Since just about every public policy issue of our age has an important economic component, surely upcoming debates will feature differing opinions about how to organize the economic interests of 330 million people. Office seekers will take sides on key questions, such as when government should be involved in the production and distribution of certain goods and services, versus when private markets be relied upon. This is a good time to review some basic economic concepts and demand that office seekers understand them.
Any such review could begin by examining a core teaching of economics: that competition among profit-seekers leads to the betterment of society as a whole, even though it is profit, not serving the larger society, that motivates the decision-makers in the market. It is this belief in “free markets” that forms the basis for much of public policy, the rebuttable presumption that markets are superior to government in the production and distribution of goods, services and assets. But it is in the rebutting that the conflict lies: when the pre-conditions for competition do not exist, markets will not self-regulate for the public good. Without keener knowledge of how markets work, politicians can’t propose efficient regulations, including when to leave markets alone to self-regulate.
Exceptions to Free Market Efficiency
Initiated by Adam Smith, a large body of knowledge has been developed to describe the circumstances under which market allocations driven by profit-seekers are superior to government programs and when they are not. Examples of the latter include:
Monopoly power: some of our most important services are sold to us by public utility monopolies - distribution of electricity, natural gas, water, cable TV, internet connectivity, sewer services. Although the competitive process cannot work for these incredibly important goods and services, the properties of the market can be used to guide their regulation. For example, the price of these services is usually regulated to provide the same sort of competitive rate of return on investment that one would find in a competitive market.
Patents: the government grants inventors temporary protection from competition so that, during that temporary period, monopoly profits are the reward for inventive and creative activity. When that period is over, the secret behind the invention is supposed to become public knowledge so that competitive markets can bring the benefit of the invention to consumers at prices that better reflect costs. When this doesn't work, as in the case of insulin, the government can step in and regulate the price. For example, President Biden's Inflation Reduction Act includes a $35 per month price cap on insulin.
Information asymmetries: when buyers or sellers can be taken advantage of because they are acting with different information about the safety, durability, or performance characteristics of a product, regulation is required to bring markets to the level of efficiency a free citizenry expects. For example, the Food and Drug Administration tests food for safety and drugs for efficacy, tasks well beyond the expertise of consumers.
Risk Spreading: primarily this is done through insurance, mostly through private insurance companies who charge a premium to pool the premiums of a very large number of people. This pool enables the insurer to write checks for those who suffer insured-against events -- car accidents, home fires, burglary -- out of the money gained by the premiums of those who have better luck. The premiums of the accident-prone are higher than the premiums of those without a record of problems. Hence, lousy drivers pay higher premiums than safer drivers, and sick people pay higher premiums than healthy people. The Affordable Care Act is a regulatory response to this latter example: the perversion of pricing the sick out of access to the medical care they need to get healthier.
Public goods: goods that the unregulated market cannot allocate well because profit-seeking firms cannot expect to earn a profit by providing the efficient amount of them. Examples range from public parks to police and fire protection to national defense, and they are paid for with taxes. Also included are public infrastructure assets that enable the private market to work more efficiently but which the market will not produce for itself. Included in this category are streets, roads, highways, bridges, tunnels, water and sewer systems, harbors and airports, and many others.
External costs: These are costs not paid for by the buyers or sellers in a market exchange, and there is no market-driven incentive to control them; they require regulation. Pollution is an example; the market actively encourages pollution because it reduces costs to the polluter. To address climate change while growing the economy, the power of the market to produce wealth must be harnessed and redirected to produce wealth with fewer emissions of greenhouse gases. The tools for doing this include taxes on those activities that produce emissions, emission quotas or bans, or subsidies for those producers whose activity results in fewer emissions.
Moderation of the Business cycle: A key role of government policy is to manage total spending so as to keep the economy running at full employment without inflation. During recessions, for example, the spending of the nation’s consumers and business investors is too small to employ all those who want to work. Government spending can fight a recession with investments that build and maintain government-owned productive assets -- streets, roads, broadband, police stations, ports, communication satellites, etc. -- and employ people in the process. Society can use these long-lived productive assets for many decades. Of course, government should avoid spending on goods that produce little of lasting value, such as weapons systems that the Pentagon does not want or “bridges to nowhere.”
Using Prices in the Public Sector: the public sector can achieve greater efficiency by implementing some free-market principles. Chief among these is to use prices when enabling people to use public assets such as highways and airport landing rights. For example, gasoline taxes require road users to pay for the roads. Similarly, carbon taxes can be used to require carbon emitters to pay for their harm to the environment. Both of these taxes use the price system in the same way price is used in private-sector markets: to organize incentives and to require people to pay for what they use.
Epilog: The country needs its office-seekers to compete in the marketplace of ideas, especially about economics. Our politicians should be conversant in the basic ideas of economics, starting with those illustrated here. Voters should root out and replace members of state legislatures and Congress who are ignorant of these principles in economics to help ensure that public policy best serves the majority of our citizens.
Joe Biden is finally touting his accomplishments: record-breaking job "creation," a drastic reduction in the annual deficit, a long streak in reducing the inflation rate, and heavy investment in infrastructure. Finally, billboards are going up at federally funded infrastructure projects around the country, explaining to passersby that these much-needed construction repair and replacement projects supporting local and state economies are due to the bi-partisan infrastructure bill promoted by President Biden. In other words, voters are finally being alerted to how Bidenomics is benefiting them personally.
Much of what has become known as "Bidenomics" involves direct involvement of the government in the workings of the economy. This has prompted Republican pundits and politicians to bemoan the expansion of government, reflexively using the standard litany: wasteful government spending, tax and spend liberalism, and, when they're really lathered up, "Socialism." And yet they are first in line when the ribbon cuttings are in their state!
Because this reflexive litany, particularly the socialist label, is so prevalent in republican discourse, we can infer that it must earn substantial acceptance in focus groups. Actually, however, Bidenomics is pro-capitalism. Modern capitalism requires an efficient public sector. Bidenomics invests in public sector projects designed to aid the functioning of the private market system; these are investments the private market won’t make on its own.
Consider a few examples of how Bidenomics complements the market.
Streets, roads, and bridges. Transportation networks complement the market system by enabling the movement of goods, services, and people. Society has chosen in nearly every case to have these transportation elements provided by government. Moreover, unlike market goods that typically are financed with revenue from prices buyers pay, these transportation elements are paid for by taxes. Unlike President Trump, who kept promising -- but not delivering -- "infrastructure week," President Biden has begun to deliver an infrastructure decade.
Broadband internet service. The result of providing Internet by private firms was predictable: putting people in rural areas as well as poor people in urban areas at a great disadvantage in business competition and educational achievement. In rural areas there are typically great distances between people; the market "cost-recovery" price would have to be very high to stretch the service to them. Although urban citizens live more compactly, for many affordability is still a problem.
Under Bidenomics, serving all these people becomes a public responsibility. The largest asset the nation has is the talent of its people, and internet access is crucial to the development of that talent.
Wind and solar energy. The "free market model" developed over 250 years beginning with Adam Smith makes it clear that competitive firms have an incentive to reduce the cost of production and distribution of their products by emitting greenhouse gases. A competitive free market will not control emissions; just the opposite. The quality of the atmosphere is a public good; preserving it becomes a public responsibility.
Those same principles of economics suggest two ways to address the emissions problem, either by taxing emissions to reduce their profitability or by subsidizing substitute cleaner forms of energy. The first option meets with public hostility, so Bidenomics addresses the emissions problem by subsidizing the installation of wind and solar energy sources in order to speed up the transition away from fossil fuels.
Battery Technology. One part of the Bidenomics project is to subsidize US firms to speed up the discovery and rapid development of battery technology. The policy aim is to permit a motorist to charge the EV battery in a matter of minutes and to get a much longer range between charges. Why won't the free market produce batteries for the increasingly popular electric vehicles, or "EVs?" A couple of reasons. First is the emergency nature of the effort to reduce carbon dioxide emissions by fifty percent by 2030. Secondly, some of the rare earth metals necessary to make batteries come from unstable and hostile parts of the world. Consequently, what is needed is an effort the scale and scope of the Manhattan Project. There will be plenty of work for the firms in a competitive marketplace once the battery discoveries are made available.
On shoring and "Friend shoring" of MicroChips. Most modern appliances and heavy equipment -- washing machines, refrigerators, new cars, and farm equipment -- are controlled by microchips. The Peoples Republic of China is capable of providing all the chips to meet the US Industry and military needs and do it at lower costs than other trading partners. However, as was demonstrated during the pandemic, microchips from China are vulnerable to cut-off. Such cutoffs would recur in a new pandemic, and certainly if hostilities broke out. As free-market principles demonstrate, we cannot leave such strategic matters up to the free market. Consequently, part of Bidenomics includes expanding the manufacturing of chips within the United States.
$35 Price cap on insulin. Insulin is a lifesaving drug for diabetics. Despite being invented over 100 years ago, contemporary variants of insulin are patented, providing producers with protection from competition. Before Bidenomics, the price of insulin was very high, often $1000 a month, well above what's necessary for a fair rate of return. Diabetic patients clearly do not enjoy the benefits of a free market, competitive ideal. Instead, a government-imposed price ceiling of $35 per month can produce the ideal outcome when the monopolized market mechanism will not.
Bidenomics is Pro Market
The United States economy has always been an interrelationship between the public and private sectors. As the free-market principles of economics demonstrate, one cannot rely on free markets when the preconditions for efficiency do not exist. Much of the public debate is over how economic responsibilities are divided between the two sectors.
As the above examples show, Bidenomics blends the powerful forces of the market with government investment in the provision of physical and social infrastructure, as well as regulations that redirect these market forces to the common good. This happens best when the public sector is directed by representative government, while the private sector is directed by the price system.
William Holahan published INVEST IN UW; INVEST IN WISCONSIN'S FUTURE in Econ4Voters 2023-08-07 10:23:36 -0500
The University of Wisconsin-Madison is recognized throughout the world as a premier research university. Sixty years ago, to serve the growing post-WWII demand created by a more complex economy, this grand university was joined by two- and four-year college campuses to form the UW System of universities that also became one of the best in the United States. Now State Assembly Speaker Robin Vos has declared that he is "embarrassed" to be a graduate of the UW system. His reason: DEI, the system’s extraordinary efforts to attract, retain and educate students from deprived backgrounds through its program of "Diversity, Equity, and Inclusion." The goal of DEI is to increase access and achievement through targeted advising on courses, study skills, tutoring, opportunities, and skills for thriving in the huge, unusual environment of a modern research university.
