Photo above: The Hertford Bridge in Oxford, England. Used by Permission. © Tom Ley 01302 782837

Thursday, December 24, 2009

Socialist Bread and Capitalist Bread by Dr. Douglas O. Walker

In a recently published article, Kevin A. Hassett points out that the groves of academe are filled with Marxists and have been so politicized and so disconnected from the rest of society that ordinary citizens no longer trust anything that emanates from our universities.

One can add to this the fall of the Soviet Union discredited state Socialism in the eyes of most people and there is a widespread belief that government is an ineffectual instrument for addressing the country's mounting problems.

In this situation, questioning of the role of government and reliance on it would seem to be in order.

Yet we live in an age when the hatred of Capitalism and love of Socialism is so transparent that many people cannot even see it. Nowhere is this more obvious than in the idea that just because the government provides something, it is seen as somehow fairer and superior to the efforts of the private sector, even if it is an inferior product and providing it collectively bankrupts everybody. As Schumpeter put it, "Socialist bread may well taste sweeter to them [the intellectuals] than capitalist bread simply because it is socialist bread, and it would do so even if they found mice in it."

There are plenty of mice in the health care bill but it matters not. Mice and all, the Left will support it and yell for more. And they will see health care as only the beginning of a banquet where they can set the menu and order the cooks about and the waiters to and fro. When the meal delivered is found to be sour, they will blame everyone but themselves.

One should not think that the trend toward a dirigisme society pushed by the Democrats is simply a matter of ideology, although that is its emanating force. There is also the fact that so much of the economy is effectively “socialized” already, and nothing is as severe an impediment to clear thinking on moral and political issues than the self-interest of the status quo and the rebarbative complexity of making your own way in a difficult world. It is so much easier to let the government worry about meeting our needs and then complain when it things are not as great as one would like.

As Schumpeter predicted, the attack on Capitalism and the Law would come from academia and the wider intellectual class. He believed Capitalism creates the productivity on which a modern economy is based and on which all aspects of a modern society feed, especially the intellectual class. Where would Harvard be without its endowment? But people, especially intellectuals, do not understand the hidden intricacies interwoven into the extensive division of labor upon which their prosperity rests and they become hostile to the very social order which created them and sustains them. Intellectuals increasingly attack Capitalism and the “creative destruction” function of Schumpeter’s hero, the entrepreneur, and as they do so the entire system weakens and declines, intellectuals included.

Yes, there is rot in academia. And in the Congress and the other corridors of political power. And in the business community. But not at Regent.

Our Faith in the Creator trumps their reliance on Man and Jean Jacques Rousseau and Karl Marx.

For as Christians, thankfully our hope and joy do not depend upon who is up and who is down in academe, or Capitol Hill, or the White House, or Wall Street.

Christ’s bread is sweetest of all and our eyes are on it. 1 Peter 1: 3-4.

May it always remain that way.

Monday, December 14, 2009

Casting Stones and the Public Interest by Dr. Gary E. Roberts

One of the great political divides of our time is the intense, polarizing and often rancorous debate over the proper size, role and scope of government. This debate occurs between and within those on all sides of the political spectrum. Irrespective of one’s opinion on this issue, there are three principles that those of good faith and reasoned intellect can agree upon. First, an efficient and effective government is essential, but a healthy society requires a limit to the size and scope of government to protect civil liberties and rights, encourage reasonable self reliance and initiative, and reduce unhealthy dependence on governmental support. Second, business is the primary engine of wealth creation, but regulation on the size and scope of the private sector is necessary to resist the formation of destructive monopolies, protect public health and safety and promote consumer interests. Third, our national and global problems in such areas as poverty, global security, health care, the environment, education, and job creation are too large and complex for any one sector.

Effective governance requires a collaborative approach to the many intractable policy problems given limitations to knowledge, power, resources and the requisite moral and legal authority. Hence, both liberals and conservatives are placed in a reluctant but often overlooked position of agreement regarding the need for a vital and active nonprofit sector to provide services and forms of support that government and business are unable or unwilling to provide. From the Salvation Army, the Red Cross, and Habitat for Humanity to community museums and symphony orchestras, nonprofits address a range of human needs from the most basic to the sublime.

However, society’s overall level of support for the nonprofit sector fails to match the rhetoric from both sides of the political equation. New York Times Op-Ed columnist Nicholas Kristof summarized data on this issue from a book by Matthew Bishop (“Philanthrocapitalism”) indicating that Americans give a paltry 1.67% of our GNP to charitable causes. According to a recent study by the Barna group, the median value donated to all nonprofits in 2007 per adult (churches, faith-based nonprofits and secular nonprofits) was $400 with an average of $1,308. Kristof cited additional data from a book by Arthur Brooks (“Who Really Cares”) indicating that conservatives, consistent to their core beliefs of smaller government, support nonprofits at higher levels than liberals (approximately 30%) more. However, given the small absolute dollar value base, this advantage is a Pyrrhic victory at best.

