The State of the Union – And the Economy: Why We Need Health Care Reform Now

According to the headlines, 10 percent of Americans are unemployed. The truth is that closer to 17 percent of the population cannot find full-time work; this number includes workers who have become discouraged and have given up looking for work as well as those who have settled for part-time jobs because they cannot find the full-time employment that they need.

The situation is not going to change anytime soon. As Princeton economist Paul Krugman recently warned: “We are facing mass unemployment — unemployment that will blight the lives of millions of Americans for years to come.”

“Even if industrial production picks up, unemployment will continue to lag,” observed Goldman Sachs’ Abby Cohen, speaking at Barron’s Roundtable about a week ago. “The problem is far more than cyclical.” (You may remember Cohen as a bull during much of the ‘Nineties boom. By temperament, she is hardly a doomster, but when she looks at today’s economy, she is very concerned.)

Cohen is saying jobs are not going to suddenly appear with the next business cycle. Current levels of unemployment reflect deep structural problems that go back at least two decades.

  • For the past 25 years economic policy in this country has encouraged consumption rather than savings or investment. Shop until you drop! Buy a home –more home than you can afford!. Take out a variable rate mortgage, Fed chairman Alan Greenspan urged Americans. Ignore the fact that interest rates are at historic lows and can only go in one direction.
  • Instead of stimulating consumption, policy-makers should have focused on capital formation. And capital formation isn’t just building factories, observes international money-manager Marc Faber, another member of the Barron’s panel. “ It means investing in infrastructure, research and development, and education.”
  • When it comes to education, our workforce is no longer upwardly mobile. For the past 10 years, the level of education attainment hasn’t risen. It is no more likely now than it was 10 years ago for an American adult to have a university education—and for men it is less likely. This is in large part because tuition has spiraled, even at state universities.

According to a 2005 report on college affordability: “Increases in tuition grew about three times faster than increases in the income of middle- and low-income households during the 1990s.” . For low-income households, the percentage of their income needed to pay tuition was 56 percent in 2001-2002, up from 32 percent in 1981-1982 and 46 percent in 1991-1992.

The burden for middle-class households rose from 8 percent of income in 1981-1982 to 11 percent in 1991-1992 and 13 percent in 2001-2002.

At the same time Congress has shifted government funding for financial aid from need-based scholarships to loans—regardless of family income. This has helped more affluent families, but left low-income and many middle-income families locked out of academe.

Unless we invest in education–and human beings—more jobs will shift overseas. At the Barron’s Roundtable, one analyst observed: “In the past six months, whenever I have talked to a company, I asked the chief executive or chief financial officer what it would take to bring jobs here. They said, ‘You know, the workforce isn’t that good . . . I’m moving jobs out of the U.S.’” (Employers also complain about government regulation.)

Over the past ten years, the U.S. lost a third of its manufacturing jobs, and the losses continue. The technology world lost 20% of its jobs. Jobs continue to move to Asia because of the cost differential. China can produce good products for less.

Protectionism is not the answer; warns another Barron’s panelist, Fred Hickey the editor of the Hi-Tech Strategist: “I’m worried that the protectionist drums are getting louder here. The U.S. has imposed duties on Chinese steel and tires, and more than 50 antidumping actions are in process.” But China is not going to cave: “China spent $600 billion to build its manufacturing sector. It needs to continue to produce, and it needs an export market. So it is not so willing to give up its competitive advantage.”

Hickey is right: Like the U.S.—or any other country—China is going to do what is necessary to keep its own economy and society as stable as possible. China’s policy is to continue to be the world’s low-cost producer and keep its people employed. Beijing really doesn’t have much choice. In a country with such an enormous population, widespread unemployment could easily lead to anarchy.

  • As bubbles collapse, jobs have dried up in areas that once provided employment for many: construction, automobile manufacturing, retailing and Wall Street finance. As they watch their budgets pancake, state and local governments are no longer hiring.
  • Over the past 10 years, median household wages have barely kept up with inflation. Yet, Americans continued to borrow and buy—and now they’re up to their eyeballs in debt. One fourth of all homeowners with mortgages owe the bank more than their home is worth.

Many families are now trying to begin to pay off their debt. But this makes it more difficult for the economy to grow, explained another guest at Barron’s Roundtable, Felix Zulauf, owner of Zulauf Asset Management in Zug, Switzerland:“If the consumer saves 5% and invests it in stocks or bonds, the savings remain in circulation. However, if he pays down debt with that 5%, the money comes out of the economic system. That is what is happening, and it will be a drag on growth.

