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LARRY SUMMERS EXPLAINS IT ALL.
Most of Obama's cabinets appointment will be listening to Barack Obama. They'll offer input, sure, but their fundamental role is to carry out the president's agenda. Larry Summers role will be rather the opposite. Barack Obama will be listening to him. His role is to help the president shape his agenda. So it's useful to read David Leonhardt's guide to What Larry Summers Thinks About Things.
There's some interesting bits about Summers newfound concern on inequality. According to Leonhardt, Summers favorite argument is that "to undo the rise in income inequality since the late ’70s, every household in the top 1 percent of the distribution, which makes $1.7 million on average, would need to write a check for $800,000. This money could then be pooled and used to send out a $10,000 check to every household in the bottom 80 percent of the distribution, those making less than $120,000. Only then would the country be as economically equal as it was three decades ago."
Interestingly, this basically eviscerates the idea you frequently hear from conservatives that you can't make up the rise in inequality by simply taxing the very rich. As it turns out, you most certainly can. But as you might imagine, I'm going to focus on Summers' opinions on health care. Leonhardt says that Summers believes "the logical next step for health care [is] an expansion of employer-based insurance (as Mr. Obama has proposed) — but in the end, the employer-based system [will] probably fall apart and the government [will] need to insure people."
In this, Summers isn't articulating a bold new vision: He's echoing the Democratic consensus. The Obama/Clinton/Edwards/Hacker/Baucus plans all do the same basic thing. With one hand, they spend some money to buttress the existing health care system and erect some new regulations to make it a gentler, more decent place. You do this because people are fundamentally scared of losing what they have right now, and reform needs to speak to their fears, not just the fears of budget and health care wonks.
With the other hand, they create a parallel health care system where the government acts as a health insurance superstore: It has a buyer who chooses products based on quality and price, offers an array of competing private and public options, and lets individuals and businesses alike compare coverage options and purchase the insurance that works best for them. At the beginning, this alternative system is fairly small. But the idea is that over time it grows to be quite large, as employers cannot continually absorb the cost of health care and they cannot squeeze out the efficiencies that a government agency with huge market share can demand. In essence, the plan deals with the fears of the public in the short-term but sets up the incentives so that the system moves towards the ideal of the experts in the long-term, which means moving away from employer-based health care.
COMMENTS (9)
Can we call this the "stuff the beast" approach to health care?
Posted by: AWT | November 26, 2008 1:36 PM
Interestingly, this basically eviscerates the idea you frequently hear from conservatives that you can't make up the rise in inequality by simply taxing the very rich. As it turns out, you most certainly can.
How, exactly, does this eviscerate the conservative argument? All Summers is saying is if you could theoretically take half of the top 1% income and redistribute it, this would eliminate the recent growth in inequality. I and every conservative agree (to deny that would be to deny the principles of basic arithmetic). He, however, never says this would be a desirable or even possible outcome.
Explicit redistributive tax policy will always have a hard time reducing inequality because they distort agents' behaviour. Higher taxes on investments for instance discourage the risk taking behaviour needed to create companies and produce wealth.
If you don't believe me just ask Romer on the costs of taxation.
Posted by: gordon gekko | November 26, 2008 2:17 PM
I will never understand why healthcare wonks don't instinctively divide the world of health insurance into one first layer with a few new rules that employers and anyone who damn well pleases can offer, with its cost now completely predictable and far lower because there is a ceiling on how much can ever be demanded from it in any one case (and because it is so predictable), and an umbrella layer of Federal insurance above that -- that we all share in because anyone of us could need it someday or tomorrow -- that covers any amount above that, whether it amounts to an extra $10,000 or an extra $10 billion in provider charges? The cost saving from such a rationalized system simply due to providers knowing that everyone is covered by something; knowing that coverage isn't going to be denied after the fact; knowing exactly where to go to get paid; knowing about when they will get paid seems, and insurers knowing they have to pay, and knowing there is a solid limit to what they will have to pay, seem enormous. No more searching for and fighting over pre-existing conditions, minimal need for coordination of benefits, less bill-padding to cover delinquency and late-pay risk, fewer accumulating finance charges for late pays (and that go into calculations of the aggregate national healthcare cost). What am I missing that nobody seems to acknowldge such a possibility? We can set the floor for the umbrella layer wherever we can do it politically. We can improve it later, too, when the money from economic recovery is rolling in.
Posted by: urban legend | November 26, 2008 2:58 PM
gordon gekko writes, Higher taxes on investments for instance discourage the risk taking behavior needed to create companies and produce wealth.
Bush made the same argument for his tax cuts. Unfortunately, the business cycle his low-tax-on-the-rich plan produced saw the LOWEST level of investment since WWII. And this report was done in August! Some of the worst hits to economy happened after that.
http://www.epi.org/content.cfm/bp214
It is unclear what you mean by "higher" taxes. For example, if taxes on investments are 0.01% in 50 years, will conservatives still be decrying "higher" taxes?
Posted by: goDems | November 26, 2008 3:12 PM
What am I missing that nobody seems to acknowldge such a possibility?
Read Obama's plan. He has a less robust option of exactly what you mention (although I'm not sure the benefits would be as broad as you suggest), but for some reason, that didn't get any coverage, either.
Posted by: wisewon | November 26, 2008 3:19 PM
I don't resent Summers getting the job, that's the way the world works... but why all the sucking up and pretending he's so smart. Inequality has been a problem since before he got into government... ditto regulation in the financial industry...
When he had the power, he spent his time ignoring those issues and trashing people who pointed them out as important...
Posted by: Meh | November 26, 2008 3:27 PM
goDems,
Declining investments are normal over time (see Solow Growth model) but what I don't get is why you feel an investment tax cut would somehow be to blame for this.
To clarify my previous point, I am not opposed to raising taxes. As Romer, an Obama girl, makes clear the problem is higher overall taxes tend to reduce output. Historically, a 1% GDP increase in exogenous taxes cause a 3% GDP decline.
So, you must either argue a tax rise is worth these costs or the distortionary tax effect going forward will be less. To get back to Ezra's point a direct redistribution tax policy (highly distortionary), during normal conditions, does not seem to meet this criteria. Not that other egalitarian policies like building better schools or infrastructure do not.
And in 50 years if investment taxes are .01%, conservatives should make their case for further reductions. If it is the optimal method of increasing output and overall welfare then by all means cut it.
Posted by: gordon gekko | November 26, 2008 3:46 PM
Obama = change.
Posted by: Anonymous | November 26, 2008 4:19 PM
As usual, the moderate consensus Democratic view is to do something that can't work and hope for the best.
Posted by: SqueakyRat | November 26, 2008 7:51 PM