Jobs Due to Biden’s Infrastructure Plan: What is Being Discussed is Not What You Think

A.  Introduction

Politicians have always been eager to announce that a program they have proposed will “create jobs”.  The Biden administration is no exception.  Indeed, President Biden has titled his $2.2 trillion proposal to rebuild America’s infrastructure the “American Jobs Plan”.  And all this is understandable, given the politics.  You would be forgiven, however, for assuming that what is being discussed on the additional jobs that would follow from Biden’s infrastructure proposals has something to do with jobs such as those depicted in the picture above.  They don’t.  The numbers on “new jobs created” that are being bandied about are on something else entirely.

There has also been some confusion on how many jobs that might be.  In remarks made on April 2, soon after his initial announcement of the proposed $2.2 trillion infrastructure initiative, Biden said:  “Independent analysis shows that if we pass this plan, the economy will create 19 million jobs — good jobs, blue-collar jobs, jobs that pay well.”  The estimate is from an analysis made by Mark Zandi, Chief Economist of Moody’s Analytics (a subsidiary of Moody’s, the bond credit rating agency).  Zandi is a well-respected economist, who was an economic advisor to John McCain during his 2008 campaign for the presidency and who has advised both Democrats and Republicans.

The 19 million jobs figure is an estimate made by Zandi and his team at Moody’s Analytics of how many more jobs there would be in the US (or, more precisely, non-farm employees) in 2030 as compared to the average number in 2020, in a scenario where Biden’s infrastructure plan is approved as proposed and then implemented.  But it is important to note that this is an estimate of the total number of jobs that “the economy will create” over the decade if the plan is passed (which is what Biden specifically said), and not an estimate of the extra number of jobs that can be attributed to the American Jobs Plan itself.  But it would be easy to miss this distinction.  The Moody’s Analytics estimates are that the number of jobs in the economy would rise between 2020 and 2030 by 19.0 million if the plan is passed as proposed, but by 16.3 million if only the covid-relief plan (Biden’s $1.9 trillion American Rescue Plan) is passed (as it has been), and by 15.7 million in a scenario where neither plan was passed.  Thus in the Moody’s Analytics forecasts, the number of jobs in 2030 would be 2.7 million higher than otherwise if the infrastructure plan is now passed (on top of the extra 0.6 million if only the covid-relief plan were passed).

But it is easy to misstate these distinctions, and some of the administration appointees discussing the proposal with the press at first did so.  In particular, Pete Buttigieg, the Transportation Secretary, and Brian Deese, the head of the National Economic Council in the White House, at first used wording that implied that the full 19 million additional jobs would be due to the infrastructure plan itself.  They later clarified that they had misspoke, and that the Moody’s Analytics estimates were of 2.7 million additional jobs due to the infrastructure plan.  However, this did not keep various news media fact-checkers (including at CNN and at the Washington Post) from taking them to task on it (and for the Washington Post to award Biden “two Pinocchios” in their fact-checking scoring system for being, in their view, misleading).

One can question whether this is quibbling over language that was not fully clear.  But what is of far greater importance is that it misses the fundamental question of what any of these employment forecasts (whether of 19 million, or 2.7 million, or 0.6 million from the $1.9 trillion covid-relief plan) actually mean.  Keep in mind that they are all estimates of how many more people will be employed in 2030 compared to the number employed in 2020, or in a comparison of one scenario for 2030 compared to another.  They are specifically not estimates of the number of jobs of primarily construction workers who would be employed as a direct result of the new infrastructure investments being built.  Yet the wording of Biden, stating that these would be well-paying blue-collar jobs, would appear to indicate that that is what he had in mind when citing the figures.

Furthermore, if the job figures were intended to refer to the blue-collar construction workers who would be hired to build these projects, it does not make much sense to base a comparison on 2030.  By that point the infrastructure plan would be essentially over, with just a small residual amount still to be spent as the program is tailing off (of the $2.2 trillion total, just $81 billion in 2030 and a final $35 billion in 2031 would remain to be spent in the Moody’s estimates).  Few construction workers would still be employed on those projects by that point.  Rather, what may be of interest is not some relatively small change in the overall number of people employed at some end-point, but rather the number of person-years of employment of such workers during the full period of the infrastructure plan.  But the Moody’s estimates are specifically not that.

This then brings up the question of what is Moody’s in fact estimating?  That will be the focus of this blog post.  It is not the number of jobs in construction that will be created as a result of the new work on infrastructure, as these will be down to a fairly minor level by 2030.  As we will see, it is rather an estimate resulting from some secondary aspects of the Moody’s model, and it is not even clear whether the differences were intended to be meaningful.

To start, this post will review how estimates of future employment are traditionally made – for example by the Bureau of Labor Statistics (BLS).  In brief, they are based on population estimates and on forecasts of what share of different population groups will seek to be part of the labor force (the labor force participation rates), with then the assumption that the economy will be at full employment at that future date.  The full employment assumption is made not because the forecaster is confident the economy will in fact be at full employment in that forecast year.  Rather, they do not really know what the short-term conditions will be in that future year, and assuming full employment is just for setting a benchmark.  Unemployment depends on how successful monetary and fiscal policies would have been in that future year to bring the economy to full employment.  Such policies are short-term, depend on the immediate situation, and we have no way of knowing now (in 2021) what shocks or surprises the economy will be facing in 2030.

With this the case, why is Moody’s forecasting any difference at all in the 2030 employment numbers?  The differences are in fact not large when compared to what overall employment will be in that year.  But there is some, and we will discuss why that is.

The post will then look at what one might say on jobs in the intervening years.  While Moody’s has produced year-by-year estimates, its approach for those years (after the next couple of years, as they forecast the economy moves to full employment) is fundamentally similar to what they assume for 2030.  What Moody’s specifically did not do in its analysis was try to estimate the direct number of jobs (or more precisely, person-years of employment) of those employed on the infrastructure projects in Biden’s plan.  Someone will likely do that at some point, but it was not done here.  The question I will then look at it is whether this should be seen as “job creation”.  I will argue that it would be more appropriate to look at it as job shifting rather than job creation, as the total number of jobs in the economy (the number employed) will likely not be all that much different.  And there is nothing wrong with that.  The primary objective, after all, is to build and maintain our badly needed infrastructure.  And on the employment that would follow, providing more attractive jobs that workers will seek to shift into is a good thing.  But the total number employed may not change, and if that is the metric one tries to use, one will likely be disappointed.  Many, including politicians, are often confused about this.

None of this should be taken to imply that the infrastructure plan is not warranted.  It desperately is, as will be discussed in the penultimate section of this post.  The US has underinvested in public infrastructure for decades, and what we have is an embarrassment compared to what is seen in Europe or East Asia.  And it has direct implications for productivity.  Truck drivers are not productive when they are sitting in traffic jams due to our poor highways.  But it is wrong to assess the value of an infrastructure investment program by some estimate of the number of jobs created.  Yes, there will be workers employed on the projects, in likely well-paid jobs.  But that should not be the objective – better public infrastructure should be the objective, achieved as efficiently as possible.  A focus on “jobs created” is instead likely to lead to confusion, as it has with the Moody’s numbers.

We will then end with a short summary and conclusions section.

Finally, note that the version of Biden’s infrastructure plan examined by Zandi and his team was estimated to cost $2.2 trillion over ten years.  However, one will see references to Biden’s plan as costing $2.0 trillion, or $2.3 trillion, or some other amount.  The final amount will depend, of course, on whatever Congress approves, but for consistency I will focus here on the plan as assessed by Zandi, at an estimated cost of $2.2 trillion.

B.  Forecasting Future Employment Levels

Yogi Berra purportedly said:  “It’s tough to make predictions, especially about the future”.  Whether he actually said that is not so clear, but it is certainly true.  And this is especially true of predictions of future employment.  But some things are more predictable than others, and the trick is to make use of factors that change only slowly over time.

In particular, population forecasts for periods of a decade or so are relatively reliable.  Those in a particular age bracket now will be ten years older a decade from now, and all one needs then to adjust for are mortality rates (which are known and change only slowly over time) and net migration rates (which are relatively small in magnitude).  Thus the Census Bureau can produce fairly reliable population forecasts for periods of a decade, and can provide these for groups broken down by age bracket as well as sex, race, and ethnicity.

The Bureau of Labor Statistics starts from such Census Bureau forecasts to produce its projections of the labor force and employment.  The BLS does this annually, with the most recent such projections from September 2000 covering the period 2019 to 2029.  The BLS takes the Census Bureau forecasts for the adult population (age 16 and above), with these broken up into age groups (mostly 10-year groups, i.e. aged 25 to 34, 35 to 44, etc.) and by sex, with overriding checks based on race (white, black, other) and ethnic (Hispanic and non-Hispanic) classifications.  For each of these groups, it estimates, based on a statistical analysis of historical trends, what its labor force participation rate can be expected to be in the projection year.  The labor force participation rate is the share of the population within each group who choose to be part of the labor force (i.e. either employed or, if unemployed, seeking a job).  Labor force participation rates change only slowly over time (as was discussed in this earlier post on this blog), so this is a reasonable approach for estimating what the labor force might be in a decade’s time.

Employment will then be the labor force minus the number who are unemployed.  But there is no way to know beyond the next few years what the unemployment rate might then be.  It will depend on what shocks or surprises there might have been to the economy at that time, and these are by definition not predictable.  If they were, they would not be surprises.  While active monetary and fiscal policy would then seek to bring unemployment down to just frictional levels, how long this will take depends on many factors, including political ones.  And the problem is one that can only be addressed in the near term, as it depends on when the shock came. Thus the Fed’s Board of Governors meets as a group every six weeks throughout the year to monitor the situation, and to decide based on what they know at the time whether to tweak monetary policy through some instrument (normally short-term interest rates, which they may adjust up or, when they can, down, to affect growth).

There is thus no way to know now, in 2021, what the rate of unemployment will be in 2030.  For this reason, to set a benchmark to which comparisons under different scenarios can be made, the BLS and others following this approach assume the economy will be operating at full employment in that projection year.  That is, the benchmark sets unemployment at some specific, low, rate to reflect just frictional unemployment.  While there has been debate on what that specific rate might be (different analysts generally peg it at between 4 and 5% currently), a specific rate would be chosen for the comparisons.  Employment will then be equal to the labor force in that forecast year minus the number unemployed at this assumed rate of unemployment.

[MInor technical note:  The employment figure arrived at in this way will be employment as measured at the individual level, and will include the self-employed as well as on-farm employment.  It will also count as one person employed even if the individual holds multiple jobs.  The employment figures normally cited (and used by Moody’s) are of non-farm payroll employment, which comes from surveys of establishments, excludes the self-employed and on-farm employment, and counts each job even if one person might hold more than one job (as the establishment will only know who they employ, and will not know if some of their employees might hold second jobs).  But the differences due to these factors are small, and adjustments can be made.]

Thus, for any given set of forecast population figures (by age group, etc.), employment will follow from the labor force participation rate and the assumed rate of frictional unemployment (i.e. unemployment when the economy is assumed to be operating at full employment).  Forecast employment in any future year under different scenarios will therefore only differ if either the labor force participation rate, or the unemployment rate (or both), differ for some reason.

C.  The Moody’s Employment Scenarios for 2030

Moody’s Analytics examined three scenarios for 2030 (and the path to it):  A base case where neither the infrastructure plan of Biden nor the covid-relief plan of Biden existed, a scenario where only the covid-relief plan was in place, and a scenario where both are in place.  In the first (base case) scenario it forecasts that employment in the US would rise to 157.9 million in 2030 from an average of 142.2 million in 2020, or an increase of 15.7 million.  In the scenario with only the covid-relief plan, Moody’s forecasts that employment in 2030 would then total 158.5 million, or 0.6 million more than in the base case.  And in the scenario where the infrastructure plan is also passed and implemented, Moody’s forecasts that employment in 2030 would total 161.2 million, or 2.7 million more than in the scenario with only the covid-relief plan passed and 19.0 million more than average total employment in 2020.

But why would employment levels in 2030 differ at all between these scenarios?  As discussed above, they can only differ if labor force participation rates differ or the assumed unemployment rates in that forecast year differ.  (The basic population numbers for that year should certainly not differ.)  In the Moody’s numbers they both do, but it is not clear why.

It is in particular difficult to understand why Moody’s allowed the assumed unemployment rates in 2030 to differ across their scenarios.  The scenario with just the covid-relief plan, which will be over by 2023 at the latest, should in particular not have an impact on the unemployment rate in 2030.  But in the Moody’s figures it does, albeit by only a minor amount (with unemployment at 4.5% in 2030 in the base scenario, and 4.4% in the scenario with the covid-relief plan).

The difference is larger in the scenario with both the covid-relief plan and the infrastructure plan.  Moody’s forecasts that unemployment in 2030 would then be just 3.8%, or well less than the 4.5% rate in the base scenario.  Why would that be?  While there would still be a small amount of spending under the infrastructure plan in 2030 (Moody’s uses a figure of $81 billion in its scenario), the impact of such spending in that year would be small (just 0.2% of forecast GDP in that year) and would in any case have been diminishing over time as the infrastructure plan was being phased down.  That is, the reductions in spending under the infrastructure plan in the outer years, relative to what they would have been a few years before, would (if not offset by other actions) be deflationary at that point, not expansionary.  But regardless of whether Biden’s infrastructure plan had been passed in 2021 or not, one would assume that fiscal and monetary policy would have sought in that future year (2030) to bring the economy to full employment, at whatever the assumed rate of (frictional) unemployment that it then is. There is no rationale for assuming the rate of unemployment in 2030 will differ across the scenarios.

The other difference in the Moody’s forecasts for 2030 under the different scenarios is in the labor force participation rates.  One can work out from the numbers Moody’s provided in its document (coupled with the BLS numbers for the adult population) that the labor force participation rate would be 58.5% in the base scenario, 58.7% in the scenario where only the Biden covid-relief package was passed, and 59.3% if the Biden infrastructure plan is also passed.  (More precisely, these are the Moody’s figures for non-farm payroll employment as a share of the population, not the overall labor force, with the small differences noted above between those two concepts).  Compared to the scenario of the covid-relief plan only, two-thirds (66%) of the extra 2.7 million in employment in 2030 is due to the higher labor force participation rates Moody’s forecasts for that year, and one-third (34%) is due to its forecast of a lower unemployment rate in that year.

