The Rapid Growth in Deaths from Covid-19: The Role of Politics

Deaths from Covid-19 have been growing at an extremely rapid rate.  The chart above shows what those rates have been in the month of March, averaged over seven day periods to smooth out day-to-day fluctuations.  The figures are for the daily rate of growth over the seven day period ending on the date indicated.  The curves start in the first period when there were at least 10 cases, which was on March 3 for the US as a whole.  Hence the first growth rate shown is for the one week period of March 3 to 10.  As I will discuss below, the chart has not only the growth rates for the US as a whole but also for the set of states that Trump won in 2016 and for the set that Clinton won.  They show an obvious pattern.

The data come from the set assembled by The New York Times, based on a compilation of state and local reports.  The Times updates these figures daily, and has made them available through the GitHub site.  And it provides a summary report on these figures, with a map, at least daily.

I emphasize that the figures are of daily growth rates, even though they are calculated over one week periods.  And they are huge.  For the US as a whole, that rate was just over 28% a day for the seven day period ending March 30.  It is difficult to get one’s head around such a rapid rate of growth, but a few figures can be illustrative.  In the New York Times database, 3,066 Americans had died of Covid-19 as of March 30.  If the 28% rate of growth were maintained, then the entire population of the US (330 million) would be dead by May 16.  For many reasons, that will not happen.  The entire population would have been infected well before (if there was nothing to limit the spread) and it is fatal for perhaps 1% of those infected.  And the 99% infected who do not die develop an immunity, where once they recover they cannot spread the virus to others.  For this reason as well, 100% of those not previously exposed will not catch the virus.  Rather, it will be some lower share, as the spread becomes less and less likely as an increasing share of the population develops an immunity.  This is also the reason why mass vaccination programs are effective in stopping the spread of a virus (including to those not able to receive a vaccination, such as very young children or those with compromised immune systems).

So that 28% daily rate of growth has to come down, preferably by policy rather than by running out of people to infect.  And there has been a small reduction in the last two days (the seven day periods ending March 29 and March 30), with the rate falling modestly to 28% from a 30% rate that had ruled since the seven day period ending March 22.  But it has much farther to go to get to zero.

The recent modest dip might be an initial sign that the social distancing measures that began to be put in place around parts of the nation by March 16 are having a positive effect (and where many individuals, including myself, started social distancing some time before).  It is believed that it takes about 4 to 7 days after being infected before one shows any symptoms, and then, in those cases where the symptoms are severe and require hospitalization (about 20% of the total), another several days to two weeks before it becomes critical for those where it will prove fatal.  Hence one might be starting to see the impacts of the policies about now.

But the social distancing measures implemented varied widely across the US.  They were strict and early in some locales, and advisory only and relatively late in other locales.  Sadly, Trump injected a political element into this.  Trump belittled the seriousness of Covid-19 until well into March, even calling Covid-19 a “hoax” conjured up by the Democrats while insisting the virus soon would go away.  And even since mid-March Trump has been inconsistent, saying on some days that it needs to be taken seriously and on others that it was not a big deal.  Fox News and radio hosts of the extreme right such as Rush Limbaugh also belittled the seriousness of the virus.

It is therefore understandable that Trump supporters and those who follow such outlets for what they consider the news, have not shown as much of a willingness to implement the social distancing measures that are at this point the only way to reduce the spread of the virus.  And it shows in the death figures.  The red curve in the chart at the top of this post shows the daily growth rates of fatalities from this virus in those states that voted for Trump in the 2016 election.  While the spread of the virus in these states, many of which are relatively rural, started later than in the states that voted for Clinton, their fatalities from the virus have since grown at a substantially faster pace.

The pace of growth in the states that voted for Clinton has also been heavily influenced by the rapid spread of the virus in New York.  As of March 30, more than half (57%) of the fatalities in the Clinton states was due to the fatalities in New York alone.  And New York is a special case.  With its dense population in New York City, where a high proportion use a crowded subway system or buses to commute to work, with the work then often in tall office buildings requiring long rides in what are often crowded elevators, it should not be surprising that a virus that goes person to person could spread rapidly.

Excluding New York, the rate of increase in the other states that voted for Clinton (the curve in green in the chart above) is more modest.  The rates are also then even more substantially lower than those in the Trump-voting states.

But any of these growth rates are still incredibly high, and must be brought down to zero quickly.  That will require clear, sustained, and scientifically sound policy, from the top.  But Trump has not been providing this.

The Democratic Primaries Thus Far: Bernie Sanders’ Vote Numbers

A.  Introduction

One of the main arguments Bernie Sanders has made for why he should be the nominee of the Democratic Party to run against Trump is that he would spur a much higher turnout, especially of young voters who would not otherwise go to the polls (with those young voters favoring him).  But this has not turned out to be the case in the Democratic primaries held thus far.  While turnout has gone up substantially, Sanders has not been receiving an exceptionally high share of that increased turnout.  And even Sanders has now acknowledged that a higher number of younger voters that he argued would go to the polls to vote for him have not materialized.

So what has been going on?  To summarize what will be discussed in more detail below, in the primaries held thus far the share of the votes going to Sanders has gone down compared to what he received in the same primary states in the 2016 elections.  But the share going to Sanders and Elizabeth Warren combined has been similar (indeed almost identical overall) to what Sanders received in 2016, when it was essentially only him running against Hillary Clinton.  Similarly, the share going to Joe Biden, Amy Klobuchar, Pete Buttigieg, and Michael Bloomberg has been similar to the share that had gone to Clinton.  This very much looks like a case of Democratic Party primary voters with a separation between those who hold the more extreme liberal views of Sanders and Warren, and those with the more moderate views of Biden, Klobuchar, Buttigieg, and Bloomberg (although it is not really correct to view them as moderates – the positions they hold are all well to the left of the positions that were held by Obama when he served as president).  Primary turnout has gone up, but with similar shares as before of voters in those two channels in that increased turnout.

