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Article Artículo

Economic Growth

Government

Fixing our Fiscal Health: Budget Deficits and Health Care Costs

Unless you live in a cave, you’ve no doubt heard about the impending “fiscal cliff” – which is actually much more slope than cliff – and the need for major steps to fix our nation’s financial future. While the fiscal showdown is overhyped, the long-term deficits projections aren’t. So does this mean we’ll need to give Big Bird a pink slip? No. Cutting funding for PBS, Pell Grants, and Acorn doesn’t make a dent in future deficits. Neither do bigger changes, like ending the war in Afghanistan or ending the Bush tax cuts for high earners. The reason for this is that projections of future deficits are driven almost entirely by health care costs. 

Next to other industrialized nations, the U.S. healthcare system is wildly inefficient. Despite only average results, the U.S. spends more per person – in many cases twice as much – on health care than any other OECD country. Between Medicare, Medicaid, and a few smaller programs, the government buys about half of all health care, and therefore savings from lower costs would have a dramatic effect on deficits.  

The graph below shows just how dramatic. The graph plots projections for US publicly held debt as a percentage of GDP, and what those projections would look like if the U.S. healthcare system had the same cost per person as Australia, Canada, or Germany. (The baseline projections come from the Congressional Budget Office’s relatively pessimistic alternative fiscal scenario, and projections include interest payments.) 

hc-spending-fig-1

If the US had the health care costs of Australia, we’d see public debt in 2022 fall from a projected 90 percent of GDP to a much more manageable 60 percent. Having the same costs as Canada and Germany would make that number only slightly higher, at around 64 percent of GDP. 

CEPR and Mark Azic / October 25, 2012

Article Artículo

Income Inequality and Globalization: The Protectionists Rule!

David Leonhardt tells readers today that income inequality is primarily due to technology and globalization. It is possible to tell the story of technology if you are prepared to jump over a few hoops. (The big problem is that economists confidently told us in the 90s that technology favored people with college degrees. In the last decade it seems to only favor people with advanced degrees. If that sounds like a "make it up as you go along" story, welcome to the state of modern economics.)

However, the globalization story requires even more hand-waving. The simple story is that we have hundreds of millions of people in developing countries who are prepared to work for a fraction of the wages of our manufacturing workers. This has caused us to lose millions of manufacturing jobs, depressing the wages of both the remaining workers in the sector and the workers in other sectors who must compete with displaced manufacturing workers.

This is undoubtedly a true story. However the part of globalization that economists seem to have difficulty understanding is that there are also tens of millions of potentially highly educated workers in the developing world who are willing to work for much lower pay than their counterparts in the United States. For example, while the average doctor in the United States gets close to $250,000 a year, there would be no shortage of doctors in India, Mexico, China and elsewhere who would be happy to train to U.S. standards and work for half this wage. The same would be true of lawyers, dentists, economists and all the other highly paid professions.

The reason that huge numbers of foreign professionals have not come to the United States and depressed the wages of the highest earning workers in the United States is that we have a large number of professional and legal barriers that make it difficult for foreign professionals to work in the United States.

(Note the use of the word "difficult," rather than "impossible." Economists often believe that because they know an Indian economist who teaches at a major university they have proven that there are no obstacles to foreign professionals working in the United States. This is sometimes referred to as the "Mexican avocado" theory of international trade. According to this theory, if I can buy an avocado grown in Mexico at my local supermarket I have proven that there are no barriers to imports of agricultural goods in the United States. This is of course a ridiculous view, but one that nonetheless usually arises in any discussion of professional barriers.)

Dean Baker / October 24, 2012

Article Artículo

China and Protectionism: It Ain't Quite as Simple as They Tell Us

Eduardo Porter has an interesting column on Governor Romney's threat to declare China a "currency manipulator" on day 1 of his administration. He makes the point that the real value of China's currency has risen substantially against the dollar in the last two years. He also notes that China is not the only country that deliberately props up the dollar relative to its own currency. Most importantly, he points out (as I have frequently noted) that declaring China a currency manipulator does nothing by itself. Inevitably the outcome of the currency issue would depend on a process of negotiation with China.

This is all true. However in the process of making his case, Porter takes advantage of a study by Gary Hufbauer on the cost of U.S. tariffs on imports of tires from China, which is more than a little suspect. Hufabauer, who is famous for predicting that NAFTA would create 250,000 jobs by increasing the U.S. trade surplus with Mexico, calculated the country paid over $900,000 for each job it saved in the tire industry as a result of the tariff. Most of this money was paid to other countries, since most tires are imported. He concluded that the net effect of higher tire prices was a modest loss of jobs, since consumers had less money to spend on other items. In addition, China retaliated by imposing barriers on imports of chicken parts that Hufbauer calculates reduced exports by $1 billion.

There are several aspects to Hufbauer's analysis that are very questionable. The most important is that he ignored the timing of the tariff. It was imposed in September of 2009, just as the car industry was recovering from its recession lows. Hufbauer attributes all the rise in tire prices in the fall of 2009 to the tariff. However, car prices more generally also rose in the fall of 2009 in response to the pick-up in demand. At the time the tariff was imposed in September of 2009 car prices were actually somewhat lower than their level of two years earlier. (They have risen by about 7 percent in total since the time the tariff was imposed.) Hufabuer makes no effort to control for the uptick in car demand in assessing the impact of the tariff on tire prices, which means he has almost certainly overstated its impact.

Hufbauer also makes a point of noting the open retaliation by China -- its tariffs on imports of chicken parts -- without taking into account the possibility that the threat of tariffs affected China' behavior in other areas. It is possible that China has limited the subsidies it has applied to other export industries in response to the tariff on tires. This would have reduced their exports to the United States and increased employment in other industries. China would of course not advertise the fact that it was responding to a tariff by adjusting its behavior in other areas.

Whether it did or not would change its behavior in other areas would require a close examination of China's conduct. Hufbauer simply assumed that there was no response to the tariff other than the public retaliation on imports on chicken parts.

Dean Baker / October 24, 2012

Article Artículo

Sae-A’s “Risky” Play in Haiti

As both Clintons and a coterie of celebrities and foreign investors flew into northern Haiti yesterday, some took the opportunity to praise Sae-A, the giant Korean garment manufacturer that opened a factory in the new Caracol industrial park. Hillary Clinton, for one, told reporters:

And I too want to thank Sae-A, because Sae-A took a decision that was something of a risk, never having worked in Haiti before, after a tremendous natural disaster that was so devastating. But they brought their expertise and they brought their commitment. And Chairman Kim, we thank you for everything that you and the leadership of Sae-A is doing.

But Sae-A’s decision to set up shop in Caracol could hardly be described as risky, as almost the entire cost of the project was borne by other actors. The New York Times, in an in-depth July investigation into the new park, reported that the land was provided free of charge by the Haitian government, the physical infrastructure was provided by the Inter-American Development Bank for around $100 million, and the United States government chipped in $124 million for  infrastructure, energy and housing services. The industrial park tenants are also granted significant tax-exemptions, and will only have to pay docking fees, which are estimated to be just $17,500 a year, hardly a boon to Haiti’s coffers. Sae-A, which reported over $1.1 billion in export business last year, committed to spending just $39.2 million on the factory. 

Jake Johnston / October 23, 2012

Article Artículo

Cholera: Two Years On, and the UN Has Yet to Take Responsibility
It has now been over two years since the first cholera death in Haiti after more than a century. Over 7,500 people in Haiti have died from the disease so far, and over 600,000 have been sickened. While there has been a drop in cholera cases in 2012 over 2

CEPR / October 22, 2012