Why should the labor force participation rate be higher in 2030 if Biden’s infrastructure plan is passed?  One could postulate a connection, but it would be tenuous and it is not clear if this was in fact intended by Moody’s or was just an outcome following from other relationships in its model.  I do not know enough about the structure of its model to say.  But one can speculate that the model may have linked the labor force participation rate in a forecast year to real wages in that year, with a higher real wage leading to a higher labor force participation rate.  Furthermore, the model might link greater infrastructure investment (or greater investment generally) to higher productivity, and higher productivity to higher wages.  In that case, the higher investment might lead, by such a route, to a higher labor force participation rate.  But this would require estimation of the responses in a series of steps, each of which might be tenuous.  It is difficult to forecast how much economy-wide productivity might rise as a result of such investment; difficult to forecast how much real wages would rise if productivity rises (real wages have been flat since around 1980, even though overall productivity rose by almost 80%); and difficult to forecast how much a rise in real wages might then raise the labor force participation rate.

But this is conceivable.  Whether it was an intended relationship in the Moody’s model is not so clear.  Such models are large and complicated, with a focus on particular issues.  Certain results might then follow, but those constructing the model might not have paid much attention to such outcomes when constructing the model, as the focus was on something else.

In any case, one has to be careful in interpreting the results as implying there would be 2.7 million additional jobs “created” in 2030 as a consequence of the Biden infrastructure plan.  There would, in the model, be 2.7 million more people employed, but this would mostly be due to a higher proportion of the population seeking employment in that year (a higher labor force participation rate).  And assuming an economy at full employment in that year, the additional number seeking employment would translate into that additional number being employed.  But it would be a stretch to interpret this as the infrastructure plan “creating” those additional jobs.  Rather, a higher share of the population are looking for work (a higher labor force participation rate), and are assumed to be able to find it.

D.  The Jobs Directly Created by the Infrastructure Plan

The Biden infrastructure plan would certainly create a huge number of jobs while the infrastructure is being built.  There would be jobs such as depicted in the photo at the top of this post, and with $2.2 trillion being spent there would be a large number of them (even with a share of the $2.2 trillion being spent in high priority areas outside of what is traditionally considered “hard” infrastructure, such as for labor training and health infrastructure).

These would, however, be jobs for a fixed period.  Once the particular projects are finished, those jobs would end.  Thus one should think of these as being so many person-years of employment (employment of one person for one year).  These are not permanent jobs being “created”, but rather workers being employed for a period of time to build a project or to complete a specific maintenance or repair task (e.g. repaving a road).

While not permanent jobs, it would still be important to have good estimates of how many there would be.  Moody’s did not do that, nor was it their intention, but one needs to be clear about that.  It will be important, however, that there be a serious effort at some point to work out such estimates, and I would guess that someone in government is working on this now.  They are needed precisely because there will be a large number who will be employed on these infrastructure projects, and workers with the necessary skills for such work are limited, in part because the US has so woefully underinvested in its infrastructure in recent decades (as will be discussed in the next section below).  It will thus be important to pay attention to the phasing of the individual projects, both over time and geographically, to ensure there will be sufficient capacity (both in terms of the workers needed and the firms that manage such projects) to build the projects at a given place and at a particular time.  It does not help much that there might be workers with the requisite skill in New York, say, when the need is for a project in California.

This will therefore need to be worked out, and I suspect it will be.  This will also guide what workforce development and training needs there will need to be, and the BLS routinely provides such estimates (at least at a broad, economy-wide, level).  But while it is correct to term jobs (or more precisely person-years of jobs) as being “created” under such an infrastructure plan, this does not necessarily mean that the total number of jobs in the economy will be higher.  If the economy is at full employment (and the labor force participation rate otherwise unchanged), the total number employed in the economy will be unchanged.  It is just that some share of those employed will be working on these infrastructure projects.  And that means fewer will be working in other jobs.

That is not a bad thing.  While the overall number employed will be the same, there will be jobs in the infrastructure projects which will have been attractive enough (either due to higher wages that they pay or for some other reason) to draw workers to those jobs.  Those who shift to those new jobs will then be better off, which is good.  Furthermore, the workers shifting to those new jobs would then have left positions that others may find attractive enough to move into (due to a higher wage, or whatever).  Thus there would be shifts across the economy.  Some less attractive jobs would cease to be filled, with employers forced to learn how to make do with less, but that is how competition works.

It is thus not correct to assert the total number employed in the economy will be higher as a consequence of the infrastructure investment plan (aside from during an initial few years as the economy moves to full employment – and Moody’s forecasts that this will be complete by 2022 with the covid-recovery and infrastructure plans enacted and even by 2024 without them).  The total number employed in such forecasts will be largely the same with or without the plans.  But that does not mean they are not without value to workers.  There will be new jobs to be filled, which will need to be attractive enough to draw workers to them.  And that helps workers.

E.  Public Infrastructure Investment in the US

Public infrastructure in the US is an embarrassment.  And it has a direct impact on productivity.  As was noted before, a truck driver sitting in a traffic jam is not terribly productive.  Similarly, exporters of soybeans who have to wait weeks to ship their product due to inadequate capacity at the ports cannot be terribly competitive in global markets (and will have to accept a price cut in order to sell their product).  And so on.

The major reason public infrastructure in the US is so poor is that the US has simply underinvested in it.  Using a broad definition of all government investment excluding that for the military, as a share of GDP, one has (calculated from BEA NIPA statistics):

Government investment peaked in the mid-1960s (as a share of GDP) and has declined ever since.  In gross terms it has been lower in recent years than in any time since the early 1950s.  Net of depreciation, it has been a good deal lower over the last half-decade (to 2019 – the 2020 figure is not yet available) than it has ever been in the last 70 years at least.  (And note that the blip up in the GDP share in 2020 was not because public investment rose.  The rate of growth of gross government investment in 2020 was in fact less than in 2019 and about the same as in 2018.  Rather it was because GDP collapsed in 2020, in the last year of the Trump administration, which pushed the share higher.)

What is of most interest for the state of public infrastructure is such investment net of depreciation.  That is shown as the curve in red in the chart, and it has fallen from a peak of 3.0% of GDP in 1966 to just 0.7% of GDP in recent years (up to 2019), a fall of 77%.  And at such a pace of adding to the net stock of public capital (infrastructure), the stock of such capital as a share of GDP will be falling.  By simple arithmetic, the ratio will be falling if the stock of that capital as a share of GDP is greater than the net investment share of GDP (0.7% here) divided by the rate of growth of nominal GDP.  Taking a nominal growth rate for GDP of, say, 4% (i.e. a real growth rate of 2% and a growth in prices of 2%), then the stock of public capital as a share of GDP will fall if the current stock of that capital is 17.5% of GDP or more (where 17.5% is equal to 0.7% / 4%).  The stock of public capital will certainly be well more than that in any modern economy, including the US.  And that underinvestment is why our highways are becoming increasingly subject to traffic jams, for example.  Our infrastructure is simply not keeping up.

Major public investment will be needed to reverse this, and the Biden infrastructure plan will be a start.  To put things in perspective, I have taken what would be spent annually under the Biden Plan (as estimated by Moody’s), as a share of GDP, and added this to a base amount where I simply assume other government investment in gross terms will remain at the average share it was between 2013 and 2019 (when it was quite steady at about 2.65% of GDP).  The figures for real GDP used for these calculations were those forecast by Moody’s under the scenario that the Biden infrastructure plan goes ahead, with these converted to nominal GDP (for the shares) using the forecast GDP deflators of the Congressional Budget Office.  Spending under the Biden Plan alone would start at 0.5% of GDP in 2023, rise to a peak of 1.3% of GDP in 2025, and then fall to 0.2% of GDP in 2030 and 0.1% in 2031.  Adding these figures to a base level of 2.65%, one would have:

A $2.2 trillion infrastructure investment plan is certainly large.  But the chart puts this in perspective.  Even with such an investment program, public investment would still not rise to as high as it was in the mid-1960s, nor would it last nearly as long.  Public investment had been relatively high (compared to later periods) from the mid-1950s to around 1980 – almost a quarter-century.  The $2.2 trillion Biden plan would raise public investment, but only for about eight years.  A question that will need to be addressed later is what happens after that.  Reverting to the recent, low, levels of infrastructure investment, would eventually lead back to the problems we have now.

F.  Summary and Conclusions

Politicians will always tout the jobs that will be “created” if their programs are approved.  If they didn’t, they likely would not hold office for long.  President Biden is no exception.  And the administration has cited independent estimates made by Mark Zandi’s team at Moody’s Analytics to say that Biden’s “American Jobs Plan” would indeed create a large number of jobs.  They cite Moody’s estimates that the number of jobs in 2030 would be 19 million higher than in 2020 if the infrastructure plan (as well as the covid-relief plan) are approved, and 2.7 million higher in 2030 if that infrastructure plan is approved as compared to a scenario where it is not.

These are, indeed, the Moody’s numbers.  But one should be careful in the interpretation of what they in fact mean, and Moody’s can be criticized for not being fully clear on this.  These are not jobs, generally in construction, that would follow directly from the infrastructure investment program (which should be counted as person-years of employment in any case, as such jobs are not permanent).  Rather, what Moody’s has done has been to use its model of the US economy to examine what overall employment levels would be in 2030 under the various scenarios.  It found that the number employed would be 2.7 million higher in 2030 (1.7% of forecast employment in that year) in the scenario with the infrastructure plan as compared to a scenario without it.  One can calculate that roughly two-thirds of this would be due to a higher labor force participation rate, and one-third due to a lower unemployment rate in that year.

It is not clear, however, why forecasts of either of those two variables – participation rates and the unemployment rate – should differ at all across the scenarios.  I would not be surprised if these were simply unintended consequences in a complex model.  In any case the differences in employment in that forecast year of 2030 are small, as one would expect.  Furthermore, by 2030 the infrastructure plan would be winding down, with only small residual amounts remaining to be spent.

During the course of the 2020s, however, a very significant number of people will be employed on these infrastructure investments.  They will be employed for limited periods until the projects are completed (and hence should be counted in person-years of employment), but this would still be significant.  It will be important to estimate not just how many will be employed and for what periods, but also what skills will be required and where and when they will be required.  This is probably now being done somewhere in government.  But Moody’s did not attempt to do that.

And while such jobs, mostly in construction, can be correctly termed as “created” under the infrastructure investment plan, this does not necessarily mean the overall number of people employed in the economy will be higher.  Unless labor force participation rates would then be higher for some reason (and it is difficult to see why that would be the case) or the unemployment rate is lower (which it cannot be if the economy is already at full employment), the overall number employed in the economy will be unchanged.  What would happen, rather, would be shifts in the job structure, not in the number of jobs overall.  Some workers would shift into the construction jobs needed to build the infrastructure, and others would shift into the jobs these workers had occupied before.  That is all good – the new jobs will need to be more attractive in terms of pay and/or for other reasons for workers to shift to them – but the total number employed (the total number of “jobs”) would largely be the same.

The public infrastructure is certainly needed.  The US has been underinvesting in its public infrastructure for decades, and when account is taken for depreciation it is clear that the net stock of public capital has not kept up with the overall growth of the economy.  That is why roads, for example, are now so often jammed.  The Biden Plan would bring public investment up to levels not seen for decades, although still not matching (even at $2.2 trillion) the public investment levels of the 1960s as a share of GDP.  It is also a time-limited program, which would phase down in the second half of the 2020s.  At some point, this will need to be addressed.  Bringing public investment levels back down to the far from adequate levels of recent decades will lead to the same problems again.  But that will likely be an issue that will not be seriously considered until the next presidential term.

Trump’s Economic Record in Charts

A.  Introduction

Donald Trump has repeatedly asserted that he built “the greatest economy in history”.  A recent example is in his acceptance speech for the Republican nomination to run for a second term.  And it is not a surprise that Trump would want to claim this.  It would be nice, if true.  But what is surprising is that a number of election surveys have found that Trump polls well on economic issues, with voters rating Trump substantially above Biden on who would manage the economy better.

Yet any examination of Trump’s actual record, not just now following the unprecedented economic collapse this year resulting from the Covid-19 crisis, but also before, shows Trump’s repeated assertion to be plainly false.

The best that can be said is that Trump did not derail, in his first three years in office, the economic expansion that began with the turnaround Obama engineered within a half year of his taking office in 2009 (when Obama had inherited an economy that was, indeed, collapsing).  But the expansion that began under Obama has now been fully and spectacularly undone in Trump’s fourth year in office, with real GDP in the second quarter of 2020 plummeting at an annualized rate of 32% – to a level that is now even well below what it was when Trump took office.  The 32% rate of decline is by far the fastest decline recorded for the US since quarterly data on GDP began to be recorded in 1947 (the previous record was 10%, under Eisenhower, and the next worst was an 8.4% rate of decline in the last quarter of 2008 at the very end of the Bush administration.

This post will look at Trump’s record in comparison to that not just of Obama but also of all US presidents of the last almost 48 years (since the Nixon/Ford term).  For his first three years in office, that Trump record is nothing special.  It is certainly and obviously not the best in history.  And now in his fourth year in office, it is spectacularly bad.

The examination will be via a series of charts.  The discussion of each will be kept limited, but the interested reader may wish to study them more closely – there is a lot to the story of how the economy developed during each presidential administration.  But the primary objective of these “spaghetti” charts is to show how Trump’s record in his first three years in office fits squarely in the middle of what the presidents of the last half-century have achieved.  It was not the best nor the worst over those first three years – Trump inherited from Obama an expanding and stable economy.  But then in Trump’s fourth year, it has turned catastrophic.

Also, while there is a lot more that could be covered, the post will be limited to examination of the outcomes for growth in overall output (GDP), for the fiscal accounts (government spending, the fiscal deficit, and the resulting public debt), the labor market (employment, unemployment, productivity, and real wages), and the basic trade accounts (imports, exports, and the trade balance).

The figures for the charts were calculated based on data from a number of official US government sources.  Summarizing them all here for convenience (with their links):

a)  BEA:  Bureau of Economic Analysis of the US Department of Commerce, and in particular the National Income and Product Accounts (NIPA, also commonly referred to as the GDP accounts).

b)  BLS:  Bureau of Labor Statistics of the US Department of Labor.

c)  OMB Historical Tables:  Office of Management and Budget, of the White House.

d)  Census Bureau – Foreign Trade Data:  Of the US Department of Commerce.

It was generally most convenient to access the data via FRED, the Federal Reserve Economic Database of the St. Louis Fed.

B.  Real GDP

Trump likes to assert that he inherited an economy that was in terrible shape.  Larry Kudlow, the director of the National Economic Council and Trump’s principal economic advisor recently asserted, for example in his speech to the Republican National Convention, that the Trump administration inherited from Obama “a stagnant economy that was on the front end of a recession”.  While it is not fully clear what a “front end” of a recession is (it is not an economic term), the economy certainly was not stagnant and there was no indication whatsoever of a recession on the horizon.