Pundit commentary, at least until recently, has not focused on this.  Rather, in the Democratic primaries and caucuses held in February before South Carolina (i.e. following the contests in Iowa, New Hampshire, and especially Nevada), all attention was on Sanders winning the vote count (modestly in Iowa and New Hampshire, more significantly in Nevada).  It was not on what the outcomes might be telling us on the broader issue of who will, in the end, amass the delegates needed ultimately to win the Democratic nomination.  Sanders was deemed the “front-runner”.

And then all were surprised when the vote in the South Carolina primary appeared to be so different.  However, if a comparison had been made to the results of the 2016 primary in that state one would have seen important similarities.

This has now become more clear with the results from the Super Tuesday primaries.  Turnout (in all but one of the states) has gone up, and sometimes quite substantially.  The Democratic base is clearly energized.  But the higher turnout was not of voters disproportionately supporting Sanders.  Indeed, the share voting for Sanders has gone down compared to the share that voted for him in 2016.  Rather, across the states with primaries held thus far, the share going now to Sanders and Warren together is very close to what Sanders had received before, and the share going to Biden, et. al., was similarly close to what Clinton had received before.  Thus the higher turnout was composed of similar shares of voters in the two groups.

There were of course differences in several of the individual states.  For the analysis here I looked at the ten states who held primaries and not caucuses (vote counts in caucuses are different, with far lower participation), did so in both 2016 and 2020, and held their primaries in each of those years on Super Tuesday (March 1 in 2016, March 3 in 2020) or before.  Thus this excluded states like Colorado and Minnesota (which held caucuses in 2016), or had primaries (or caucuses) after Super Tuesday in 2016.  The most important, and largest, state thus excluded is California, which held its primary on June 7 in 2016.  I will discuss separately the special case of California.

The overall results for those ten states are summarized in the chart at the top of this post.  But rather than discuss that one first, it is perhaps better to examine the cases in a few of the states individually, before looking at the overall totals across the ten states.  The vote numbers are all as reported in the New York Times, at this post for 2016, or at this post for 2020.  The 2020 results are all as shown as of about 2:00 pm on Wednesday, March 4.  At that point, almost all were either complete (with 100% of precincts reporting) or close to it (with 99% or more in two cases, one at 97.0%, one at 93.8%, and one at 93.4%).  There will be some differences, but small, as they get to 100% of precincts reporting, and as mail-in ballots are fully counted (rules vary by state).  However, these will likely not affect the shares to any significant degree, which are the focus of the analysis here.  And while it will not change the shares, I did scale up to 100% the figures for the cases where fewer than 100% of the precincts had reported, in order to estimate what the total votes (and hence change in turnout) will be and to add up the figures consistently across the states.

B.  Individual States

The South Carolina primary, which was critical for Biden, shows well what the pattern has been.  The key results are summarized in this chart:

Sanders received only 26% of the vote in this primary in 2016, losing badly to Clinton who received 73% of the vote.  And that share of Sanders went down to 20% this year, even though there was a 46% increase in turnout.  But Sanders plus Warren together received 27% of the vote, almost the same as what Sanders received in 2016.  Despite an increase in turnout of close to half, the share going to the extreme liberal candidates remained about the same – not more, not less.

One saw the same in Virginia:

Here turnout rose by close to 70%.  And the Sanders share fell again, from 35% in 2016 to 23% in 2020.  But Sanders and Warren together received 34%, very close to what Sanders had received before.  Despite the far higher turnout, the shares were close to unchanged (taking Sanders and Warren together).

As noted above, there were a total of ten states where one could make such a comparison.  I won’t go through them all, and there were individual exceptions.  One noteworthy case was that of New Hampshire, the state with the first primary (Iowa is a caucus):

Bernie Sanders did exceptionally well in that primary in 2016, receiving 60% of the vote, against Hillary Clinton’s 38% (with other candidates receiving the rest).  Sanders won again in 2020, but this time with only 25.7% of the vote (with Pete Buttigieg in second place at 24.4%).  But while the pundits focused on Sanders winning that primary again, I did not see mentioned that despite an increase in turnout (of a not insignificant 18%), the absolute number of votes Sanders received fell in half (falling from 151,584 in 2016, to just 76,234 in 2020).  And even if one adds in the votes that Warren received, the total still came only to 103,711, with a share of 35%.

There were two other states where Sanders and Warren together did significantly worse than Sanders alone in 2020.  One was in Sanders’ home state of Vermont, where Sanders received 86% of the vote in 2016 while Sanders and Warren together received just 63% in 2020 (despite a 17% increase in turnout).  The other was Oklahoma, where Sanders received 52% of the vote in 2016 while Sanders and Warren together received just 39% in 2020 (and is the one state where turnout fell – by 7%).

These states were offset by Texas, where Sanders received 33% of the vote in 2016 (and 30% in 2020), but where Sanders and Warren together received 41% (with turnout rising 47%).  In the other states, the shares of Sanders in 2016 and Sanders plus Warren together in 2020 were pretty much the same.  Especially similar was the case of Massachusetts (the home state of Warren):  Sanders received 48.7% of the vote in 2016, while Sanders plus Warren received 48.3% in 2020.

California is also a special case, but an important one.  In 2016, the California primary was held on June 7, close to the end of the primary season.  Close to 5.1 million voted in the Democratic primary in that year, and Sanders won 45.7% of the vote.  As I write this (in the evening of Friday, March 6, and based on what is shown on the New York Times website), California has posted results for only 89% of the precincts.  Why this is less than 100% three days after the primary is not clear to me.  California also accepts mail-in ballots that were mailed on election day or before, and the state allows up to a month for these to come in.

But based on what has been reported as of now, Sanders plus Warren together received 45.9% of the votes, almost exactly the same as the 45.7% Sanders received in 2016.  But there was a big change in turnout, likely tied to the different election date.  While 5.1 million voted in 2016, the total votes recorded as of today is just 3.3 million.  While this will go up as all the mail-in ballots are counted (and as full reports are provided on all of the precincts), it will certainly not go up to anywhere close to the 5.1 million of 2016.