Even among the 7% of population that identifies themselves as evangelical Christians, a pillar of the conservative movement, Barna found that only 24% tithe (give 10% of their income to charitable causes) with an overall average yearly giving level of $4,260. When all categories of Christians are included, the average drops precipitously to $1,426. The tithing figure for the entire population of the United States is even more depressing at 5%. A further parsing of the statistics by the Center for Philanthropy at Indiana University found that only 30% ($58 billion) of the total $252 billion of all charitable giving in 2005 was directed at helping the poor. Even among the $ 101.1 billion contributed to churches, about 80% of the giving is directed at “bricks and mortar” capital spending and internal budget support.

The cold reality is just as there is "market failure" in terms of the private sector there is corresponding "generosity failure" in regards to our support of nonprofit organizations. Hence, no group across the political spectrum can “cast stones” and externalize blame or responsibility for failing to support the nonprofit sector. Most Americans are blessed with a generous standard of living, and we choose how to spend the 70 percent of our income after the government removes its 30 percent share. The majority of Americans could live more simply and forgo what many of us now define as necessities which are in reality luxuries or desires, not legitimate needs. It is our free will choice to purchase larger houses, to live a hectic lifestyle that demands two or three cars, and to define the purchase of electronics and the latest computer equipment as essential. This lifestyle contributes to proliferate spending and excessive debt levels and to more than one form of bankruptcy.

The American dream of consumerism and materialism has contributed to a living nightmare for many and is contrary to the example of all the major faith traditions. One solution is to regain our compassion and develop a heartfelt empathy for the many unmet needs that contribute to endemic human suffering throughout our great country and the world. Please forgive me for pontificating, but even in the face of our current economic troubles the majority of Americans are still employed and the level of need is greater than ever. Take the path less well traveled whatever your political persuasion and become part of the solution to relieving human suffering and improving the quality of life for all citizens by increasing your giving to the worthy nonprofit of your choice.

RSG World Economic Brief for November 2009

The World Economic Brief for November focuses on three key developments that have taken place in the world economy in recent months:
  • Significant changes are taking place in the pattern of foreign purchases of U.S. government and corporate assets, with the previous rapid pace of foreign accumulation of U.S. assets declining dramatically at the summer’s end. This is in response to an increase in private saving in the U.S. as households and business rebuild their balance sheets.

  • There are signs that the world economy is starting to recover from the deepest contraction of the post-World War II period. An increasing number of countries are reporting positive growth since the second quarter of 2009. International trade and commodity prices have also strengthened in recent months. The global recovery, however, is seen as fragile, and financial conditions across the world remain in a state of distress. Forecasts for countries and regions are given in the Brief.

  • Prices on world oil markets have stopped their recent rise and may have begun to fall again. Some of the recent rise was attributable to financial transactions unrelated to oil fundamentals rather than supply and demand considerations in this key market, which may be unfavorable at this time to high oil prices.

RSG U.S. Economic Brief for November 2009

The U.S. Economic Brief for November looks at conditions, trends and policy developments now under discussion in the country:

  • Employment trends continue to be a key focus of attention and the Brief reviews the unemployment situation in Virginia and the country. It points out that Virginia is doing better than the rest of the country. It also mentions the difficulty Bank of America is having finding a new CEO.

  • A look at the recent performance of the U.S. economy points to a major crisis in the financial sector and a rapid deterioration in the real economy that may have finally reached a bottom. But major difficulties now describe the economy in terms of high unemployment, unprecedented fiscal imbalances, and continued financial problems that will be difficult to overcome and weigh on the prospects for growth in the foreseeable future.

  • Energy policy has been mentioned as a main focus of Congress’s attention early next year. The Brief looks at the Cap-and-Trade Bill currently before the U.S. Senate and lists the arguments in favor and opposed to this legislation. It also asks some questions intended to provoke thought about how the policies being recommended work and what their effect on the economy, energy markets and emissions of greenhouse gases might be if this legislation were to be enacted.

Thursday, December 3, 2009

Poverty Progress, Poverty Persevering and Poverty Surmounted by God's Grace by Dr. Douglas O. Walker

The Census Bureau recently released updated data relating to living conditions in the United States detailed by households classified by age, sex, race and income level. Included are tables relating to the stock of household consumer durables in 2005 for poor families that can be compared with similar data for previous years.