The chart at the top of this post shows the path followed by real GDP during the course of Obama’s first and second terms in office, along with that of Trump’s term in office thus far.  Both are indexed to 100 in the first calendar quarter of their presidential terms.  Obama inherited from Bush an economy that was rapidly collapsing (with a banking system in ruin) and succeeded in turning it around within a half year of taking office.  Subsequent growth during the remainder of Obama’s first term was then similar to what it was in his second term (with the curve parallel but shifted down in the first term due to the initial downturn).

Growth in the first three years of Trump’s presidency was then almost exactly the same as during Obama’s second term.  There is a bit of a dip at the start of the second year in Obama’s second term (linked to cuts in government spending in the first year of Obama’s second term – see below), but then a full recovery back to the previous path.  At the three-year mark (the 12th quarter) they are almost exactly the same.  To term this stagnation under Obama and then a boom under Trump, as Kudlow asserted, is nonsensical – they are the same to that point.  But the economy has now clearly collapsed under Trump, while it continued on the same path as before under Obama.

Does Trump look better when examined in a broader context, using the record of presidents going back to the Nixon/Ford term that began almost 48 years ago?  No:

The best that can be said is that the growth of real GDP under Trump in his first three years in office is roughly in the middle of the pack.  Growth was worse in a few administrations – primarily those where the economy went into a recession not long after they took office (such as in the first Reagan term, the first Bush Jr. term, and the Nixon/Ford term).  But growth in most of the presidential terms was either similar or distinctly better than what we had under Trump in his first three years.

And now real GDP has collapsed in Trump’s fourth year to the absolute worst, and by a very significant margin.

One can speculate on what will happen to real GDP in the final two quarters of Trump’s presidency.  Far quicker than in earlier economic downturns, Congress responded in March and April with a series of relief bills to address the costs of the Covid-19 crisis, that in total amount to be spent far surpass anything that has ever been done before.  The Congressional Budget Office (CBO) estimates that the resulting spending increases, tax cuts, and new loan facilities of measures already approved will cost a total of $3.1 trillion.  This total approved would, by itself, come to 15% of GDP (where one should note that not all will be spent or used in tax cuts in the current fiscal year – some will carry over into future years).  Such spending can be compared to the $1.2 trillion, or 8.5% of the then GDP, approved in 2008/09 in response to that downturn (with most of the spending and tax cuts spread over three years).  Of this $1.2 trillion, $444 billion was spent under the TARP program approved under Bush and $787 billion for the Recovery Act under Obama).

And debate is currently underway on additional relief measures, where the Democratic-controlled Congress approved in May a further $3 trillion for relief, while leaders in the Republican-controlled Senate have discussed a possible $1 trillion measure.  What will happen now is not clear.  Some compromise in the middle may be possible, or nothing may be passed.

But the spending already approved will have a major stimulative effect.  With such a massive program supporting demand, plus the peculiar nature of the downturn (where many businesses and other centers of employment had to be temporarily closed as the measures taken by the Trump administration to limit the spread of the coronavirus proved to be far from adequate), the current expectation is that there will be a significant bounceback in GDP in the third quarter.  As I write this, the GDPNow model of the Atlanta Fed forecasts that real GDP in the quarter may grow at an annualized rate of 29.6%.  Keep in mind, however, that to make up for a fall of 32% one needs, by simple arithmetic, an increase of 47% from the now lower base.  (Remember that to make up for a fall of 50%, output would need to double – grow by 100% – to return to where one was before.)

Taking into account where the economy is now (where there was already a 5% annualized rate of decline in real GDP in the first quarter of this year), what would growth need to be to keep Trump’s record from being the worst of any president of at least the last half-century?  Assuming that growth in the third quarter does come to 29.6%, one can calculate that GDP would then need to grow by 5.0% (annualized) in the fourth quarter to match the currently worst record – of Bush Jr. in his second term.  And it would need to grow by 19% to get it back to where GDP was at the end of 2019.

C.  The Fiscal Accounts

Growth depends on many factors, only some of which are controlled by a president together with congress.  One such factor is government spending.  Cuts in government spending, particularly when unemployment is significant and businesses cannot sell all that they could and would produce due to a lack of overall demand, can lead to slower growth.  Do cuts in government spending perhaps explain the middling rate of growth observed in the first three years of Trump’s term in office?  Or did big increases in government spending spur growth under Obama?

Actually, quite the opposite:

Federal government spending on goods and services did rise in the first year and a half of Obama’s first term in office, with this critical in reversing the collapsing economy that Obama inherited.  But the Republican Congress elected in 2010 then forced through cuts in spending, with further cuts continuing until well into Obama’s second term (after which spending remained largely flat).  While the economy continued to expand at a modest pace, the cuts slowed the economy during a period when unemployment was still high.  (There is also government spending on transfers, where the two largest such programs are Social Security and Medicare, but spending on such programs depends on eligibility, not on annual appropriations.)

Under Trump, in contrast, government spending has grown, and consistently so.  And indeed government spending grew under Trump at a faster pace than it had almost any other president of the last half-century (with even faster growth only under Reagan and Bush, Jr., two presidents that spoke of themselves, as Trump has, as “small government conservatives”):

The acceleration in government spending growth under Trump did succeed, in his first three years in office, in applying additional pressure on the economy in a standard Keynesian fashion, which brought down unemployment (see below).  But this extra government spending did not lead to an acceleration in growth – it just kept it growing (in the first three years of Trump’s term) at the same pace as it had before, as was seen above.  That is, the economy required additional demand pressure to offset measures the Trump administration was taking which themselves would have reduced growth (such as his trade wars, or favoritism for industries such as steel and aluminum, which harmed the purchasers of steel and aluminum such as car companies and appliance makers).

Trump has also claimed credit for a major tax cut bill (as have Reagan and Bush, Jr.).  They all claimed this would spur growth (none did – see above and a more detailed analysis in this blog post), and indeed such sufficiently faster growth, they predicted, that tax revenue would increase despite the reductions in the tax rates.  Hence fiscal deficits would be reduced.  They weren’t:

Fiscal deficits were large and sustained throughout the Reagan/Bush Sr. years.  They then moved to a fiscal surplus under Clinton, following the major tax increase passed in 1993 and the subsequent years of steady and strong growth.  The surplus was then turned back again into a deficit under Bush Jr., with his major tax cuts of 2001 and 2003 coupled with his poor record for economic growth.  Obama then inherited a high fiscal deficit, which grew higher due to the economic downturn he faced on taking office and the measures that were necessary to address it.  But with the economic recovery, the deficit under Obama was then reduced (although at too fast a pace –  this held back the economy, especially in the early years of the recovery when unemployment was still high).

Under Trump, in contrast, the fiscal deficit rose in his first three years in office, at a time when unemployment was low.  This was the time when the US should have been strengthening rather than weakening the fiscal accounts.  As President Kennedy said in his 1962 State of the Union Address: “The time to repair the roof is when the sun is shining.”  Under Trump, in contrast, the fiscal deficit was reaching 5% of GDP even before the Covid-19 crisis.  The US has never before had such a high fiscal deficit when unemployment was low, with the sole exception of during World War II.

This left the fiscal accounts in a weak condition when government spending needed to increase with the onset of the Covid-19 crisis.  The result is that the fiscal deficit is expected to reach an unprecedented 16% of GDP this fiscal year, the highest it has ever been (other than during World War II) since at least 1930, when such records began to be kept.

The consequence is a public debt that is now shooting upwards:

As a share of GDP, federal government debt (held by the public) is expected to reach 100% of GDP by September 30 (the end of the fiscal year), based on a simple extrapolation of fiscal account and debt data currently available through July (see the US Treasury Monthly Statement for July, released August 12, 2020).  And with its momentum (as such fiscal deficits do not turn into surpluses in any short period of time), Trump will have left for coming generations a government debt that is the highest (as a share of GDP) it has ever been in US history, exceeding even what it was at the end of World War II.

When Trump campaigned for the presidency in 2016, he asserted he would balance the federal government fiscal accounts “fairly quickly”.  Instead the US will face this year, in the fourth year of his term in office, a fiscal deficit that is higher as a share of GDP than it ever was other than during World War II.  Trump also claimed that he would have the entire federal debt repaid within eight years.  This was always nonsense and reflected a basic lack of understanding.  But at least the federal debt to GDP ratio might have been put on a downward trajectory during years when unemployment was relatively low.  Instead, federal debt is on a trajectory that will soon bring it to the highest it has ever been.

D.  The Labor Market

Trump also likes to assert that he can be credited with the strongest growth in jobs in history.  That is simply not true:

Employment growth was higher in Obama’s second term than it ever was during Trump’s term in office.  The paths were broadly similar over the first three years of Trump’s term, but Trump was simply – and consistently – slower.  In Obama’s first term, employment was falling rapidly (by 800,000 jobs a month) when Obama took his oath of office, but once this was turned around the path showed a similar steady rise.

Employment then plummeted in Trump’s fourth year, and by a level that was unprecedented (at least since such statistics began to be gathered in 1947).  In part due to the truly gigantic relief bills passed by Congress in March and April (described above), there has now been a substantial bounceback.  But employment is still (as of August 2020) well below what it was when Trump took office in January 2017.

Even setting aside the collapse in employment this year, Trump’s record in his first three years does not compare favorably to that of other presidents:

A few presidents have done worse, primarily those who faced an economy going into a downturn as they took office (Obama) or where the economy was pushed into a downturn soon after they took office (Bush Jr., Reagan) or later in their term (Bush Sr., Nixon/Ford).  But the record of other presidents was significantly better, with the best (which some might find surprising) that of Carter.

Trump also claims credit for pushing unemployment down to record low levels.  The unemployment rate did, indeed, come down (although not to record low rates – the unemployment rate was lower in the early 1950s under Truman and then Eisenhower, and again in the late 1960s).  But one cannot see any significant change in the path on the day Trump was inaugurated compared to what it had been under Obama since 2010:

And of course now in 2020, unemployment has shot upwards to a record level (since at least 1948, when these records began to be kept systematically).  It has now come down with the bounceback of the economy, but remains high (8.4% as of August).

Over the long term, nothing is more important in raising living standards than higher productivity.  And this was the argument Trump and the Republicans in Congress made to rationalize their sharp cuts in corporate tax rates in the December 2017 tax bill.  The argument was that companies would then invest more in the capital assets that raise productivity (basically structures and equipment).  But this did not happen.  Even before the collapse this year, private non-residential investment in structures and equipment was no higher, and indeed a bit lower, as a share of GDP than what it was before the 2017 tax bill passed.

And it certainly has not led to a jump in productivity:

Productivity growth during Trump’s term in office has been substantially lower (by 3%) than what it was during Obama’s first term, although somewhat better than during Obama’s second term (by a cumulative 1% point at the same calendar quarter in their respective terms).

And compared to that of other presidents, Trump’s record on productivity gains is nothing special:

Finally, what happened to real wages?  While higher productivity growth is necessary in the long term for higher wages (workers cannot ultimately be paid more than what is produced), in the short term a number of other factors (such as relative bargaining strength) will dominate.  When unemployment is high, wage gains will typically be low as firms can hire others if a worker demands a higher wage.  And when unemployment is low, workers will typically be in a better bargaining position to demand higher wages.

How, then, does Trump’s record compare to that of Obama?:

During the first three years of Trump’s tenure in office, real wage gains were basically right in the middle of what they were over the similar periods in Obama’s two terms.  But then it looks like real wages shot upwards at precisely the time when the Covid-19 crisis hit.  How could this be?

One needs to look at what lies behind the numbers.  With the onset of the Covid-19 crisis, unemployment shot up to the highest it has been since the Great Depression.  But two issues were then important.  One is that when workers are laid off, it is usually the least senior, least experienced, workers who are laid off first.  And such workers will in general have a lower wage.  If a high share of lower-wage workers become unemployed, then the average wage of the workers who remain employed will go up.  This is a compositional effect.  No individual worker may have seen an increase in his or her wage, but the overall average will go up if fewer lower-wage workers remain employed.

Second, this downturn was different from others in that a high share of the jobs lost were precisely in low-wage jobs – workers in restaurants, cafeterias, and hotels, or in retail shops, or janitors for office buildings, and so on.  As the economy shut down, these particular businesses had to close.  Many, if not most, office workers could work from home, but not these, commonly low-wage, workers.  They were laid off.

The sharp jump in average real wages in the second quarter of 2020 (Trump’s 14th quarter in office) is therefore not something to be pleased about.  As the lower-wage workers who have lost their jobs return to being employed, one should expect this overall average wage to fall back towards where it was before.

But the path of real wages in the first three years of Trump’s presidency, when the economy continued to expand as it had under Obama, does provide a record that can be compared.  How does it look relative to that of other presidents of the last half-century?:

Again, Trump’s record over this period is in the middle of the range found for other presidents.  It was fairly good (unemployment was low, which as noted above would be expected to help), but real wages in the second terms of Clinton and Obama rose by more, and performance was similar in Reagan’s second term.

E.  International Trade Accounts

Finally, how does Trump’s record on international trade compare to that of other presidents?  Trump claimed he would slash the US trade deficit, seeing it in a mercantilistic way as if a trade deficit is a “loss” to the country.  At a 2018 press conference (following a G-7 summit in Canada), he said, for example, “Last year,… [the US] lost  … $817 billion on trade.  That’s ridiculous and it’s unacceptable.”  And “We’re like the piggybank that everybody is robbing.”

This view on the trade balance reflects a fundamental lack of understanding of basic economics.  Equally worrisome is Trump’s view that launching trade wars targeting specific goods (such as steel and aluminum) or specific countries (such as China) will lead to a reduction in the trade deficit.  As was discussed in an earlier post on this blog, the trade balance ultimately depends on the overall balance between domestic savings and domestic investment in an economy.  Trade wars may lead to reductions in imports, but then there will also be a reduction in exports.  If the trade wars do not lead to higher savings or lower investment, such trade interventions (with tariffs or quotas imposed by fiat) will simply shift the trade to other goods or other nations, leaving the overall balance where it would have been based on the savings/investment balance.

But we now have three and a half years of the Trump administration, and can see what his trade wars have led to.  In terms of imports and exports:

Imports did not go down under Trump – they rose until collapsing in the worldwide downturn of 2020.  Exports also at first rose, but more slowly than imports, and then leveled off before imports did.  They then also collapsed in 2020.  Going back a bit, both imports and exports had gone up sharply during the Bush administration.  Then, after the disruption surrounding the economic collapse of 2008/9 (with a fall then a recovery), they roughly stabilized at high levels during the last five years of the Obama administration.

In terms of the overall trade balance:

The trade deficit more than doubled during Bush’s term in office.  While both imports and exports rose (as was seen above), imports rose by more.  The cause of this was the housing credit bubble of the period, which allowed households to borrow against home equity (which in turn drove house prices even higher) and spend that borrowing (leading to higher consumption as a share of current income, which means lower savings).  This ended, and ended abruptly, with the 2008/9 collapse, and the trade deficit was cut in half.  After some fluctuation, it then stabilized in Obama’s second term.

