Educational Divide, Emerging White Underclass and Desperation

Vijay K. Mathur

On January 13, 2016, I published a blog in The Huffington Post, where I pointed out that an increasing proportion of families and “their future generations” are ending up in the bottom of the income distribution and hence are trapped in the cycle of poverty.  Poverty rates vary among racial groups.  Blacks and Hispanics face twice the poverty rates of Asians and Whites.  In August 29, 1997, Time magazine’s lead article termed poor Blacks as an Underclass, as they were entrapped in the cycle of psychological and material deprivation even after 20 years of civil rights and anti-poverty programs.

Nobel Laureate Economist Angus Deaton, (http://knowledge.wharton.upenn.edu/article/despair-and-the-white-working-class/, in a conversation at Knowledge@Wharton, April 6, 2017, is raising a similar issue, with a slightly different twist, pertaining to the effect of material deprivation and lack of economic opportunities on working class middle age White undereducated Americans.  Most economists have also been pointing out that, in the emerging technologically sophisticated economy, the role of higher education and skills beyond high school will play a significant role in determining the success of job seekers in the labor market and their economic well-being.   

Professor Deaton argues that the mortality rate among Non-Hispanic Whites in their early 50’s,  “after 100 years of declining had turned the wrong way or at least flattened out.”  (See source above).  This is happening to both men and women, and not to Hispanics and African-Americans, and not in other rich countries.  Most deaths are due to alcohol consumption, drug overdose and suicides.  Deaton has argued in his book, The Great Escape (2013), that well-being is primarily based upon income and health. 

In this age of rapid technological change, job opportunities open up for those who have acquired human capital that complements physical capital with advanced technologies. The Wall Street Journal, November 30, 2017, reports a study by McKinsey Global Institute that predicts that around the world close to 375 million workers, displaced by new technologies, will have to find new occupations by 2030.  Public policy makers and businesses have to equip workers with new skills and technical training to minimize labor market disruptions of automation.  The US is not alone in facing this challenge.  In fact, even now, manufacturers in the US have been complaining about the problem of finding technologically skilled workers (The Wall Street Journal, December 1, 2017).

Those with less education are facing desperate times in finding job opportunities that will create a sense of income security and economic well-being.  The Trump administration and Republican Congressional members are derelict in providing sufficient support to Americans who need new skills, job training and education to meet challenges of automation in the labor market.  Job uncertainty, income insecurity and inadequate health care of this group of Americans create a sense of anxiety, despair and depression compounded by the lack of family ties, and public and community support.   Unhealthy and depressed workers cannot be productive members of society.

Deaton argues in his book (p. 207) that despite the belief in the American dream, the US is not  “particularly good at actually delivering equal opportunities.” This is supported by high correlation between fathers’ earnings and sons’ earnings in the US, highest among OECD countries of Europe and only lower than China and some Latin American countries.

Deaton states that this problem among Non-Hispanic Whites with low levels of education has arisen due to “...a cumulative disadvantage over life in the labor market, in marriage, in child outcomes and in health triggered by progressively worsening labor opportunities at a time of entry…”(See source above).  A study by John F. Helliwell and Hafang Huang (HH), Economic Enquiry, October 2014, using subjective well-being (SWB) data covering life evaluations and emotional experiences reports, finds that SWB increases with income, education, and marriages, and diminishes with increase in unemployment rates. Unemployment rate increase also affects emotional well-being of employed, since it threatens workplace downsizing --  hence their job security.  HH also find, for those who are employed, that a one percent increase in unemployment rate is equivalent to a 4 percent decline in household income. 

A labor market that creates employment and occupational growth for skilled and highly educated workers and dries up job opportunities, occupational growth and economic well- being of less skilled and educated workers is bound to be disruptive to households and the nation.   It would also lead to increasing levels of income inequality that we experience today in the US as opposed to other advanced nations. And as Deaton would argue, income inequality is harmful to the nation and its economic system when rent seeking (special favors from government by lobbying) rich affect public policy that deprives lower income people of services, such as education and health care to enrich themselves.  In fact that is what the Congressional Republican’s tax law will do.  

I hope that the Trump administration and some Republican Congressmen will be bold enough to realize that just enacting a tax law to make a political point is not an achievement for the well-being of Americans.

Enacting tax and spending laws that benefit all current and future generations of Americans to meet challenges of advanced technologies and competitive forces in the global market would be a laudable legacy.  As Justice Sonia Sotomayor has stated, “Until we get equality in education, we won’t have an equal society.”