What the Speaker should be embarrassed about is the state's underfunding of the faculty and facilities of the system. Funding per student in the UW System now ranks 43rd in the nation with no relief in sight in the recently-passed state budget. Moreover, despite the pandemic-induced inflation of roughly 13% over 18 months, the faculty and staff were awarded a mere 2% salary increase in the current budget, even after a decade without any salary increase. Chronic underfunding will continue to cause serious damage to the competitive position of the University in the academic world. In turn, it will diminish the opportunities for the business community to hire highly-educated graduates, and to engage in collaborative projects with university personnel.
Two Episodes of Disinvestment
Two recent episodes illustrate this hostility to the UW system and its missions of research, teaching, and service: denial of funding for the proposed UW Madison Engineering Building, and the deteriorating budget for UWM.
Proposed UW Engineering Building
Despite the state’s current surplus of $7 billion, the gerrymandered, non-representative legislature has failed to include in the current budget UW-Madison’s proposal to construct a new state-of-the-art engineering facility. Currently, Wisconsin has hundreds of students in the queue seeking training in engineering, and employers wanting to hire them; this new facility would add significantly to the capacity to meet that demand.
Meanwhile, UW Milwaukee is one of the greatest institutions in the country for the upward mobility of its graduates. Moreover, the Carnegie Foundation now ranks UWM Research Tier One, the top ranking (aka "R-1"). Despite its success, UW – Milwaukee’s budget is being seriously neglected. Between 2015 and 2020, its main-campus faculty numbers dropped by 24%. One consequence: the highly productive Milwaukee Institute of Drug Discovery once had a seasoned, full-time leader with expertise in translating bench research into new drugs. Today, an excellent faculty member struggles part-time to lead the Institute. Another: the space-strapped University received no support for its plan to renovate a vacant former hospital as new space for its College of Health Sciences.
Former UW-System President Ray Cross once observed that the future of Wisconsin runs through UW-Milwaukee, recognizing the centrality of Milwaukee in Wisconsin’s economy. That future seems a long way off unless the University receives needed funding.
Often overlooked: because UW research professors collaborate with researchers around the world, they provide a kind of multiplier effect supporting the local and regional economy. These relationships expand the scale and scope of the knowledge resources available to the home state university and its stakeholders, including the business community that wants and needs to hire its graduates. Cutting-edge education is particularly important for advanced manufacturing and technology firms that want to locate within the state but to do so require a robust supply of engineering and science graduates.
The 21st-century economy is a knowledge-based economy in which universities and colleges play the central role in preparing the future workforce. Competition within this global economy certainly does occur between nations. But it also takes place between states and communities within nations. Wise investments in vocational and technical schools has brought that spending up to 4rth in the nation on a per student basis. State Investment in the UW should be brought up to the same standard: up from 43rd to 44th.
Another facet of the competition: universities elsewhere have made sustained, cutting-edge investment in their engineering & science programs, an attractor of top students from Wisconsin. Once top students earn degrees in other states, they seldom return to Wisconsin to pursue their careers, raise families, and contribute to local economies.
Surplus is transitory; invest in educational assets
The state $7 B budget surplus was due to the in-pouring of federal stimulus money in response to the pandemic. Surpluses generated by such emergencies are unlikely in the future. Fortunately, a transitory surplus can be converted to a more permanent economic benefit by investing in long-lived productive assets. The proposed engineering school at Madison and a restored and expanded UWM are just such investments.
As the nation approached it's 31.4 trillion dollar debt limit, Steve Scalise (R-LA) House Majority Leader and leading figure in the "Freedom Caucus," stepped up to a bank of microphones and in 90 seconds demonstrated dangerous economic misunderstanding about borrowing and the debt. He asserted that the nation must stop borrowing money it does not have; it must live within its limits like a family with a credit card limit; and that somehow Joe Biden is the one responsible for the size of run-away deficits.
Because failure to raise the debt ceiling would cause a worldwide economic disaster, ceilings have always been raised, sometimes with 11th-hour deals. However, this time seems different: never before have such ignorant legislators, with such powerful anti-government reflexes, wielded such strong influence. Perhaps a fail-safe exists among the 18 republican members of Congress who won their elections narrowly in districts that Joe Biden carried in 2020. Perhaps enough of these members – – it would only take six – – could be persuaded to vote with the 212 democratic members to pass legislation to raise the debt ceiling.
It's About Time
Scalise exhibited no understanding of the debt ceiling, nor any understanding of the role of borrowing in a market economy. He announced that the country must stop spending money we don't have. This statement reflects a fundamental misunderstanding of what borrowing is! All borrowed money is money the borrower doesn't have; the lender has it. If the borrower is willing to pay the lender a price – – called interest – – for the privilege of using the lender's money for an agreed amount of time, then the borrower can spend that amount much earlier than would be possible without the loan. The "capital market" enables borrowers and lenders to create a mutually advantageous trade, e.g., when a borrower purchases a home or a car and the lender earns interest payments and the eventual return of the borrowed money. Borrowers borrow precisely because they don't have the money but do have an important investment opportunity.
Credit card balance limits are raised all the time
Scalise also sought an analogy in the limit on credit card balances as if they serve as immutable limits on consumer credit. They don't; credit card limits are raised regularly for the very important reason that lenders want to earn more within reasonable risk. When family incomes grow, the total credit available in the banking system can be increased, especially to borrow money for long-lived productive assets like houses, cars, and education. Such assets enhance borrower productivity and income, raising living standards as well as the ability to repay the loan.
Among all the advanced economies, often referred to as the Group of Seven, or "G7," the United States has the lowest post-pandemic inflation rate, the highest economic growth rate, the lowest unemployment rate, and a robust rate of innovation in such key areas as computer software and mRNA vaccines. Consequently, like the household that earns increases in its credit card limits, the United States government regularly demonstrates its credit worthiness around the world, as is reflected in the low-interest rate it is now paying in order to borrow; a condition that would be reversed should the US breach the debt ceiling.
To curtail spending, Scalise and the Freedom Caucus want to cut the "runaway spending" of the Biden administration, including the $1.7 trillion infrastructure spending over 10 years. However, borrowing to finance the building, maintenance, and repair of long-lived productive assets -- e.g., streets roads, sewer water, public buildings, ports harbors, bridges -- Home figure quit fucking around send it borrowing makes a great deal of sense. Such productive public assets will last a long time and when in good repair, they add to the national productivity, income, and wealth. It makes sense to borrow and let future generations help to repay the cost of the infrastructure as they use it.
Blaming Biden for Deficits while Ignoring Trump's much larger deficits. How convenient!
Contrary to Scalise's assertion, the Biden administration has brought the deficit down by a greater amount and faster than any administration in history. Of course, that is because Trump drove up the debt by a greater amount and faster than any administration in history. Trump added over $8 trillion to the national debt in just four years. Trump's pre-pandemic deficit was $3.1 Trillion for Fiscal Year 2020 (10/1/2019 to 9/30/2020; Federal Fiscal Years run from October 1 of the preceding calendar year to September 30). His final budget included his final deficit of $2.8 Trillion for FY 2021. The first Biden budget resulted in an FY 2022 deficit of only $118 Billion dollars, cutting it by more than half in just one fiscal year, just what the Freedom Caucus claims it wants.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.
William Holahan published INSTANT RUN-OFF VOTING IN PRESIDENTIAL PRIMARIES: A PATH TO MAJORITY RULE AND INOCULATION AGAINST TRUMP in Econ4Voters 2022-11-30 07:21:59 -0600
INSTANT RUN-OFF VOTING IN PRESIDENTIAL PRIMARIES: A PATH TO MAJORITY RULE AND INOCULATION AGAINST TRUMP
As the 2024 presidential primary season approaches, we can anticipate a large number of Republican presidential hopefuls will declare their candidacy. This will be reminiscent of the 2016 primary season which began with 17 candidates. Meanwhile, should President Biden decide not to run for re-election -- perhaps even if he does! -- Democrats will also have a primary season beginning with several hopefuls, if not in 2024 then certainly in 2028. Neither party has a rational procedure for choosing the final winner in multiple candidate primary seasons.
If the current primary election rules apply, the 2024 primaries will be conducted as a series of state elections over many months, each decided by plurality rule, not majority rule. Instead, plurality rule in a series of primaries among a large number of contestants is highly likely to prevent majority rule as a matter of simple arithmetic; each individual primary in the sequence being essentially a plurality vote process of eliminating candidates. This effect is especially acute in the Republican primary system which awards delegates on a winner-take-all basis, permitting huge leads to develop very quickly, speeding the process of elimination.
In other words, a repeat of 2016 looms. During that Republican primary season, Donald Trump won early primaries with only 25 to 30% of the vote. Meanwhile, while the more traditional established vote was split among several more candidates including Jeb Bush, Chris Christie, Carly Fiorina, and John Kasich. Because Trump retains solid support among at least 30% of Republicans, he is primed to do that again in 2024.
The problem facing Republicans in 2016 serves as a rough numerical illustration of the problem in 2024. The party had a core constituency of roughly 60% of its members. These are Republicans who yearn for a return to the often-recited "principles:" free markets; individuality; personal responsibility; law and order, de-regulation, lower taxes, smaller government, and so on. Another 30% are fringe voters who grieve for an imagined past, and a candidate who will vaguely promise to shake things up, protect unregulated gun ownership, freedom from vaccine and mask mandates, and bans on accurate history taught in schools. "Undecided" made up the other 10%.
Now suppose that the 60% core voters are split among five candidates, averaging 12% apiece. With the core vote split among the several candidates, a fringe candidate with only 30% of the vote can defeat the other candidates and the 60% core voter policy preferences they represent.
The Essence of the Problem
The presidential primary season culminates in a convention to nominate the final winner as the candidate for the fall general election. The prize in each primary consists of delegates to the convention. But each primary influences the next one in the sequence; the winner gains not only that election victory, including the associated delegates, but also an advantage in the next election in the sequence, growing donor support, improvement in the polls, media reports on the candidate's momentum, and priceless television interview time.
One by one, contenders who lose in the early primaries drop out as their poll numbers fall and donors cut them loose. As the candidate pool shrinks, winners of contests later in the series will get larger vote percentages, perhaps even greater than 50%. But even 50+ margins should not be interpreted as a majority-rule result since they were made possible by the elimination of contenders in plurality-rule contests.
Toward Majority Rule: Ranked Choice Voting (aka Instant Runoff Voting)
Instant runoff voting (IRV) results in majority rule in each contest in the series, regardless of how many candidates enter those contests. IRV increases the likelihood that the winners of early primaries will represent the preferences of the majority of voters.
Here's how it works: instead of voting for just one candidate, the IRV ballot permits the voter to vote for several contestants, ranking them in their order of preference. After the polls close computers tally the first-choice votes. A winner is declared only if the top vote-getter has a majority of all votes cast. Otherwise, a new round of calculation ensues in which the last-place finisher is eliminated and the voters' lower-ranked votes are redistributed to their other candidates. If this second-round calculation produces a majority vote-getter, that candidate is the winner. If not, additional rounds are calculated until a candidate does get a majority.