Under Trump, in contrast, the trade deficit grew compared to where it was under Obama.  It did not diminish, as Trump insisted his trade wars would achieve, but the opposite.  And with the growing fiscal deficit (as discussed above) due to the December 2017 tax cuts and the more rapid growth in government spending (where a government deficit is dis-saving that has to be funded by borrowing), this deterioration in the trade balance should not be a surprise.  And I also suspect that Trump does not have a clue as to why this has happened (nor an economic advisor willing to explain it to him).

F.  Conclusion

There is much more to Trump’s economic policies that could have been covered.  It is also not yet clear how much damage has been done to the economic structure from the crisis following the mismanagement of Covid-19 (with the early testing failures, the lack of serious contact tracing and isolation of those who may be sick, and importantly, Trump’s politicizing the wearing of simple masks).  Unemployment rose to record levels, and this can have a negative impact (both immediate and longer-term) on the productivity of those workers and on their subsequent earnings.  There has also been a jump in bankruptcies, which reduces competition.  And bankrupt firms, as well as stressed firms more generally, will not be able to repay their loans in full.  The consequent weakening of bank balance sheets will constrain how much banks will be able to lend to others, which will slow the pace of any recovery.

But these impacts are still uncertain.  The focus of this post has been on what we already know of Trump’s economic record.  It is not a good one. The best that can be said is that during his first three years in office he did not derail the expansion that had begun under Obama.  Growth continued (in GDP, employment, productivity, wages), at rates similar to what they were before.  Compared to paths followed in other presidencies of the last half-century, they were not special.

But this growth during Trump’s tenure in office was only achieved with rapid growth in federal government spending.  Together with the December 2017 tax cuts, this led to a growing, not a diminishing, fiscal deficit.  The deficit grew to close to 5% of GDP, which was indeed special:  Never before in US history has the fiscal deficit been so high in an economy at or close to full employment, with the sole exception of during World War II.

The result was a growing public debt as a share of GDP, when prudent fiscal policy would have been the reverse.  Times of low unemployment are when the country should be reducing its fiscal deficit so that the public debt to GDP ratio will fall.  Reducing public dis-saving would also lead to a reduction in the trade deficit (other things being equal).  But instead the trade deficit has grown.

As a consequence, when a crisis hits (as it did in 2020) and government needs to spend substantial sums for relief (as it had to this year), the public debt to GDP ratio will shoot upwards from already high levels.  Republicans in Congress asserted in 2011 that a public debt of 70% of GDP was excessive and needed to be brought down rapidly.  Thus they forced through spending cuts, which slowed the recovery at a time when unemployment was still high.

But now public debt under Trump will soon be over 100% of GDP.  Part of the legacy of Trump’s term in office, for whoever takes office this coming January 20, will therefore be a public debt that will soon be at a record high level, exceeding even that at the end of World War II.

This has certainly not been “the greatest economy in history”.

The Plans for Medicare-for-All and Medicare-for-All-Who-Want-It: A Comparison and a Path Forward

A.  Introduction

The US health care funding system is a mess.  One consequence is that despite spending far more than any other country in the world for its health care system (about 18% of GDP currently, where the next highest country spends only about 12%), US health care outcomes are mediocre at best.  Among OECD member countries, only a few countries, with incomes well below that of the US (some countries of Central or Eastern Europe or in Latin America), have worse outcomes than the US in such standard measures as life expectancy or infant mortality rates.

Bringing this to the level of individual families, the Kaiser Family Foundation found (based on a survey of firms) that the average cost of an employer-sponsored health plan in the US in 2019 came to $20,576 for family coverage.  Of this, the share covered directly by the employer (as part of its overall worker compensation package) came to $14,561 (71%) while the worker paid via premia an additional $6,015 (29%).  For 2018, the figures were a total cost of $19,616, with $14,069 for the employer share and $5,547 for the employee share.  Median family income in 2018 (the most recent year available) in the US was $80,663 (Census Bureau estimate).  Adding in the employer share of the cost of the health plan to cash family income, the total cost of an employer-sponsored health care plan came to 21% of this expanded family income.

On top of this, a family will have to pay out-of-pocket the costs of deductibles, co-pays, co-insurance, and health care costs not covered under their insurance plan.  Milliman, a health care advisory firm, estimated that in 2018 such out-of-pocket costs were an average of an additional $4,704 for a family of four.  This would bring the total cost of health care for a family of four to $24,320, or 26% of expanded family income.  This is huge.  And the burden is of course proportionally larger for the 50% of the population with an income below the median.

Such a high cost for health care is in and of itself a giant problem.  But beyond this, not having effective access to the health care system, at whatever the cost, is even worse.  It can literally be a matter of life and death.

It should not therefore be a surprise that what to do about health care has become a prominent issue in the race for the Democratic nomination for the presidency in 2020.  While each candidate has his or her own specific proposals, most are grouped around one of two alternatives:  A single-payer Medicare-for-All plan, where Elizabeth Warren has released the most detailed proposal on what she would seek to do; and plans which would add a public option to the Obamacare exchanges, which has been dubbed Medicare-for-All-Who-Want-It by Pete Buttigieg, its most prominent proponent.

This blog post will review these two alternative proposals, focusing on the implications of each.  In addition, Elizabeth Warren has also released a detailed plan for what would be, under her proposals, a transition to a Medicare-for-All system during which she would add a public option to the Obamacare exchanges.  On the surface this would appear similar to the Medicare-for-All-Who-Want-It proposals of Buttigieg and others, but there are in fact important differences in the specifics.  After discussing the Warren Medicare-for-All proposal and then the Buttigieg Medicare-for-All-Who-Want-It proposal, this post will then review the Warren transition proposal and its differences with the Buttigieg plan.

To summarize very briefly, the implications of these different plans include:

a)  The Warren Medicare-for-All plan, while providing comprehensive and generous health care coverage for all in the US, would also imply massive shifts in how health care is funded.  Total costs would not rise (an increase due to the broader coverage would be offset, she argues, by efficiency gains of similar magnitude).  But the shifts in how health care would be funded are staggeringly large, potentially disruptive, and unrealistic in the view of many analysts.

b)  The Medicare-for-All-Who-Want-It plan, in contrast, need not in principle cost much.  A public-managed option added to the Obamacare health insurance exchanges could be priced to cover its costs, just as private insurers on the exchanges do now (along with their profits).  And indeed, a careful analysis by the Congressional Budget Office (which will be discussed further below) concluded that the overall impact of allowing a public option would reduce the fiscal deficit significantly, due to indirect effects that would reduce public expenditures while increasing public revenues.  However, the specific Buttiegieg plan goes further than just adding a public option, by increasing the health care plan subsidies significantly and providing them to a broader range of families and individuals than receive them now.  With this as well as other measures, Buttiegieg estimates his proposals would lead to increased federal spending, but of only $1.5 trillion over ten years.  This would be well below the $26.5 trillion shifted to federal spending in the Warren Medicare-for-All plan.

However, while a Medicare-for-All approach (such as proposed by Warren) would lead to everyone enrolled in a similar (and comprehensive) health insurance plan with funding through federal government sources, the addition of a public option to the Obamacare exchanges would lead to what would still be a highly diverse and variable set of health insurance plans, with very different levels of coverage and very different costs.  Some enrollees would pay relatively little (if they are young and healthy, or of low income) while others would pay much more (if they are older, or of moderate or higher income).  The health care funding system would remain fragmented, extremely complex, and with widely varying costs for different families and individuals.  And from such a starting point it would then be difficult to transition to a Medicare-for-All system, even if the overwhelming majority choose to enroll in the public option.

c)  Finally, while the Warren transition plan would add a public option at the start of the process, her public option would be of a health plan that is very different from the public option of Buttiegieg, Biden, and others.  Her proposed public option would be for an insurance plan that is similarly comprehensive to what she has proposed for her Medicare-for-All plan.  It would also then receive, from the start, a high level of subsidy, benefiting those who choose to enroll in that public option.  These subsidies would be funded centrally by the government.  The overall expense would depend on how many would choose to enroll in the plans, but with the comprehensive coverage proposed by Warren coupled with high subsidies, it would be foolish for most not to enroll.  While this would then provide a path to a compulsory Medicare-for-All system, the funding that would need to be provided would be large.

B.  The Elizabeth Warren Medicare-for-All Plan

Elizabeth Warren has presented the most detailed proposal for how her Medicare-for-All plan would be set up, and importantly also how it would be paid for.  Medical costs covered would be expansive in her plan, and include not only that 100% of the cost of the medical services that Medicare currently provides for would be covered (i.e. no deductibles, no co-pays, no co-insurance), but so would medical expenses such as for dental and visual services, and for prescription drugs.  This would be much broader than what Medicare as it currently exists covers, as Medicare has a deductible, limits on the number of hospital days covered, and generally covers only 80% of doctor services.  Furthermore, Medicare does not cover expenses for dental, visual, and certain other areas of care, and while Medicare Part D now covers certain prescription drug costs, there are limits on how much it pays.

This expansive coverage is similar (indeed probably identical) to what Senator Bernie Sanders has proposed.  But while Elizabeth Warren has presented a detailed plan on how the costs of the expansive health funding program would be covered, Bernie Sanders has not.  Rather (at least as of this writing) Sanders has made available a six-page note titled “Options to Finance Medicare for All”.  But while the alternative funding sources outlined in that note are presented as options from which to choose, if one adds up the estimated amounts that would be raised by summing up all of the options presented the total of $16.2 trillion over ten years would not suffice to cover the costs of his Medicare-for-All program.  As we will see below, the shift in health care spending to the federal government, even after an assumed $7.5 trillion in savings through various measures, would come to $26.5 trillion over ten years.

We will therefore focus on the Warren plan, although on the cost side the figures would be similar to what Sanders has proposed.  And there will be a lot of numbers.  The key issue for the Warren (and Sanders) plans is that the dollar amounts involved are massive.  It is important to stress that this does not mean health care costs will be higher (other than certain costs from the increased access, to be offset by savings from several reforms), but rather that there will be shifts (and massive shifts) from how these costs are covered now to how they would be covered under the Medicare-for-All plan.

To see these shifts, it is best to start from estimates of what national health care expenditures would be should the US keep the current system.  A ten-year period is being covered (as is standard in most budget analyses), and for the purpose of this exercise the Warren team has come up with estimates of how those costs would then change if their plan were fully in place for the years 2020-29.  This is of course notional, as the full Medicare-for-All plan was not in place on January 1, 2020.  But use of the 2020-29 period is reasonable to demonstrate what would happen under such a plan, as reasonable estimates can be made for such a period.

For what health expenditures are expected to be under current law, most US analysts use the detailed forecasts provided each year by the professional staff at the Centers for Medicare and Medicaid Services (CMS).  The most recent National Health Expenditure (NHE) projections, covering the period 2018-27, were released in February 2019, and the figures presented below are based on Table 16 of that set of forecast tables.  The NHE projections stop at 2027 and hence do not include 2028 and 2029, but for those final two years I extrapolated from the 2027 estimates based on the growth rates in the forecast numbers of the last few years before 2027 (specifically, 2025 to 2027).  Other analysts would use similar methods, and for the final two years of a ten-year series the totals will be close.

As we will see below, the Warren figures are mostly, although not entirely, consistent with these NHE forecasts.  The causes of the limited inconsistencies are not fully clear, as the Warren figures are mostly presented in terms of what the shifts would be from some base.  Despite this, it is still useful to review first the NHE numbers, as they will give one a sense of the magnitudes involved in the funding of our health care system as it currently exists.  And they are huge.

The NHE forecasts (extrapolated for the final years, as noted above) for health expenditures between 2020 and 2029 under current law will be:

in $ trillion

GDP share

Total National Health Expenditures under Current Law:  2020-29

$52.5

18.9%

A.  Federal Government

$15.8

5.7%

  Private insurance for government employees

$0.5

0.2%

  Medicare taxes for government employees

$0.1

0.0%

  Medicare from budget

$6.0

2.1%

  Medicaid

$5.5

2.0%

  Other health programs (CHIP, DOD, VA, more)

$3.8

1.4%

B.  State and Local Government

$8.7

3.1%

  Private insurance for government employees

$2.8

1.0%

  Medicare taxes for government employees

$0.2

0.1%

  Medicaid

$3.4

1.2%

  Other health programs

$2.3

0.8%

C.  Private Business

$10.1

3.6%

  Private insurance for employees

$7.7

2.8%

  Other (Medicare, disability, worker comp, more)

$2.4

0.8%

D.  Households

$14.3

5.2%

  Private insurance premia and employee share

$5.1

1.8%

  Medicare taxes

$4.0

1.4%

  Out-of-Pocket

$5.2

1.9%

E.  Other Private Revenue (philanthropy, more)

$3.5

1.3%

Total national health expenditures under current law are forecast to be $52.5 trillion dollars over the period 2020 to 2029.  This is huge.  It comes to an average of 18.9% of GDP over the period as a whole, rising from 17.9% in 2020 to 19.9% in 2029.  By way of comparison, the Congressional Budget Office forecast of total federal government tax and other revenues (including all income taxes, Social Security taxes, and everything else) will be less than this, summing “only” to $45.6 trillion over this period.  Addressing how health care spending is funded will unavoidably deal with huge dollar amounts.

The $52.5 trillion in total health care costs are then funded through a combination of the amounts spent by the federal government ($15.8 trillion), state and local governments ($8.7 trillion), private businesses for their employees ($10.1 trillion), households ($14.3 trillion), and other sources, including philanthropy ($3.5 trillion).  Taking the federal government expenditures as an example, the NHE forecasts are that the federal government will spend $0.5 trillion over the ten years for its payments to private insurers to cover health insurance for federal workers, and $0.1 trillion in Medicare taxes for those federal employees.  These are relatively minor amounts but are included for completeness.  The really major expenditures are then what the federal government will provide directly to Medicare from the budget ($6.0 trillion), will spend on Medicaid ($5.5 trillion), and will spend on other health programs such as for CHIP (the Children’s Health Insurance Program), for the Department of Defense, for the VA, and so on ($3.8 trillion).

The breakdowns in the other components of health care spending are similar, and will not be repeated here.  But it is useful to note that even under current law, the total being spent on health care by government (the federal $15.8 trillion as well as the state and local $8.7 trillion) would be expected to come to $22.5 trillion over the ten years, or 43% of the $52.5 trillion forecast to be spent.  Government is already heavily involved in health care funding in the US, even though the system is often described as “employer-based”.

This mix of health care funding sources would then differ dramatically under any Medicare-for-All proposal, even with total health care expenditures unchanged.  Elizabeth Warren provides specifics on what this would be under her plan (available at both her campaign website and identically also at this commercial website in case her website is eventually closed).  Additional detail is provided in two more technical notes, prepared by advisors to her campaign, first on the overall costs of her Medicare-for-All plan, and second on the taxes and other measures that would be implemented to fund the federal government expenditures in such a program.

