A Forward Looking Agenda for the Democrats

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Dean Baker
Challenge Magazine, February 2007

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The Democrats regained control of Congress in November partially as a result of the corruption and incompetence of the Republicans, but also in part due to promises to make things better for the average family. Their ability to stay in power will depend on their ability to make good on these promises. Two areas that are central to the economic security of average workers are health care reform and trade policy. The Democrats will have to put forward a clear progressive agenda in these areas if they expect to be taken seriously in future elections.

In the case of health care reform, the obvious place to start is by reforming the Medicare prescription drug benefit. The basic logic here is simple: the most efficient way to have provided the drug benefit would have been as an add-on to the existing Medicare program, with Medicare using its enormous marketing power to bargain down drug prices to the levels paid by the Veterans Administration or the Canadian government.

According to the Congressional Budget Office, the lower administrative costs of the Medicare system relative to private insurers would reduce the cost of the program by nearly 10 percent. The savings from negotiated drug prices would be even larger. The Veterans Administration (VA) and the Canadian government only pay 50-60 percent as much for drugs as the private insurers in the Medicare drug program. The potential savings from lower drug prices and administrative costs are so large that if Congress had allowed Medicare to directly offer its own drug plan, it would have been possible to eliminate the “doughnut hole” gap in coverage and still reduce the cost of the program to the government.

In the election, the leadership of the Congressional Democrats repeatedly promised that allowing Medicare to negotiate drug prices would be one of the first items on its agenda in the new Congress. It is important that the Democrats follow through on this commitment and reform the drug benefit to make it more efficient. Opinion polls consistently show that reforming the Medicare drug plan is hugely popular, so if the Democrats back away from their proposal it will not be because it lacks public support.

While reforming the drug benefit would be an important measure, both from the standpoint of beneficiaries and also for the purpose of saving government money, it is only the beginning. Rising health care costs are imposing an enormous burden on the nation’s economy. In the private sector, firms are increasingly requiring more cost-sharing from workers or leaving them uncovered altogether. In the public sector, rising health care costs are a serious strain on all levels of government. The projections that health care costs will continue to rise rapidly in the future are the basis for all the dire projections of multi-trillion dollar long-term budget deficits that conservatives try to blame on demographics. In short, it is essential that we get our health care costs under control.

Since every other wealthy country in the world has managed this trick (average per person health care spending in other wealthy countries is less than half as much as in the United States, and they all enjoy longer life-expectancies), we should be able to fix our health care system also. The obvious route to go would be to adopt a Canadian style universal Medicare system. It is not possible to overhaul the health care system with a near evenly divided Congress and a conservative Republican president, but the Democrats can try to push measures that set a reform process in motion.

At the top of this list would be allowing a Medicare buy-in system under which every person and employer in the country is able to buy into the Medicare system at a fee that would cover their expenses. This step would hugely increase the security of millions of workers by providing them access to a relatively low cost insurance plan independent of their employment. Also, since this measure would require no additional money from the government, it cannot be rejected on the grounds of costs. Members of Congress who are indebted to the insurance and pharmaceutical industries will undoubtedly oppose such a measure, but they would be hard-pressed to muster a serious argument. After all, allowing a Medicare buy-in doesn’t take any options away from anybody, it is simply giving people an additional choice.

It will be necessary to make some changes in the Medicare program to ensure that it is an attractive option for workers. This will require some additional funding for current beneficiaries, but this money can be obtained from reforming the drug benefit and eliminating the subsidies for private insurers that operate within the Medicare program.

The other major area in which the Democratic Congress can begin to make a difference is on trade policy. Many of the new members elected in November made trade an important issue in their campaigns. As a result, new bi-lateral trade agreements or another W.T.O. agreement will have a very difficult time passing in the new Congress. While blocking these new trade pacts may be desirable, most of the potential damage from trade has already been done. The huge influx of low-cost manufactured goods from the developing world has eliminated millions of manufacturing jobs in the United States. Since manufacturing has historically been a source of relatively well-paying jobs for less educated workers (those without college degrees), the loss of these manufacturing jobs has put downward pressure on the wages of the 70 percent of the workforce that lack a college degree.

