by Steven Pearlstein
from Washington Post
Luigi Zingales, an Italian economist now at the University of Chicago, contrasts high-tax, high-trust socialist countries such as Denmark and Sweden with high-tax, low-trust countries where populations are ethnically and culturally diverse, politics are fractious, and government is incompetent and corrupt. In terms of social trust, he said, the Americans are somewhere in between.
“The danger for the United States is that it would wind up looking more like Italy and Greece than Denmark and Sweden,” Zingales said.
Attitudes toward globalization is another difference. Free trade is so widely accepted in Scandinavia that it even has strong support from organized labor. “Their unions recognize that for their workers to have a job, companies need to export to grow and be successful,” Kirkegaard said. By contrast, Sanders has made common cause with American unions in proposing to roll back every trade treaty signed since the North American Free Trade Agreement (NAFTA) in the 1990s.
The world, in fact, may be better off when different countries adopt different economic systems, argue Daron Acemoglu, Thierry Verdier and James Robinson in a widely noted paper, “Can’t We All Be More Like Scandinavians?”
The United States, with its more “cutthroat” form capitalism, they argue, plays a unique role in the global economy because it generates a disproportionate share of innovative new technologies and business practices that are quickly adopted by other countries. If Americans were to embrace Denmark’s “cuddly” form of capitalism, they fear, there would be less of that disruptive innovation and both Americans and Danes would be worse off. A robust global economy requires the co-existence of both systems trading with each other.
Although economists are sympathetic to the direction of many of the individual policies that make up Sandernomics, even those who lean liberal worry they go too far.
The best example is the single-payer health plan that would effectively replace today’s private and public insurance programs with comprehensive medical, dental and optical services with no co-payments or deductibles for all Americans. Every other advanced country does it that way, at significantly lower cost and better health outcomes. Why, Sanders asks, can’t we do the same?
An analysis done for the Sanders campaign by Gerald Friedman, a University of Massachusetts economist, concluded that the single-payer plan would shave $1 trillion off what would otherwise be $6 trillion in national health spending by 2026, a decade after enactment — even after extending coverage to tens of millions of Americans who now are uninsured or underinsured.
The reduction, he calculates would come primarily from eliminating most of the billing and administrative expenses at doctor’s offices, hospitals, pharmacies and insurance companies — an immediate savings of 12 percent. Additional savings would come from government bargaining and controls that reduce — and slow the growth of — prices for drugs and medical services.
The average family, Friedman estimated, would save nearly $6,000 a year, even after paying a new 8.4 percent payroll tax to the government instead of premiums and co-payments to insurance companies. At the same time, employers who offer insurance would save more than $9,000 per employee.
But Kenneth Thorpe, a widely respected health economist at Emory University, argues that Friedman overestimated the administrative savings and reduction in drug prices that the government could negotiate on generic drugs and home health care, both fast-growing segments. And he said that Friedman badly underestimated the additional demand for medical services induced by the total elimination of co-payments and deductibles, creating the health care equivalent of an all-you-can-eat buffet.
Thorpe is no stranger to single-payer health plans. His cost analyses led Sanders’s own state of Vermont to scrap its plans for a statewide single-payer system. Sanders’s plan, he calculated, would require another trillion dollars a year in new taxes on top of the $1.3 billion that Sanders had proposed to fund the system.
Beyond the financial challenges are the political ones. Health economists predict the Sanders plan would reduce incomes for doctors, hospital administrators and drug company shareholders, much as happens in other countries. Warren Gunnels, Sanders’s policy director, acknowledged as much but argued that Canadian and British doctors and nurses still lived “very comfortably.”
Keeping a tighter rein on health spending could also result in fewer tests and procedures if they fail to meet strict cost-benefit guidelines, or longer wait times for non-urgent care, which are also common in other countries. Gunnels said that kind of rationing will be minimal and, in any case, is preferable to the kind of rationing of health care that now leaves 60 million Americans uninsured or underinsured.
Economists have also questioned Sanders’s plan for free tuition at all public colleges and universities.
Ron Ehrenberg, a Cornell University expert on higher education, notes that because of existing federal and state assistance, low- and moderate-income students already pay little or no tuition. Much of the tuition benefit, he predicts, will go to students from middle- and upper-income families.
“I’m not sure this is a wise thing,” Ehrenberg said. “It won’t affect the ability of lower-income students to get higher education.”
Others predict that the plan could strain the capacity of public institutions as large numbers of students shift from private to public colleges. They also warn that the extra demand probably would drive up the annual cost of the program well beyond the $75 billion Sanders has projected. A recent study by the bipartisan Tax Policy Center found that the financial transaction tax that Sanders relies on to pay for the tuition-free initiative could raise, at most, $50 billion a year. Setting the tax as high as Sanders proposes, they warn, would simply cause investors and speculators to make fewer trades or drive the trading offshore.
A cornerstone of Sandernomics is a promise to raise the national minimum wage to $15 an hour — enough to lift any full-time worker out of poverty. Other proposals — pay equity for women, stricter overtime enforcement and rules making it easier for workers to unionize — are also meant to push up working-class wages. These regulatory changes would increase average wages by 8 percent within a decade, according to Friedman at UMass.
Liberal economists such as Princeton’s Alan Krueger, former chief economist in the Obama White House, have long thought that, in modest doses, such policies can largely pay for themselves because of the reduced turnover and increased worker productivity that result from higher pay. But even Krueger has been reluctant to push the minimum wage as high as $15, calling it a “risk not worth taking.”