The specifics on the costs are presented in the following table:

Warren Medicare-for-All Plan:  2020-29

in $ trillion

GDP share

A.  Base National Health Expenditures

$52.0

18.7%

  Increase in cost from expanded cover

$7.0

2.5%

B.  Total Health Expenditures if nothing else done

$59.0

21.2%

1) National health spending not affected by plan

$8.0

2.9%

2) Base level of Federal Govt Spending before plan

$17.0

6.1%

C.  Increase in Federal Govt Spending Before Savings

$34.0

12.2%

D.  Savings from Reforms

$7.5

2.7%

1) Lower Admin Costs (beyond Urban Inst estimate)

$1.8

0.6%

2) Lower Costs of Prescription Drugs

$1.7

0.6%

3) Lower Costs and Payments to Health Providers

$2.9

1.0%

4) Slower Growth of Medical Costs

$1.1

0.4%

E.  Net Increase in Federal Govt Spending

$26.5

9.5%

As a base from which to start, the Warren team used estimates made by analysts at the Urban Institute of what total national health expenditures would be under current law and then under a Medicare-for-All system (with the expansive cover proposed by Warren as well as by Sanders).  The Urban Institute forecasts that under current law, total national health expenditures would be $52.0 trillion for the period 2020-29.  This is a bit below the $52.5 trillion figure arrived at using the NHE forecasts of the staff at the Centers for Medicare and Medicaid Services (CMS), but close (99%).  The Urban Institute has its own model for forecasting health expenditures, but say that they use the CMS figures for certain components they do not directly model.

The $52 trillion in health expenditures would be under current law.  The more expansive cover under the Warren (and Sanders) plans would then make health care more widely available, and the Urban Institute estimated (in a separate, but linked, publication) that this would lead to a net increase in health care costs of $7 trillion over the 2020-29 period.  This is a net increase as the Urban Institute includes in the $7 trillion certain savings from a Medicare-for-All system, in particular savings from the far lower administrative costs of Medicare compared to the costs at private insurers in the US (savings I discussed in an earlier post on this blog).

Total national health spending would then be $59 trillion over the ten years.  To arrive at what the federal government would be funding out of this, the Urban Institute analysts first subtracted $8 trillion of health care costs that they estimate would not be affected under a switch to a Medicare-for-All funding system.  These include a variety of expenditures, such as medical care for the military and their families when deployed overseas, acute care for people living in institutions (such as prisons as well as nursing homes), certain state and local government direct expenditures, public health programs, and so on.

The Urban Institute then estimates that other federal government health expenditures (under current law) would total $17 trillion over the ten years.  This is higher than the $15.8 trillion forecast in the CMS NHE numbers discussed above, and it is not clear why (particularly as certain of the federal government expenditures, such as for military personnel, are included in the $8 trillion figure of costs that will not be affected).  The Urban Institute reports made publicly available are not technical documents, so many of the details are not explained and documented.  But based on the $17 trillion figure for federal health spending, the increase in federal health expenditures (due to shifts from others under a Medicare-for-All plan), would be $59t – $8t – $17t = $34 trillion.

The Warren advisors started from this $34 trillion figure.  From this, they estimated that savings from several measures that would accompany their plan would lead to $7.5 trillion in lower national health care costs over the period.  One would be further savings from the lower administrative costs of the far more efficient Medicare system.  The Urban Institute estimated that such administrative costs (as a share of total costs of the insurance plan) could, conservatively, be reduced to 6% under Medicare, down from the 12.2% that it costs private insurers to administer their insurance plans (in their high-cost business model, with its negotiated networks and other such costs).  The Warren team argued, reasonably, that this could be reduced further to just 2.3%, which is what it now in fact costs Medicare to administer its system.

The Warren advisors then estimated that other cost savings could be achieved through reforms of the prescription drug system in the US ($1.7 trillion), through lower costs incurred by health care providers when they need only to deal with one insurance provider (Medicare) rather than the complex system of private insurers they must now contend with (and then lower payments to reflect this – an estimated $2.9 trillion in savings), and an overall slower growth of health care costs ($1.1 trillion).

With the estimated $7.5 trillion in savings from such measures, the net increase in federal spending for health care over the ten year period would be $26.5 trillion ( = $34.0t – $7.5t).

This is still a giant number.  Recall that the CBO estimate of all federal government tax and other revenue over this period totals just $45.6 trillion, and $26.5 trillion is 58% of this.  So how would Warren cover this cost?:

Warren Plan:  Paying for the Shift to Federal Govt Spending

in $ trillion

GDP share

Net Increase In Federal Spending

$26.5

9.5%

A.  Taxes / Transfers from Current Health Care Spending:

$14.9

5.4%

1) Transfer from State/Local Govt health insurance savings

$6.1

2.2%

2) Tax Private Businesses amount of insurance savings

$8.8

3.2%

B.  Other New Taxes / Federal Govt Spending Reductions:

$11.7

4.2%

1) Taxes on worker income now spent on health insurance

$1.4

0.5%

2) Financial transactions tax of 0.1%

$0.8

0.3%

3) Systemic risk fee on large financial institutions

$0.1

0.0%

4) End accelerated depreciation for large businesses

$1.25

0.5%

5) Minimum tax on foreign earnings of 35% + tax on foreign firms in US

$1.65

0.6%

6) Additional tax of 3% on wealth over $1 billion

$1.0

0.4%

7) Capital gains (as accrued) taxed at regular rates for richest 1%

$2.0

0.7%

8) Better tax law enforcement

$2.3

0.8%

9) Tax revenues from normalization of immigrants

$0.4

0.1%

10) Reduction in military spending

$0.8

0.3%

C.  Reductions in Health Care Funding

$12.2 4.4%

1) Household savings on health costs (insurance + out-of-pocket)

$12.0

4.3%

2) Net private business savings on health costs

$0.2

0.1%

First, Warren would require that state and local governments transfer to the federal level what those governments are now spending out of their own budgets for private insurance for state employees ($2.8 trillion in the table above of the CMS NHE forecasts) plus what those governments spend out of their budgets for Medicaid ($3.4 trillion in the CMS NHE figures).  The total in the CMS NHE figures of $6.2 trillion is within roundoff of the $6.1 trillion in the Warren estimates.  Whether such a transfer is politically realistic is a separate question.  I can imagine that a number of the state governments (particularly those in Republican hands) would tell the federal authorities that it is great that they are now covering those health care costs directly (under a Medicare-for-All system), but that they will keep the savings in their budgets for themselves.  In any case, it would certainly be litigated in the courts.

Warren would then also set what would in essence (or in actuality) be a tax on private businesses, equal to 98% of what those businesses now spend for the employer share of the health care premia for the private insurance for their workers.  Warren’s team estimates that businesses would spend under current law a total of $9.0 trillion over the ten year period on their share of their employer-based health insurance plans, and 98% of this is $8.8 trillion.  The $9.0 trillion figure appears to be broadly consistent with the CMS NHE figures discussed above, which estimates that private businesses will spend $7.7 trillion over the period on private health insurance for its employees, and also some portion of a further $2.4 trillion in other health expenses the employers will incur.

But the main issue with the new $8.8 trillion tax on private businesses is that it would be set, business by business, to reflect what that business is currently spending for its share (or, more precisely, 98% of its share) of the private health insurance plans for its workers.  Thus firms with health insurance plans that are generous in what they cover and in what share of health care costs they pay (and hence are more expensive), will pay more.  Workers at such firms might be accepting lower wages than they could earn elsewhere, knowing that the generous health insurance plans cover more, including more of what they would otherwise need to pay out-of-pocket.  At the other end, there are firms with stingy plans that are cheap, or even with no health insurance plans at all (which is legal if the firm has fewer than 50 employees, although health insurance plans are still common among such firms).  These firms would pay much less, or even nothing at all, under the Warren proposal, even though their workers, like everyone, would be covered by Medicare-for-All.

Many would view this as inequitable:  Firms with strong health care plans would be penalized, as they would then pay more into the Medicare-for-All funding, while firms with stingy or no health care plans would pay less or even nothing at all.  While there would be some undefined phasing in period in the Warren proposal to more equal shares being charged across firms, this would only be implemented over several years.

Furthermore, knowing that at least for some initial period the firms with the more generous plans would pay more and the firms with the more stingy plans would pay less, would create a perverse set of incentives.  In the mid-November update on her plans (which will be discussed in more detail later in this post), Senator Warren said that she would not introduce legislation for her Medicare-for-All plan until her third year in office.  That would mean that the new Medicare-for-All system would not enter into effect until at least her fourth year in office, and more likely no earlier than two or three years after that (as any such major reform takes time to implement).  If firms expect this to take place at some point in the next several years, they would have a strong incentive to revise the health insurance plans they sponsor for their employees in the direction of making them more stingy, or dropping them altogether if they legally can.

It is therefore likely that at least this aspect of the Warren plan will be revised should it go forward.  An addition to the payroll tax we now pay for Social Security and for Medicare is one likely alternative, and will also give a sense of the magnitudes involved.  Currently workers pay on their wages (half directly and half by their employers on their behalf as part of their overall compensation package) a tax of 12.4% on wages up to $137,700 in 2020 ($132,900 in 2019).  In addition, they pay 2.9% to fund Medicare (with no ceiling), for a total payroll tax of 15.3% on wages up to the ceiling.

The Congressional Budget Office, in their August 2019 forecasts, estimated that the Social Security tax (of 12.4%) will raise $11,269 billion in revenues over 2020-29.  To raise $8.8 trillion on this same wage base, would therefore require a rate of 9.7% (based on the proportions).  The overall payroll tax would then increase from the current 15.3% to a new 25.0%.  Many might view this as too much to pay, but one should recognize that it reflects what is now, on average, being paid on wages once one adds together Social Security, Medicare, and what the average employer pays for its share (or more precisely, 98% of its share) of the private health insurance plans for its employees.  One should also note that while 25% might seem high, it is substantially less than the approximately 40% rate found for payroll taxes (employer and employee combined) in a number of European countries (including Germany, the Netherlands, Belgium, Sweden, and Italy, and with France at over 50%).

Transferring to the federal government what is now being paid out by state and local governments for health insurance ($6.1 trillion, including the state portion for Medicaid), and by 98% of what private businesses are paying ($8.8 trillion), would then leave $11.7 trillion to be raised from other sources (where $11.7t = $26.5t – $6.1t – $8.8t, with rounding).  The Warren plan lists ten specific measures to do this:  six would be new taxes (or increases in existing or proposed taxes); one would be tax revenues from personal incomes that would become taxable with the move to Medicare-for-All; one would be increased revenues from better tax law enforcement; one would be taxes on incomes of immigrants who have had their status normalized; and one would be savings from reduced military spending.  A total of $10.9 trillion would come from higher taxes and $0.8 trillion from military spending reductions.

This is a wide, and diverse, set of funding sources.  I will not comment on each, but note that some analysts consider at least some of the revenue forecasts to be highly optimistic.  And one should always be skeptical when “better tax law enforcement” is assumed to raise a substantial share of the increased revenues needed ($2.3 trillion over ten years in the Warren plan, or 0.8% of GDP, which is huge).

Nevertheless, the Warren plan at least sets out proposals on how revenues might be raised (or expenditures reduced).  She should be commended for this, and it is in sharp contrast to, for example, the Republican / Trump tax cuts approved in December 2017.  Those tax cuts were forecast to lead to a loss in government revenues of $1.5 trillion over ten years (and it now appears that the losses will be even higher).  No effort was made by Trump or by the Republicans in Congress on how those revenue losses would be covered – the revenue losses would instead simply be added to overall government debt.  Warren, in contrast, has laid out specific proposals on how shifting health care expenditures to the federal level would be covered.  While one can be skeptical of certain of the figures, there is at least the recognition that something should be done to cover the shift in health costs.

It is also telling that the measures listed seek to avoid what might be obviously taxes on middle-class incomes.  Presumably this was done for political purposes, but one should recognize that at least some of the measures will impact middle-class incomes.  Specifically, it should be recognized that what employers pay for what is termed “the employer share” of health insurance premia for their employees is, in reality, a portion of the overall compensation package being paid to workers.  Over time, workers’ wages adjust to reflect this.  And while under the Warren plan this employer share (or 98% of it) would be transferred to the government, such a transfer would eventually become a uniform tax on employers (and as discussed above, this should probably be done immediately to avoid the perverse incentives of a gradual shift). The payroll tax would need to increase by 9.7% points to cover this, bringing the total payroll tax (for Social Security, current Medicare, and part of the cost of the new Medicare-for-All program) to 25.0%.  This is a tax on middle-class incomes.  There is nothing necessarily wrong with that, but it should be recognized.

Similarly, the Warren plan recognizes that since what workers now pay as their direct share of the cost of the employer-sponsored health insurance plans will go away under a Medicare-for-All system, the increase in income taxes on such incomes (as they are now largely income tax-exempt) would be substantial ($1.4 trillion over ten years in their estimate).  While fully reasonable, this is still a tax on middle-class incomes.

With total health care spending about the same ($7.0 trillion more for the increased access, offset by $7.5 trillion in cost reductions, for a net reduction of $0.5 trillion), but with $11.7 trillion in funding from new taxes and other measures, which groups will be spending less?  Under this plan, households would no longer pay health insurance premia nor out-of-pocket for most health care expenses.  The Warren campaign put this figure at $11 trillion over the ten-year period, which would then go to zero.  In addition, private businesses would gain the 2% from the requirement that they transfer 98% (not 100%) of what they now pay in health insurance premia, which would be an additional $0.2 trillion.  The total gain then by these two groups would be $11.2 trillion (ignoring, for this calculation, that some portion of the additional taxes would be paid by them).

But this does not add up properly.  After struggling with this for some time, I believe a mistake was made by the Warren advisors (which may have arisen as they were in a rush to get the plan out).  Assuming all the underlying numbers are correct, the $11.7 trillion raised by additional taxes (mainly) plus the $0.5 trillion net reduction in national health care spending under the plan ($7.0 trillion in more comprehensive coverage, minus $7.5 trillion in cost savings), would imply that the total gain by households and private businesses would be $12.2 trillion.  With the private businesses gaining $0.2 trillion (the 2%), this would imply a $12 trillion gain by households, not $11 trillion.  My guess is that instead of adding the net $0.5 trillion reduction in overall health care expenditures to the $11.7 trillion in increased funding (a total of $12.2 trillion), they subtracted it (a total of $11.2 trillion).

