Author: Larry Littlefield

The majority of economists trained in the classical tradition believe there is a public policy tradeoff between distributional equity and economic efficiency; to get more of one, you get less of the other. But the U.S. health care finance system is an exception to that rule, as it is both inequitable and inefficient. You read about the inequities in my prior post; this post is about the economic damage. By tying the availability of affordable health insurance to group plans provided by employers, the current system prevents many workers from moving to jobs where they could be better compensated. It also dissuades them from becoming entrepreneurs, or becoming freelancers by choice, if that is what they would prefer. Therefore, the link between employment and health insurance has created a kind of economic serfdom for millions of Americans. For low, moderate, and middle income households lacking health insurance, since an serious illness or injury would wipe them out, the lack of such insurance means it is irrational to save. And, the burden of providing health insurance for middle-aged and older people has made older companies — and communities — uncompetitive with newer, growing firms and taxing jurisdictions. This sets up a merry-go-round in which the former are abandoned for no other reason than the age distribution of their employees, stranding those employees and residents and wasting capital, infrastructure and other resources. That issue is going to become critical as large swaths of suburban and Sunbelt America go into decline in the wake of the housing bust, and confront fiscal crises similar to what older northern cities faced in the 1970s.

There are many reasons for inequality. Some are blessed, by God and by nature, with great intelligence, athletic ability, or beauty; others cursed by congenital handicaps, disabilities, and diseases. Some are born into loving and stable families; others into broken homes filled with drugs and abuse. Some parents have the money required to induce the broader society to provide their children with extensive resources and support; others have little money, and must raise their children in unsupportive environments. All these advantages and disadvantages are present even before a person begins to make his or her own choices and mistakes. For the worst off, mistakes made in youth – with drugs, violence, sexuality, relationships, learning – often cannot be recovered from later on. Some of us would like to see government policies reduce the level of this “naturally occurring inequality,” and some would not.

Twenty-five years ago those running the federal government made my generation, and those after, a promise: pay a vastly higher regressive payroll tax throughout your lives and accept a later retirement age, and Social Security will be there to keep you out of poverty in your later years. That promise was made by the eight Republicans and seven Democrats, led by Alan Greenspan and appointed by President Reagan, who made up the 1982 National Commission on Social Security Reform, by the Congress that adopted its recommendations, and by the President who signed them into law in 1983. With all the extra payroll taxes since collected over and above those required to pay benefits, plus interest, the rest of the federal government owed Social Security nearly $1.9 trillion dollars as of FY 2006. And now for the two questions that cut through all the bullshit about Social Security.

Where will the rest of the federal government get the $1.9 trillion to pay back Social Security? Well, it will either have to drastically increase taxes, drastically slash other services and benefits, or drastically increase the federal budget deficit – leading to even higher taxes or even greater service and benefit cuts when those higher debts have to be paid. In other words it is those of at the back end of the baby boom, and those younger, would have to sacrifice to pay Social Security back. The federal government has no money of its own. It will have to get it from us. But wait a minute! If we have already been paying in extra for Social Security in the past, how come we will have to pay for it again in the future? Because the extra money that was collected in the past was spent in the past, and substituted for the personal income tax that was cut in the past. Not only that, but during the past 25 years the federal government borrowed even more money on top of that, and we will have to pay that back too.

As the Presidential posturing continues, is anyone interested in what Presidents have actually done with our money over the past 30 years? The Reagan defense buildup, the peace dividend, and the War on Terror explain much of the variation in total federal expenditures as a share of Gross Domestic Product over the past several administrations. Despite an aging population, spending on Social Security is at about the same share of GDP today as it was in the Carter Administration, although this is about to change as the baby boomers retire. Federal health care expenditures, which primarily benefit senior citizens, have soared as a share of GDP, although that growth was slower during the Clinton Administration. Federal spending on investments in the future – science, space and technology, energy, natural resources and the environment, community development and transportation – is much lower as a share of GDP than it was before the Reagan Revolution, though it has tended to increase somewhat under Presidents named Bush. Presidents named Bush also increase federal spending on the poor as a share of GDP, but overall spending on the poor is down as a share of GDP since the Carter Administration, with big shifts in the nature of that spending during the Reagan and Clinton administrations. And we’re lucky interest rates are low, because although the national debt is up as a share of GDP, the cost of interest payments has fallen, and a reversal of that trend could cause a downward economic spiral.

As demonstrated in my prior post, the Reagan Administration cut personal income taxes and subsequently raised payroll taxes, theoretically to save Social Security but in reality to pay for the income tax cut and other things. More on the other things later. Despite significant tax changes under subsequent administrations, this tax shift remains in place. In addition, the income tax code has been made vastly more complicated by higher rates combined with more deductions, exemptions, preferences, and favors, starting with the Clinton Administration and continuing in the administration of President George W. Bush. The same process has occurred at the state and local level in New York, with former Governor Pataki handing out this deal and that and sending checks, Mayor Bloomberg adding his own check, and former Mayor Giuliani pushing a special sales tax deal for clothing and cutting taxes for any individual company that got into his office and threatened to move to New Jersey. This is something that certainly didn’t change on Day One of the Spitzer Administration. In recessions, tax rates are raised to make of the lost revenue and service the debts. So, with payroll taxes up and income taxes down, and with tax rates rising and tax deals proliferating, who wins and who loses?