C.  The Ten States as a Whole

The chart at the top of this post reflects the figures added up across all of the ten states.  And one finds that as with most of the states (where the few exceptions basically offset each other), the share of the vote Sanders and Warren together received in 2020 (38%) was very close to what Sanders alone received in 2016 (39%).  The share of Sanders alone went down, with this offset almost exactly by the share Warren received.  And this was despite a substantial increase in turnout – of 34% across the ten states as a group.

In terms of what has been called the “more moderate” wing, the share across the ten states of those voting for Clinton in 2016 was 59%.  The share going to Biden plus Klobuchar plus Buttigieg plus Bloomberg in 2020 was 58%.  Again almost the same.

With turnout up by a third, the Democratic primary electorate appears to be energized.  There are real concerns about Trump, and what he has done to our country.  But the higher turnout is not because Sanders is pulling in a large number of new voters who will vote for him and him only.  Rather, the split in the new voters between those voting for Sanders or Warren on one side, or for Biden, Klobuchar, Buttigieg, or Bloomberg on the other side, is very close to the split between Sanders and Clinton voters in 2016.

With the withdrawal in the past week of all of the major remaining candidates other than Sanders and Biden, we will now see whether this pattern continues.  It is now basically a two-person race, and the results should be clear to all.

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.

Andrew Yang’s Proposed $1,000 per Month Grant: Issues Raised in the Democratic Debate

A.  Introduction

This is the second in a series of posts on this blog addressing issues that have come up during the campaign of the candidates for the Democratic nomination for president, and which specifically came up in the October 15 Democratic debate.  As flagged in the previous blog post, one can find a transcript of the debate at the Washington Post website, and a video of the debate at the CNN website.

This post will address Andrew Yang’s proposal of a $1,000 per month grant for every adult American (which I will mostly refer to here as a $12,000 grant per year).  This policy is called a universal basic income (or UBI), and has been explored in a few other countries as well.  It has received increased attention in recent years, in part due to the sharp growth in income inequality in the US of recent decades, that began around 1980.  If properly designed, such a $12,000 grant per adult per year could mark a substantial redistribution of income.  But the degree of redistribution depends directly on how the funding would be raised.  As we will discuss below, Yang’s specific proposals for that are problematic.  There are also other issues with such a program which, even if well designed, calls into question whether it would be the best approach to addressing inequality.  All this will be discussed below.

First, however, it is useful to address two misconceptions that appear to be widespread.  One is that many appear to believe that the $12,000 per adult per year would not need to come from somewhere.  That is, everyone would receive it, but no one would have to provide the funds to pay for it.  That is not possible.  The economy produces so much, whatever is produced accrues as incomes to someone, and if one is to transfer some amount ($12,000 here) to each adult then the amounts so transferred will need to come from somewhere.  That is, this is a redistribution.  There is nothing wrong with a redistribution, if well designed, but it is not a magical creation of something out of nothing.

The other misconception, and asserted by Yang as the primary rationale for such a $12,000 per year grant, is that a “Fourth Industrial Revolution” is now underway which will lead to widespread structural unemployment due to automation.  This issue was addressed in the previous post on this blog, where I noted that the forecast job losses due to automation in the coming years are not out of line with what has been the norm in the US for at least the last 150 years.  There has always been job disruption and turnover, and while assistance should certainly be provided to workers whose jobs will be affected, what is expected in the years going forward is similar to what we have had in the past.

It is also a good thing that workers should not be expected to rely on a $12,000 per year grant to make up for a lost job.  Median earnings of a full-time worker was an estimated $50,653 in 2018, according to the Census Bureau.  A grant of $12,000 would not go far in making up for this.

So the issue is one of redistribution, and to be fair to Yang, I should note that he posts on his campaign website a fair amount of detail on how the program would be paid for.  I make use of that information below.  But the numbers do not really add up, and for a candidate who champions math (something I admire), this is disappointing.

B.  Yang’s Proposal of a $1,000 Monthly Grant to All Americans

First of all, the overall cost.  This is easy to calculate, although not much discussed.  The $12,000 per year grant would go to every adult American, who Yang defines as all those over the age of 18.  There were very close to 250 million Americans over the age of 18 in 2018, so at $12,000 per adult the cost would be $3.0 trillion.

This is far from a small amount.  With GDP of approximately $20 trillion in 2018 ($20.58 trillion to be more precise), such a program would come to 15% of GDP.  That is huge.  Total taxes and revenues received by the federal government (including all income taxes, all taxes for Social Security and Medicare, and everything else) only came to $3.3 trillion in FY2018.  This is only 10% more than the $3.0 trillion that would have been required for Yang’s $12,000 per adult grants.  Or put another way, taxes and other government revenues would need almost to be doubled (raised by 91%) to cover the cost of the program.  As another comparison, the cost of the tax cuts that Trump and the Republican leadership rushed through Congress in December 2017 was forecast to be an estimated $150 billion per year.  That was a big revenue loss.  But the Yang proposal would cost 20 times as much.

With such amounts to be raised, Yang proposes on his campaign website a number of taxes and other measures to fund the program.  One is a value-added tax (VAT), and from his very brief statements during the debates but also in interviews with the media, one gets the impression that all of the program would be funded by a value-added tax.  But that is not the case.  He in fact says on his campaign website that the VAT, at the rate and coverage he would set, would raise only about $800 billion.  This would come only to a bit over a quarter (27%) of the $3.0 trillion needed.  There is a need for much more besides, and to his credit, he presents plans for most (although not all) of this.

So what does he propose specifically?:

a) A New Value-Added Tax:

First, and as much noted, he is proposing that the US institute a VAT at a rate of 10%.  He estimates it would raise approximately $800 billion a year, and for the parameters for the tax that he sets, that is a reasonable estimate.  A VAT is common in most of the rest of the world as it is a tax that is relatively easy to collect, with internal checks that make underreporting difficult.  It is in essence a tax on consumption, similar to a sales tax but levied only on the added value at each stage in the production chain.  Yang notes that a 10% rate would be approximately half of the rates found in Europe (which is more or less correct – the rates in Europe in fact vary by country and are between 17 and 27% in the EU countries, but the rates for most of the larger economies are in the 19 to 22% range).