This is not fully clear as all the underlying numbers from the Urban Institute used by the Warren advisors have not been made publicly available (at least not from what I have been able to find).  Of relevance here is how they arrived at their figure that health care costs totaling $34 trillion would shift to the federal government under a Medicare-for-All plan such as that of Senator Warren (and Senator Sanders).  Nor did the Warren advisors present all the numbers on what each of the groups (state and local governments, private businesses, and households) would spend under current law and under their Medicare-for-All proposal.  Rather, they only provided how each of these would change.

[Side note:  There is possibly also another issue.  The CMS NHE figures discussed above forecast that total household expenditures over the period for private health insurance premia and for out-of-pocket expenses would total just $10.3 trillion.  On top of this, households would also spend $4.0 trillion in existing Medicare taxes (for old age cover).  While the Warren plan does not address this explicitly, implicit in her numbers is that the taxes gathered for old-age Medicare would remain as they are now (even though Medicare benefits would switch to the more generous cover of the Warren Medicare-for-All plan, such as no deductibles or co-pays).  But if households will be spending $10.3 trillion over the period for health care premia and other expenses, then their savings under the Warren plan cannot be $11 trillion, much less $12 trillion.  What is going on?  It is not fully clear, as the full set of underlying numbers have not been presented, but it is possible that the Warren advisors are working from a forecast that household spending on health care will total $11 trillion, rather than the $10.3 trillion forecast in the CMS NHE figures.  We would need to see the underlying numbers to sort this out.]

With the exception of this possible “glitch”, the Warren plan does, however, provide us with a good sense of the magnitudes of what the shifts in costs would be under a comprehensive Medicare-for-All plan.

In summary, with the US spending so much on health care ($52.0 or $52.5 trillion expected over the ten-year period under current law, or close to 19% of GDP), shifting how those costs are paid from private to public insurance will inevitably imply massive dollar amounts.  This does not mean higher amounts would be spent on health care.  Indeed, with Medicare far more cost-efficient than private insurers, total costs for a given level of coverage will go down.  But the shifts will still be massive.

The Warren plan covers these costs by three steps:  First, while an enhanced level of coverage would be provided (which by itself would increase overall costs by an estimated $7.0 trillion), these would be more than fully offset by measures which would save on costs (by an estimated $7.5 trillion).  Second, what state and local governments are now spending for health care coverage ($6.1 trillion), and 98% of what private businesses are spending as part of the wage packages for their employees ($8.8 trillion), would be transferred to the federal government, as the federal government would now cover these health care costs under the Medicare-for-All plan.  And third, the remaining $11.7 trillion needed to cover the additional federal level expenditures (of $26.5 trillion under the plan) would come from a wide range of measures, mostly of new or increased taxes, but also from a cut in military spending.

The net result would then be that households would no longer pay for health insurance directly, nor for current out-of-pocket costs.  These would be paid for through indirect means, as outlined above.  One can debate the extent to which these new taxes (in particular the transfer from private firms of what they are now paying for their employee health insurance) will impact households, but in the end there will be impacts.  Some households will end up spending less than they are now, and some will spend more.  And given the magnitudes of the underlying health care costs involved, those impacts will be huge.

C.  The Buttigieg Medicare-for-All-Who-Want-It Plan

Pete Buttigieg, as well as several other of the Democratic candidates for president (notably former Vice President Joe Biden and Senator Amy Klobuchar), have proposed instead adding a public option to the Obamacare market exchanges.  Buttigieg calls this Medicare-for-All-Who-Want-It, and has said that if private insurers then do not respond with something dramatically better “this public plan will create a natural glide-path to Medicare for All”.  This option would be a publicly managed (perhaps by Medicare) insurance plan, with similar coverage to what is now offered by private insurers and made available through the Obamacare marketplace exchanges along with the private insurance plans.  Buttigieg’s basic proposal is available at his campaign web site, with more detail provided at this additional post.

To see how this would work, we will first review how prices and other features for the health insurance plans are currently set by private insurers on the Obamacare exchanges, and then how the public option as proposed by Buttigieg would fit into this system.  One can then draw the implications for the system that one would end up with – a system that would be quite different from a Medicare-for-All system such as that proposed by Senator Warren.  And an important question is whether a system with a public option such as that proposed by Buttigieg would in fact create a “natural glide-path” to Medicare-for-All.

The Obamacare marketplace exchanges allow individuals to choose, from among the private plans offered in their particular jurisdiction, a health insurance plan for themselves as an individual or for their family.  The plans offered on the exchanges are not (other than for a few exceptions for small businesses) for the health insurance offered through employers.  Thus they are priced by the insurance companies to reflect what the risk (health expenses) would be, on average, for the individual.  There are some restrictions on how the prices for the individual plans can be set, most notably by not charging different rates for males and females, nor excluding (or charging different rates) those with pre-existing health conditions.  But other than these restrictions, the premia that are charged to individuals vary, and vary widely, based on a number of factors.

Specifically, they can vary by:

a)  The age of the individual (or of the family members in a family plan):  Health care costs are generally higher for older individuals.  While private insurers had lobbied to be able to charge prices for the oldest individuals that would be covered (age 64, as Medicare starts at age 65) of as much as five times the prices for the youngest, the final legislation set the limit at three times.  Still, this is a broad range.

b)  Location:  The price of the insurance plan varies by where the individual lives – not just by state but down to the county level within a state.  Health care costs can differ greatly across the country.  And while this is often attributed to general living costs being higher in some parts of the country than in others, a more important factor is the extent to which effective competition drives down (or not) the costs charged by doctors and hospitals on the one hand, and by the private insurers themselves on the other hand.  As discussed in an earlier post on this blog, much of the health care system in the US is characterized as a bilateral oligopoly in any given locality, where there might be only one or a few hospitals (where those few hospitals may themselves be part of a chain with common ownership), only a few doctors in particular medical specialties, and where there are also may only be a small number (including possibly just one) of health care insurers.

Health care prices charged will be high where such competition is limited, and low relative to elsewhere where such competition is more extensive.  Thus, for example, the premium rate for a 40-year old individual enrolled in the benchmark Obamacare insurance plan in 2020 in Minnesota is an average (across the state) of $309 per month (the lowest in the nation), while the benchmark rate in next-door Iowa is $742 per month (the second-highest in the nation) and $881 in not-so-far-away Wyoming (the highest).  The cost of living does not differ that much across these states.  The extent of competition does.

c)  Tobacco use:  While states can opt out of this (or limit it further), the Affordable Care Act allowed that health insurance plans offered on the marketplace exchanges could charge up to 50% more for those individuals who smoke.  This would partially compensate for the much higher health care costs of smokers.

d)  The extent of health care costs covered:  Finally, the Obamacare exchanges allowed for up to four bands or categories of insurance plans, designated by the labels Bronze, Silver, Gold, and Platinum.  They differed in terms of the share of health care costs that would, on average, be covered under the insurance plan, and the share that would then be covered by the individual (in terms of the premium to be paid for the plan, and through the deductibles, co-pays, co-insurance, and other costs, up to some out-of-pocket maximum).  A Bronze level plan would be expected, on average over all the individuals enrolled in the plan, to cover 60% of medical care costs, a Silver plan would cover 70%, a Gold plan 80%, and a Platinum plan 90%.

But the plans offered within a band (Bronze, Silver, Gold, Platinum) can differ widely in what the mix would be between the deductible, the specific co-pay and co-insurance rates, the out-of-pocket maximum, and then in the premium to be paid.  The plans could also differ in exactly what medical costs they cover (e.g. some cover dental costs, some cover prescription drugs, etc.), which doctors and hospitals were in the network for that plan, and what (if any) costs would be covered if one obtained medical services from an out of network doctor or hospital.

The resulting prices for the plans will therefore differ markedly across individuals in the nation.  To illustrate how wide this variation can be, even within just one state, I looked at the cost of the insurance plans offered in two regions of Florida.  Florida was chosen because its average benchmark plan premium rate ($468 in 2020) is close to the US average ($462), and it is a largish state where up to six insurers compete in offering plans in some parts of the state, while in other parts of the state only one insurer offers plans.  Choosing each just at random, I looked at the plans offered in Wakulla County, in the northern part of the state, which has just one insurer offering plans, and in Hillsborough County, around Tampa in the central part of the state, where five insurers offer plans.  One can find the plans offered, with all the details on their prices and coverage, at the Affordable Care Act web site, HealthCare.gov.

The costs differ dramatically between the two regions, and are systematically higher in Wakulla County.  I priced what a family plan would cost, with a household of four:  a man of 35, a woman of 35, a boy of 12, and a girl of 10 (although sex will not matter).  The cost of the second-lowest cost Silver plan (the benchmark plan, which I will discuss further below) would be $2,451.12 per month ($29,413 per year) in Wakulla, or 80% higher than the benchmark plan rate of $1,358.94 per month ($16,307 per year) in Hillsborough.  But the effective price difference was even greater, as the deductible in the Wakulla benchmark plan is $11,900, versus a deductible of $8,000 in Hillsborough.  And the plans differed in various other ways as well.

At the low end of the price range, the least expensive plan offered in Wakulla (a Bronze level plan) would still cost $1,538.22 per month ($18,459 per year), which is 52% more than the least expensive plan offered in Hillsborough of $1,011.00 per month ($12,132 per year).  Both of these plans had a deductible of $16,300 for the family, and also an out of pocket maximum of $16,300.  That is, these were essentially catastrophic health care plans that would not cover any health care expenses unless very high health care costs ($16,300) were incurred in the year.  Furthermore, one would have to pay $34,759 in Wakulla ($28,432 in Hillsborough) for the monthly premia plus the out of pocket expenses in any year when one’s health care costs exceeded the out of pocket maximum.

These costs are huge but reflect the fact that, as discussed at the top of this post, health care costs are simply very high in the US.  The amounts paid in premia each year (of $29,413 in Wakulla and $16,307 in Hillsborough) span the average paid (in 2019) of $20,576 for a family plan in employer-sponsored coverage discussed at the top of this post.  The main difference is that a large share (71% on average in 2019) of the cost of the employer-sponsored plans is hidden as it is paid by the employer from the overall compensation package for the employees, but before what is then (residually) paid in wages to the workers.  But the cost is still there.

Competition (or lack of it) between insurers also matter.  The far higher costs in Wakulla relative to Hillsborough are not due to a much higher cost of living in that part of the state (indeed, the cost of living there is probably lower), but rather because only one insurer is offering plans in Wakulla versus five in Hillsborough.  But even with the benefit of competition between insurers, it would be difficult for most families to be able to afford, on their own, such health insurance costs.  Hence a key aspect of the Affordable Care Act are federally funded subsidies provided to individuals and households to be able to purchase such health care coverage.  But this also adds an additional layer of complexity.

There are two forms of these subsidies provided for under the Affordable Care Act.  One is a subsidy on the insurance premia paid.  This is set according to the cost of the second-lowest cost Silver level plan in the area where the individual lives (termed the “benchmark plan”), and sets the subsidy to be equal to the difference between the cost of that benchmark plan and some percentage of family income.  That percentage varies by family income, and starts low (2.08% of family income in 2019, for example, for family incomes of up to 133% of the federal poverty line), and rises up to 9.86% (in 2019) for a family income between 300 and 400% of the federal poverty line.  There is no subsidy for those with incomes above 400% of the federal poverty line.  The percentages are adjusted year to year according to a formula that reflects certain relative price changes.  The ceiling rate of 9.86% in 2019, for example, began at 9.5% in 2014, and in fact fell in 2020 to 9.78%.

[Technical Note:  Why the second-lowest price to determine the benchmark plan?  It follows from a basic finding of those who analyze how markets function best.  If you are selling a product, then one wants those who are bidding to buy the product to bid the highest price that they are willing to pay.  But if the price that they will pay in the end depends on the price they specifically offer, they will bias their bid price downwards in the hope that they will get the product at a somewhat lower price.  And since all the bidders follow the same logic, the price will be biased low.  By providing the product to the one who bids the highest, but at the price of the second-highest bidder, one will remove that systematic bias.  In the case here, where one is offering a product for sale (the insurance plan), the same logic holds, but it will be the second-lowest priced plan chosen to serve as the benchmark.  And while the issue here is a price to be used for setting the subsidy that will be provided to those participating in these markets, the same principle holds.]

The second subsidy, provided for those with incomes up to 250% of the federal poverty line, covers a share of the out-of-pocket costs for deductibles, co-pays, and co-insurance.  The insurance companies would initially provide these (i.e. not charge the individual for these when health costs are incurred), and under the Affordable Care Act would then be compensated by the federal government for these costs.  However, the Trump administration working with the then Republican-controlled Congress ended these payments to the insurance companies, by zeroing out the funds for these in the budget.

The insurance companies were, however, still obliged by law to provide these cost-sharing subsidies to the eligible (low income) enrollees in their plans.  The result was that the insurance companies were forced to raise their premium rates on the plans to everyone to cover those costs.

Here it is important to note a feature of how the Obamacare premium subsidies are structured.  Since the amount a person eligible for a premium subsidy (i.e. with income up to 400% of the federal poverty line) will pay is fixed at some percentage of their income, any increase in the cost of the benchmark insurance plan for that individual will be matched dollar for dollar by an increase in the premium subsidy.  Hence the decision by Trump and the Republicans in Congress to end the cost-sharing subsidies led directly to a similar amount of higher premium subsidies being paid, with little or no savings to the budget.

But it gets worse. While those receiving the premium subsidies (those with incomes up to 400% of the federal poverty line) would not be affected by the now higher plan prices, middle-income households with incomes above that 400% line would have to pay the higher prices.  As a result, some of those households dropped their coverage due to the higher cost.  This in turn led the insurance companies to raise the costs of their plans by even more (due to the more limited, and likely higher risk, mix of enrollees in their plans).  This in turn then led to even higher premium subsidies being paid to those eligible (those with incomes below 400% of the poverty line).  The end result of this effort by Trump and the Republicans in Congress to undermine the Obamacare exchanges was to increase the amount spent in the federal budget over what would have been the case had they continued to fund the cost-sharing subsidies.

The Buttigieg plan (and similarly that of others, such as Joe Biden) would then be to keep this basic structure, but add to it a publicly-managed health insurance option.  It would be sold on the Obamacare marketplace exchanges, in parallel with the private plans, and those seeking health care insurance in those markets would be able to choose whichever they preferred.

What would be the impact?  The Congressional Budget Office provided estimates in an analysis undertaken in 2013.  They concluded that a public option would be able to provide health plans similar to the private plans offered on the Obamacare exchanges, but at premium rates that would be 7 to 8% less.  That is, for similar coverage the greater efficiency that could be achieved by a publicly managed option (due to greater scale, the ability to piggy-back on the extremely efficient Medicare system, and by not paying the profit margins that the private health insurers demand), could provide insurance cover at a significantly lower cost.  Note this 7 to 8% lower cost would be an average across the country – it would be more in some areas and less in others.  And with the public option priced at this level, covering its costs, the CBO estimates (conservatively, it would appear) that 35% of those participating in the Obamacare exchanges would choose this public option.

