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Home Publications Blogs Beat the Press Robert Samuelson Says It's Schools vs. Banks

Robert Samuelson Says It's Schools vs. Banks

Sunday, 04 August 2013 22:01

Sorry, I misread the piece, it was "schools vs. nursing homes." In a 35-year period in which we have seen the most massive upward redistribution of income in the history of the world, Robert Samuelson tells us that the only way that we can pay for our kids' education is by breaking contractual obligations to public sector workers and cutting Social Security and Medicare. Yeah, where else could we possibly find money?

The starting point here is the bankruptcy of Detroit, which Samuelson tells us is an omen of things to come. In the case of Detroit, Samuelson wants the government to renege on its pension obligations to workers. This is striking because pension payments are a contractual obligation; they are part of workers' wages. Samuelson tells readers that the government has little choice in this situation, it is either cutting schools or breaking contracts with workers.

There are in fact many other contracts that the government could break if it is going to follow this path. It could not pay contractors for work they done for the government, it could retake patent or copyrights it had granted (imagine the benefits from taking back some of the patents issued to Apple), it could even retake land which might have been sold off for a small fraction of its current value.

Economists generally consider it bad policy to break contractual obligations, not just as a moral issue, but because it undermines incentives. If people cannot count on contracts being respected, then they will not value them in the same way and a contractual commitment will not provide as much motivation as in a society in which contracts are honored.

Samuelson doesn't seem to take this effect into account. He apparently assumes that breaking contracts with workers has little consequence, both in the sense that it will still be possible to find workers even if they cannot count on receiving the pay for which they contracted, and also that breaking contracts with workers will not have any spillover effect in making it more likely that other contracts will also be broken.

The other parts of Samuelson's piece are even more bizarre. Rather than seeing a future in which budgets look increasingly constrained, the recent slowing of health care costs suggests the opposite. In fact, the sharp slowdown in projected health care cost growth has reduced CBO projections of Medicare and Medicaid spending in 2023 from 7.7 percent of GDP (Table 1) to just 5.7 percent of GDP in the most recent Budget and Economic Outlook. This reduction in spending would be roughly $320 billion a year in the current economy or nearly $4 trillion over the 10-year budget window.

Of course there are many ways that the government could raise revenue without cutting Social Security and Medicare benefits. For example, a financial speculation tax on trades of stock, derivatives and other assets could raise close to $2 trillion over the next decade with most of the burden born by Goldman Sachs, Citigroup and other financial firms. There are enormous potential savings to the government and the economy as a whole from opening up the health care industry to free trade. The revised GDP data show that after-tax corporate profits in the last three years have been far higher than at any point in the post-war era, suggesting that the government could also raise revenue with a well-designed corporate tax reform. In fact, recent polling data from the National Academy of Social Insurance indicated that most people would be willing to pay higher payroll taxes rather than seeing Social Security cut. 

In short, the trade-off between meeting obligations to seniors and ensuring that our children receive a decent education is entirely an invention of Robert Samuelson. There is no economic reason that both cannot be easily met. The only problem is the political opposition of special interests, like Wall Street banks, health insurance companies and highly paid medical specialists, and high level corporate executives who rip off both their companies and taxpayers.

Samuelson's trade-off story is especially ironic since it comes at a time when the Congressional Budget Office estimates that the economy's output is roughly 6 percent (@ $1 trillion a year) below its potential. This means that if the demand were there (i.e. we spent the money necessary to support both our seniors and our children) then output and employment will increase. While CBO projects that this demand gap will gradually be eliminated over the course of the decade, at the moment our problem is too little spending, not too much.

The squeeze that cities like Detroit now face is entirely the result of political decisions to deny them resources. It is also the result of really bad economic policy over the last  decades in which we allowed an over-valued dollar to create large trade deficits and then filled the gap in demand, first with a stock bubble in the 1990s and then with a housing bubble in the last decade. The moral of that story is that we probably need economic policy that is designed by people who may not be as smart as Larry Summers, but who have a better understanding of the economy.