Conventional runoffs are time-consuming, expensive, and inconvenient for the voters. Consequently, neither party uses them. The default has been to designate the plurality vote-getter as the winner and move on to the next primary contest. By contrast, IRV is conducted by computer and results can be established very quickly after the polls close.,
The current procedures for presidential primaries threaten a repeat of 2016, including the nomination of Donald Trump as the presidential candidate in the Republican party. To safeguard against such a biased process, the Republican Party should implement ranked choice voting.
Similarly, the next time the Democratic Party faces a presidential primary season -- whether in 2024 or 2028 – – it will no doubt attract a large number of hopefuls, and therefore face the same challenge of selecting the nominee by a majority-vote process; Democrats should implement rank choice voting. Moreover, if the Republicans use IRV they are likely to put up a more competitive candidate; the Democrats should use IRV as a defensive response.
 Instant runoff voting does not delay reporting election results. Delays are due to the collection of data from the individual precincts and regions of a state. Once the data is collected, the calculations employing that data are nearly instantaneous.
 Wisconsin's own Katherine Gehl provides an excellent description of how rank-choice voting works. https://www.youtube.com/watch?v=YvjfMTlefc8&t=23s
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.
William Holahan published DOES SUCCESS IN BUSINESS PROMISE SUCCESS IN PUBLIC OFFICE? in Econ4Voters 2022-11-02 22:28:19 -0500
Ron Johnson, running for reelection to a third term as Senator from Wisconsin, and Tim Michels, candidate for Governor, are proud of their achievements as business people. But when they claim to be "job creators" they run afoul of economic principles discovered by Adam Smith and refined by 250 years of rigorous economic thought.
Entrepreneurs invest in and organize the production and sale of goods and services. They build their enterprises with a combination of ingenuity, vision, smarts, risk-bearing, and often with great personal sweat. Theirs is a key role in a complex market process that creates jobs, but they do not act alone, creating jobs out of nothing in a modern-day version of the biblical parable of the "loaves and fishes."
Since the time of Adam Smith, the economics profession has explained that entrepreneurs are interdependent, not independent. They rely on the actions of a host of others to provide many of the inputs they need to both build and operate their enterprises. Economics explains how markets employ the decentralized price system to coordinate the interdependence of entrepreneurs with other elements in the economy.
In a market system, entrepreneurs do not have job creation as a primary objective; they are profit-seekers. If it is profitable to add employees, they will do that. But if it is more profitable to outsource jobs, or substitute capital equipment for labor, entrepreneurs will do those things instead of increasing employment.
Moreover, entrepreneurs demonstrate their need for infrastructure services when they locate near them. They do not have to build the infrastructure their firms use. If they need freeway access, they locate near one. If they need internet access, they make sure that the broadband is competitive where they locate. The public sector is responsible for those goods and services that must be shared, such as bridges, streets and roads, sewer and water, computer superhighway, barge lanes, and school buildings, paid for with taxes and user charges. Other infrastructure, such as internet service and utilities, are a combination of public enterprises and regulated private enterprises.
Business firms also require market-provided resources, such as capital and labor, which must either be made or bought by the firm. What the worker brings to the job – experience, literacy, manual or computer skills, punctuality, education – are the product of countless activities that took place in the time before the worker was hired. Even the high school and kindergarten teachers play a role in the sequence of investments that formed the "human capital" possessed by an employee. These essential ingredients are not created by the entrepreneur, they are purchased by the entrepreneur through the employment contract.
Entrepreneurs are necessary for job creation; they are not sufficient. No one is sufficient; the elements of the market process -- entrepreneurs, workers, education, training, experience, infrastructure, the legal system, etc. – – together are necessary and sufficient to create jobs. So who creates jobs? Not any of the necessary but not sufficient elements acting independently; all of the necessary elements together are sufficient.
So the real issue is whether success in business connotes a transferable skill that will lead to success in leadership positions in the public sector such a senator or governor. Johnson and Michels assume that the transferability of their business acumen is self-evident. Not so. The same market forces that foster interdependence also incentivize people to specialize, not generalize; entrepreneurs are encouraged to deepen their knowledge of their own business -- including the markets that serve that business -- but not the economy generally. Yes, it’s important for Governors and Senators to have intuition and instincts to understand the private sector but that's no guarantee that they will understand the public sector.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.
William Holahan published WE NEED A CLOSER LOOK AT SOCIAL SECURITY in Econ4Voters 2022-11-02 16:46:04 -0500
Senator Ron Johnson claims Social Security is Ponzi scheme, that it is broke, and that in order to "save it" the program should be re-evaluated and re-authorized annually. Actually, it is this set of assertions that needs a closer look.
THE BEST DEFENSE IS UNDERSTANDING HOW THE PROGRAM WORKS
To defend Social Security it is essential to know how the amount of individual retiree benefit checks are determined and how they are paid for. Two published formulas (at ssa.gov) constitute very specific promises of Social Security benefits made to workers in exchange for very specific tax payments.
The Benefit Formula
The retiree benefit formula determines the amount of the retiree's first monthly check; all subsequent checks are equal to that amount, adjusted annually for inflation, with monthly payments continuing until death of the retiree or the end of eligibility of a designated beneficiary. The formula that determines the amount of that first check adds the individual's payroll tax payments made during the top 35 earnings years, then adjusts for past inflation since those years, labor productivity growth, and a means-test factor (an upward adjustment of the payment to the lowest-income contributors).
The Financing Formulas
The revenue to pay for those Social Security benefits comes from two sources. The first is the familiar payroll tax, or FICA (Federal Insurance Contribution Act) withholding from earnings up to a cap (which this year is $147,000).
The second source of revenue is proceeds from the sale of Social Security bonds. This source is more complicated than the first and designed to address the financial burden of the baby-boom retirement. The "Post-War Baby Boom" was 77 million people born in the 18 years between 1946 and 1964. In the subsequent 18 years only 47 million people were born, a "Baby Bust." Because of this population boom and bust sequence, an undue burden would have been imposed on the "busters" if the sole source of revenue for boomers' retirement benefits had been the payroll tax on worker income.
To prevent that burden, the baby boomers were forced during their working years, beginning in 1985, to pay a higher payroll tax rate than required at that time to pay the retirement benefits of those then retired. That difference, or " surplus" cash, was invested in Social Security Bonds bought from the Treasury. These special bonds are not issued to the world financial markets but instead are traded back-and-forth between the Social Security Administration and the Treasury Department. In those years when the payroll tax generates a revenue surplus net of retiree benefits, bonds are bought from Treasury by Social Security; in those years when there is a revenue deficit, bonds are sold by Social Security back to Treasury.
FOLLOW THE MONEY AND FOLLOW THE BONDS
In effect, these special bonds act as a loan mechanism. During their working years, the boomers were forced to loan money to the country and the country would repay the loan with interest during their retirement years. This loan mechanism was a savings vehicle for the boomers and a debt obligation for the country. The Social Security Administration acted as agent of the workers while Treasury acted as agent for the country; the electronic record of these bonds is known as the "Social Security Trust Fund."
Are the Bonds "Worthless" or "Pro-growth?"
Senator Johnson has asserted that the bonds are "worthless" because they are traded between one branch of government and another. The economic concept behind this financial mechanism proves otherwise. The plan was to boost savings by the boomers and invest in the public-sector assets of the economy and then pay a portion of retirement benefits out of that enlarged productivity. In other words, it relied on a reciprocal relationship between generations: the young would pay for the retirement benefits of the old out of the greater wealth made possible by the old when they were young. The Treasury Department, at the direction of the Congress, would invest in long-neglected public sector assets including bridges, roads, harbors, clean-up of chemical dump sites, broadband, research and development, and other public-sector complements to the market economy. The plan rested on one of the most important and least understood principles of economics: a market system requires a strong public sector to do those things that the market needs for optimum performance but will not produce for itself.
If all that had worked out as planned the bonds would have run out in 2060, 75 years after the boomers began their forced savings. Because the economy grew more slowly than planned there was a slower growth of the surplus and of the bond purchases by Social Security on behalf of the boomers. Consequently, the bond fund will not run out in 2060, when all but the most persistent boomers will be dead, but instead, under current estimates, will run out in in 2035, when nearly half of the boomers would still be very much alive.
WHAT HAPPENS WHEN THE BONDS RUN OUT?
After the bonds run out -- i.e., after Social Security has sold all of its bonds back to the Treasury in exchange for cash -- the payroll tax revenue will be enough to pay 75% of the scheduled benefits. When that happens, Congress will face two choices. The first choice is to reduce benefits by 25% so that payroll tax revenue would be sufficient to cover that level of expense. This is unlikely because Members of Congress like to keep their jobs; it would be very difficult to explain to retirees and workers close to retirement that Congress plans to renege on the annually published promises of benefits they earned by paying FICA taxes during their working years.
The second choice is to continue honoring the benefit schedule in full, deriving the 25% supplement from general taxes and borrowing, i.e., the same place where Treasury got the money to buy back the Social Security bonds before the bonds were all gone. Moreover, the amount required will be determined the same way: the supplement needed to meet the scheduled benefit formula. Since the amount of money needed is equal to 25% of the retiree benefits whether there are bonds to be redeemed or not, no increase in taxes or borrowing will be required for Treasury to provide the supplementary funds to Social Security.
Social Security is not a Ponzi scheme; it is not broke; it is not facing bankruptcy when the bonds run out; the bonds not worthless because one agency of government exchanges the bonds with another agency. Moreover, the system has been reviewed regularly and an annual report issued to the Congress and the public. In addition to the large change made due to the Baby Boom, this long-standing process of steady review and reevaluation has led to several other changes. For example, because life expectancy has increased, the age of eligibility has been increased; in 2027 that gradual increase will settle at age 67 for full schedule benefits (lesser benefits available at age 62). Finally, the benefits schedule includes a means test.
The arithmetic is in sharp contrast to the notion that Social Security is in deep trouble and in need of major overhaul. The greatest threat to Social Security is misunderstanding how it works.
William Holahan published GERRYMANDERING, DONOR-DRIVEN ELECTIONS, AND SOCIALISM FOR THE RICH in Econ4Voters 2022-10-11 16:04:43 -0500
In their arsenal of campaign rhetoric, Republicans affix the "Socialism" label to the candidates of the Democratic Party and their policies. This stratagem is a lazy substitute for thought but it has the added advantage that it works. The assertion is repeated so frequently that many voters have come to regard it as the truth, and so it is an effective vote-getter. And, in a curious way, the Democrats seem defenseless in the face of this scare tactic, even though readily-understood economics would provide a rigorous and vigorous response: the economic distortions commonly attributed to socialist systems are also produced by unrepresentative government in service to the donor class, as here in Wisconsin.