This structural setup could last another five years. The U.S. consumer has to lower his debt by at least $4 trillion.“The funny thing is, whenever the consumer wants to save and tries to do the right thing, the government and central bank come in and encourage spending,” by keeping a lid on interest rates, making it cheap to borrow.

  • Even if households don’t try to pay off debt, if we continue losing jobs, Americans won’t be able to consume as much as they have in the past and the rebound we are now enjoying in some sectors won’t be sustained.

In an effort to fuel consumption the Fed will no doubt continue to keep interest rates low—at least as long as it can. But this is hardly a long-term solution to our economic woes. As Zulauf points: “printing money doesn’t create a single job.”

(In theory, low interests rates might encourage employers to borrow and invest in their businesses by hiring more workers. But in the current economic climate, banks are wary of lending, and businesses are reluctant to borrow unless they know that there is an expanding market for their products and services.)

  • At some point, everyone agrees, the Fed will have to raise interest rates. Otherwise, foreign investors will stop buying our Treasuries. Treasuries are government IOUs and we depend on those investors and central banks to buy and hold our debt. But as our deficit grows they have less faith in the value of the dollar—and less reason to see our Treasuries as a “safe haven” investment. Thus, we will have to raise rates. This will make it harder for Americans to pay off variable rate mortgages, and it will be more difficult for businesses to invest.

Even worse, higher interest rates will make it that much more difficult for the U.S. government to pay off the heap of debt that it has accumulated in recent years.

  • Ultimately, “U.S. citizens will have to lower their expectations,” says Barron’s panelist Archie MacAllaster, Chairman of MacAllaster Pitfield MacKay. They will have to save more, as will the states and the federal government. Home prices are too high. General managers and coaches of football teams are paid $13 million, and there are other examples. Those figures will have to come down plenty. People are going to have to get used to it, and they will.” And MacAllaster is one of Barron’s most optimistic guests.

These are just some of the themes the Roundtable addressed. You will find Part 1 of the discussion which begins by focusing on the economy, here. (Later installments of the Roundtable concentrate on investment recommendations.) I have been reading Barron’s annual Roundtables for more than twenty years, and I have never seen the panelists paint such a bleak picture of the U.S. economy. But as they say, this is a structural problem that has been building for years. Too much easy money. Too much borrowing. Too much speculation driving stock prices and then real estate prices ever higher. Too much shopping for things that we really don’t really need: consumer goods, gadgets, bigger homes, bigger cars. And too little investment in the real wealth of the nation: infrastructure, human capital (education) and the environment.

I would add that the Roundtable participants were focusing primarily on what the economy looks like for the middle-class and upper-middle class.

What about the rest of the country?

Nearly One-Third of Americans Mired in Poverty

A new study from the Brookings Institution reveals that from 2000 to 2008, the number of poor people in the U.S. grew by 5.2 million, reaching nearly 40 million. That represented an increase of 15.4 percent in the poor population, which was more than twice the increase in the population as a whole during that period.

New York Times columnist Bob Herbert adds: “The study does not include data from 2009, when so many millions of families were just hammered by the recession. So the reality is worse than the Brookings figures would indicate.”

By 2008 Herbert reports, a startling 91.6 million people — more than 30 percent of the entire U.S. population — “were living below 200 percent of the federal poverty line, which is a meager $21,834 for a family of four.”

Nearly one-third of Americans sunk in poverty. Seventeen percent of workers were unable to find a full-time job. This is the state of the nation. I hope the President will be frank about this tomorrow night. He should acknowledge that this is the crisis he inherited, and that it took years to bring us to this low point. The problems will not be solved in a year, or two or three.

But it is clear that the government must begin to create jobs. In this economy, the private sector is not going to be able to produce the employment that we need.

Does this mean that we cannot afford health care reform? No, it means that we must go forward with the legislation, as quickly as possible.

This is not because health care reform will create millions of jobs. It’s likely to bring us more nurses and other professionals needed to staff the community clinics that the Senate bill calls for, and the legislation offers scholarships and loan forgiveness that will bring us more primary care physicians.

But if we’re going to cut health care spending, some jobs will disappear. We don’t need more specialists. In some areas, we have too many. And assuming that Medicare follows through on cutting fees for Cat-scans and other diagnostic tests, we’re not going to need as many workers manufacturing pricey diagnostic equipment. Hospital construction will slow down. In most parts of the country, we don’t need more beds, and we definitely don’t need more atriums, marbled lobbies and waterfalls.

The Senate Bill Will Help Bring Down the Deficit

Nevertheless, as Obama campaign manager David Plouffe pointed out in Sunday’s Washington Post: “our nation’s long-term fiscal health depends on passing meaningful health insurance reform package without delay.”