Comments (9)Add Comment
Who Knew? The Opportunity Cost of One School is a Nursing Home
written by Last Mover, August 05, 2013 6:16
“We live in a world of finite resources,” says Rhode Island Treasurer Gina Raimondo, a Democrat who successfully promoted an overhaul of the state’s pensions.

Robert Samuelson discovers scarcity and delivers the message with tough love. Wake up America. There's not enough to go around in a free lunch society. Something has to give and it ain't going to be the 1% free lunchers is it.

No sireee. The Detroit phase of scarcity and tough choice has arrived America. The time has come when stupid liberals can no longer avoid the debt monster that devours all of us on their behalf.

It's time to pay the Pied Piper America. Line up your children and parents in the same room and make those tough decisions now. Who gets to stay in school? Who gets to stay in a nursing home? Who gets neither to make room for the rest?

To be or not to be in a school or nursing home. That is the question America. If you don't answer it, someone will answer it for you. Someone from the 99% tax and spend takers who are bringing the country to its knees.

Act now. Save the 1% makers to keep the trickle of schools and nursing homes flowing down on loved ones selected to survive. For the rest who couldn't make it in a land of scarcity full of valuable idle resources, salute them daily for their sacrifice.

Co-Director, Center for Policy Analysis on Trade and Health
written by Ellen Shaffer, August 05, 2013 6:20
Dear Dean,
Admiring as I do your invaluable and articulate analysis of macro economic policy, I implore you to resist the temptation to continue reprinting references to your hastily co-authored piece from 2011 recommending free trade in health care as a solution to the U.S.' own woes. First, trade agreements set out to achieve corporate objectives, and to undermine rather than enhance public sector authority or programs, as I can assure you based on my work at the Center for Policy Analysis looking closely at both trade and health regimes; this view is shared by Deborah James of OWINFS and Robert Weissman and Lori Wallach of Public Citizen, to name just a few in the U.S.
Regarding the related proposals: 1. Patients go overseas for major medical procedures: This works great. Unless you are sick. 2. Import doctors. Richer countries have been importing doctors, and nurses, for decades, destabilizing health care systems abroad and leaving untouched inequities in the importing countries. Of course, at present, importing an economist e.g. to head up the Fed could seem an appealing proposal, but we probably just need to try harder at home. With great respect, Ellen
The trade deals have been made that is not a law of nature
written by Dean, August 05, 2013 8:16

I appreciate your comments and I agree with the history, trade deals have been crafted to push corporate interests. However that is not an inherent feature of trade.
I cannot see any downside in saying that we should push features of trade that would benefit the vast majority of the population. For the record, they have zero argument against this -- they can just say that they are not going to do it.

In terms of medical travel, yes it is hard to do if you're sick, but why would not want healthy people to have this option? As far as poor countries being hurt by medical professionals going to rich countries, this is completely true. If we formalized the process we could also institute some mechanism for compensating the poor countries so that they can train more professionals. As it is now, they get nothing and as a practical matter, you are not going to be able to completely block the flow of medical professionals from developing countries in any case.
We are not poor
written by Jennifer, August 05, 2013 8:21
It is astounding in an article of that length there was no mention of increased revenue. Everybody knows corporations have more money than ever, the idea that that we have "finite resources" (financial anyway) is ridiculous.
written by Eric377, August 05, 2013 11:31
Who denied which specific resources to the city of Detroit and what is the basis of thinking that those resources were obligated to Detroit? Name names, please and try to do better than something like national Republicans denied federal revenues to cities.
The Sanctiy of Contracts
written by Aaron, August 05, 2013 6:00
I don't recall whether Samuelson specifically endorsed the "sanctity of contracts" argument espoused by those who decreed that the AIG employees who broke their company and helped tank the economy had to be paid every penny of the "retention bonuses" they "negotiated" right before the taxpayer ended up on the hook to pay their salaries. But I certainly don't recall his arguing that those contracts had to take a back seat to the greater good of the taxpaying public.