A VAT is a tax on what households consume, and for that reason a regressive tax.  The poor and middle classes who have to spend all or most of their current incomes to meet their family needs will pay a higher share of their incomes under such a tax than higher-income households will.  For this reason, VAT systems as implemented will often exempt (or tax at a reduced rate) certain basic goods such as foodstuffs and other necessities, as such goods account for a particularly high share of the expenditures of the poor and middle classes.  Yang is proposing this as well.  But even with such exemptions (or lower VAT rates), a VAT tax is still normally regressive, just less so.

Furthermore, households will in the end be paying the tax, as prices will rise to reflect the new tax.  Yang asserts that some of the cost of the VAT will be shifted to businesses, who would not be able, he says, to pass along the full cost of the tax.  But this is not correct.  In the case where the VAT applies equally to all goods, the full 10% will be passed along as all goods are affected equally by the now higher cost, and relative prices will not change.  To the extent that certain goods (such as foodstuffs and other necessities) are exempted, there could be some shift in demand to such goods, but the degree will depend on the extent to which they are substitutable for the goods which are taxed.  If they really are necessities, such substitution is likely to be limited.

A VAT as Yang proposes thus would raise a substantial amount of revenues, and the $800 billion figure is a reasonable estimate.  This total would be on the order of half of all that is now raised by individual income taxes in the US (which was $1,684 billion in FY2018).  But one cannot avoid that such a tax is paid by households, who will face higher prices on what they purchase, and the tax will almost certainly be regressive, impacting the poor and middle classes the most (with the extent dependent on how many and which goods are designated as subject to a reduced VAT rate, or no VAT at all).  But whether regressive or not, everyone will be affected and hence no one will actually see a net increase of $12,000 in purchasing power from the proposed grant  Rather, it will be something less.

b)  A Requirement to Choose Either the $12,000 Grants, or Participation in Existing Government Social Programs

Second, Yang’s proposal would require that households who currently benefit from government social programs, such as for welfare or food stamps, would be required to give up those benefits if they choose to receive the $12,000 per adult per year.  He says this will lead to reduced government spending on such social programs of $500 to $600 billion a year.

There are two big problems with this.  The first is that those programs are not that large.  While it is not fully clear how expansive Yang’s list is of the programs which would then be denied to recipients of the $12,000 grants, even if one included all those included in what the Congressional Budget Office defines as “Income Security” (“unemployment compensation, Supplemental Security Income, the refundable portion of the earned income and child tax credits, the Supplemental Nutrition Assistance Program [food stamps], family support, child nutrition, and foster care”), the total spent in FY2018 was only $285 billion.  You cannot save $500 to $600 billion if you are only spending $285 billion.

Second, such a policy would be regressive in the extreme.  Poor and near-poor households, and only such households, would be forced to choose whether to continue to receive benefits under such existing programs, or receive the $12,000 per adult grant per year.  If they are now receiving $12,000 or more in such programs per adult household member, they would receive no benefit at all from what is being called a “universal” basic income grant.  To the extent they are now receiving less than $12,000 from such programs (per adult), they may gain some benefit, but less than $12,000 worth.  For example, if they are now receiving $10,000 in benefits (per adult) from current programs, their net gain would be just $2,000 (setting aside for the moment the higher prices they would also now need to pay due to the 10% VAT).  Furthermore, only the poor and near-poor who are being supported by such government programs will see such an effective reduction in their $12,000 grants.  The rich and others, who benefit from other government programs, will not see such a cut in the programs or tax subsidies that benefit them.

c)  Savings in Other Government Programs 

Third, Yang argues that with his universal basic income grant, there would be a reduction in government spending of $100 to $200 billion a year from lower expenditures on “health care, incarceration, homelessness services and the like”, as “people would be able to take better care of themselves”.  This is clearly more speculative.  There might be some such benefits, and hopefully would be, but without experience to draw on it is impossible to say how important this would be and whether any such savings would add up to such a figure.  Furthermore, much of those savings, were they to follow, would accrue not to the federal government but rather to state and local governments.  It is at the state and local level where most expenditures on incarceration and homelessness, and to a lesser degree on health care, take place.  They would not accrue to the federal budget.

d)  Increased Tax Revenues From a Larger Economy

Fourth, Yang states that with the $12,000 grants the economy would grow larger – by 12.5% he says (or $2.5 trillion in increased GDP).  He cites a 2017 study produced by scholars at the Roosevelt Institute, a left-leaning non-profit think tank based in New York, which examined the impact on the overall economy, under several scenarios, of precisely such a $12,000 annual grant per adult.

There are, however, several problems:

i)  First, under the specific scenario that is closest to the Yang proposal (where the grants would be funded through a combination of taxes and other actions), the impact on the overall economy forecast in the Roosevelt Institute study would be either zero (when net distribution effects are neutral), or small (up to 2.6%, if funded through a highly progressive set of taxes).

ii)  The reason for this result is that the model used by the Roosevelt Institute researchers assumes that the economy is far from full employment, and that economic output is then entirely driven by aggregate demand.  Thus with a new program such as the $12,000 grants, which is fully paid for by taxes or other measures, there is no impact on aggregate demand (and hence no impact on economic output) when net distributional effects are assumed to be neutral.  If funded in a way that is not distributionally neutral, such as through the use of highly progressive taxes, then there can be some effect, but it would be small.

In the Roosevelt Institute model, there is only a substantial expansion of the economy (of about 12.5%) in a scenario where the new $12,000 grants are not funded at all, but rather purely and entirely added to the fiscal deficit and then borrowed.  And with the current fiscal deficit now about 5% of GDP under Trump (unprecedented even at 5% in a time of full employment, other than during World War II), and the $12,000 grants coming to $3.0 trillion or 15% of GDP, this would bring the overall deficit to 20% of GDP!