The Socialist Label is Powerful
It works because some socialist countries have failed in spectacular ways to address the economic wants and needs of their populations. For those who have immigrated here from socialist European countries, as well as those who remember 1950s cold war newsreels, "Socialism" carries with it a particularly powerful imagery. The label brings to mind long lines for food, involuntary job assignments, and gulags and disappearance for those who complain too much. More recent immigrants from Venezuela or Cuba react viscerally to the label.
The core definition of socialism is advocacy for social organization around public ownership of the means of production and distribution, and centralization of their management. This is in stark contrast to the market system in which decentralized management is guided by a price system. Confusion arises when Socialism is conflated with government activity. This is odd since capitalism requires a well-functioning public sector. Capitalism must provide those goods and services that the market system needs but does not produce well or does not produce at all. The modern economy can be thought of as comprised of the public and private sector, sectors that must work together to optimize overall economic performance.
Brief Look at the Private Market Sector
The United States economy is at its core a highly successful market system. (For an earlier essay in this series on market economics, see https://www.grassrootsnorthshore.com/20220722_mt). One of the great strengths of a market system is its responsiveness to individual willingness and ability to spend money according to one’s preferences. People earn money in the "job market" and spend their income according to their preferences in the "goods and services market." In the standard conception, all these exchanges are guided by decentralized prices and wage rates, and are made without coercion, prompting Adam Smith to refer to the market as a "system of perfect liberty."
But this market responsiveness to consumer preferences does not always work; there are important preconditions. Chief among these is competition which imposes on sellers the incentives to serve informed buyers. This interplay between buyers and sellers independent of government is labeled the "private sector." In important and familiar sectors of the economy, those preconditions for market efficiency do not exist.
Brief Look at the Public Sector
The absence of these preconditions leads to two roles for government. First, the public sector has the responsibility to regulate markets that are non-competitive but still produce very important products. Examples include the public utilities that produce and distribute electricity, natural gas, and cable television. Also included are firms that produce valuable products but which, if unregulated, would impose the spillover costs of pollution, noise, or danger, e.g., carbon dioxide emissions.
Second, if, through representative government, the people express a preference for certain goods and services that the market will not provide, some level of government – – state, local or federal – – could step in and provide it. Examples include national defense, police and fire protection, health insurance, essential insurance programs such as Social Security and disaster relief, as well as the legal system that enforces contracts, addresses crime and adjudicates accident costs.
To best serve society, a capitalist system requires the right mix of private and public activities. The ideal combination of public and private rests on the simultaneous achievement of efficient prices guiding exchanges in the private sector and representative government guiding decisions in the public sector. In the private sector, the price system is the mechanism for responsiveness to constituents by coordinating the incentives of buyers and sellers in the market. In the public sector the mechanism for responsiveness to the constituents is representative government. Distortions from this ideal combination -- for example by producing in the public sector products better left to the market -- diminish the income and wealth of society.
In his defining work, The Road to Serfdom, Friedrich Hayek further warned that inefficient concentration in one sector would spread to other sectors, and with each step down this "road" increasing centralized political control, diminishing economic performance and personal liberty. In the paradigm case, Vladimir Lenin foresaw the spread of political power through the spread of economic power. He envisioned certain vital sectors that could have been served by the private sector, including agriculture, utilities and transportation, banking, and communications as "commanding heights" of the economy; control these and you control the society generally, leading to the "serfdom" that Hayek feared.
So the fundamental problem of socialism is not that there is a public sector -- public sectors are a requirement of any economic system including capitalism -- but the distortion away from the right mix of reciprocal complementary public and private sector activity.
Just as the private sector is weakened when decentralized prices are distorted, a public sector is weakened when representative government is distorted by a gerrymandered non-representative legislature or discriminatory limits on voting rights. Donor-driven legislative decision-making combined with gerrymandering that leads to non-representative government yields economic distortion comparable to Socialism.
We see one of the worst examples of this distortion right here in Wisconsin where voters gave Democrats 52% of their vote count but received only 39% of the legislative seats. In other words, the people with a slim majority preference are relegated to a powerless minority position in the legislature. That means that their preferences for public goods and services are bypassed in favor of the preferences of a donor-driven minority among the citizenry.
This distortion by nonrepresentative government plagues decision-making of all kinds. For example, should the state build new roads or repair existing roads; rural roads versus suburban roads versus urban roads; cut taxes versus increase spending on math education; reproductive rights versus the 1849 law that banned those rights; convenient voting in numerous polling places and drop boxes versus restricted access to voting and relentless unproven claims of voter fraud.
Unrepresentative government was on full display on October 4th when they refused to hear a proposal to place a referendum on reproductive rights before the voters to permit them to express their preferences. The effort to put the referendum on the ballot was made in reaction to the overwhelming vote in Kansas to reject a change in the state constitution that would have banned abortions. The referendum would test whether the voter preference in Wisconsin is about the same as in Kansas.
The gerrymandered legislature prevented Wisconsin residents from voting on the matter. Instead, after the governor convened the non-representative legislature to consider the matter, it "gaveled in" the beginning of the session and then immediately "gaveled out" the end of the session without considering the motion. This voter by-pass is little different from that in a socialist state.
A Republican foray into actual socialism is the Foxconn fiasco that taxed successful business and residential economic activity in order to subsidize a private foreign firm that has proven to be notoriously incapable of fulfilling promised product and jobs on the valuable land cleared for the purpose. It is amazing that the Dems have not applied the socialist label to this misplaced Republican investment.
William Holahan published ENGLISH AND MATH PREP CAN CUT COLLEGE COSTS in Econ4Voters 2022-09-28 09:14:07 -0500
ENGLISH AND MATH PREP CAN CUT COLLEGE COSTS
In discussions of college costs -- the high and rising price tag, the necessity of taking out student loans and the burden of repaying them, the fairness of forgiving some or all of those loans, the foregone opportunity to work and earn instead of going to college -- an important element is often left out: how to maximize the long-term personal and financial benefit from those college years. A college education is a lifelong asset requiring investment of both time and money. There is a lot riding on how those investments are made: earning good grades in a rigorous course of study, discovering and developing talent and passion into lifelong learning, lifetime friendships, and associations, and increased lifetime income.
To Reduce College Costs, Students Should Enter Prepared in Math and Writing Skills
The difference between what is expected in high school versus what is expected in a rigorous college program can come as quite a shock to entering students. Good colleges require students to organize and develop a large amount of work product and to record and communicate their findings in written and oral form. English and math are the two languages in which this requirement is met; students should use the time in high school to deepen their working knowledge of them. This preparation enables students to progress from passive to active learning, from routine derivative thinking to inventive thinking, from working with materials created by others to more actively creating their own work product. Prepared students have the foundation to earn higher grades in more rigorous disciplines, allocate their time efficiently, reduce the burden of student loans, and maybe even reduce total cost.
Emphasizing High School Writing
Opportunities to improve writing skills while in high school occur most obviously in English classes. Students should be smart consumers, enrolling in courses where a dedicated teacher will assign writing regularly, impose strict deadlines, and, most importantly, mark up draft essays and -- because advanced writing involves multiple revisions -- provide an opportunity to revise and resubmit the draft written work. Applying this pattern to increasingly complex topics enables the student to take organization and communication skills to a much higher and more innovative level and become a more analytical thinker and writer. All this effort also instills time management, starting projects as early as possible to permit those productive revisions.
Elective courses in history and social studies will solidify this discipline if they include additional written work and the opportunity to revise after teacher feedback.
Emphasizing Math Word Problems
A working knowledge of math is acquired through diligent, steady work of two kinds: working through routine exercises and solving word problems. Exercises challenge the student to use well-known steps or algorithms to solve arithmetic calculations or algebraic equations. In contrast, word problems require the student to set up an exercise by reading a problem description, separating the germane from the irrelevant, developing a math model and solving it, and then writing a short statement explaining their results. The importance and applicability of math can be conveyed in word problems derived from a wide range of real-world topic areas such as business, engineering, sports or personal finance. Examples could include the power of compound interest and the importance of saving when young; how to choose a car and pay for it with a car loan; navigating an airplane or ship in strong wind and water currents; calculating the time required to travel to Mars and return; how to decide whether to kick a field goal or run the ball on fourth down; and perhaps the most immediate word problem: how much to borrow to pay for college.
Finally, the high school years are a good time to hone computer skills needed in college. Requirements for essay writing and math problem-solving, complemented by computer skills, appear in virtually all disciplines across any college campus from science and engineering to social science humanities and fine arts. In many instances, electronic textbooks have replaced physical books. E-books and their electronic ancillaries are festooned with electronic problem sets and video clip tutorials. Students are expected to use their computer skills to enhance communications with professors, teaching assistants, and other students.
OK, But How Does Such Preparation Ease the Financial Burden?
Once in college, prepared students can produce written work with greater speed and sophistication. For them, college work is more time-manageable as well as higher quality. The prepared students can therefore choose from a much wider selection of majors, and enjoy a greater chance of discovering what they love, both for personal pleasure and to earn a living. They save money when they enter a rigorous major earlier, select more advanced courses in that major, and graduate in the traditional four years rather than the five or six years that too often results from insufficient planning. The prepared student can justify borrowing for their education, bypassing low-paying part-time jobs that add very little to their human capital. They can devote more of their time to investing in the durable asset of an education of greater value.
William Holahan published JOE BIDEN ENDORSES LARGE TUTORING PROGRAM in Econ4Voters 2022-08-22 09:53:03 -0500
On the steps of the Lincoln Memorial that sweltering afternoon of August 28, 1963, Martin Luther King told the nation of his dream, and how long his people had been waiting. Seared into that speech was "the fierce urgency of now."
"Now" was 59 years ago. Much progress has been made on voting, housing, and employment, but not in many high-paying occupations. Among the remaining barriers to opportunity that has been getting far too little attention: gaps in math education and attainment across the social and economic spectrum.
Those deprived of solid math preparation are denied entry into many highly paid occupations. The lack of diversity in high-paid and rewarding professions, including the obvious ones – – engineering, science, IT, medicine, business analysis and finance, economics -- and, in this high-tech age, even history, political science, journalism, and the arts -- has lasted generations, reinforcing the income and wealth gap across race, ethnic and gender lines.
Unlike subsidies for rent, utilities, food, and other important assistance, a working knowledge of math cannot simply be transferred. Instead, that knowledge must be learned through an organized time commitment, involving both instruction and practice. For most of the math deprived, circumstances prevent them from making the necessary investment themselves. If the investment is to be made, and latent talents developed for the benefit of the individual and society as a whole, it must be done at public expense.
Investment in the Math Teacher Corps
Teaching math requires an educational background, experience, and love of the subject. These attributes are transferrable to many employment options; teaching is only one of them. To attract more highly qualified individuals to the teaching profession, pay them more and invest in smaller classes.