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

GOP Tax Policies in Shambles

Vijay K. Mathur

A brief history informs us that GOP political identity is defined by their political policy stand for tax cuts, with only lip service to reducing budget deficits and national debt.   The Reagan administration cut taxes that primarily benefitted the rich, but the increasing deficits forced the administration to pass tax increases.

George H.W. Bush stated “read my lips-no new taxes” in the GOP primaries, but gave up on that promise due to the reality of more deficits.   As president he signed the budget deal to raise taxes.  George W. Bush’s administration cut taxes in 2001 and 2003.  However, more spending, low real growth rate, rising unemployment rates, more deficits and debt, and the great recession of 2007-08 did not accomplish what was promised.

The GOP is obsessed with tax cuts as a policy tool to stimulate growth and employment.  And even though the rhetoric of tax cuts is buttressed by high growth and claims of reduced budget deficits, those claims seldom materialize.  In addition, tax cut during times of economic expansion is counter to any economic logic.  It makes it harder to implement any tax stimulant in case of economic downturns. But it seems logic of any kind escapes Republicans in the Congress. 

In the Trump administration there was a clarion call to reduce corporate and other taxes. The GOP marketing campaign to sell their tax plan as a middle class tax cut was a sideshow without much tax benefit to middle class taxpayers.  GOP Congressmen emphasized that corporate tax cuts will boost profits, investment, growth, employment and high wages for the middle class. They are oblivious to the fact that, historically, economic growth is declining over time despite reductions in corporate taxes.  However, the Congress passed the tax cut under the "Tax Cuts and Jobs Act" with a slim majority. 

Thomas L. Hungerford of Economic Policy Institute (EPI), June 4, 2013, finds that during 1950-1960 annual average economic growth was 3.9 percent when the statutory corporate tax rate was above 50 percent.  However, during 2000-2010 statutory corporate tax rate was 35 percent while the annual average growth rate was 1.8 percent.  In fact, from 1948-2010 there is a positive relationship between higher real growth rates and higher statutory corporate tax rates. 

GOP Congressmen are dreaming if they think that cutting statutory marginal tax rate for corporations from 35 percent to 21 percent will create a flood of repatriated profits to the US from tax havens, where tax rates are next to nothing or much below the proposed rate.  As EPI authors Josh Bivens and Hunter Blair state, October 3, 2017, multinational corporations are waiting for another tax holiday, such as in 2004, when they paid 5.25 percent on repatriated profits.

There is an emerging consensus among many experts, including Congress’ Joint Committee on Taxation, that the tax proposal favors the wealthy and rich over middle and low-income Americans.  Even though the tax cut proposal reduces tax brackets from 7 to 4 with generally lower marginal tax rates, it either takes away or limits deductions for state and local taxes, mortgage interest, property taxes and medical expenses. 

Aside from the repeal of the estate tax, rich and very rich Americans, the tax law would benefit only certain businesses such as LLC's, S-corporations and partnerships with "pass through incomes.''  Pass -through incomes of businesses (close 40 million) are taxed at the individual tax rates than at the corporate tax rates. They could get close to 20 percent deductions in earnings. The law has made the tax for small businesses more complicated and confusing than before.  It has also excluded certain business services from tax benefits.  C-corporation do not gain much benefits. But the fact remains that tax cuts worsen income distribution, already skewed toward the rich, and increase national debt. Therefore I propose that if Democrats are in the majority in the Congress they should make some major changes in the tax law that will benefit all Americans.  

I propose the following:

1. To stimulate investment there should be targeted tax breaks for investment and saving in 401(k) type plans for all Americans irrespective of their employment status.  The Economist, July 29, 2017, reports on a study by German Gutierrez and Thomas Philippon, that found reduced investment since 2000 is due to an increase in business market power and decline of competition.  Hence, tax breaks for investment must be complemented by enhanced enforcement of Anti-Trust Laws.

  

In addition, to encourage innovations and entrepreneurship a tax cut for small businesses that employ 100 employees or less should be much more than the tax cut for large corporations.

 

2. Impose a carbon tax, and the revenue should be earmarked for infrastructure investment.

3. Capital gains, dividends and carried interest (akin to capital gains) when received should be treated as regular income for tax purposes.

4.  A progressive tax should be levied on earnings of all Americans to finance Medicare and Social Security programs.  States should be required to make a larger proportionate contribution to the Medicaid program.  Abuses in the disability insurance program must be prevented.

5. Keep the new corporate tax rate and lower tax rates for small businesses but all tax expenditures, loopholes and subsidies for businesses must be taken away.