Samuelson's earlier comments about Detroit pensions and their relationship to the city's bankruptcy demonstrated how little he knows about Detroit and the causes of its financial crisis. The fact that he's still carrying on about those pensions, arguably implying that they're the leading factor in the city's bankruptcy, suggests that he doesn't care - he's pushing his ideological argument and isn't about to let tiny little things like facts get in the way.
We should import foreign health policies
written by Ellen Shaffer, August 06, 2013 9:11
Dean, a few points:

It is one thing to point to the tremendous advantages of just about any other country's health care system over the U.S.'; another (and a real abrogation of our responsibility as as a nation) to palm off our externalities on other countries.

Point by point: Trade in itself is not necessarily a mechanism for corporate advantage over the rights and interests of governments, but modern era trade agreements certainly are (starting with Bretton Woods, and accelerating with the 1980s Uruguay round), and decidedly so the more recent agreements addressing services like health care. Campaigners have explicitly fought, with considerable success, to compel our governments not to make commitments to trade rules through GATS and bilateral/regional agreements for vital human services like health care and water supply.

Health care tourism: It is already a solution for some. However, adopting this as a policy magnifies the significant negative consequences for exporting and importing countries. The privileged in the U.S. get to flee for bargain-cost health care services in, say, India, relieving pressure on the U.S. to fix our system. The vast majority of Americans who can't afford surgery are in no financial position to hop a plane for a procedure. Meanwhile, the inflow of $ for specialty care already induces the Indian health care system to distort the supply of high-tech hospitals and surgi-centers, to the great detriment of population health, which cries out for more primary care.

Importing health professionals: Maybe a more familiar argument is the long-standing fight over H1-B visas for high tech engineers: while immigration generally is a great benefit for many reasons, it is the wrong solution - and certainly not a progressive one - for papering over glaring failures of our own system. Can we really not figure out how to educate Americans as engineers? Do employers prefer foreigners because they are more easily underpaid and otherwise exploited? In the case of health care, there just aren't enough workers abroad to serve the vast U.S. population, and our imminent need for long-term care for our aging population demands policy solutions. We already import virtually the entire population of nurses from the Phillippines, which bears the cost of educating them; in this case, it is a deliberate policy, and the pay-off is the remittances the nurses send back home. Not a great comfort to Filipinos who need health care at home, or the nurses themselves who would generally prefer to be able to work at home.. English-speaking countries/regions like South Africa, the Caribbean, and Ireland periodically find their nursing supply decimated by foreign recruitment. The health care migration industry is too often characterized by the underpayment and exploitation of foreign workers. Standards for national ethical conduct, while very important, are too often honored in the breach. Finally, the issue of cultural competence: communication between patients and health care providers, complicated in the best of circumstances, is additionally challenging when the provider is foreign, and may have limited language fluency. To be sure, talented individuals bridge these gaps; and it is certainly true that many highly-trained health professionals who immigrate to the U.S. for other reasons too often are denied the license to practice here, and California has had a great program to enable licensing for these workers, who are especially effective in immigrant communities. But: the problem with the U.S. health care system is that we train too many specialists, pay them too much, and provide inadequate incentives for primary care. The Affordable Care Act begins to point to solutions for this fundamental distortion. That is where we need to continue to concentrate.
As mentioned above about corporate profits . . .
written by Troy, August 07, 2013 2:05
health care trade
written by Dean, August 08, 2013 7:27

I don't know what the specific points pursued by that campaigners you cite, but if they wanted to make it more difficult for people in the U.S. to get cheaper health care elsewhere, then their efforts enriched doctors, hospitals and drug companies. Those are not progressive goals in my book.

On medical travel, there are enormous potential savings for large numbers of people by getting major procedures done elsewhere. The vast majority of people in the U.S. do have insurance. The point is to make it so the insurance company and the patient can easily split the savings. The potential gains are enormous. And, this can be done in a way that improves the health system for people in India as well -- just tax the trade. (Countries that export food don't have starving populations -- it's the same principle.)

I can see zero argument for not wanting educated foreign immigrants. Again, they will come to the U.S. in any case. But we can design a system where the home countries get compensated unlike the situation we have now, where they don't.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.