Invest in Tutoring
Many students find it difficult to get accurate and timely help with homework. One way to reduce this math-help gap is to offer online tutoring through virtual meeting technology like Zoom or Google Meet. To reverse this gap, widened even further by the Covid pandemic, researchers at Johns Hopkins and Brown University propose a massive increase in tutoring online. They outline a tutoring service staffed by 300,000 college students and other community members who could interact with students struggling with their math and reading:
"What we and many other researchers have found is that the most effective strategy for struggling students, especially in elementary schools, is one-to-one or one-to-small group tutoring. Structured tutoring programs can make a large difference in a short time, exactly what is needed to help students quickly catch up with grade level expectations."
Matthew A. Kraft, and Grace Falken of the Annenberg Institute at Brown University, set forth a ten-point "blueprint" for implementation. They propose that tutoring, greatly scaled up, could become a permanent feature of the U.S. public education system. "Tutoring is among the most effective education interventions ever to be subjected to rigorous evaluation." (https://www.edworkingpapers.com/sites/default/files/ai20-335.pdf)
Biden Tutoring Plan
Joe Biden endorses the plan to engage such a large number of tutors. Under the plan, "peer" tutoring be organized where successful students, properly trained, would provide the service for struggling students a few years younger: with high-schoolers earning class credit for tutoring elementary school students; college students earning work-study pay or course credit or partial loan forgiveness for tutoring high school students; and college graduates tutoring in high schools under the AmeriCorps program. Biden is including such a massive tutoring plan as part of his administration’s support for student success (https://www.whitehouse.gov). Finally, the state of modern technology should compel state and local governments to provide all students with laptops and WIFI hotspots so that students and school systems can take advantage of this tutoring option.
William Holahan published SENATOR JOHNSON STEPS ON THE POLITICAL "THIRD RAIL" in Econ4Voters 2022-08-13 10:05:52 -0500
The third rail of subway systems provides high-voltage electricity to the subway cars; anyone who touches it is likely to be burned to a crisp. The analogous "third-rail of politics" is Social Security, and yet Senator Johnson of Wisconsin seems willing to risk political electrocution. Famous for recommending Listerine for Covid, and claiming that climate change is a hoax, he now claims Social Security is bankrupt, and to cure this alleged fiscal condition he wants Congress to adjust Social Security payments annually. In other words, rather than use the system formulas for determining retiree benefits, Johnson would substitute congressional "discretion," shifting the Social Security program to an annual budget item rather than a permanent program. Before assessing Johnson's proposal, voters should be aware of how the Social Security system determines benefits now.
The program works under two arithmetic formulas, first, to generate revenue via the payroll tax, and second to calculate the benefits that workers receive upon retirement. These two formulas determine the obligations income earners have and the earned entitlement during their retirement.
The Payroll Tax
In 1935, President Franklin Roosevelt designed Social Security as a government-mandated retirement insurance program to reduce poverty in old age. He chose to finance the program with a payroll tax as a kind of insurance premium. This had the effect of stabilizing the system in the face of strong "conservative" opposition. Because program benefits are tied to worker earnings, voters do not perceive Social Security as “welfare." Roosevelt said: “We put those payroll contributions there to give the contributors a legal, moral, and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my Social Security program.” To this day, any “damn politician” who proposes to curtail any aspect of Social Security can expect to encounter opposition from a huge majority of the electorate.
There is no mystery about the payroll tax withheld from earnings: it appears right on a worker's pay stub as the FICA (federal insurance contribution act) tax. This year, for example, the FICA tax rate is 7.65 percent (on the first $147,000 of earnings for the 6.2% deducted for Social Security; no income cap for the 1.45% deducted for Medicare). Both the employer and the employee pay this amount for a total of 15.3% (The self-employed pay both halves). In effect, this is an insurance premium.
The Benefit Formula
In addition to the payroll tax, the benefit formulas also add to the stability of the system. The method for calculating benefits is described at the website ssa.gov. In a series of steps, the method leads to the retirees' Primary Insurance Amount (PIA), i.e., the amount of the retiree's first monthly check. That monthly amount is adjusted for inflation to provide a rough estimate of a constant level of purchasing power. The United States of America has not missed one payment in the 82 years of the program.
Step one in the calculation of the PIA is the determination of the average indexed monthly earnings, or AIME. This is a tabulation of the worker's earnings during their top 35 earning years, up to a maximum amount designated for each year ($147,000 for 2022).
These past earnings are then adjusted via a wage index to reflect the average worker's contribution to the nation's productivity. This adjusts the past dollar earnings not only for inflation during the period between the performance of the work and the present, but also for productivity growth. In other words, the prosaic arithmetic is designed to reflect the worker's participation in the steady growth of labor productivity, which has averaged 1.5% annually. Using this wage index ascribes to past work the same purchasing power as if the work were produced in the current year.
The next step in establishing the PIA is a three-part summation. In the first part, each dollar of the average indexed monthly earnings up to the first $1,024 adds 90 cents to the benefit check; in the second part each dollar between $1,024 and $6,172 adds 32 cents; and finally, in the third part, each dollar above $6,172 adds a mere 15 cents. Note that while the benefit amount rises with earnings, the rate of increase drops very fast at the $1,024 and the $6,172 “bend points." The result of adding these three parts is the amount of the retiree's monthly check. This amount is adjusted for inflation beginning each May, and checks are sent for the remainder of the retiree's life.
Roosevelt's reliance on the payroll tax formula and the benefit formula manifests a social contract with carefully specified contractual terms. The payroll tax formula and the benefit formula are conditions of employment in the United States. They are part of what workers agree to when they accept their terms of employment.
For Johnson's proposal to have any meaning, he must be talking about reducing the benefits below the benefit formula that people have relied upon for their entire work life. In effect, Johnson would have the benefits reduced long after the work that earned those benefits had been performed and accepted by employers. The worker cannot reclaim the value of that work if the terms of the benefit formula are reneged upon after the work is performed, a portion of the value of that work will have been stolen.
William Holahan published If You Have a Business, Who Built What? in Econ4Voters 2022-07-25 11:58:22 -0500
The fall election season will bring the familiar type of campaign ads accusing Democratic Party candidates of fiscal irresponsibility and wasteful government spending, even on infrastructure spending that will boost productivity and competitiveness. Expect to hear an old favorite: the story of how President Obama stumbled into a rhetorical thicket when he said, “If you have a business, you didn’t build that. Someone else did that.”
Standing alone, these two sentences are outrageous. Accordingly, by omitting the immediately preceding sentences, these words became part of Republican campaign ads, declaring that they showed Obama’s socialist tendencies.
The Importance of Interdependence
In his 2019 book, The Conservative Sensibility, George F. Will does his readers a great favor: he includes the entire paragraphs of Obama’s quotation, words that demonstrate that Obama was speaking about the role of government in providing public infrastructure essential to the business sector but which businesses do not provide for themselves. Immediately preceding the famous quotation above, Obama said, “Somebody invested in roads and bridges.” He was making a case for increased government investment in the nation’s deteriorated infrastructure, claiming such spending would improve business profits. His point was that firms do not have to build the entire infrastructure they use, that they can focus on what they do well and support government efforts to provide such public assets as bridges, roads, water, sewer, and police and fire protection.
Obama further noted that firms need not build many of the other assets they need and can simply buy or rent them in the marketplace. He was appealing to bedrock economics which for 250 years has demonstrated how markets guide the inter-dependence of the citizens in a market economy. He further said, “Somebody helped to create this unbelievable American system that has allowed you to thrive,” emphasizing the importance of this interdependence in enhancing the firm’s pursuit of profit.
Instructional Episode in The Role of Government in a Market System.
Two lessons can be drawn from the episode. First, without streets and roads, reflexively anti-government "free market" advocates would have a hard time moving their goods and services to market and having their employees show up for work. These complements to business are built by government and paid for by taxes.
Second, an important lesson for political speech writers: don’t use pronouns with an antecedent that lies in another far-off sentence! A lot of ad-writer opportunism would have been avoided if Obama had simply said, “If you have a business, you didn’t build the streets, roads, bridges, water and sewer systems that you rely on to run that business. Some level of government did each of those things, and we all paid taxes to enable them to make that happen.” That’s it: no pronoun, no link to an antecedent that can be de-linked.
Rhetorical vulnerability aside, Obama’s meaning is essential: the private enterprise sectors of the economy depend strongly on the public sector. Reciprocally, the various levels of government rely on market activity to generate the value added to the economy from which the resources are drawn to finance the public goods. Markets rely on government and vice versa.
William Holahan published THE FREE MARKET MODEL, "A SYSTEM OF NATURAL LIBERTY" in Econ4Voters 2022-07-22 09:34:05 -0500
Webster’s Dictionary defines a “conservative” as someone who adheres to established beliefs and practices, adopting new ideas for long-held views only if rigorous examination compels that change. Consequently, the dictionary definition of the word “conservative” suggests a principled approach to thinking about public policy. By comparison, if you ask a self-described conservative what the word means, you are likely to get a response that includes slogans like: individualism; personal responsibility, smaller government, limited government, liberty, freedom, and fiscal responsibility. Moreover, there is a headliner attribute -- "free markets" -- that they confidently claim assures that all these goals can be met within a robust economic system where self-regulating markets can better serve the public than if the government intervened.
Economists refer to markets favorably too; they conclude that under certain preconditions, markets expand individual access to resources, contributing to greater economic freedom from Nature's scarcity. But, this "pro-market" preference comes with a warning: for markets to function in the public interest, certain prerequisites must be met.
The Free Market Model
To understand complex systems like markets it is common to build "models." These are detailed descriptions of an idealized version of a real thing. Building models is a centuries-old art; Archimedes (287BC - 212BC) taught engineering by explaining frictionless "natural machines," including pulleys, levers, inclined planes, etc. Although there is no such thing as a frictionless machine, engineering students from Archimedes' time to the present begin their study of real machines by first studying imaginary frictionless machines. Economists do the same thing with "the free market model," a set of principles describing how a market would function under idealized conditions.
The Free-Market Model
In the free-market model, business and private investors base their decisions on their expectation of profits and losses. They invest, invent, innovate, buy equipment and hire people, all free of government direction or interference. Firms seek profit by selling to buyers. The process of competition among profit-seeking firms establishes market prices that eliminate shortages and surpluses: the amount buyers want to buy equals the amount sellers want to sell.
The model describes how markets adjust to change; for example, if demand for an industry’s goods and services increases, price and the expected profits will rise, encouraging the expansion of supply via the participation of more profit-seeking investors. This inflow of new competitors increases the choices available to consumers, driving down prices until it is no longer attractive for additional profit-seeking suppliers to flow in. This process of entry and exit transforms the original profit potential into a benefit to consumers, reducing price to the level that covers production and distribution costs including a "fair rate of return to investors."