These are some suggestions that would benefit the country and all Americans and put the budget deficits and national debt on a lower trajectory.  Bob Bryan of Business Insider, November 6, 2017, states that Penn-Wharton model predicts that the tax plan reduces Federal revenue by $1.75 trillion during the first decade.  In addition, over 22 years the plan reduces tax revenue by $4.4 trillion, thus contributing to substantial increase in national debt.  However, such predictions did not matter for the GOP in the Congress.     

I hope that GOP Representatives in the Congress start thinking about the country first rather than about the next election.  I also hope that they do not get the impression that all Americans in the middle class and at lower income levels are ignorant of the real intent of the Republicans in the Congress in passing the current tax law.  The majority of Americans do not favor the new tax law.  Hopefully they would  express their dislike in their votes in the upcoming elections.

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

Economic and Non-Economic Consequences of Economic Growth

Vijay K. Mathur

Economic growth in any country is the most well understood and significant index of the economic wellbeing of the population.  It is usually measured as the percentage change in the gross domestic product (GDP).   However, it is not explicitly known to most that it may also spread a sense of happiness, hopefulness and tolerance, hence a sense of cohesiveness among people.  The divisiveness among people occurs when there are winners and losers, and the winners are reluctant to provide opportunities to losers to achieve a satisfying economic status and are self-centered in pursuing their own economic gains, even at the cost to others.

Professor Benjamin Friedman in his book “The Moral Consequences of Economic Growth”, provides some thought- provoking insights into the non-economic consequences of economic growth.  He states, “The value of rising standard of living lies not just in the concrete improvements it brings to how individuals live but in how it shapes the social, political, and ultimately the moral character of a people.” In his view, economic growth that lifts all boats “…fosters greater opportunity, tolerance of diversity, social mobility, commitment to fairness, and dedication to democracy”.  These attributes are also the hallmark of innovation and growth.  Fear of growth due to negative side effects of environmental damage, congestion and diminished biodiversity are unwarranted, since growth provides more resources to offset these effects. 

In a winner and loser society, where winners are relatively better off and the losers are relatively worse off against some benchmarks, economic and social divisiveness among people increases and perception of fairness falters.  Professor Friedman remarks, “ The central question is whether, when people see that they are doing well (in other words, enjoying ‘more’) compared to the benchmark of their own prior experience, or their parents’ – or when they believe that their children ‘s lives will be better still – they consequently feel less need to get ahead compared to other people.” If most people perceive that they are worse off as compared to these benchmarks, it creates a ripe environment for divisiveness, hostility and intolerance to economically well-off groups and other competing groups.   The opportunistic political leaders and their sympathizers use this rift for their own political, social and economic ends.   

President Trump constantly reminds his supporting base that winners, immigrants and international trade are responsible for their plight.  But, he is also telling them that he is working on policies to stimulate economic growth.   However, there are no visible signs of meaningful and sustainable high growth policies.  The economy is growing between the average annual rates of 2% to 3%, but as compared to historical standards, it has not trickled down in significant wage gains to workers severely affected by the deep economic recession of 2007-08.   

The Wall Street Journal, August 24, 2017, reported that world wide economic growth has picked up and forecasts for US are in the range of 2 to 3 percent per year.   This US growth forecast will not improve the economic predicament of most Americans in the lower rung of the income distribution without substantive policy initiatives to stimulate productive investment in human and physical capital and R&D. The Trump administration’s aspirations for higher economic growth are incongruous with their regressive budget and tax proposals and strategies to restrict international trade and immigration.  Former Congressman Jack Kemp once remarked,  “Economic growth doesn’t mean anything if it leaves people out.”      

NAFTA trade pact is in jeopardy since Mexico and Canada are not willing to agree with the stringent concessions the Trump administration wants in the trade agreement.  The President has already withdrawn from the Trans Pacific Partnership trade pact with countries in South East Asia, a burgeoning regional trade market.   Restricting trade could prove to be a severe blow to economic growth.

A great source of unhappiness and divisiveness among the general population is the increasing income and wealth gap. C.I. Jones of Stanford University shows in his study on growth that, since 1980, GDP per person grew at the average rate of 6.8% per year for the top 0.1%, while it grew at the rate of only 1.82% per year for the bottom 99.9%, thus widening the income gap over time.   This has created a perception of unfairness and has led to general intolerance, especially fueled by the rhetoric of the President against immigrants and so-called elites.   

The increasing income gap is accompanied by an increasing wealth gap.  The study by Daniel Carroll and Nicholas Hoffman, Economic Commentary, Cleveland FED, June 28, 2017, finds that wealth mobility has also decreased over the past three decades.  On average, household are more likely to stay within their wealth quintiles over a period of 10 years than in the past two decades.  