This harm will not be easily reversed, but the process can be started. First, the United States must bring the dollar down to a sustainable level. The over-valued dollar has led to a trade deficit of more than $800 billion (approximately 6.1 percent of GDP). The trade deficit is more than twice as large as the budget deficit. A trade deficit of this magnitude imposes burdens on future generations in the same way as a budget deficit of the same size, with the additional caveat that the trade deficit also lowers the relative income of manufacturing workers and others who are directly or indirectly subjected to international competition as result of trade policy. The only way (other than a severe recession) to bring the trade deficit down is to bring the dollar down.

Many economists and pundits have implied that bringing the dollar down is a complex process that would require international negotiations and careful coordinated policy. While negotiations and coordinated policy might be desirable, reducing the value of the dollar is actually very simple. The Treasury needs to only make a commitment to having a lower valued dollar, setting targets against other currencies. For example, the Treasury can say that on a certain date it will begin buying Chinese yuan at a value of 17 cents per yuan (as opposed to China’s official peg of just over 12 cents per yuan). This sort of commitment would almost certainly lead to an increase in the price of the yuan against the dollar, if financial markets believed that the Treasury was prepared to follow through on this commitment.

The outcome of such clear pronouncements would likely be negotiations between the major financial powers and a coordinated effort to bring about an orderly decline in the dollar. But, the key step to set the process in motion is to be absolutely clear that a lower dollar is a policy goal that the government is determined to achieve. While Congress may not be able to force President Bush’s hand on this issue if he is determined to maintain an over-valued dollar, it can at least draw the lines clearly by passing resolutions in support of such a policy.

Finally, the Democratic Congress can confront the proponents of the current trade agenda by putting a more progressive agenda on the table. Trade agreements to date have been focused on subjecting less educated workers to international competition. All the same arguments on the gains from trade would apply to agreements that are intended to subject the most highly educated workers (e.g. doctors, lawyers, accountants, and economists) to international competition. The difference is that these agreements would have the effect of equalizing income and also the potential gains would be much larger. For example, the average earnings for doctors in the United States is over $200,000 a year (net of malpractice insurance). Doctors in Europe average less than half as much. If free trade could bring the salaries of doctors in the United States to European levels, it would save the country more than $80 billion a year in health care costs.

While some of the trade-related redistribution away from less educated workers has gone to higher profits, the biggest gains have been the most highly paid workers. In fact, while the trade deficit has soared over the last decade, the profit share of GDP has just now returned to the 1997 level, the profit peak of the last business cycle. This means that the entire redistribution away from ordinary workers over the last 9 years have gone to pay higher wages for high-end workers, not rising corporate profits.

The Democratic Congress will not be able to restructure U.S. trade policy, but it can put an alternative on the table. Laying out a trade policy that is oriented towards allowing foreign doctors, lawyers, and other highly paid professionals to compete in the U.S. market will expose the class bias in the current “free-trade” policy and will also make clear who are the real protectionists. (It is would be necessary to have a tax on the U.S. earnings of foreign trained professionals which would reimburse the home countries. This will prevent them from suffering from brain drain by losing their most highly educated workers.)

There is a limit to how much progress can be made as long as a conservative Republican remains in the White House and Congress is so narrowly divided, but there are important areas where the agenda can at least be set in the right direction. Health care and trade policy top this list.


Dean Baker is the co-director of the Center for Economic and Policy Research (CEPR). He is the author of The Conservative Nanny State: How the Wealthy Use the Government to Stay Rich and Get Richer (www.conservativenannystate.org). He also has a blog, "Beat the Press," where he discusses the media's coverage of economic issues. You can find it at the American Prospect's web site.