Few economists would accept that such a scenario is anywhere close to plausible.  First of all, the current unemployment rate of 3.5% is at a 50 year low.  The economy is at full employment.  The Roosevelt Institute researchers are asserting that this is fictitious, and that the economy could expand by a substantial amount (12.5% in their scenario) if the government simply spent more and did not raise taxes to cover any share of the cost.  They also assume that a fiscal deficit of 20% of GDP would not have any consequences, such as on interest rates.  Note also an implication of their approach is that the government spending could be on anything, including, for example, the military.  They are using a purely demand-led model.

iii)  Finally, even if one assumes the economy will grow to be 12.5% larger as a result of the grants, even the Roosevelt Institute researchers do not assume it will be instantaneous.  Rather, in their model the economy becomes 12.5% larger only after eight years.  Yang is implicitly assuming it will be immediate.

There are therefore several problems in the interpretation and use of the Roosevelt Institute study.  Their scenario for 12.5% growth is not the one that follows from Yang’s proposals (which is funded, at least to a degree), nor would GDP jump immediately by such an amount.  And the Roosevelt Insitute model of the economy is one that few economists would accept as applicable in the current state of the economy, with its 3.5% unemployment.

But there is also a further problem.  Even assuming GDP rises instantly by 12.5%, leading to an increase in GDP of $2.5 trillion (from a current $20 trillion), Yang then asserts that this higher GDP will generate between $800 and $900 billion in increased federal tax revenue.  That would imply federal taxes of 32 to 36% on the extra output.  But that is implausible.  Total federal tax (and all other) revenues are only 17.5% of GDP.  While in a progressive tax system the marginal tax revenues received on an increase in income will be higher than at the average tax rate, the US system is no longer very progressive.  And the rates are far from what they would need to be twice as high at the margin (32 to 36%) as they are at the average (17.5%).  A more plausible estimate of the increased federal tax revenues from an economy that somehow became 12.5% larger would not be the $800 to $900 billion Yang calculates, but rather about half that.

Might such a universal basic income grant affect the size of the economy through other, more orthodox, channels?  That is certainly possible, although whether it would lead to a higher or to a lower GDP is not clear.  Yang argues that it would lead recipients to manage their health better, to stay in school longer, to less criminality, and to other such social benefits.  Evidence on this is highly limited, but it is in principle conceivable in a program that does properly redistribute income towards those with lower incomes (where, as discussed above, Yang’s specific program has problems).  Over fairly long periods of time (generations really) this could lead to a larger and stronger economy.

But one will also likely see effects working in the other direction.  There might be an increase in spouses (wives usually) who choose to stay home longer to raise their children, or an increase in those who decide to retire earlier than they would have before, or an increase in the average time between jobs by those who lose or quit from one job before they take another, and other such impacts.  Such impacts are not negative in themselves, if they reflect choices voluntarily made and now possible due to a $12,000 annual grant.  But they all would have the effect of reducing GDP, and hence the tax revenues that follow from some level of GDP.

There might therefore be both positive and negative impacts on GDP.  However, the impact of each is likely to be small, will mostly only develop over time, and will to some extent cancel each other out.  What is likely is that there will be little measurable change in GDP in whichever direction.

e)  Other Taxes

Fifth, Yang would institute other taxes to raise further amounts.  He does not specify precisely how much would be raised or what these would be, but provides a possible list and says they would focus on top earners and on pollution.  The list includes a financial transactions tax, ending the favorable tax treatment now given to capital gains and carried interest, removing the ceiling on wages subject to the Social Security tax, and a tax on carbon emissions (with a portion of such a tax allocated to the $12,000 grants).

What would be raised by such new or increased taxes would depend on precisely what the rates would be and what they would cover.  But the total that would be required, under the assumption that the amounts that would be raised (or saved, when existing government programs are cut) from all the measures listed above are as Yang assumes, would then be between $500 and $800 billion (as the revenues or savings from the programs listed above sum to $2.2 to $2.5 trillion).  That is, one might need from these “other taxes” as much as would be raised by the proposed new VAT.

But as noted in the discussion above, the amounts that would be raised by those measures are often likely to be well short of what Yang says will be the case.  One cannot save $500 to $600 billion in government programs for the poor and near-poor if government is spending only $285 billion on such programs, for example.  A more plausible figure for what might be raised by those proposals would be on the order of $1 trillion, mostly from the VAT, and not the $2.2 to $2.5 trillion Yang says will be the case.

C.  An Assessment

Yang provides a fair amount of detail on how he would implement a universal basic income grant of $12,000 per adult per year, and for a political campaign it is an admirable amount of detail.  But there are still, as discussed above, numerous gaps that prevent anything like a complete assessment of the program.  But a number of points are evident.

To start, the figures provided are not always plausible.  The math just does not add up, and for someone who extolls the need for good math (and rightly so), this is disappointing.  One cannot save $500 to $600 billion in programs for the poor and near-poor when only $285 billion is being spent now.  One cannot assume that the economy will jump immediately by 12.5% (which even the Roosevelt Institute model forecasts would only happen in eight years, and under a scenario that is the opposite of that of the Yang program, and in a model that few economists would take as credible in any case).  Even if the economy did jump by so much immediately, one would not see an increase of $800 to $900 billion in federal tax revenues from this but rather more like half that.  And other such issues.

But while the proposal is still not fully spelled out (in particular on which other taxes would be imposed to fill out the program), we can draw a few conclusions.  One is that the one group in society who will clearly not gain from the $12,000 grants is the poor and near-poor, who currently make use of food stamp and other such programs and decide to stay with those programs.  They would then not be eligible for the $12,000 grants.  And keep in mind that $12,000 per adult grants are not much, if you have nothing else.  One would still be below the federal poverty line if single (where the poverty line in 2019 is $12,490) or in a household with two adults and two or more children (where the poverty line, with two children, is $25,750).  On top of this, such households (like all households) will pay higher prices for at least some of what they purchase due to the new VAT.  So such households will clearly lose.

Furthermore, those poor or near-poor households who do decide to switch, thus giving up their eligibility for food stamps and other such programs, will see a net gain that is substantially less than $12,000 per adult.  The extent will depend on how much they receive now from those social programs.  Those who receive the most (up to $12,000 per adult), who are presumably also most likely to be the poorest among them, will lose the most.  This is not a structure that makes sense for a program that is purportedly designed to be of most benefit to the poorest.