Some claim that income inequality is essential for economic growth, but the evidence for the US is at best murky.  However, evidence points out that any marginal growth effects of inequality may not be economically beneficial to most people in the lower income distribution.   Aspirations for high growth rates and its trickle down effects in the Trump administration should be tempered by the fact that during 1973-1995, 1995-2001 and 2001-2017 the average annual growth rates of GDP per person were 1.82%, 2.17% and 1.72% respectively (see C.I. Jones).  

Hopefully, President Trump and his team recognize that in a slow growth economy policies matter to make people feel economically secured, to bring harmony among people, and to promote a healthy and vibrant society.

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

Is Globalization Anti Nationalism?

Vijay K. Mathur

Greenspan did not like the word globalization, and George Orwell stated, “Nationalism is power hunger tempered by self deception.”   However, to me globalization implies interaction of people, exchange of goods and services, information and technology between countries.  Nationalism is loyalty to your own country and working for its welfare and prosperity.  This interaction between countries is no different than interaction between states, except with different currencies.  The prosperity of any state within the US is interlinked with others’ prosperity.  Similarly, US prosperity is affected by other countries’ prosperity through trade and interaction with other people, thus creating an environment for the transmission of information and technology.  This is in our national interest.

President Trump has spread the myth that US trade deficit is against our national interest.  This phobia against trade and trade deficit is misguided and exaggerated.  In 2016 the deficit in goods and service trade and income payments to foreign countries (current account) was merely 2.42 percent of GDP (gross dollar output of the economy).  The percentage of this deficit has not varied much since 2013.  Most of the trade deficit is due to deficit in the trade of goods.  We have had a surplus in service trade and income receipts from foreigners for some time.  However, it is not enough to offset deficit in goods trade.  In addition, most of our deficit is with European Union countries, followed by China.   Hence, it is perplexing to hear President Trump constantly blaming China for the deficit.  

President Trump must also note that in 2016 US exports and imports combined constituted 36 percent of the GDP (17 percent are exports), a very significant part of the total economy. Any protectionist policy, followed by retaliation from other countries in response, would have a devastating effect on the economy in terms of income, employment and growth; it would be contrary to the national interest.  Trade promotes competition and an efficient allocation of resources, such as labor and capital.  Support of industries that cannot compete in the world markets would deprive other competitive industries’ demand for scarce resources.  Efficient allocation of resources would promote innovation, technical change and productivity.     

National income accounting would show that trade deficit is partly home-made.  If private saving is not enough to finance private investment and government deficit, it would result in trade deficit.  Trade deficit implies borrowing from abroad to finance our demands.  In US, household saving rate ranges from 4 to 5 percent of disposable income, while in China it ranges from 30 to 35 percent (www.quora.com).  Even if private saving is enough to finance domestic private investment, trade deficit will arise when the government has a substantial fiscal deficit.  This is the twin deficit problem we face.  CBO’s baseline budget projections in June 2017 show government deficit was 3.4 percent of GDP in 2016 and is expected to increase in the next decade.  

If President wishes to pursue a nationalist agenda, he should consider the fact that trade deficit in goods is due to Americans’ consumption beyond output of goods.  Perhaps President Trump should go on a campaign to persuade Americans to save more and consume less output of goods to “make America great again”.

If Americans save more it could help reduce the trade deficit as well as the burden on government transfer payments.  Americans would also be wealthier to support their pensions in old age.   By providing tax incentives to increase saving among poor, low-income and middle-income Americans, President Trump’s budget could partly ameliorate the trade deficit problem and the burden on government assistance.  Giving tax breaks to the rich is futile and would lead to government deficits and trade deficits.  Obtaining some concessions in trade negotiations with EU and NAFTA countries would have only marginal effect on trade deficits, since they will be subject to WTO rules and regulations.

The catchiest argument President Trump advanced in his presidential campaign was that job losses in manufacturing were due to bad trade deals and outsourcing.  Mr. Matthew J. Slaughter, Dean of the Business School at Dartmouth College, cogently argues in his opinion page article, The Wall Street Journal, June 15, 2015, that trade and movement capital between countries is not a zero sum game. He shows that between 2004 and 2014, US parent multinational companies hired as many people as their foreign affiliates.  Their value added of and investment in parent companies grew faster than in foreign affiliates.  The parent companies also contributed more to exports, expenditure in R&D, employee compensation and stimulus to the supply chain.

President Trump’s slogan “make America great again”  lacks substance and is without merit.  National prosperity and economic dynamism require international trade and a well thought-out immigration policy.  Americans who were displaced from jobs should ask their lawmakers to provide resources and opportunities, so they can prepare themselves for the new competitive global environment.  This approach would assure a more prosperous future for them and their children.