And it gets better.  While there would be no direct effect on the net government budget by offering a public option priced to cover its costs (no more and no less), there would be significant positive indirect effects.  First, government outlays would be reduced, as the new competition brought on to the Obamacare exchanges by the public option would drive down overall prices on the exchanges, and in particular the price of the benchmark insurance plan (the second-lowest cost Silver plan).  At these lower costs, the amount the government would need to spend on premium subsidies for existing enrollees with incomes up to 400% of the federal poverty line would go down.  This would be partially (and only partially) offset, however, by a larger number of those currently with no insurance choosing now to enroll through the exchanges to obtain health care insurance.  A number of these individuals and their families would be eligible for premium subsidies.  However, while this would be a cost to the budget, increased enrollment is a good thing and was, after all, the primary objective of the Affordable Care Act.

Second, with some workers (and their employers) now finding the insurance options on the exchanges more attractive, a switch of some share of workers to the exchanges will lead to an increase in the taxable share of worker incomes.  Hence government revenues would go up.

The impact of these two sets of indirect effects would be significant savings to the government budget.  The CBO estimates were for the period 2014 to 2023, but assumed the program would be in effect only from 2016 to 2023 and with a ramping up period in 2016.  Hence this was not a true ten-year impact estimate.  But if one extrapolates the CBO figures for a full ten years, and for the period 2020 to 2029 (the same period as was used above for the Warren plan), the net savings to the budget would be about $320 billion.  This is not small.

Adding a public option to the Obamacare exchanges would therefore appear to be an obvious thing to do, and it is.  And indeed, a public option was included in the Affordable Care Act legislation as it was originally passed in the House of Representatives in 2009.  But it was then taken out by the Senate.  The Democrats had a majority in the Senate at that time, but still abided by the legislative rules that required a 60 vote majority to pass major pieces of legislation.  (This was later effectively changed by Senate Majority Leader Mitch McConnell when Republicans took control of the Senate so that, for example, the major re-writing of the tax code in December 2017 was deemed to require only 51 votes to pass.)  But to get to 60 votes, the Democrats needed the vote of Senator Joe Lieberman of Connecticut.  Lieberman would only agree if the public option was taken out.  Lieberman represented Connecticut and insurers are especially influential in that state, providing significant campaign contributions and with several headquartered there.  And it is only the private insurers who will lose out by allowing competition from a public option.  As a consequence, the Affordable Care Act as ultimately passed did not include a public option.

Buttigieg’s full health care plan includes a number of other proposals as well.  Generally, all the candidates support them (even Trump says he does on some of them), including requirements such as ending surprise out-of-network billing (when care is provided at an in-network hospital by an out-of-network doctor or other provider, and then billed at often shockingly high out-of-network rates); limits on what those out-of-network rates can be (Buttigieg would set a ceiling of two times the Medicare rates); allowing Medicare to negotiate on prescription drug prices used in health care services it covers (Medicare is currently blocked from doing so by law); and more.  But while all the candidates support such reforms, there are powerful vested interests that have so far succeeded in blocking them.

Buttigieg would also lower the share of family income used to determine the premium subsidies they are eligible for.  As discussed above, that share is 9.78% in 2020 for those with incomes between 300 and 400% of the federal poverty line (and lower for those at lower income levels).  Buttigieg would set the ceiling rate at 8.5% (with lower rates for those at lower incomes), and importantly would also remove the limit on family incomes for eligibility.  This would be significant for many.  Take, as an example, the price of the benchmark plan being offered in 2020 in Wakulla County, Florida, of $29,413 for a family of four (at the ages specified, as discussed above).  With the federal poverty line in 2020 of $26,200 for a family of four, and hence $104,800 as 400% of this poverty line, such a family would be required to pay 9.78% of their income ($10,249) for their share of the cost should they choose the benchmark insurance plan, and would receive a subsidy of $19,164 (where $19,164 = $29,413 – $10,249).  If they earned $1 more than 400% of the poverty line, they would receive no subsidy and would have to pay the full $29,413 should they purchase the benchmark plan.

In the Buttigieg proposal, the share of income would be capped at 8.5%, so for someone at 400% of the poverty line their share of the cost would be $8,908 instead of $10,249.  Furthermore, it would not be restricted only to those with an income below 400% of the poverty line.  So if the benchmark plan cost were to remain at $29,413 (the CBO estimates it would go down by 7 to 8% if a public option is introduced, as noted above, but leave that aside for here), families with incomes of up to $346,035 would be eligible in this county of Florida for at least some subsidy, with the subsidy having diminished smoothly to zero at that point.

Another difference is that Buttgieg proposes that the benchmark plan be shifted from the second-lowest cost Silver plan to a Gold-level plan (presumably also second-lowest cost, although he does not say specifically in what is posted).  Gold-level plans have more generous benefits than the Silver plans, but at the cost of higher premia.  Hence the premium subsidies would be higher for any given level of income given the 8.5% cap.  Keep in mind also that the Affordable Care Act premium subsidies, while determined relative to the cost of the benchmark insurance plan, can then be used by the individual for any other plan offered on the exchanges.  The dollar amount provided under the subsidy will be the same.

Buttigieg would also auto-enroll into the public option (which could then later be switched by the individual to one of the private plans) those who would otherwise be eligible for free insurance.  This would be in cases where they would have been eligible for Medicaid had that state accepted the expansion under the Affordable Care Act but then refused to do so, or in cases where the individual or family would have been eligible for a zero-cost plan after the premium and cost-sharing subsidies are taken into account.  Possibly more problematic would be the Buttigieg proposal to enroll retroactively someone without a health insurance plan who would then need some health care treatment.  This could provide an incentive not to enroll in any insurance plan (with its associated monthly premia) unless and until some substantial health care cost is incurred.

How would this be paid for?  Buttigieg estimates that the 10-year cost would be $1.5 trillion, which is modest compared to the Medicare-for-All plans.  There is no way I can check that figure, but it appears plausible.  Part of the reason it is relatively modest is that for those workers enrolled in an employer-based plan but who choose to switch to the public option (as they would now be allowed to do), Buttigieg would require the employer to pay in an amount equal to what they would otherwise have paid for that employee’s health insurance plan.

While one should want to require something of this nature, exactly how it would work is not clear.  There could be an adverse selection problem.  If the employer was required to pay in an amount that is the pro-rated share of the cost of one worker in the company plan, and hence the same for each worker whether old or young or with a pre-existing condition or not, there would be an incentive to encourage (perhaps quietly) the workers with the more expensive expected health insurance expenses to switch to the public program.  How to set the prices of what the companies would pay to avoid such negative outcomes would need to be worked out.  There is also the issue that the system would create an incentive for companies to scrimp on the coverage of the health plans they offer, so that they would then both encourage workers to shift to the public option and pay less into that system when their workers do so.

But such issues should be resolvable, for example by tying what the employer would pay for an employee switching to the public option not to what the employer was spending before on their health plan, but rather to what providing health care coverage would cost in the public option for that worker.

The addition, then, of the public option would be a major improvement over what we have now.  Would it, however, provide as Buttigieg asserts a “natural glide-path to Medicare for All” if private health insurers “are not able to offer something dramatically better” than what they have now?  That is not so clear.

The addition of the public option to the present system would not fundamentally change the system.  One would continue to have a highly complex and fragmented system, with disparate plans where any individual’s cost of health insurance would depend on several factors.  Specifically, even for the same degree of coverage in terms of what medical costs are covered and for the same deductible, co-pays, and so on, the cost of their health plan would vary depending on the expected health care risks of the individual (their age), how much it then costs to address any consequent health care issues that arise (their location), and their income (for those eligible for subsidies).

Setting aside the income (health care subsidies) issue for the moment, we have noted above that health plan costs can vary by up to a factor of three based on age.  And the costs by location vary similarly.  Even using state-wide averages (the variation will be greater if one took into account the different costs at the county level within a state), the average cost of the benchmark insurance plan for a 40-year-old in 2020 is $881 per month in Wyoming but $309 in Minnesota.  This is a ratio (between the most expensive and the least) of close to three.  Putting just these two cost factors together, the range of costs for an individual across the country can vary by a factor of nine.  Taking within state variation in cost also into account would lead to an even higher ratio.

By what path would this then possibly transition to a Medicare-for-All system?  Suppose one is at the point where 90% or more of the population has chosen to enroll in the public option.  While almost all of the population might then be in a publicly managed health care plan, they would be in plans where either they (or other parties on their behalf, i.e. their employers or the government) are paying premia that could vary by a factor of nine or more for the exact same coverage.  Some (the young and healthy, living in areas where health care costs are more modest) would be paying relatively little, while others (the old and those living in areas where health care costs are especially high) would be paying much more.  This is not what most people envision when referring to Medicare-for-All.

Would this then transition to a true Medicare-for-All system?  That could be difficult.  In a Medicare-for-All system as most people view it, the amount paid for health care would vary only based on income.  The current Medicare system (for those aged 65 and older) is funded by a combination of taxes on wages (2.9% of wages of workers of all ages, technically half by the employer and half by the employee), and by monthly premia for those enrolled in Medicare (where these premia start at $144.60 monthly in 2020 per person, and rise to as much as $491.60 per person for those at high-income levels).

If the Medicare-for-All system were then funded, directly or indirectly, by taxes and/or premia that are based solely on income (such as a higher payroll tax, for example), the transition would imply that those who were before paying relatively modest amounts in premia for their health care plans (whether via the public option or in one of the private plans) would end up paying more.  And it could be much more given the factor of nine (or greater) range in the cost of these plans.  One should expect that they will scream loudly, and seek to block such a transition.

This would then not be a “natural glide path” to Medicare-for-All.  Rather, unless something major is done, and forced through despite the likely opposition of those who would end up paying more for their health care insurance, the system would likely remain as now, with a highly fragmented and complex system of multiple health care plans, at widely varying premium rates, with some paying relatively modest amounts and some an order of magnitude more.

[And a point of full disclosure:  I had myself, in an earlier post on this blog, not seen this issue.  I had argued that a system with an efficient public option could lead, through competition, to a Medicare-for-All system.  The proposal I had discussed there included that the publicly-managed option would be allowed also to compete on the market for employer-sponsored plans, and not just in the market for individual cover, but the issue would remain.  One would end up in a system with widely varying premia rates, based on the risk of those being covered, and it would then be difficult to move out of such a system to one where what is paid is linked solely to income.]

D.  The Warren Plan for a Public Option as a Transition to Her Medicare-for-All Plan

Senator Warren announced her Medicare-for-All plan (described in section B above) on November 1, 2019.  Two weeks later, on November 15, she announced that as first step she would seek to add a public option early in her administration, while postponing to the third year of her prospective administration seeking approval in Congress for her Medicare-for-All plan.  See the link here for this proposal at her campaign website, or here for the same proposal at an external website.

While there are a number of health care reforms she presents in this proposal, several of which she says could be implemented by executive order alone and not require congressional legislation, I will focus here on how she envisions her public option.  It is quite different from the public option as discussed by Buttigieg, Biden, and others, and indeed Warren labels it (somewhat confusingly) a “Medicare for All option”.  It would be offered on the Obamacare market exchanges, along with the private insurance plans that are there now, but would differ from them in key ways.

Most importantly, Warren’s public option would provide for a far more generous level of coverage than what is covered under the private health insurance plans, with this paid for in part by substantially more generous government subsidies than what would be provided to those who enroll in any of the private health insurance plans.  That is, this would no longer be a level playing field, with the public option priced to cover its costs and then competing on the basis of being able to operate more efficiently and at a lower cost than the private plans.

This then addresses the key question, discussed above, of how to transition from a system of multiple, competing, health plan options, to a single-payer Medicare-for-All system.  The answer is that the public option that Warren proposes to add in the first year of her administration would be so generous, and at such a low cost to the individual, that it would make little sense for almost anyone not to enroll in it.

Specifically, under her proposals:

a)  The Warren public option health insurance plan would be comprehensive in what it covers, matching what would be covered in Warren’s November 1 Medicare-for-All proposal.  That is, in addition to what the insurance options on the Obamacare exchanges are now required to include, her public option would include coverage for expenses such as for dental care, vision services, auditory, mental care, long term care, and more.  This would be far broader than what the current Medicare system covers for those over age 65 (but as part of her proposal, she would have Medicare expand its coverage to include these additional medical expenses as well).

b)  There would be a zero deductible from the start, and some unspecified (but low) cap on out-of-pocket expenses.

c)  The Warren public option would be free for those below the age of 18, and free as well for households with incomes below 200% of the federal poverty line (i.e. $52,400 for a family of four in 2020).  Note that in effect this makes Medicaid redundant, as all those now eligible for Medicaid (those with incomes up to 130% of the federal poverty line, but less in states that did not accept the expansion of Medicaid provided for in the Affordable Care Act) would be better off with the proposed Warren public option.

d)  The Warren public option plan premiums, co-pays, and co-insurance would then be set so that the plan would initially cover 90% of expected medical costs.  Note that while a Platinum level plan on the Obamacare exchanges also covers 90%, the public option plan proposed by Warren would cover a broader range of medical expenses (dental, etc.), so they are not fully comparable.

e)  Premium subsidies for the Warren public option (and usable only for this option) would be set so that households do not spend more than 5.0% of their incomes for the insurance plans (and less for those at lower incomes).  This would be well below the 9.86% ceiling in effect in 2019 on premium subsidies (9.78% in 2020) under the current Affordable Care Act system for those purchasing coverage on the exchanges.  Importantly, and as Buttigieg also proposes, these subsidies would be available for households of any income, and not capped at a household income of 400% of the federal poverty line.

The new subsidies would be generous compared to what is now provided.  While it is not clear how much it would cost on average for the comprehensive coverage (with zero deductible) as envisioned in the Warren public option (no estimate was provided in what was posted by the Warren campaign) if one assumes a modest plan cost of $25,000 per year for this expansive cover, the subsidies would be:

Family Income

5% of Income

Subsidy

$100,000

$5,000

$20,000

$300,000

$15,000

$10,000

$500,000

$25,000

$0

The subsidy would only fully phase out at an income of $500,000 in this example.  This would mean that even some households with an income in the top 1% in the US (incomes that started at about $475,000 in 2019) would be receiving subsidies to purchase their health insurance plan.

f)  Keep in mind as well that, as was discussed earlier, any increase in the cost of providing the insurance plan will be covered dollar-for-dollar with an increased subsidy (for those receiving any subsidy).  The amount the individual pays is capped at 5% of income.  This is important as Warren would have the 90% share of expected medical costs being covered by the insurance plan rising “in subsequent years” to 100%.  While this more generous cover would, in normal insurance, need to be paid for by higher premia, the 5% of incomes cap on what will be charged in effect means that the more generous cover would be paid for by higher government subsidies, dollar for dollar, for all those eligible to receive such subsidies.

g)  For those who choose to continue to enroll in one of the private insurance plans offered on the Obamacare exchanges, Warren has that the share of income required from the individual would be “lowered” from the 9.86% rate of 2019 (9.78% in 2020).  But she does not specify to what rate it would be lowered to.  Presumably if the intention is to lower it to the 5.0% rate that would apply for Warren’s public option, they would have said so.  And the subsidy would also be made more generous by benchmarking it to the cost of Gold level plans, rather than the second-lowest cost Silver plan.  Finally, the Warren plan says that for those choosing still to enroll in one of the private insurance plans they would also “lift the upper income limit on eligibility” for the premium subsidies from the current 400% of the federal poverty line.  But it is not clear if it would be removed altogether, or simply lifted to some higher level.