If demand decreases, the system works in reverse; price falls, threatening losses and encouraging some firms to leave the market. This outflow of some firms reduces supplies of goods, causing prices to rise for the remaining firms until once again price covers cost including a fair rate of return to investors. Through this process of profit and loss, prices are determined not by the individual firm but by the interplay of all market buyers and sellers. The final results of these competitive pressures are lower prices, improved products, innovative ways to produce products, and control costs, ultimately for the benefit of consumers.
This model reflects the keen insight of Adam Smith, the Founder of Modern Economics: in competition, profit-seeking firms serve the public interest even though the firms do not have public interest in mind as they seek profits; that “is no part of their intent.” Because there is no coercion, these are called "free markets." Investors are free to add or withdraw their investment and free to expand or contract their offerings of products and services to buyers. Firms are free to innovate, i.e., to change those products or the way they are made, sold, warranted, or financed. Meanwhile, buyers are free to buy the quantity they prefer, provided they have the ability to pay. They earn the ability to pay in another free market: the market for their uncoerced labor. All of this operates without government interference. Smith referred to this description as a “system of natural liberty.”
Product warning: If the preconditions for competition do not exist in a particular sector of the economy, the beneficent outcome ascribed to the free-market model cannot be expected. For example, the pre-conditions for competition are not present if firms collude, i.e., obstruct the process of competition by forming agreements to reduce total output to force prices up. The anti-trust laws are designed to protect the competitive process by criminalizing such collusion.
Contradiction: Markets cannot exist without government.
Real markets cannot function without certain foundations provided by government, including rule of contract law, property rights law, ownership rights law, and other sectors of the law that form the “rules of the game.” There are no investor returns to these laws or their enforcement. Although they are prerequisites for markets, markets cannot provide these laws. Those who favor market allocations over central planning allocation of resources must still favor complementary government activity.
Strictly speaking, there is no such thing as a free market. However, the free-market model has broad applicability not only as a preliminary tool of analysis and critique but also as a guide to public policy. The model captures the role of competition and the role of the price system in the coordination of the economic affairs of independent-minded people in a free society.
Future essays in this series on Econ4Voters for Grassroots North Shore will explain the compatibility of regulated markets with representative government; how the powerful forces of markets can be used to address climate change; regulate utilities such as electricity, natural gas, cable TV; and guide the construction and operation of infrastructure such as streets, roads, bridges and airline flight-paths. Examples such as these, and more, will show the importance of economic understanding in the development of public policy and in the evaluation of politicians at election time.
William Holahan published Will Social Security "Go Broke" in 2035? No. in Econ4Voters 2022-07-03 09:40:42 -0500
Every year the Social Security Administration issues a trustee report stating the condition of the system, including the "bond fund," or, as it is officially known, the "Social Security Trust Fund." This year the trustees estimate that the bonds in the trust fund will "run out" in 2035. (Find the report summary here: https://www.ssa.gov/oact/TRSUM/) And every year there is confusion about what it means for the trust fund to be exhausted. Will retiree payments be cut? Will taxes have to be raised?
Soon after the Social Security Administration trustees report landed, the Washington Post ran opinion-writer Megan McArdle's June 9, 2022, front-page article under the screaming headline: "As Our Entitlements Crisis Gets Closer, A Solution Moved Farther Away." She describes the pending "insolvency" of Social Security and the fraught choice that will face the Congress at that time.
This commonly-held description implies that the country’s most popular government program is in serious trouble. Current retirees, as well as current workers who've paid into the system during their entire work life and who anticipate reliable payments during their retirement, all have reason to be alarmed when such reports appear in leading newspapers.
Moreover, there is no doubt that this issue will play a role in the election season. For instance, in the race for the US Senate seat in Wisconsin, two-term incumbent Ron Johnson, now seeking a third term, has claimed that Social Security is a "Ponzi scheme" and it's pending "insolvency" is just another example of "democrat (sic) socialist programs bankrupting the country."
Follow the Money. Follow the Bonds
Fortunately, the system is not going broke. The correction of this common misunderstanding and the political opportunism derived from it must begin with a review of how the social security system gets its money. As designed in 1935, the chief source of revenue for Social Security is a designated tax: the payroll tax on earned income. Originally this payroll tax was to be "pay-as-you-go," workers paying for retirees in a rolling obligation, each generation of workers paying for the Social Security benefits of the retirees. But it is easy to overlook this economic reciprocity: each generation of workers inherits the knowledge and physical capital produced in the past, resulting in an average growth of productivity of roughly 1.5% per year.
No one could have predicted in 1935 that the hugely disruptive World War II would be followed by an 18-year "baby boom" of 77 million people, in turn, followed by an 18-year "baby bust" of 47 million people. This pattern of boom and bust birth rates predetermined a boom of retirees collecting benefits and a bust of workers to finance those benefits. This meant that the pay-as-you-go system based on payroll tax revenue would place a financial strain on workers when the baby boomers retired. To avoid this excess burden, beginning in 1985, President Reagan raised the payroll tax above the amount needed to meet the retirement benefits year by year. That "surplus" amount was used by the Social Security System to purchase special Treasury bonds on behalf of the boomers. In effect, this combination of taxes on boomer income and investment in bonds forced the boomers to invest in partial payment of their own retirement benefits. The reserve of those bonds is known as the "Social Security Trust Fund." The plan was to build up this fund during the working life of the baby boomers, using the cash for the good of the country during those years, and then return the cash with interest during their retirement years. The sale of the bonds would be the accounting transaction in exchange for the cash.
The revenue gained from this sale of bonds would be added to the payroll taxes paid by the workers during those years. As a result, the payroll tax rate paid by workers would be set lower than if the workers had to finance the entirety of baby boom retirement benefits. The System would sell bonds from the Trust Fund back to the Treasury in exchange for cash sufficient to pay for about 1/4 of the retiree Social Security benefits; the payroll tax paid by workers would pay the other 3/4.
Crisis? What Crisis?
According to estimates made in 1985 when the bond reserve was established, the boomers would be forced to save enough to pay their share until the year 2060, and accordingly, the bonds would be sold out by the year 2060. By then all but a few persistent boomers will be gone and no longer collecting retiree benefits. As the trustees now report, however, the bonds will run out in 2035 when over half of the boomers will still be very much alive and collecting retirement benefits. Where will that money come from when the bonds are gone?
The great fear presented by the predicted exhaustion of the bond fund by 2035 is that Congress will have to choose between cutting benefits by 1/4 or raising taxes to pay 1/4 of the benefits. Fortunately, the math shows that fear is unfounded: the retention of the planned benefits schedule will not require an increase in taxes or borrowing after the bonds run out.
If after 2035 Congress orders the Social Security Administration to maintain scheduled benefits, the amount required will be the financial difference between retirement benefits and worker payroll tax revenue. The retirement benefits schedule depends upon the summation of the individual retiree's highest 35 years of earnings during their working years. The payroll tax revenue depends upon worker earnings. Neither of these two formulas depend upon past savings; the exhaustion of the bond fund does not affect the difference between them.
The bonds are going to run out sooner than expected because the savings were offset by expenditures not anticipated in 1985, including cuts in general taxes; increased defense costs; the multi-trillion-dollar response to the economic downturn of 2008/9; the pandemic–induced economic downturn of 2020. But such diversions should not be paid for by boomers in the form of reductions in their retirement benefit checks. Like all citizens, they will pay their share of those government expenditures through their general taxes. They should not have to pay twice; i.e., once through their general taxes and a second time through reductions in their retirement checks.
Because the amount to be supplemented is not dependent on the existence of bonds, neither the rate of taxation nor the rate of government borrowing will have to change after the bond fund is exhausted. If in 2035 Congress orders the Treasury to continue to supplement Social Security retirement checks, the Treasury can provide the required supplementary money without raising tax rates or borrowing.
William L. Holahan is Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee
William Holahan published URGENT: MAKE A CARBON TAX PART OF CLIMATE CHANGE POLICY NOW in Econ4Voters 2022-05-23 14:21:41 -0500
The latest UN annual report on climate change issues the sternest warning yet that climate change due to human activity is accelerating. This series of reports has triggered two types of responses. The first type calls for government command and control measures that would phase out all fossil fuel-based energy by 2030; this has gained a great deal of attention with the introduction of the Green New Deal. The second favors the carbon tax, a pro-market approach that would use price incentives to induce market participants to reduce their greenhouse gas emissions. Both strategies will be needed, but the carbon tax is misunderstood and needs further explanation.
The atmosphere is a “common access resource.” Consequently, an unregulated “free market” does not require payment when polluters emit CO2 into the atmosphere. They have an incentive to save abatement costs by using the atmosphere as a free disposal site. The implementation of a tax per unit of carbon emitted into the atmosphere would insert the missing price per unit of CO2 emission. Profit-seeking firms would be incentivized to direct their engineers and scientists to seek emission-reducing methods that are cheaper than paying the tax.
Reducing carbon emissions costs money. In an unregulated "free" market, a firm that voluntarily incurs abatement costs places itself at a competitive disadvantage relative to competitors that do not abate their emissions. The carbon tax applied to all emitters levels the playing field by eliminating the emitters’ advantage: without the carbon tax, a firm can gain a competitive advantage by emitting more carbon; with the carbon tax, a firm can gain a competitive advantage by emitting less carbon.
As the carbon tax is passed on to consumers, they will perceive a change in the relative prices of different energy sources. For example, due to coal's relatively high carbon content per unit of energy, the carbon tax for coal would be roughly twice that for natural gas, providing coal users with a strong incentive to switch to gas. Energy buyers would perceive even lower relative prices for non-fossil energy, like wind and solar, provided they can work around natural interruptions of those sources.
The Bipartisan Approach
Recognition of the potential of this tax to curtail climate-altering CO2 emissions is growing, and support for it is gaining ground on both sides of the aisle. Recently, Senators Whitehouse (D-RI) and Schatz (D-HI) proposed charging polluters $49 per ton for their carbon emissions. Meanwhile, the Climate Leadership Council (CLC), a "conservative" organization, endorsed a fee of $40 per ton.
This measure would generate considerable revenues (e.g., the CBO estimates that the Whitehouse/Schatz proposal would generate over $2 trillion per decade). The money could be spent partially offsetting the increase in the national debt resulting from the 2017 recent debt-financed tax cut. Or, the money could be spent to beef up safety net programs for the poor, shore up the national retirement and health programs, and fix the nation’s crumbling infrastructure. Or, it could be spent on speeding up the development of alternatives to fossil fuels. After all, if the scientists are right, we need to make up for lost time. Finally, the CLC has proposed that the money could be returned to the public in the form of an equal per-person “citizen dividend.” At $40 per ton, that annual dividend is estimated at roughly $2,000 per family of four.