It is worthwhile to remember the words of Mother Teresa

“Yesterday is gone.  Tomorrow is not yet come.  We have only today.  Let us begin.”

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

Invisible Hands of Conservative Wealthy are Guiding Economic Policy

 Vijay K. Mathur

Before Adam Smith wrote his most well-read book, The Wealth of Nations, he wrote The Theory of Moral Sentiments in 1759.  In the latter book he argued that man (referring to a person) has the ability to make moral judgments even though he is naturally guided by self-interest. In their economic history book, Professors Robert Ekelund, Jr. and Robert Herbert argue that according to Adam Smith,  “…moral judgments are typically made by holding self-interest in abeyance and putting oneself in the position of a third person.” 

Adam Smith was an ardent advocate of property rights, division of labor and invisible hand of competitive market forces.  For him these institutional arrangements, guided by self-interest, would create self-regulating forces to bring about robust economic growth and improved wellbeing of the society.  Smith’s invisible hand proposition did not support the doctrine of merchant capitalists from 16^th to 18^th century Europe, called Mecantilists who, in alliance with the monarchy, were primarily interested in the accumulation of their wealth. Smith also promoted free trade and saw it as a vehicle for expanding markets.  Ekelund and Herbert state that Smith was concerned about accumulation of wealth and its influence in a civil society.

The Trump administration has not learned from Adam Smith’s critique of Mercantilist thought.  As Jane Mayer argues in her book, Dark Money, a selected group of ultra-conservative billionaires, headed by David and Charles Koch and their paid support network and surrogates, have been planning for decades to change the government to support their agenda; it consists of lower taxes for the rich and wealthy, lower expenditure for entitlement programs for the low income and poor, while maintaining business subsidies (akin to welfare payments for the wealthy) and less regulations of businesses. In order to support their wealth accumulation agenda, they have methodically followed a plan to change the political makeup of Congress and government institutions, including the Presidency. 

Jane Mayer shows that the efforts of these ultra-conservative billionaires are backed by tax-deductible donations used to create an interlocking network of charitable foundations, think tanks and academic institutes at universities, so that sources of donated money are hard to trace. That is the reason why Jane Mayer calls it Dark Money. 

This tax-deductible network of charitable foundations with ancillaries and surrogates works like invisible hands of the wealthy as automatic instruments to change the political and economic system that meet their agenda.

So far this wealthy group has succeeded in changing the political make-up of Congress, the Administration and many state governments friendly to their cause.  Economic policy is also in the process of change, as for example the health care bill AHCA, passed in the House of Representatives, which would primarily hurt lower income people and poor, and benefit the rich and wealthy.  In addition, the Administration’s tax reform proposal and regulatory changes, as in environment, and banking and finance, disproportionately enrich the wealthy and asset rich businesses and impoverish most other Americans.

The decision to withdraw the US from the trade pact TPP that would have opened US and Pacific Rim countries to more trade, and the threat to scuttle the trade pact NAFTA with Mexico and Canada is contrary to the free market doctrine and supports Mercantilist thought.  Free trade promotes more competition and innovation, and hence benefits consumers, workers and businesses in the long run.  Adam Smith’s invisible hand proposition works in a competitive market, therefore he abhorred monopoly power. The Administration’s nationalistic bent is contrary to the conservative stand on the virtues of free market and is supportive of monopoly power that is increasingly emerging in many sectors of the US economy.

We are also witnessing changes in K-12 public education, as envisaged by this select group of ultra-conservative wealthy billionaires that includes Betsy DeVos (Secretary of Education) and family.   In many states charter schools are emerging and more are planned. They are run by private businesses but are supported by tax dollars.  Secretary DeVos is a great supporter of tax dollar supported private schools. 

She would like a voucher program supported by tax dollars where students could go to any school, including any private school of their choice.  Such a program dismantles the main conceptual idea behind public education and the system of public schools that has successfully produced an educated citizenry and prepared the workforce for generations. Even Adam Smith recognized the usefulness of public educational institutions. 

Faulty accounting only counts the current cost but not the human capital benefits of public education that occur over a period of time. In addition, proposed budget cuts of $9.2 billion from K-12 through higher education and $1.1 billion from job-training programs are not only unproductive as they adversely affect human capital formation, but they especially deprive lower income and poor Americans of educational opportunities.

The sinister part of the strategy of the select group of ultra- conservative billionaires is to use tax dollars to create the perception among a significant number of Americans that their efforts to change economic policies are for the benefit of less wealthy and poor Americans.  It is hoped that soon their invisible hands and their hidden agenda see the light of day.     

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

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.