In his speeches, Sanders suggests the higher incomes at the bottom will be paid for in the form of lower incomes for shareholders and executives who have captured all of the benefit of economic growth in recent decades. But even Friedman estimates that about half of the cost of these wage-boosting policies will eventually be passed on to workers, in the form of higher prices for what they buy, smaller pay raises or higher unemployment as firms replace workers with new technology.
Certainly the most aggressive aspect of Sandernomics is the senator’s plan to collect an additional $1.6 trillion a year in taxes — the equivalent of 7 percent of GDP. Although all households would pay higher taxes, 40 percent of the extra taxes would come from households in the top 1 percent — those with annual incomes above $500,000, according to a Tax Policy Center analysis. Those households would see their overall federal tax bite rise from 34 percent to 55 percent.
Sanders argues that it is misleading to look at the tax increase he proposes without also considering the money households would not have to spend on health insurance premiums and co-payments as a result of his plan. A study by the liberal-leaning Citizens for Tax Justice found that 95 percent of American households — those with incomes below $225,000 — would have more money to spend on everything other than taxes and health care.
But Sanders makes no apologies for the dramatic tax increase he wants to impose on “the billionaire class,” whose after-tax income would fall 40 percent, according to the Tax Policy Center.
For households with annual incomes above $10 million, the combined income and payroll tax bite on the last dollar of salary income — what economists call the marginal rate — would be 77 percent (after adding in the employer share of payroll taxes, as most economists would do). That compares with 43 percent today. For investment income — typically the bulk of income for wealthy households — the marginal rate would be 64 percent, compared with 24 percent today. None of those numbers includes state and city income taxes, which in some places could add another 10 percentage points to the tax bite.
Even households with incomes as low as $250,000 would face a marginal rate of 62 percent for earned income and 50 percent for investment income, significantly above today’s levels.
For years, mainstream economists have argued that governments could raise top marginal rates on salary income as high as 60 percent and investment income to 30 percent, without causing high-income households to change their economic behavior. But with combined state and federal marginal rates reaching 70 or even 80 percent, they warn, it is likely that some business executives, hedge fund managers and well-paid professionals — or their spouses — will decide to hang it up and head for the beach. For sure they will hire armies of lawyers and accountants to help them convert salary income to lower-taxed investment income — and then move investment income offshore, where it is not subject to any U.S. tax.
“You will just never be able to tax [investment income] that highly,” warns Princeton’s Blinder, as European countries discovered years ago. Today, European tax rates on investment income are now half of what Sanders proposes.
And it’s not just rich people who would be affected by Sanders’s tax increases at the top. “Almost any economist would say that those taxes on investment will have a negative impact on economic growth,” said Len Burman, director of the Tax Policy Center. “It raises the costs for business of making new investment, so they will invest less. And it makes investors less inclined to own [stocks].”
Indeed, it would be surprising if Sanders’s plan for steep increases in taxes on investment income, corporate profit and financial transactions did not cause stock prices to fall significantly, reducing household wealth and, with it, consumer spending.
Sanders thinks this is nonsense. By redistributing spendable income to the poor and middle class and increasing government investment for infrastructure and education, he promises that Sandernomics would supercharge economic growth. According to Friedman’s analysis, it would add 25 million jobs over a decade, increase the income of the average household by more than $20,000 and drive the unemployment rate down to 3.8 percent.
Even Democratic economists, however, are skeptical of such claims.
Christina Romer, another former adviser to Obama, with her husband, David, released a paper last week concluding that there just weren’t enough unemployed workers and unused capacity left in the economy to make it possible for the economy to grow 5 percent each year for a decade, as Sanders imagines. The more likely result, they said, would be dramatically higher inflation, not growth.
“A realistic examination of the impact of the Sanders policies on the economy’s productive capacity suggest[s] those effects are likely to be small at best, and possibly negative,” wrote the Romers, both professors at the University of California at Berkeley. The higher inflation would prompt the Federal Reserve to raise interest rates, further depressing business investment, they warned. And by providing free tuition to students and guaranteed health care to everyone, it was unlikely, they concluded, that Sanders would succeed in greatly expanding the workforce.
Some economists, such as Jamie Galbraith of the University of Texas, think the Romers are working from an outdated economic model.
At a time when there is slow economic growth because of a glut of savings and too few opportunities for private investment, shifting money to well-targeted public investments such as infrastructure and education would surely increase growth, Galbraith said.
Moreover, in the newly globalized economy, there is a greatly reduced inflation risk. If wages are pushed high enough, Galbraith says, there are plenty of students, retirees, stay-at home parents, underemployed freelancers and Mexican immigrants who could be lured back into the American workforce.
That, however, is not what generally happens in Denmark and Sweden. In those countries, higher wages, free tuition and universal health care come in an economic package that generally also includes modest growth, higher unemployment, limited immigration and significantly higher middle-class taxes. The problem with the Sanders program, say its critics, is that it promises all the good parts of the Scandinavian model without any of the bad parts — all dessert, no spinach.
As Denmark’s Kirkegaard sees it, in the modern world, existing social, economic, political and cultural institutions are so complex and interdependent that it’s not possible to bring about radical change in one area without changing everything else. And even if Sanders did manage to pull off all those changes, he said, the process would generate disruption and uncertainty that would slow the economy for years.
“Revolutions in advanced economies are extraordinarily costly,” he said. “That’s why incremental change is preferred.”