For middle and higher-income households the net gain (or loss) from the program will depend on the full set of taxes that would be needed to fund the program.  One cannot say who will gain and who will lose until the structure of that full set of taxes is made clear.  This is of course not surprising, as one needs to keep in mind that this is a program of redistribution:  Funds will be raised (by taxes) that disproportionately affect certain groups, to be distributed then in the $12,000 grants.  Some will gain and some will lose, but overall the balance has to be zero.

One can also conclude that such a program, providing for a universal basic income with grants of $12,000 per adult, will necessarily be hugely expensive.  It would cost $3 trillion a year, which is 15% of GDP.  Funding it would require raising all federal tax and other revenue by 91% (excluding any offset by cuts in government social programs, which are however unlikely to amount to anything close to what Yang assumes).  Raising funds of such magnitude is completely unrealistic.  And yet despite such costs, the grants provided of $12,000 per adult would be poverty level incomes for those who do not have a job or other source of support.

One could address this by scaling back the grant, from $12,000 to something substantially less, but then it becomes less meaningful to an individual.  The fundamental problem is the design as a universal grant, to all adults.  While this might be thought to be politically attractive, any such program then ends up being hugely expensive.

The alternative is to design a program that is specifically targeted to those who need such support.  Rather than attempting to hide the distributional consequences in a program that claims to be universal (but where certain groups will gain and certain groups will lose, once one takes fully into account how it will be funded), make explicit the redistribution that is being sought.  With this clear, one can then design a focussed program that addresses that redistribution aim.

Finally, one should recognize that there are other policies as well that might achieve those aims that may not require explicit government-intermediated redistribution.  For example, Senator Cory Booker in the October 15 debate noted that a $15 per hour minimum wage would provide more to those now at the minimum wage than a $12,000 annual grant.  This remark was not much noted, but what Senator Booker said was true.  The federal minimum wage is currently $7.25 per hour.  This is low – indeed, it is less (in real terms) than what it was when Harry Truman was president.  If the minimum wage were raised to $15 per hour, a worker now at the $7.25 rate would see an increase in income of $15.00 – $7.25 = $7.75 per hour, and over a year of 40 hour weeks would see an increase in income of $7.75 x 40 x 52 = $16,120.00.  This is well more than a $12,000 annual grant would provide.

Republican politicians have argued that raising the minimum wage by such a magnitude will lead to widespread unemployment.  But there is no evidence that changes in the minimum wage that we have periodically had in the past (whether federal or state level minimum wages) have had such an adverse effect.  There is of course certainly some limit to how much it can be raised, but one should recognize that the minimum wage would now be over $24 per hour if it had been allowed to grow at the same pace as labor productivity since the late 1960s.

Income inequality is a real problem in the US, and needs to be addressed.  But there are problems with Yang’s specific version of a universal basic income.  While one may be able to fix at least some of those problems and come up with something more reasonable, it would still be massively disruptive given the amounts to be raised.  And politically impossible.  A focus on more targeted programs, as well as on issues such as the minimum wage, are likely to prove far more productive.

The “Threat” of Job Losses is Nothing New and Not to be Feared: Issues Raised in the Democratic Debate

A.  Introduction

The televised debate held October 15 between twelve candidates for the Democratic presidential nomination covered a large number of issues.  Some were clear, but many were not.  The debate format does not allow for much explanation or nuance.  And while some of the positions taken refected sound economics, others did not.

In a series of upcoming blog posts, starting with this one, I will review several of the issues raised, focussing on the economics and sometimes the simple arithmetic (which the candidates often got wrong).  And while the debate covered a broad range of issues, I will limit my attention here to the economic ones.

This post will look at the concern that was raised (initially in a question from one of the moderators) that the US will soon be facing a massive loss of jobs due to automation.  A figure of “a quarter of American jobs” was cited.  All the candidates basically agreed, and offered various solutions.  But there is a good deal of confusion over the issue, starting with the question of whether such job “losses” are unprecedented (they are not) and then in some of the solutions proposed.

A transcript of the debate can be found at the Washington Post website, which one can refer to for the precise wording of the questions and responses.  Unfortunately it does not provide pages or line numbers to refer to, but most of the economic issues were discussed in the first hour of the three hour debate.  Alternatively, one can watch the debate at the CNN.com website.  The discussion on job losses starts at the 32:30 minute mark of the first of the four videos CNN posted at its site.

B.  Job Losses and Productivity Growth

A topic on which there was apparently broad agreement across the candidates was that an unprecedented number of jobs will be “lost” in the US in the coming years due to automation, and that this is a horrifying prospect that needs to be addressed with urgency.  Erin Burnett, one of the moderators, introduced it, citing a study that she said concluded that “about a quarter of American jobs could be lost to automation in just the next 10 years”.  While the name of the study was not explicitly cited, it appears to be one issued by the Brookings Institution in January 2019, with Mark Muro as the principal author.  It received a good deal of attention when it came out, with the focus on its purported conclusion that there would be a loss of a quarter of US jobs by 2030 (see here, here, here, here, and/or here, for examples).

[Actually, the Brookings study did not say that.  Nor was its focus on the overall impact on the number of jobs due to automation.  Rather, its purpose was to look at how automation may differentially affect different geographic zones across the US (states and metropolitan areas), as well as different occupations, as jobs vary in their degree of exposure to possible automation.  Some jobs can be highly automated with technologies that already exist today, while others cannot.  And as the Brookings authors explain, they are applying geographically a methodology that had in fact been developed earlier by the McKinsey Global Institute, presented in reports issued in January 2017 and in December 2017.  The December 2017 report is most directly relevant, and found that 23% of “jobs” in the US (measured in terms of hours of work) may be automated by 2030 using technologies that have already been demonstrated as technically possible (although not necessarily financially worthwhile as yet).  And this would have been the total over a 14 year period starting from their base year of 2016.  This was for their “midpoint scenario”, and McKinsey properly stresses that there is a very high degree of uncertainty surrounding it.]

The candidates offered various answers on how to address this perceived crisis (which I will address below), but it is worth looking first at whether this is indeed a pending crisis.

