New Mercantilism--State Sponsored Income Redistribution Favors the Rich

Vijay K. Mathur

According to Professors Robert Ekelund, Jr. and Robert Hebert in their book on economic history, Mercantilist writers between the 16th and 18th centuries were a group of merchants in Western Europe who were primarily interested in pursuit of their own material ends in alliance with the monarchy. They were concerned about the nation-state’s power, as long as it promoted their accumulation of wealth.

Mercantilists advanced the cause of nationalistic international trade regime and import tariffs that allowed them to accumulate export surplus. They were in favor of keeping wages as low as possible because, as Professors Ekelund and Herbert state, they believed that “suffering is therapeutic”. Poverty makes workers industrious. High wages would make labor lazy and hence supply less work.

Mercantilists were in favor of selective regulations, subsidization and taxation of industries, and monopoly in some sectors. Benefits to them guided their efforts and support for such state actions. In summary, Mercantilist thought represented distribution of income from labor and the poor to the rich.

Mercantilist thought, among many Republicans in the Congress and the Trump administration, runs through some of the actions they have implemented so far and are proposing to implement in the near future.

One of the most egregious Congressional actions that is pro- rich and anti middle and low-income is the American Health Care Act (AHCA) passed by House of Representatives on May 4, 2017. The AHCA increases the number of uninsured among low income, disabled, elderly and poor people. It eliminates 14 million people from Medicaid by cutting $800 billion (2017-2026), according to CBPO estimates, March 13, 2017. The bill reduces all taxes and fees that are part of the Affordable Care Act (ACA-Obama Care) and paid primarily by people with high income. They were used to subsidize those low-income people who could not afford to buy health insurance before ACA.

The Congressional Republicans’ claim that their health care bill is based upon principles of free market is “phishing for phools” strategy, as elaborated by Professors George Akerlof and Robert Shiller (Nobel Prize winners) in their book Phishing for Phools. Akerloff and Shiller cogently argue that “phishing for phools” occurs in the free market as well as in politics. In politics such a strategy succeeds when the typical voter is ill informed, and the campaign donors are well informed. Since the health care bill is so complicated, many voters, except the “donor class”, would be ill informed about the contents of the bill. Even the Congressmen who voted for the bill were not sure about the contents of the bill. Therefore, there is a great deal of room for phishing for the ill informed phools.

Republicans in Congress and the Trump administration have such a disregard for the plight of the non-rich that they are proposing to give wealthy Americans the largest tax breaks, while severely cutting health care funding for low income and poor Americans. Such policies would not only result in large budget deficits and concentration of wealth, but are ethically bankrupt and economically damaging to the nation in the long run.

Proposed tax cuts for the rich are large in absolute as well as in percentage terms, relative to middle and low-income people. Also, marginal tax rates are reduced from 35% to 15% on “pass through incomes”, such as incomes in S corporations, partnerships and proprietorships that mostly benefit the rich. It would also encourage formation of such organizations to avoid taxes. Eliminating estate taxes benefits only 0.2 percent of estates (Center for Budget and Policy Priorities, April 27, 2017). Their hope that it would result in a growth rate of 3% is based on fictional evidence, given average total productivity growth rate below 2% for decades (see Robert Shackleton, CBO working paper, March 2013).

Trump’s world view on international trade is more Mercantilist and is mixed with distrust of free trade and World Trade Organization (WTO). Trump’s administration and Congressional Republicans are also on a rampage to rescind many of the past regulations and laws in order to benefit businesses, without regard to harmful effects to the general public. It is ironic that these politicians, who publically pronounce the virtues of the free market, would defy regulations on pollution control and financial and consumer protection that promote efficiency of free markets.

Republicans are completely oblivious to the fact that one of the most productive resources a country has is its human capital. A country with mostly sick and unhealthy people cannot be productive. Substitution of technology has limitations, and it cannot be efficiently utilized without human capital. Unlike physical capital, investment in human capital starts at a young age and continues through adulthood, and it pays off over generations.

It seems that Congressional Republicans have succumbed to the will of the rich and powerful. Since the Citizen United decision the power of dark money, the title of the book by Jane Mayer, has corrupted political decision-making in the Congress. More emphasis is on appearance, rather than contents, of policies that are pro rich and against poor and lower income people.

I hope politicians realize the corrupting influence of dark money. But if they do not it is at their own peril, and consequently the peril of all Americans and Democracy.

Mathur is former chair and professor of economics, now professor emeritus, Department of Economics, Cleveland State University, Cleveland, Ohio. He resides in Ogden, Utah.

