic growth, followed by personal income taxes and then consumption taxes, with recurrent taxes on immovable property being the least harmful tax.”

Corroborating these findings is another recent peer reviewed study supporting lower corporate taxes: The Effect of Corporate Taxes on Investment and Entrepreneurship, published in the American Economic Journal in July 2010. It stated, “in a cross-section of countries, our estimates of the effective corporate tax rate have a large adverse impact on aggregate investment, FDI [foreign direct investment], and entrepreneurial activity… The results are robust to the inclusion of many controls.” (The authors were from the World Bank: Simeon Djankov, Caralee McLiesh and Rita Ramalho. And from Harvard University: Tim Ganser and Andrei Shleifer.)

Based on this evidence, some observers argue to significantly reduce or even eliminate corporate taxes entirely! In fact, many countries and jurisdictions are reducing corporate taxes significantly, exactly because of such studies. Though no country has yet eliminated them altogether.

Most of these respected studies variously infer that one optimal solution to spur economic growth in developed countries is to cut taxes, while to reduce onerous government deficits and debt, Alberto F. Alesina and Silvia Ardagna suggest cutting spending. Moreover, some of these studies clearly demonstrate that to promote economic growth, governments should most especially cut corporate taxes. Of course this is advocated by some US ‘Tea Party’ leaders, though it is a problematic issue for electorates in many developed countries.

However, shouldn’t at least one country try eliminating corporate taxes entirely? Now that would be one country to study!

Copyright alrroya.com

Posted in Economics, Finance & Investing, Monetary Policy | Tagged: , , , , , , , , , , , , , , , , , , , | 2 Comments »

• Short Term Gain, Long Term Pain

Posted by Ron Robins on April 12, 2011

By Ron Robins. First published March 31, 2011, in his weekly economics and finance column at alrroya.com

Unacknowledged as key causes of most developed countries’ growing and unsustainable debt is their citizens’ lack of happiness and well being. This induces people to seek immediate comfort in material goods, drugs, and activities and lifestyles that eventually cause them, and their societies, great harm, ill health, and massive debt!

After decades of study, Robert E. Lane, the Eugene Meyer Professor Emeritus of Political Science, at Yale University in the US, found that it is a lack of happiness and well being that is eating away the moral fibre of the populations in advanced market democracies. In Professor Lane’s seminal book, Loss of Happiness in Market Democracies, he writes, “amidst the satisfaction people feel with their material progress, there is a spirit of unhappiness and depression haunting advanced market democracies throughout the world, a spirit that mocks the idea that markets maximise well-being and the eighteenth-century promise of a right to the pursuit of happiness under benign governments of peoples choosing.”

Continuing, “the haunting spirit is manifold: a postwar decline in the United States in people who report themselves happy, a rising tide in all advanced societies of clinical depression and dysphoria [anxiety, malaise], especially among the young; increasing distrust of each other and of political and other institutions, declining belief that the lot of the average man is getting better, a tragic erosion of family solidarity and community integration together with an apparent decline in warm, intimate relations among friends.”

It is these conditions which Professor Lane observes that give rise to individuals seeking immediate comfort anyway they can. Hence, most developed countries’ populations gravitate to instant solutions that might ameliorate their lack of happiness and anxieties. This, no matter the long term monetary, psychological, or physical consequences and costs to themselves or society. Professor Lane believes it is imperative for western democracies to give the highest priority to improving the happiness and well being of its individuals. And this means their focus should be on human psychological health and relationships—not about income levels.

By looking for hedonistic joys in the present, many developed countries’ individuals seek excessive material consumption which then creates unsustainable levels of consumer debt. In the US, though to a lesser degree in other developed countries, consumer debt has grown far faster than individual earnings gains over the past several decades. Despite a respite in consumer debt growth during the past two years, signs are emerging that US consumer debt might well begin to outpace actual earnings gains again in 2011, thereby creating conditions for yet another future financial crisis.

Also, and again much ignored in the debate concerning debt, are other individual behaviours that induce it. For example, to provide a modicum of happiness and to make life more bearable, people in America (and in many developed countries) consume drugs (legally and illegally) in extraordinary amounts. These drugs—alcoholic beverages, marijuana, cocaine, cigarettes, prescribed and non-prescribed medications, etc.—often create dependencies that impair health, brain and psychological functioning. These dependencies then lead to greater crime to support drug habits, increase prison populations and criminal/legal costs, raise the number of accidents everywhere, and encourage unhealthy lifestyles that in turn produce epidemics of obesity, diabetes, heart disease and all manner of health problems.

Americans spend more on healthcare, by far, than anyone else. In 2009, according to the Centers of Medicare and Medicaid Services, Americans spent $8,086 per person on healthcare, equal to 17.6 per cent of their economic output or gross domestic product (GDP). And such expenditures continue spiralling 4 to 10 per cent a year, far faster than GDP itself. Thereby they add inexorably to future unfunded US federal government medical liabilities that Boston University’s Professor Laurence Kotlikoff believes is about $125 trillion over an infinite timeframe. To fund that liability would require every man, woman and child in America to pay about $407,000 to the US federal treasury!

And among public companies a short term focus on near term profits that potentially create longer term costs and debt has been endemic. Consider this 2001 quote by Maryann Keller on the US automobile industry. In Forbes magazine, she said, “[That] Chrysler, GM and Ford spent billions of dollars to buy their stock in the open market… It was always obvious that product spending [developing new autos] was being sacrificed to provide trading liquidity [ease of selling stock] for big investors while boosting earnings per share. GM, Ford and the Chrysler Group today [in 2001] find themselves with growing gaps in their product portfolios as they lose market share…”

Thus, the US automobile industry preferred to spend profits on supporting their near term stock prices rather than developing new products for longer term profits. By 2009 all but Ford were bankrupt. After losing tens of thousands of jobs and engaging in a massive automobile industry restructuring program, the US government bailed out the industry (for now?) at a cost of about $85 billion. (Canadian governments also supported GM and Chrysler to the tune of $13.5bn CAD.)

Total societal US debt (private, corporate and government) is now likely to continue moving higher again as consumers are forever encouraged to spend now while saving is discouraged due to artificially mandated low rates. Increasing employment, though welcome, is not likely the answer to mounting unsustainable societal debt. In fact, it might well exacerbate it if former long term trends of debt growth outpacing income gains continue.

The US, like most other developed countries, is on a path to increased human suffering and tragic financial circumstances unless it deals with the fundamental issue: enabling individuals and families to become intrinsically happier and experience feelings of greater well being. Only then can the compulsion towards short term thinking and gratification—which builds huge unsustainable long term debt—be stopped.

Copyright alrroya.com

Posted in Consciousness/Psychology, Economics, Labour Issues, Spiritual | Tagged: , , , , , , , , , , , , , , , , , , , | Leave a Comment »

 
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