The Carbon Tax Complements Other Government Regulation.
Many “small government conservatives,” who recognize the need to reduce CO2 emissions, over-estimate the effectiveness of a “free-market solution” offered by the carbon tax. It has great appeal for them because, as a complement to market forces, they regard it as a substitute for the "heavy hand" of government command and control actions (quotas, bans, equipment requirements, measurement techniques, inspections, and compliance rules that restrict managerial prerogatives). However, while a carbon tax reduces the scope of the required regulatory oversight, it does not eliminate the role for regulation. The regulatory authorities still will be required to continually monitor carbon emissions to determine how high to set the tax - the higher the tax, the lower the emissions. Moreover, the government must also monitor compliance. So, while the carbon tax creates compatible incentives to reduce emissions, it is not sufficient to absolve the government of all its responsibilities.
The Carbon Tax is a Start on Net Zero CO2 Emissions by 2050
According to the CLC, such a hefty tax would induce investment in abatement methods that would keep our emissions far below the 2030 target levels agreed to in the Paris accords. That would be a good start on the "net zero" by 2050, regarded by scientists as a necessary condition to keep global temperature increase to 2°C. So the carbon tax is a good component in the large set of proposals that must work to re-organize the incentives of 340 million ideologically mixed citizens. The carbon tax gives all decision-makers an incentive to act in ways that save the planet, even if that is no part of their intent.
William Holahan published EASING THE BURDEN OF STUDENT LOAN REPAYMENT in Econ4Voters 2022-05-11 12:16:19 -0500
EASING THE BURDEN OF STUDENT LOAN REPAYMENT
College students face rising costs in two ways: first, tuition has risen as states have cut back on their support of higher education. Second, the number and frequency of course offerings have been reduced, increasing the time to graduation, which further adds to the student's total cost of education. In response, many students take out large loans and/or work long hours at low wages in the hope of building an educational asset of incalculable value that will last a lifetime. Various relief measures have been proposed, including “free college tuition” and student loan debt forgiveness.
Here's a plan targeted to the two trends that have imposed the greater repayment burden: the government/taxpayer share of higher education costs as well as the student loan repayment schedules.
Part I: Government/taxpayer Share
Taxes are already high; we cannot expect the taxpayer share of college tuition costs to be returned to 80% -- last seen in the 1970s -- let alone 100%, or “free college.” Since college graduates will, on average, eventually earn more than today’s average taxpayer, a free college education would involve a transfer from the average working person to those who will eventually be financially better off. Still, society at large does benefit from an educated populace, so the first part of the plan is a compromise taxpayer share of 50%.
Part II: Reformed Loan Repayment Schedule
To reduce the loan repayment burden, student loans should be spread over the earning years, a term of 30 to 40 years. As with other long-lived assets, such as houses and commercial buildings, the student loan term would reflect the life of the asset.
In addition, the annual dollar amount of the repayment should be capped at some low percentage of the graduate’s annual income -- e.g., 5%. With such a cap, the dollar amount would rise and fall with income until the debt is repaid in full, including interest. Because the years just after graduation are often low-income years (especially for students graduating during a recession or a slow national job-market recovery), the loan repayment burden is most pronounced during those years. A fixed percentage rather than a fixed monthly dollar amount would bring the pattern of repayment in line with the graduate’s pattern of earned income.
To see how this would work, consider a recent college graduate whose first job pays $36,000 per year. The student loan repayment would be capped at 5%, or $1800 per year, $150 per month. If after a time the student's income would rise to, say, $50,000, the cap would rise to $2500 per year or $208 per month. Of course, different percentage caps could be agreed-upon: if the cap were 3% of annual income, the yearly payment based on $36,000 per year income would be $1080, or, $90 per month. With such a fixed percentage cap formula in place, the repayment would fall automatically for the graduate who suffers a period of lower pay or even unemployment.
To assure a high repayment compliance, the loan should be collected by the federal internal revenue service; repayment would simply become part of paying taxes, which are not dischargeable in bankruptcy.
A properly designed loan system would enable college students to focus on maximizing the value of their educational asset, studying more hours per week, taking more rigorous courses and majors, and graduating sooner with higher grades. Their capacity to repay the loan would be increased by an enhanced learning experience and earlier entry into their chosen career path. College is a long-lived asset; both society and the students gain when we treat it that way.
William Holahan published HITTING BACK WHEN CHARGED WITH “SOCIALISM” in Econ4Voters 2022-04-19 08:31:47 -0500
It's that season again: Republicans are claiming that Democratic Party office-seekers have taken a “hard left turn” toward socialism. This gambit evokes powerful negative imagery: economic failure, soup and bread lines, the suppression of individual initiative and innovation, and gulags for those who complain. This rhetorical device distracts from the difficult issues facing the public, as well as deflects responsibility for resolving those issues. The best defense is a quick pivot to offense, incorporating mainstream economics in the response. Consider a few examples:
Economic Issues of Great Concern to Voters
Many of today’s concerns (health insurance, infrastructure, climate) derive from the failure of the market sector to perform well (often dubbed "market failure") or from the failure of the government sector to perform the functions assigned to it (similarly dubbed "government failure"). As the socialist label is tossed around, both voters and pundits must keep in mind a guiding economic principle: capitalism requires efficient provision of public assets that private markets will not provide. Moreover, because capitalism requires a well-functioning public sector, it is crazy to call public investments "socialism."
We do not face a choice between capitalism and socialism: all capitalist economies are “mixed economies” in which a large number of activities are directed by private market forces while others are directed by government forces. In those sectors where market direction is chosen, profit-seeking private firms will compete to provide those goods and services that can be owned by individuals and bought and sold on markets. In those sectors in which government direction is chosen, the means of production will be owned collectively and directed by bureaucracy and elections and paid for with taxes and user charges.
Because capitalism is such a successful wealth-producing system, the American presumption is that goods and services are best directed by market forces rather than through government direction. However, the challenge for modern society is not to choose markets in all sectors of the economy versus government ownership of the means of production in all sectors. Instead, it is to determine task-by-task, sector-by-sector, whether private enterprise markets or a well-chosen level of government would be the better allocator of resources within each sector. In transportation, for example, while roads and bridges are built and maintained by government, the cars driven over them are produced by private enterprise
Two types of error can be made: Type I is the error of implementing government ownership of the means of production in a sector that would be better served by market forces. Type II is the error of relying on markets when government ownership of the means of production would serve society better. Steady improvement of an economy’s performance depends on avoiding both types of error.
Hitting Back When Hit with the Charge of “Socialism”
Candidates can use well-accepted economics to hit back sharply when confronted with a charge of socialism, with responses such as these:
On Deteriorating Roads … “We are plagued with terrible road conditions that increase costs for commuters and business firms. Fixing roads requires a collective initiative. … and money. To pay for the roads, we need user fees to require that those who use the roads pay for them. For now, that means raising fuel taxes; as technology improves so will better ways to impose user charges. It is ridiculous to apply the term "socialism" to investments in roads and the user charges to pay for them; roads provided publicly are essential for capitalism to thrive, and user charges employ one of the hallmarks of markets, which is using prices to require users to pay for what they use.”
On Health Insurance … “My opponent claims that the Affordable Care Act will lead to socialized medicine. Not true: as shown by the Heritage Foundation, a pro-market think tank, market insurance alternatives that are unregulated cannot provide universal health insurance coverage. Why not? Competition would force insurers to charge experience-rated premiums, i.e., charging higher premiums to higher-risk policy-holders. Low-income people, and those with pre-existing conditions, would be priced out of the insurance market and lose access to basic medical care.”
On Greenhouse Gas Emissions … “An important first step in addressing the climate threat is to recognize that the current cost of emitting carbon is too low; polluters use the atmosphere as a low-cost waste dump. Consequently, polluters are encouraged to overproduce and underprice their products. To re-direct those market forces toward reducing carbon emissions, we should follow the advice of the Climate Leadership Committee and implement a carbon tax of $40 per ton of carbon emitted, which will generate a $2,000 per taxpayer rebate. My opponent calls this socialism. Ridiculous. The carbon tax is an example of how to use market forces to reduce global warming pollution to sustainable levels."
William Holahan published An essay responding to Senator Johnson's remark that Republicans should repeal the Affordable Care Act if they retake the Congress in 2022 or 2024 in Econ4Voters 2022-03-31 14:09:47 -0500
An essay responding to Senator Johnson's remark that Republicans should repeal the Affordable Care Act if they retake the Congress in 2022 or 2024
SENATOR JOHNSON STILL WANTS TO REPEAL THE AFFORDABLE CARE ACT
In his effort to retake the Congress, Senator McConnell is urging Republicans to shut up about their policy preferences until "we take it back." Senator Johnson violated the secrecy of this stealth platform when he said recently that he would like to return to the days when Republicans actively tried to "repeal and replace Obamacare." Speaker Pelosi responded: "the GOP just can't quit their obsession with ripping healthcare away from Americans with pre-existing conditions." The White House issued a statement: "Senate Republicans have a plan to gut healthcare, raise premiums, and strip protections for pre-existing conditions."
Opponents of the ACA seem to have forgotten the extreme dissatisfaction voters expressed with the health insurance market that existed prior to the ACA when insurance companies could deny coverage based on "pre-existing" health problems. Now seems a good time to ask whether the basic economics of insurance markets can help us predict how the ACA and its free-market alternatives would work.
A Primer on Insurance
Insurance provides financial relief to those who suffer the consequences of low-probability, high-cost events — car crashes, health problems, natural disasters. Companies collect premiums so that the few who suffer insured-against events receive financial assistance from the many who avoid these problems. In a process called "experience rating," they place their insureds into pools based on perceived risk levels. High-risk people are assigned to a high-risk pool and charged a higher premium than lower-risk people who are placed in a lower-risk pool and charged a lower premium. For example, drivers with prior accidents or OWI arrests pay higher car insurance premiums than drivers who have clean records. Similarly, the sick person with a pre-existing condition would pay more -- and may even be denied coverage for that condition.
Experience rating will not result in universal healthcare because the premiums charged high-risk people (mainly those with pre-existing conditions, or currently ill, or older Americans) will be simply too high for many of them. Their only choice is to forego coverage and utilize emergency rooms when medical care is needed. While the road system is designed for the cautious driver, the healthcare system is designed to help sick people and to prevent healthy people from becoming sick. To insure sick people the same way we insure drunk drivers is unjust and perverse. This "free-market solution" would return the nation to the days when families would hold bake sales and car washes, sell their homes, and take on odd jobs to help sick members.
The regulatory alternative is "community rating," where premiums reflect a shared responsibility and are based upon the experience of a large “community” of people. Accordingly, those who are lower risk subsidize those who are higher risk: high-risk policyholders pay less than their expected cost as their costs are subsidized by low-risk policyholders who pay more than their expected cost; as a result, higher-risk people are not priced out of the market.