In the past I have quoted White House budget director Peter Orszag explaining that spiraling health care spending poses the single greatest threat to the U.S. economy. Ultimately, that spending adds to the deficit while crowding out investment in other areas where we need to create jobs that would add to the wealth of the nation —infrastructure, education, alternative sources of energy, the environment. By contrast, sinking more dollars into unnecessary tests and over-priced medications is not going to help our economy grow.

If we continue to let the nation’s health care bill skyrocket, the rest of the world will question the soundness of our economy, and cast a cold eye on the dollar. Central banks already are buying gold because they are losing faith in paper currencies.

Plouffe acknowledges that when it comes to passing the health care legislation : “the short-term politics are bad. [The Senate bill] is a good plan that’s become a demonized caricature.

But politically speaking, if we do not pass it, the GOP will continue attacking the plan as if we did anyway, and voters will have no ability to measure its upside. If we do pass it, dozens of protections and benefits take effect this year. Parents won’t have to worry their children will be denied coverage just because they have a preexisting condition. Workers won’t have to worry that their coverage will be dropped because they get sick. Seniors will feel relief from prescription costs. Only if the plan becomes law will the American people see that all the scary things Sarah Palin and others have predicted—such as the so-called death panels—were baseless. We own the bill and the health-care votes.”

I agree. The Senate bill offers a good plan that has been caricatured by people who in many cases, haven’t read it. The bill has fallen victim to media spin. A blizzard of disinformation has created great confusion. No wonder the public doesn’t know what’s in the legislation.

A recent Kaiser Family Foundation tracking poll reveals how conservatives have misled the public on the question of whether the legislation would control costs. The Congressional Budget Office (CBO) scoring suggests that both the House and Senate proposal would result in a reduction in the federal budget deficit—and, as I have written in the past, the CBO is notorious for under-estimating the savings that can come from health care reforms. Yet Kaiser reports that “most Americans – including large majorities of Republicans and independents – believe that the proposed legislation would increase the deficit. This may reflect both a lack of widespread awareness of the official estimates and a reaction to the fact that opponents have publicly claimed the proposed legislation will increase the deficit.”Thanks to deliberate lies spread within the media, 60 percent of those polled believed that the legislation provides federal money to cover care for illegal immigrants. Not True. Nearly half didn’t realize that the bill limits payments to some Medicare providers. (Here the goal is to remove waste and lift the quality of care. For example, going forward Medicare no longer plans to pay for an excessive number of hospital re-admissions which could have been prevented if the hospital made sure that discharged patients would be receiving the follow-up-care they need.)

In a recent comment, HealthBeat reader Fred Moolten, M.D., summed up some of the other ways that the bill reins in inflation: “the proposed reforms would begin to curtail rising healthcare costs outside of the federal arena as well—through primary care incentives, emphasis on appropriately chosen preventive medicine practices, comparative effectiveness research, controls on excess expenditures by hospitals and other providers, and exploration of alternatives to fee for service as a payment mechanism. These measures would serve only as a beginning and would need to be expanded, but they are an important beginning.” (Hat-tip to Fred who has had the time and stamina to pore over and analyze the bill.)

Finally, as I explain here, the Kaiser study also shows how little many voters know about the benefits the plan offers. A startling number were unaware, for example, that the legislation provides subsidies to those who cannot afford insurance. Fifty-two percent had no idea that the bill offers tax credits to small businesses that will help them hire and provide benefits to employees. Most didn’t know that, under the legislation, insurers cannot charge women more.

Read Kaiser’s tracking poll here –It offers a quick checklist of provisions in the bill that you, too, may not know about.

Kaiser reports that when voters are given information about what is actually in the plan, they like it. And that information is widely available on the blogosphere and elsewhere. No one is hiding anything. But the legislation is filled with details, and the benefits are packed into paragraphs that you can’t easily skim. The bill protects patients and their families in so many ways that you can’t spell out the savings in a sound-bite.

But you can make negative statements such as “Americans will never be able to afford it” or “There are no cost controls in the bill” in less than a second. And voters who don’t have time to read the legislation will believe you.

As a HealthBeat reader recently pointed out, lies tend to spread more quickly than the truth.That is because the truth is often quite complicated. Lies can be as simple as you want to make them.

Maggie Mahar is an award winning journalist and author. A frequent contributor to THCB, her work has appeared in the New York Times, Barron’s and Institutional Investor. She is the author of “Money-Driven Medicine: The Real Reason Why Healthcare Costs So Much,” an examination of the economic forces driving the health care system. A
fellow at the Century Foundation, Maggie is also the author the increasingly influential HealthBeat blog, one of our favorite health care reads, where this piece first appeared.