The answer is no.  While the study cited said that perhaps a quarter of jobs could be “lost to automation” by 2030 (starting from their base year of 2016), such a pace of job loss is in fact not out of line with the norm.  It is not that much different from what has been happening in the US economy for the last 150 years, or longer.

Job losses “due to automation” is just another way of saying productivity has grown.  Fewer workers are needed to produce some given level of output, or equivalently, more output can be produced for a given number of workers.  As a simple example, suppose some factory produces 100 units of some product, and to start has 100 employees.  Output per employee is then 100/100, or a ratio of 1.0.  Suppose then that over a 14 year period, the number of workers needed (following automation of some of the tasks) reduces the number of employees to just 75 to produce that 100 units of output (where that figure of 75 workers includes those who will now be maintaining and operating the new machines, as well as those workers in the economy as a whole who made the machines, with those scaled to account for the lifetime of the machines).  The productivity of the workers would then have grown to 100/75, or a ratio of 1.333.  Over a 14 year period, that implies growth in productivity of 2.1% a year.  More accurately, the McKinsey estimate was that 23% of jobs might be automated, and with this the increase in productivity would be to 100/77 = 1.30.  The growth rate over 14 years would then be 1.9% per annum.

Such an increase in productivity is not outside the norm for the US.  Indeed, it matches what the US has experienced over at least the last century and a half.  The chart at the top of this post shows how GDP per capita has grown since 1870.  The chart is plotted in logarithms, and those of you who remember their high school math will recall that a straight line in such a graph depicts a constant rate of growth.  An earlier version of this chart was originally prepared for a prior post on this blog (where one can find further discussion of its implications), and it has been updated here to reflect GDP growth in recent years (using BEA data, with the earlier data taken from the Maddison Project).

What is remarkable is how steady that rate of growth in GDP per capita has been since 1870.  One straight line fits it extraordinarily well for the entire period, with a growth rate of 1.9% a year (or 1.86% to be more precise).  And while the US is now falling below that long-term trend (since around 2008, from the onset of the economic collapse in the last year of the Bush administration), the deviation of recent years is not that much different from an earlier such deviation between the late 1940s to the mid-1960s.  It remains to be seen whether there will be a similar catch-up to the long-term trend in the coming years.

One might reasonably argue that GDP per capita is not quite productivity, which would be GDP per employee.  Over very long periods of time population and the number of workers in that population will tend to grow at a similar pace, but we could also look at GDP per employee:

This chart is based on BEA data, the agency which issues the official GDP accounts for the US, for both real GDP and the number of employees (in full time equivalent terms, so part-time workers are counted in proportion to the number of hours they work).  The figures unfortunately only go back to 1929, the oldest year for which the BEA has issued estimates.  Note also that the rise in GDP during World War II looks relatively modest here, but that is because measures of “real” GDP (when carefully estimated using standard procedures) can deviate more and more as one goes back in time from the base year for prices (2012 here), coupled with major changes in the structure of production (such as during a major war).  But the BEA figures are the best available.

Once again one finds that the pace of productivity growth was remarkably stable over the period, with a growth rate here of 1.74% a year.  It was lower during the Great Depression years, but then recovered during World War II, and was then above the 1929 to 2018 trend from the early 1950s to 1980.  And the same straight line (meaning a constant growth rate) then fit extremely well from 1980 to 2010.

Since 2010 the growth in labor productivity has been more modest, averaging just 0.5% a year from 2010 to 2018.  An important question going forward is whether the path will return to the previous trend.  If it does, the implication is that there will be more job turnover for at least a temporary period.  If it does not, and productivity growth does not return to the path it has been on since 1929, the US as a whole will not be able to enjoy the growth in overall living standards the economy had made possible before.

The McKinsey numbers for what productivity growth might be going forward, of possibly 1.9% a year, are therefore not out of line with what the economy has actually experienced over the years.  It matches the pace as measured by GDP per capita, and while the 1.74% a year found for the last almost 90 years for the measure based on GDP per employee is a bit less, they are close.  And keep in mind that the McKinsey estimate (of 1.9% growth in productivity over 14 years) is of what might be possible, with a broad range of uncertainty over what will actually happen.

The estimate that “about” a quarter of jobs may be displaced by 2030 is therefore not out of line with what the US has experienced for perhaps a century and a half.  Such disruption is certainly still significant, and should be met with measures to assist workers to transition from jobs that have been automated away to the jobs then in need of more workers.  We have not, as a country, managed this very well in the past.  But the challenge is not new.

What will those new jobs be?  While there are needs that are clear to anyone now (as Bernie Sanders noted, which I will discuss below), most of the new jobs will likely be in fields that do not even exist right now.  A careful study by Daron Acemoglu (of MIT) and Pascual Restrepo (of Boston University), published in the American Economic Review in 2018, found that about 60% of the growth in net new jobs in the US between 1980 and 2015 (an increase of 52 million, from 90 million in 1980 to 142 million in 2015) were in occupations where the specific title of the job (as defined in surveys carried out by the Census Bureau) did not even exist in 1980.  And there was a similar share of those with new job titles over the shorter periods of 1990 to 2015 or 2000 to 2015.  There is no reason not to expect this to continue going forward.  Most new jobs are likely to be in positions that are not even defined at this point.

C.  What Would the Candidates Do?

I will not comment on all the answers provided by the candidates (some of which were indecipherable), but just a few.

Bernie Sanders provided perhaps the best response by saying there is much that needs to be done, requiring millions of workers, and if government were to proceed with the programs needed, there would be plenty of jobs.  He cited specifically the need to rebuild our infrastructure (which he rightly noted is collapsing, and where I would add is an embarrassment to anyone who has seen the infrastructure in other developed economies).  He said 15 million workers would be required for that.  He also cited the Green New Deal (requiring 20 million workers), as well as needs for childcare, for education, for medicine, and in other areas.

There certainly are such needs.  Whether we can organize and pay for such programs is of course critical and would need to be addressed.  But if they can be, there will certainly be millions of workers required.

