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New controversies over health care finance

Paul Krugman has been pointing to the nuttiness of many Republican presidential candidates’ economic positions on the Presidential campaign trail: mostly he focuses on criticisms of expansionary monetary policy during times of high unemployment, which run up against the logic of standard countercyclical macro policy—lower stimulus in economic booms, higher stimulus in troughs.

Following a flurry of debate left of center on the relative merits of the Democrats financial policies, there has been arguments over claims that Sanders’ Medicare-for-all plan could be paid for with a relatively modest new tax. (Krugman’s most recent post) The plan would one-up Obama’s health care achievements with an extension of Medicare eligibility to those not currently eligible, achieving truly universal coverage with a single-payer, Canadian-style plan.

Suppose the plan costs more than anticipated by the Sanders camp. It then might increase the deficit in a way that has not been explained to the public. Nonetheless, the relatively uncontroversial nostrums of modern monetary theory show that the federal government would indeed be able to pay for a huge increase in spending if it so chose, since it has its own sovereign currency. Moreover, the Fed would continue, as always, to hold the power to set interest rates on very-low-risk loans in dollars. The question would be whether spending money on this large program would improve or hurt overall well-being.

I believe that the meager stimulus offered by U.S. fiscal policy (along with similar weakness from most other major economies) has tended to be consistently insufficient to maintain growth in the face of worldwide stagnation and broadly deflationary conditions. Hence, increased fiscal stimulus would seem to be justified on the same grounds as the lower interest rates defended by Krugman in his columns on crazy macro policy views and statements from various candidates. Indeed, while the amounts discussed in the debate on the costs of the ambitious health care plan are enormous, they are perhaps not too large, given that current levels of unemployment—5 percent or so by conventional measures—are probably still above achievable full employment—for example, rates attained in the 1960s in the U.S. and in much of Western Europe for many years. Many moderate opponents of tax cuts and big new programs such as Sanders’s plan are anticipating significant increases in unemployment in the immediate realistic future. They regard current unemployment rates as unsustainably low, in the face of this historical evidence.

Moreover, fiscal policy can be tightened in the future in the event inflation or more-than-full employment begin to appear. Somewhat tighter monetary policy also can be used to compensate for higher spending.

Also, consider the fact the a substantial amount of medical care provided in this country is payed for by patients using consumer credit. Hence, the use of federal deficit spending would substitute for policies that result in huge amounts of private expenditure on consumer credit, including use of credit cards and hospital loans. Hence, a big rise in the deficit following the implementation of single-payer health coverage would be offset by reductions in excessive use of household-sector credit, which tends to make the financial system more unstable. This means that Sanders’s approach might help the private sector to avoid a big, unsustainable increase in household-sector leverage in the next expansion. This is an application of the economic insight pioneered by a prescient Wynne Godley and others in his tradition (stock-flow-consistent Keynesianism) in the late 1990s. So, considering effects on all sources of debt-financed expenditure, excessive stimulus to the economy might well be avoided.

Moreover, why use an approach with such huge administrative costs, as long as people can use their coverage to see a provider of their choice, as in the standard Medicare plan? The plan would ultimately make sense on grounds of efficiency in the use of labor and other resources, the main real concern with health care when it comes to avoiding serious inflation.

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