Republicans’ Free Market Health Care Fantasy

Vijay K. Mathur

Conservative politicians and others in and out of government think of health care as a homogeneous product in the market. Usually a homogeneous product, or products that are close substitutes, define an industry, synonymous with a market. For example, the automobile industry sells automobiles, though of different brands. In health care we have a market of health care providers, such as hospitals and clinics of various types, health insurance market and a market for pharmaceutical drugs.

On the consumer side we have consumer patients. However, consumers are also providers of their own health care, as when they control their diet and engage in physical activity. In addition, out of six major government (third party) programs, Medicare and Medicaid, the biggest programs, covered slightly more than one-third of the population in 2015.

The myth, especially among GOP conservatives, is that there is a high degree of free market competition where the “law of one price” prevails in markets for hospitals, clinics, insurance industry and pharmaceutical drugs. Most GOP politicians in Congress have consistently propagated the free market myth. It was one of the centerpieces of the legislative bill proposed and withdrawn by Rep. Paul Ryan in the House of Representatives.

Politicians tend to prime their constituents with this falsehood that overtakes, among many Americans, their own conscious reasoning in deciding the real economic status of the current health care system. Professor and Nobel Laureate Daniel Kahneman states in his book, Thinking, Fast and Slow, “Studies of priming effect have yielded discoveries that threaten our self image as conscious and autonomous authors of our judgments and our choice.” Based on his experimental research Professor Kahneman further argues that,

“A reliable way to make people believe in falsehoods is frequent repetition, because familiarity is not distinguished from falsehood.”

The facts are that none of the component markets in health care are free in the sense outlined above. Providers, especially investor owned, are monopolistic. They engage in non-price competition in heterogeneous output of services and in inducing demand, since insurance coverage and government programs make consumers less sensitive to prices. Prices of medical services and drugs (see Steven Brill report, “Bitter Pill”, Time, March 4, 2013) have very large variability, which tends to increase insurance premiums. In addition, most small towns have a very limited choice of hospitals or clinics, with a limited choice of services. There is locational disparity in the number of providers of medical care, hence locational monopolies in small towns. However, contrary to other markets, in the health care providers’ market even the large number does not bring down the cost, due to increased competition for and hence wages of physicians. Medical drugs are subject to import controls and patent protection, thus contributing to monopoly power and price escalation.

Consumers’ choices of hospitals and/or clinics are governed by choices of physicians. Since there is asymmetrical information problem between providers and patients, physicians are supposed to represent the consumer patient to fill the information gap. However, they are influenced by monetary and non-monetary incentives provided by hospitals and drug companies in their quest for maximizing revenues and /or profits. The study by Jeffrey and Joshua Gottlieb, American Economic Review, April 2014, finds that physicians’ supply of health care does significantly respond to financial incentives. Medicare is involved in funding projects to facilitate information flow between doctors and patents.

The insurance industry suffers from moral hazard problem, one of the causes of market failure, when patients’ incentive to take care of their health decreases when an insurance company pays most of the cost of care. However, this problem is partly remedied by increasing deductions and co-pays in such instances. The industry is also implementing incentives in providing preventive health care mandated by the Affordable Care Act (ACT), such as paying for obesity prevention strategies and for gym services.

Kaiser Family Foundation reported in 2010 that in the large group insurance market, the insurance industry is monopolistic, according to Herfindahl-Hirschman Market Share Index. Insurance companies also face adverse selection problem when they end up with mostly unhealthy people in the pool. It increases premiums, thus further discouraging healthy people to buy insurance, especially when emergency care is guaranteed. To keep premiums low, the insurance pool must have a mix of young and old, and healthy and unhealthy people.

Many companies have opted out of some areas under ACA because they did not have enough healthy people in the insurance pool to keep premiums low enough to attract such people to buy insurance. That is the reason for the mandate in the ACA to buy insurance. Congressional Republicans’ opposition to mandates is indicative of their poor grasp of the insurance business.

The fact is that ACA mandate incentives are weak. One probable way to bring down insurance premiums would be Medicare coverage for all. In such a program all would be required to pay into the fund according to their ability to pay, Medicare would be allowed to negotiate drug prices and design payment schemes, as is done now, for providers’ services in the market. Insurance market would be allowed to issue policies such as Medicare Advantage supplemental insurance.

Another possible course of action could be that, rather than reinventing the wheel of health care, they may try to fix the problems in ACA and incentivize the component markets in health care to improve on efficiencies and relax import controls on drugs. I hope that Republicans in the Congress, and policy makers, look at the reality of markets in health care and do not get swayed by the free market rhetoric.

Our nation’s health crucially depends upon the health of its people.

Mathur is chair and professor of economics and professor emeritus, Department of Economics, Cleveland State University, Ohio. He resides in Ogden, UT.