These measures would lead to an increased level of subsidies for those choosing to remain with one of the private plans on the Obamacare exchanges.  But while there is much that is not fully clear here, it does appear clear that the subsidies would not rise to what would be provided to those who choose instead to enroll in the Warren public option.  And what would certainly be the case is that the public option as proposed by Warren would provide a more comprehensive level of health cost cover than what is being covered in the private plans, and with a zero deductible, lower co-pay and co-insurance rates, and a lower out-of-pocket ceiling.

h)  Workers in firms that provide company-sponsored health insurance plans could opt to enroll in the Warren public option instead.  For those who do, their companies would be required to “pay an appropriate fee” to the government.  How that “appropriate fee” would be set was not specified.  If linked to what the employer would be otherwise paying for the company-sponsored plan for the worker, one would have the same adverse selection issue that was discussed above for the similar proposal in the Buttigieg plan.  But it should be possible to address this in some way.

How much would this cost, and how would it be paid for?  As noted above, no specific cost estimates (on neither the cost of a typical plan nor the cost of the overall proposal) are provided in what the Warren campaign posted.  All that is clear is that with the more comprehensive list of what is covered, along with the zero deductible, modest co-pays and co-insurance, and a low limit on out-of-pocket expenses, the Warren public option plans will cost more to provide than what the Platinum level plans offered on the exchanges cost.  This is true even though both would be priced to cover 90% of expected medical costs, since the list of medical costs covered would be broader.

But while the cost of providing the Warren public option plan would be higher, the cost to the individuals signing on to it would be lower due to the greater premium and other subsidies that would be made available for it (with the 5.0% limit on family income, with no ceiling on income for eligibility).  With such subsidies being made available, it is difficult to see why anyone would not wish to sign on to such a plan.  While technically voluntary, and with private insurance “allowed” to compete for such business, this would be far from a level playing field.

Thus there would be a significant cost to the overall government budget to cover the cost of the subsidies provided to those signing on to the Warren public option.  But as noted, no estimate was provided in what was posted by the Warren campaign of what this might be.  All that was provided was the statement that the cost would be less than what her full Medicare-for-All plan (as discussed in Section B above) would cost.  She notes that that proposal had listed a number of taxes and other measures to pay for the Medicare-for-All plan, and that the more modest cost of her proposed public option could make use of some subset of these.

But how much less would that cost be?  It would of course depend on how many people enroll, and that is not known.  But with the higher subsidies provided for a far more extensive cover than available in the private plans offered on the Obamacare exchanges, and indeed more extensive than in most employer-sponsored private health insurance plans, there are not many who would not be personally better off by switching to the Warren public option.

There would, however, be at least one key difference in the funding, at least to start.  While Warren has that individuals with incomes over 250% of the federal poverty line would pay premia for the public option she is proposing, with this capped at no more than 5.0% of family income, the full Warren Medicare-for-All plan would have no such premia.  But paying premia of 5% of income would generate significant funding.  While Warren says that the 5% rate would be scaled down over time (at some unspecified pace), a crude back-of-the-envelope calculation indicates that a 5% charge (if applied throughout the 2020-29 period) could provide on the order of about 40%, and possibly more, of the $11.7 trillion in extra funding (for the 2020-29 period) that would be required in Warren’s Medicare-for-All plan

Specifically, the share of family income to be paid for premia (whether 5.0%, or the 9.86% in 2019 on the current Obamacare exchanges) is based on a share of taxable household income.  With some minor adjustments (which can be ignored for the purposes here), that income is the adjusted gross income shown on the family’s income tax return.  Using data for 2016 reported by the IRS, the total adjusted gross income shown on all tax returns filed in the US that year was $10,226 billion.  Of this, $1,960 billion was reported by households with incomes of less than $50,000 (which also accounted for 59.4% of all returns filed).  Since this is roughly what 250% of the poverty line would be (for a family of four), where Warren would not charge any premium rate, those incomes will be excluded.  And while the premium rate would then only be phased up with incomes to the full 5.0% rate, Warren does not say what the pace of that would be.  Taking the extreme case by assuming it would go immediately to the 5.0%, the total adjusted gross income on tax returns filed for 2016 for incomes of $50,000 or more would then be $8,266 billion (= $10,226b – $1,960b).

To make this comparable to the figures discussed in Section B above on the cost of Warren’s full Medicare-for-All plan, one can then take this as a share of GDP and apply it to the forecast value of GDP for the 2020-29 period.  Note first that the figure for overall adjusted gross income as reported on tax returns ($10,226 billion in 2016) is less than GDP (which was $18,715 billion in 2016) for a number of reasons.  Taxable income, as defined under tax law, differs from income as defined in the GDP accounts, and there are other factors as well (such as corporate income).  But the two will generally move together.  Applying then the share of GDP in 2016 accounted for by households with incomes of more than $50,000, to the forecast total GDP for the 2020-29 period ($261,911 billion) and then taking 5.0% of that, households would pay (assuming 100% enroll) about $5.8 trillion if applied to the full ten year period.  This would be a substantial portion of the $11.7 trillion that would need to be raised by new taxes or government spending reductions in the Warren Medicare-for-All plan.  That is, very roughly, half.

This assumes, however, that the premia paid will always be 5.0% of incomes.  But that will not be the case.  The premia will be set at some rate, and households would pay only up to whatever that rate is (but no more than 5.0% of their incomes).  As noted above, even with a premium rate of $25,000 a year (likely low for an average rate, given the generosity of what would be covered), households with incomes of up to $500,000 a year would be receiving subsidies.  And $500,000 a year for household income is approximately the break-point between the 99% and the 1% in terms of income ranking.  If one assumes that the 1% choose not to enroll in the Warren public option, but rather buy their health insurance directly from some private provider, the impact on health care costs incurred in the public plans would be negligible.  They are only 1% of the total (assuming the other 99% do enroll), plus they probably have lower per person health care costs than for those of lower incomes (the rich are generally healthier, with a lower incidence of heart disease, cancer, diabetes, and so on).

But the richest 1% do account for a significant share of overall household income.  Again using the IRS data for 2016, the richest 1% of households accounted for 17.2% of overall adjusted gross income of all households.  Taking this as a share of GDP, applying that share to the forecast 2020-29 GDP, taking 5% of it and subtracting that amount from what would be generated if all households paid the 5%, one arrives at a figure of $4.6 trillion for the funding that could be raised.  This would be close to 40% of the $11.7 trillion required.

These estimates are rough, and would apply only to the initial years of the program Warren is recommending as part of a transition to her Medicare-for-All plan.  But it suggests that 40% or more of the extra government funding required could be raised by charging a 5% premium to those with incomes over 250% of the poverty line.  Note that the $11.7 trillion in net funding needed (over ten years) already has taken into account a transfer from state and local governments of what they would otherwise be spending on Medicaid and other health insurance programs that would become redundant under Warren’s plans.  It is also net of transfers from private companies of what they would otherwise be spending on the employer shares of company-sponsored health insurance plans.  Thus the 5% premium would be a substitute for some share of the additional taxes that Warren has proposed in her Medicare-for-All plan.  But as that 5% premium rate is reduced to zero over time under her proposals, that full set of additional taxes would be needed.  Just not right away.

Still, the amounts involved are huge.  If everyone (other than the extremely rich) choose to enroll in Warren’s public option, as it would make sense for them to do, the 5% premia paid would come to 1.7% of GDP.  The $11.7 trillion required in the full Medicare-for-All plan comes to 4.2% of the ten-year GDP.  Thus there would be a need to raise from some set of sources an additional 2.5% (= 4.2% – 1.7%) of GDP.  GDP in 2020 will total about $22 trillion, and 2.5% of this is $550 billion.  That is a massive amount to be raised.  Keep in mind that this is not additional spending, but rather in effect a transfer from what would otherwise be spent on health care (through the insurance premia we now pay, plus out-of-pocket expenses).  Indeed, there would be a net saving by moving to a more efficient / lower-cost health care funding system.  But that $550 billion would still need to be raised.

E.  Summary, and a Path Forward

The health care funding system in the US certainly needs to change.  The US spends far more than any other country in the world on health care, but despite this health care outcomes are worse than elsewhere.

Fundamental reform is needed, and a number of proposals have been made.  The most far reaching would be to move to a Medicare-for-All system.  Senator Elizabeth Warren has made a detailed proposal on how this would work and what the funding needs would be, and is to be commended for this.  But the funding needs would be massive.  While overall spending on medical care would not go up (indeed it would go down under her plan), there would be massive shifts from how the payments are made now (via premia paid for private health insurance and out-of-pocket) to how they would be made in a single-payer Medicare-for-All scheme.

In Warren’s plan, the shift in spending through government accounts would total an estimated $34.0 trillion over the ten years of 2020-29 (12.2% of GDP), if nothing else is done.  However, Warren’s team estimates that there would be savings of $7.5 trillion from a number of reforms and other efficiency gains leaving $26.5 trillion (9.5% of GDP) to be funded.  To provide a sense of how large this is, it can be compared to the forecast by the CBO that individual income taxes over this period would in total raise less, at only $23.2 trillion.

Part of the $26.5 trillion would be covered by transfers from state and local governments of what they currently spend on health care programs out of their own budgets (primarily Medicaid), and part from transfers of 98% of what private companies spend on the employer share of company-sponsored health care plans for their employees.  But even assuming such transfers will be possible (it is likely they will be strongly resisted), there will still be a need to raise a further $11.7 trillion (4.2% of GDP).  Warren proposes to do this through a series of measures, mostly from new taxes.  In terms of 2020 GDP of about $22 trillion, that 4.2% would come to $920 billion.  This is huge.

Given such amounts to be raised, plus concerns over the possible disruption that any such plan might cause (where one especially never wants to face disruption when health is at stake), many prefer a more gradual and possibly more modest reform.  An obvious alternative would be to include in the Obamacare market exchanges a public option, similar to Medicare and possibly managed by Medicare itself.  Allowing also employees currently on a company-sponsored health insurance plan to opt in to the public option should they wish (with their company still paying a fee tied to what they otherwise would be spending for the worker), one would have that those who want a Medicare-like plan could choose it, and those who don’t don’t.

The Congressional Budget Office has estimated that such a public option could be provided at a cost that is, on average, 7 to 8% less than what private plans charge, as the public option would be more efficient.  On top of this, there would be significant indirect savings to the overall government budget.

But would this then provide “a natural glide-path” to a Medicare-for-All system, as Buttigieg asserts?  That is not so clear.  The reason is that the public option would price plans similar to how the private plans are now priced (just 7 to 8% lower on average).  Their prices would reflect the risks of the individuals being covered and the cost of providing health care where they live.  Thus even if the public option grew to dominate the market, one would still have a wide range of health care premia being paid, which could easily vary by an order of magnitude between the low risk / low cost individuals to the high risk / high cost ones.  And the system would then remain like this, complex and with a wide range of costs linked to factors other than income.  Moving that system to one where the costs depend only on income would lead to higher costs for the low risk / low cost individuals in the system, and they will likely complain loudly.

How was this addressed in the second plan that Warren put out, where (in addition to a long list of other reforms) a public option would be made available immediately, as a transition step to her full Medicare-for-All scheme?  The answer is that the “public option” Warren proposed was quite different from the public option referred to by Buttigieg (as well as by Biden, Klobuchar, and others).  The public option as normally presented has been an option that competes with the private plans on the Obamacare exchanges, priced to cover its costs and receiving no special advantages.

Warren’s public option is different.  It would be comprehensive in terms of what it covered, would not have a deductible, only low co-pay and co-insurance rates, and a low out-of-pocket ceiling.  And while the premium for such a plan would need to be relatively high to cover such benefits and low out-of-pocket costs, Warren would provide government subsidies so that no one would need to pay more than 5% of their incomes to cover those costs.  And at a 5% ceiling, those subsidies could go to some pretty rich people.  Assuming a premium of $25,000 a year would be required to cover the costs of the plans (a conservative estimate, given what it would cover), households with incomes of up to $500,000 a year would be eligible.  That is, all but the richest 1% would be eligible.

In such a system one could choose to continue with a private plan, but for most it would be foolish not to switch.  Thus while this public option as proposed by Warren would be competing with the private plans, it would not be on a level playing field.  Rather, those enrolling in the public option of Warren would receive subsidies substantially greater than what those enrolling in a private plan could.  There is nothing necessarily wrong with this, but it should be recognized.  And those subsidies would have to be funded from somewhere.

The Warren team provided no estimate of what the overall cost of this might be, but simply noted that it would be something less than the full Medicare-for-All plan she had earlier proposed.  And the premium of up to 5% of family income that would be paid to cover a portion of the cost would be a significant source of funds.  But even including this, and assuming most Americans (other than the rich in the top 1%) chose to enroll in Warren’s public option, there would be a need to find $550 billion in additional government funding (if this applied in 2020).

These amounts are all huge.  But given the amount the US is now spending on health care (about $4 trillion expected in 2020, or 18% of GDP), any fundamental shift in how health care is funded will involve massive amounts.  And again it should be emphasized that the amounts needed do not imply a net increase in what will be spent, as the reforms being considered can be expected to reduce overall health care costs.  Nevertheless, the amounts are large, and will lead to major interpersonal shifts (with some paying less than they are now, and some paying more and possibly much more).  Those impacts should not be downplayed.

Still, the Warren plan for a transition to a Medicare-for-All system would be a plan for how to move forward.  It may well not be possible to do this quickly, given the size of the shifts in funding sources.  But one can envision where one might start with a public option such as Warren has proposed (exhaustive in what it covers, and with a zero deductible), but where the ceiling on family income for the premia might start not at 5% but perhaps more like the 8.5% Buttiegieg has proposed.  Then this would be reduced over time, perhaps by 1% point per year while other funding sources are scaled up, with this eventually brought down to zero.  At that point we would be in a full Medicare-for-All system.