President Reagan wasn’t actually a great tax cutter, he was a great tax shifter, and his shift in the tax burden has remained in place ever since. A weak economy meant that President George HW Bush ended up with less personal income tax revenue despite breaking his “read my lips” tax pledge. President Clinton’s personal tax increases, concentrated at the top of the income distribution, really did increase tax revenues, because that’s where an increasing share of the nation’s income is going. The total federal tax burden, and the federal budget deficit, during the administration of President George W. Bush are different than in similar years of the administrations above. But W’s tax take and budget deficit are very similar to that under President Carter. With the exception of the Clinton Administration, all the additional payroll taxes to “save Social Security” since 1983 have already been spent, with IOUs deposited in federal accounts, and despite those additional revenues the amount of federal debt held by the public is 50% higher as a share of GDP than it was before the Reagan era. These are the findings when one tabulates federal revenues and expenditures as a share of GDP, for representative years of the last five Presidential Administrations, as I have in the attached spreadsheet.

Those who have read my posts over the past two years know that state and local policy and regional economic trends, not national policy and macro economic trends, are my main areas of concern and expertise. In particular, right now I am more afraid of the next state budget than unstable, nuclear armed Pakistan. Since part one of the Presidential campaign begins and ends this month, however (with part two not beginning until September) I’ve decided to analyze and write a series of posts on the federal budget. One task in doing so is to try to standardize the measure of federal revenues and expenditures to disentangle the decisions made by each administration from the external conditions that had nothing to do with those decisions. This means adjusting the figures for inflation, and for the resources available in the country, something I do at the state and local level by tabulating state and local revenues, expenditures and debt as a percent of personal income, the best measure available for counties and up, and will do at the national level by tabulating revenues, expenditures and debt per $100,000 of Gross Domestic Product (GDP).

Imagine the top executives of a corporation voting each other shares of stock, enriching themselves and diluting shareholder equity. Imagine elected officials getting together with the lobbyists for a select group of interests, handing out billions of dollars in favors, and immediately raising taxes and cutting services to pay for it. In that case, people might finally realize what is happening in this country in general, and in Albany in particular, and do what it takes to stop it. But that isn't the way it works. What you generally have is a two-part fleecing,and by the time the hammer falls on the victims everyone has forgotten all about the beneficiaries.

In business, in good times stock options are issued but offset by share buybacks, so stockholder's equity is not diluted — until later when unfortunately "circumstances beyond anyone's control" require that new stock be issued and capital infusions sought. And in politics the winners, the abusers, get their favors paid out of the public treasury funded by debts, deferred costs, advanced revenues, and higher returns. And then when pension funds are going broke and debt service starts eating the budget, there is "no choice" but to make "tough decisions" and raise taxes, cut benefits, cut spending, and raise fees. Those tough choices somehow never include taking back any tax breaks, excessive spending levels, and rich pensions and benefits for those cashing out. "Realism" requires that others pay the price, and since the price has been deferred as part of the two-part fleecing, it must be paid with interest.

Bill Hammond of the Daily News writes in favor of capping the permitted increase in school property taxes in New York State, in order to prevent school districts from continuing to ramp them up no matter how much aid they receive.  I'm glad that someone is willing to concede that New York State school spending outside the city is too high, far higher than is needed for a superb education let alone an adequate one.  Hammond recommends capping property tax increases at 2 1/2 per year, as Massachusetts has.  As I've noted many times, however, a tax cap based on a percentage increase from the current level merely guarantees that those who have spent the most will continue to be permitted to spend the most, forever, while those spending less (admittedly a shrinking group) can never catch up, no matter what.  Worse, thanks to STAR, it ensures that those currently spending more will continue to receive more state education assistance than those spending less. 

In my prior post, I provided and discussed New York State’s overall Medicaid spending in 2005, and spending by category of service. In this post, I’ll briefly discuss spending by age of beneficiary — a spreadsheet is attached for your further review. As noted, New York State accounted for 6.5% of the people in the United States, 7.3% of the poor people (2006 data), 9.3% of poor Americans over age 65 — and 8.4% of Medicaid beneficiaries. But there is a group for which New York’s share of U.S. Medicaid beneficiaries is much closer to its share of the overall population — those 18 and under. And, for that same group, spending per beneficiary is generally 25% to 50% higher than then national average, a fact related to the higher cost of living here. For those in some other age groups, spending per recipient is 70% or more higher than the national average, and/or New York State accounts for 10% or more of U.S. Medicaid recipients. I don’t think anyone is prepared to concede that New York State is cheating its children out of required Medicaid-financed services. So perhaps the number of child beneficiaries, and spending on them, is what one has to expect given the state’s higher poverty rate, higher cost of living Downstate, and one would hope greater generosity. New York should expect to account for 8% to 11% of the nation’s Medicaid spending, despite accounting for just 7.6% of its personal income. For other groups, another explanation is required for higher spending.