Sanders was also asked by the moderator specifically about his federal jobs guarantee proposal (and indeed the jobs topic was introduced this way).  But such a policy proposal is more problematic, and separate from the issue of whether the economy will need so many workers.  It is not clear how such a jobs guarantee, provided by the federal government, would work.  The Sanders campaign website provides almost no detail.  But a number of questions need to be addressed.  To start, would such a program be viewed as a temporary backstop for a worker, to be used when he or she cannot find another reasonable job at a wage they would accept, or something permanent?  If permanent, one is really talking more of an expanded public sector, and that does not seem to be the intention of a jobs guarantee program.  But if a backstop, how would the wage be set?  If too high, no workers would want to leave and take a different job, and the program would not be a backstop.  And would all workers in such a program be paid the same, or different based on their skills?  Presumably one would pay an engineer working on the design of infrastructure projects more than someone with just a high school degree.  But how would these be determined?  Also, with a job guarantee, can someone be fired?  Suppose they often do not show up for work?

So there are a number of issues to address, and the answers are not clear.  But more fundamentally, if there is not a shortage of jobs but rather of workers (keep in mind that the unemployment rate is now at a 50 year low), why does one need such a guarantee?  It might be warranted (on a temporary basis) during an economic downturn, when unemployment is high, but why now, when unemployment is low?  [October 28 update:  The initial version of this post had an additional statement here saying that the federal government already had “something close to a job guarantee”, as you could always join the Army.  However, as a reader pointed out, while that once may have been true, it no longer is.  So that sentence has been deleted.]

Andrew Yang responded next, arguing for his proposal of a universal basic income that would provide every adult in the country with a grant of $1,000 per month, no questions asked.  There are many issues with such a proposal, which I will address in a subsequent blog post, but would note here that his basic argument for such a universal grant follows from his assertion that jobs will be scarce due to automation.  He repeatedly asserted in the debate that we have now entered into what has been referred to as the “Fourth Industrial Revolution”, where automation will take over most jobs and millions will be forced out of work.

But as noted above, what we have seen in the US over the last 150 years (at least) is not that much different from what is now forecast for the next few decades.  Automation will reduce the number of workers needed to produce some given amount, and productivity per worker will rise.  And while this will be disruptive and lead to a good deal of job displacement (important issues that certainly need to be addressed), the pace of this in the coming decades is not anticipated to be much different from what the country has seen over the last 150 years.

A universal basic income is fundamentally a program of redistribution, and given the high and growing degree of inequality in the US, a program of redistribution might well be warranted.  I will discuss this is a separate blog post.  But such a program is not needed to provide income to workers who will be losing jobs to automation, as there will be jobs if we follow the right macro policies.  And $12,000 a year would not nearly compensate for a lost job anyway.

Elizabeth Warren’s response to the jobs question was different.  She argued that jobs have been lost not due to automation, but due to poor international trade policies.  She said:  “the data show that we have had a lot of problems with losing jobs, but the principal reason has been bad trade policy.”

Actually, this is simply not true, and the data do not support it.  There have been careful studies of the issue, but it is easy enough to see in the numbers.  For example, in an earlier post on this blog from 2016, I examined what the impact would have been on the motor vehicle sector if the US had moved to zero net imports in the sector (i.e. limiting car imports to what the US exports, which is not very much).  Employment in the sector would then have been flat, rather than decline by 17%, between the years 1967 and 2014.  But this impact would have been dwarfed by the impact of productivity gains.  The output of the motor vehicle (in real terms) was 4.5 times higher in 2014 than what it was in 1967.  If productivity had not grown, they would then have required 4.5 times as many workers.  But productivity did grow – by 5.4 times.  Hence the number of workers needed to produce the higher output actually went down by the 17% observed.  Banning imports would have had almost no effect relative to this.

D.  Summary and Conclusion

Automation is important, but is nothing new.  The Luddites destroyed factory machinery in the early 1800s in England due to a belief that the machines were taking away their jobs and that they would then be left with no prospects.  And data for the US that goes back to at least 1870 shows such job “destroying” processes have long been underway.  They have not accelerated now.  Indeed, over the past decade the pace has slowed (i.e. less job “destruction”).  But it is too soon to tell whether this deceleration is similar to fluctuations seen in the past, where there were occasional deviations but then always a return to the long-term path.

Looking forward, careful studies such as those carried out by McKinsey have estimated how many jobs may be exposed to automation (using technologies that we know already to be technically feasible).  While they emphasize that any such forecasts are subject to a great deal of uncertainty, McKinsey’s midpoint scenario estimates that perhaps 23% of jobs may be substituted away by automation between 2016 and 2030.  If so, such a pace (of 1.9% a year) would be similar to what productivity growth has been historically in the US.  There is nothing new here.

But while nothing new, that does not mean it should be ignored.  It will lead, just as it has in the past, to job displacement and disruption.  There is plenty of scope for government to assist workers in finding appropriate new jobs, and in obtaining training for them, but the US has historically never done this all that well.  Countries such as Germany have been far better at addressing such needs.

The candidate responses did not, however, address this (other than Andrew Yang saying government supported training programs in the US have not been effective).  While Bernie Sanders correctly noted there is no shortage of needs for which workers will be required, he has also proposed a jobs guarantee to be provided by the federal government.  Such a guarantee would be more problematic, with many questions not yet answered.  But it is also not clear why it would be needed in current circumstances anyway (with an economy at full employment).

Andrew Yang argued the opposite:  That the economy is facing a structural problem that will lead to mass unemployment due to automation, with a Fourth Industrial Revolution now underway that is unprecedented in US history.  But the figures show this not to be the case, with forecast prospects similar to what the US has faced in the past.  Thus the basis for his argument that we now need to do something fundamentally different (a universal basic income of $1,000 a month for every adult) falls away.  And I will address the $1,000 a month itself in a separate blog post.

Finally, Elizabeth Warren asserted that the problem stems primarily from poor international trade policy.  If we just had better trade policy, she said, there would be no jobs problem.  But this is also not borne out by the data.  Increased imports, even in the motor vehicle sector (which has long been viewed as one of the most exposed sectors to international trade), explains only a small fraction of why there are fewer workers needed in that sector now than was the case 50 years ago.  By far the more important reason is that workers in the sector are now far more productive.