A Market Solution with Regulations
In the early 1990s, the Heritage Foundation, a pro-market think tank, recognized two critical facts about insurance markets: first, unregulated "free" markets are incapable of delivering universal health insurance coverage, and second, to approximate universal coverage while retaining the advantages of competition among private insurance companies, a series of new government regulations is necessary. Heritage proposed a regulated private insurance market in which insurers are required to offer policies that meet certain specifications. These specifications include: (1) a mandate requiring everyone to have proof of insurance; (2) a prohibition against the use of pre-existing conditions as a basis for rejection of coverage; (3) a ban on lifetime coverage limits; and (4) the creation of state insurance exchanges that provide consumers with information to assist them in their selection of a health insurance plan. The purpose of these exchanges is to protect those in need of health insurance against the natural tendency of unregulated insurance companies to charge experience-based premiums. To have access to the market through these exchanges, insurers must agree not to deny coverage for pre-existing conditions or to raise premiums to unreasonable levels when people get sick.
Further ACA Market Support
Under the Affordable Care Act, the federal government helps people pay their premiums, especially the poor and those with pre-existing conditions, using tax dollars levied on higher-income people. In exchange for mandating that insurance companies cannot deny coverage to any applicant, the government pays “premium support," a subsidy to make up the difference between the insurance premiums and the amount paid by the citizen. Further, the government helps those with pre-existing conditions by capping the net premiums they pay.
In addition, ACA pays “reinsurance” directly from the federal government to those insurance companies who wind up with a disproportionate share of the high-risk customers, as well as “risk corridors,” which are limits on potential losses. Premium support, premium caps, risk corridors, and reinsurance, all stabilize the regulated market in which all applicants must be issued policies. In combination, these measures are designed to increase the number of firms willing to compete in the exchanges.
The ACA is not the free-market solution Ron Johnson instinctively advocates. Nor should it be equated with either the single-payer (non-market government) solution or the British-style (tax-supported government health provider) solution. The ACA exchanges create a market of private insurance companies to which President Biden would add a "public option" as a choice on the ACA exchanges. This public option would resemble Medicare but would be available to people below age 65 as an alternative to private insurance.
If Senator Johnson has an alternative system that can solve the same problem that the popular ACA solves, the senator should propose it before proposing repeal of what is working. The fact that Congressional Republicans attempted 70 efforts to repeal the ACA without proposing a viable replacement indicates that the Heritage Foundation was right when it set forth its necessary conditions for a system that would work, the very conditions upon which the Affordable Care Act is built.
William Holahan published EFFICIENT GOVERNMENT IS OFTEN COUNTER-INTUITIVE in Econ4Voters 2022-03-30 11:03:59 -0500
In every election cycle, some of the candidates running for national office claim they are running against Washington. They claim that only people with their particular life experiences have the transferable skills to free the country from an alleged mess created by career politicians. Consider the Republican primary race to succeed retiring Senator Rob Portman of Ohio. Josh Mandel, who served as Ohio Treasurer and served honorably in Afghanistan, assures us that when he gets to Washington he will not only "drain the swamp" but also "blow up the swamp." Another contender for that Senate office is prominent businessman Mike Gibbons who asserts his comparative advantage is great business acumen honed in the private sector. Consider, too, Wisconsin's Senator Johnson, currently running for a third term, who often touts his business experience and his accounting training as giving him essential insights into the importance of shrinking the government.
Should Government Be Run Like a Business?
The frequently-heard assertion from office-seekers who lack public-sector experience is that government should be run like a business; if it were, the U.S. would be solvent, more efficient, and more prosperous. Along with this misconception goes its corollary: private sector CEOs are “job creators” and government is a job killer. As with many trivializations in economics, this one resonates well with the public but it is dangerously wrong.
The reason this is wrong is derived directly from the free-market model, a concept initially proposed by Adam Smith and rigorously developed since. The model is routinely taught in economics classes and business school prerequisite classes and shows that the public interest is served best by competition among firms and their investors, even though the public interest is not part of the decision maker's motivation. But it also shows that when the pre-conditions for competition do not exist, market efficiency requires intervention by government. Economic activity, including job creation, requires a great confluence of inputs as well as coordination of the public and private sectors. The private sector firm is necessary for most of the jobs created, but it is not sufficient. Public goods (roads, schools, universities, courts, and law enforcement), paid for with taxes, are essential components of successful job creation efforts. Moreover, government often has to promote the process of competition, as well as ward off recession and high unemployment.
The Private and Public Sectors are Complements
The economy is not a large version of a business firm. Managing an economy requires a more comprehensive economic model than the one followed in managing a firm. A firm is a small piece of a very large puzzle. To manage a firm, CEOs employ "microeconomic" reasoning to guide all aspects of their puzzle piece: e.g., financing, marketing, and operating decisions. By contrast, managing an economy requires an understanding of macroeconomics, which focuses on the aggregate behavior of firms in the economy, i.e., how all the puzzle pieces fit together. For example, a properly-run government will counter the business cycle by dampening an expansion to control inflation and softening a downturn to limit unemployment. A properly run business firm, even a very large one, cannot hope to modulate economy-wide swings and instead must accept its limited role within the economy.
Consider the different strategies pursued by firms and governments during recessions. Firms suffer reduced demand for their products and services. Consequently, to survive a recession and prepare for better times, a firm has a strong incentive to contract. But business leaders who "tighten their belts" during recessions often have a hard time understanding why the government orders a bigger belt. Economic activity encompasses four categories of spending: consumption, private sector investment, net exports, and government. In the disastrous recession of 2008, the first three of these categories declined. Mark Zandi, chief economist at Moody's Analytics, estimated that, if the government had also tightened its belt, unemployment would have risen to 15 percent. Instead, it peaked at the still-terrible rate of 9.5 percent. In other words, the recession would have been much worse had it not been for government intervention.
Similarly, in 2020, during the pandemic and prior to the successful distribution of a vaccine, many businesses were shutting down due to collapsing demand and, in many cases, were forced to shut down by government order. As the economy lost 21 million jobs in a month and a half, the federal government frantically borrowed and spent $3.1 trillion in just one year. This counter-cyclical spending shored up businesses and households which otherwise would have been lost.
When the nation was founded, the right to vote was limited to white landowners. Since then, our nation has strengthened representative democracy by extending the right to vote to people who do not own land, to non-whites, to women, to younger people. Each time the right to vote was extended to a new demographic group, it was declared that all registered voters are to be accorded equal access to the polls. Officially, access was to be both fair and unbiased. For example, it became customary within a state that all voting places be open for the same days and hours. That would seem to provide equal access, but in practice, it can be used as a tool to suppress the vote; while the polling places may be in operation for exactly the same amount of time, the amount of time needed to vote may differ considerably due to local conditions such as the number of polling places per capita.
The Wisconsin primary of April 7, 2020, provides an illustration. Contrary to the recommendations of the President’s Pandemic Advisory Task Force to delay an election for a State Supreme Court seat, Wisconsin held it as scheduled on April 7, 2020. Efforts to change the date due to Covid were rejected by the gerrymandered Republican legislature, the Wisconsin Supreme Court, and the United States Supreme Court. Consequently, contrary to the stay-at-home recommendation of the Center for Disease Control, the election proceeded on schedule, and voters waited in lines for up to two and a half hours, wearing surgical masks on their faces and maintaining six-foot "social distances" from each other. The local TV news that evening featured footage of the long lines to vote at Riverside High School on Milwaukee's East Side. As if the time cost we're not enough of a deterrent, Mother Nature delivered an inch of rain in an hour, punctuated by hailstones. While those voters endured long lines in bad weather, just a mile up the street in the northern suburb of Shorewood, voters were voting in 10 minutes, parking in designated parking spaces, and then heading off to their next appointment.
Time has a great opportunity cost: the greater the amount of time required to vote, the more other activities have to be cut back; the more parents need babysitters; the less time available for work or family. When some vote in ten minutes with ease while others stand in bad weather for ten times as long; the opportunity costs are very different. The greater that cost, the greater the disincentive to vote.
The tools available to achieve more equal voting times include more conveniently located polling places, mail-in ballots, ballots received by mail, drop boxes, and the ability to drop a completed ballot with a certified clerk. Since all of these have been used for years in various jurisdictions around the country, those opposed to them should bear a burden of proof that they lead to integrity problems.
The 2020 election provides a controlled experiment. Anticipating long lines at polling centers, exposing voters to Covid while waiting to vote, the state relaxed its rules on absentee voting by mail-in ballot and the use of drop boxes. Eight hundred thousand registered voters applied, providing an online photo of their driver’s license to receive a ballot in the mail. The return envelope required a signature witnessed by another registered voter who also had to provide an address. Any errors nullified the ballot, and fraud was deterred by stiff financial fines and possible jail. The completed ballot was then either mailed or placed in a certified drop-box. This pandemic-induced procedure worked well, and despite strenuous effort to find evidence of voter fraud, none has been found.
The Wisconsin Institute for Law and Liberty (WILL) filed a lawsuit arguing that the use of drop boxes was not in accordance with the requirements of ballot custody spelled out quite clearly in Wisconsin Statute. They won: on February 11, 2022, the State Supreme Court agreed and banned the use of drop-boxes for the remainder of 2022.
The proponents of equal access to the ballot box should propose an evidence-based change in the law to permit the use of drop boxes. Here WILL helps: in addition to their successful lawsuit, WILL also issued a report confirming that the use of drop boxes during the pandemic did not contribute to voter fraud! Mail-ballot voting with drop boxes has been the norm in four states for twenty years: Washington, Utah, Oregon, and Colorado. They report no significant problems. For example, Oregon found that out of 100 million ballots handled since the year 2000, there were 12 cases of voter fraud or 0.000012%. With tiny numbers like that, the benefit of mail-in voting vastly outweighs any damage done to democracy by potential fraud. Moreover, a problem would have to be based on “net fraud,” i.e., the difference between the tiny number of fraud cases in in-person voting versus the tiny number of fraud cases from absentee ballot/dropbox voting. The burden of proof should be on those who make this extremely dubious charge. Finding none, let's get those drop boxes back in the business of reducing voter suppression and strengthening democracy.
(A very comprehensive account of the issue, including a discussion of WILL's report finding no voter fraud, can be found here: https://www.wsj.com/articles/the-best-summary-of-the-2020-election-biden-wisconsin-trump-lawsuit-voting-rights-fraud-absentee-dropboxes-ballot-curing-big-lie-11642966744?st=pjas9v2kn1k1wjr&reflink=desktopwebshare_permalink)
William L. Holahan is an Emeritus Professor and former Chair of Economics at the University of Wisconsin-Milwaukee.