When taken together with statistics relating to cash and non-cash income, the data on household living conditions present a picture of a long-term improvement in the level of living of some of the poorest segments of the U.S. population. According to the latest data, the consumer wealth position of many poor families has improved markedly in recent decades, with the percentage of poor households with washing machines, clothes dryers, dishwashers and other consumer durables rising significantly over the course of the past two decades. Almost half of all poor families now have cell phones and more than 70 per cent have one or more cars.

While the overall poverty rate based on cash income has at times risen during downturns in the economy, there has nonetheless been a longer-term downward drift in the percentage of American families living below the official poverty line, especially among the elderly. This overall improvement does not even consider the effects of the significant expansion in non-cash income maintenance programs not included when assessing poverty status, such as food stamps, housing benefits and health care subsidies. These have contributed significantly to raising the level of resources available to the poor. In longer-term perspective, broad trends in cash income, non-cash benefits and household consumer wealth would indicate that the real income of the poor has risen significantly in recent decades.

All this does not mean the problem of poverty has gone away or is going away. Far too many Americans continue to live in poverty and efforts to reduce it must continue. It must also be recognized that many remaining groups that suffer from poverty and its consequences, such as the elderly, the disabled, and the mentally ill, represent core segments of the population where poverty is not going to be reduced simply by an improved economic environment, a lower unemployment rate, or traditional government programs intended to improve job skills and prepare people for the workplace. It will take special efforts over a very long period of time to reduce the level of poverty in core poverty groups, especially greater efforts by non-governmental organizations such as churches and charities. To this end, each of us should focus more on what we can do to lift others and encourage churches and charities to expand their work of service to people who by their very circumstances cannot work themselves out of poverty and require special help tailored to their individual circumstances.

As Christmas approaches we should pause and give thanks that we live in this country at this time in history and recognize that our bounty comes not from our own hands but from the grace of the God, who placed us here where the little we do is multiplied by His Hand through the efforts of others and the inheritance we received from our forefathers. Had we lived even a century ago in the same place and worked twice as hard as we do today, we would nonetheless live below the poverty line we now use to identify the very poor. Were we living today in one of the least developed countries and worked three times as hard as we do each day, we would nonetheless barely survive with little in the way of food and shelter and clothing and nothing in the way of opportunities, health care and the other services we take for granted. Our efforts, taken alone, count for nothing.

The Bible tells us that it is not of our works that we are saved (Eph. 2: 8-9). It is equally true that it is not by our works that we are materially blessed. It is always His incomprehensible grace that defines this life and the life to come, and we should be grateful and give thanks to He Who gave us life, placed us in the here and now, and blessed us with all we have (Act 17: 26).

Wednesday, December 2, 2009

The Road to Fiscal Ruin by Dr. Douglas O. Walker

Both the New York Times and the Wall Street Journal have recently published articles about the burgeoning level of government debt and the escalating deficit that adds to its weight.

The Federal government ran a deficit of $1.4 trillion in fiscal year 2009 and spending continues to far outpace revenues this fiscal year, adding greatly to a mounting national debt that now stands at more than $12 trillion.

Worse, rather than dealing with the recession that now grips the nation or the looming explosion in Social Security and Medicare benefits now on the horizon, the Administration and Congress have chosen to aggravate the country's problems by pushing for an expensive new health care entitlement which will add greatly to the country's fiscal woes. They seem completely oblivious to the fiscal nightmare they are creating.

As noted in the Times, one reason for their blindness may be that much of the recently acquired debt was financed at abnormally low interest rates brought about by the recession. These low rates made the acquisition of new debt and refinancing of old seem tolerable, at least for the moment.

However, as is always inevitable, this will soon change. The Treasury now faces what could be a significant rise in interest rates at a time when it has an immediate need for new borrowing as well as re-financing the huge debt it previously issued. According to the Times article, the Treasury estimates $1.6 trillion of the government's marketable debt is coming due in the next few months.

Added to this, as stressed in the Journal, is the need to fund higher costs associated with rising Social Security, Medicare and Medicaid expenses.

The credit demand of the Federal government seems insatiable. It raises questions about whether its huge deficits can be financed without markedly worsening the prospects for a recovery.

China and Germany as well as other countries are increasingly worried about this country's financial position and have been warning about the deteriorating state of U.S. finances. I for one am glad they are expressing their concern.

But given the way the Administration and Congress are conducting U.S. economic policy, I wonder if anyone in the U.S. government is equally concerned.

Monday, November 23, 2009

Congress and the Haste for Health Care Reform by Douglas O. Walker

The Reid health care bill has now passed the Senate and proceeds to a formal debate on the Senate floor. It brings to mind not only the importance of this health care legislation in how it will affect all Americans but the importance in the way it is being enacted.

Needless to say, many controversies surround the question of health care and the vote to proceed merely sets the stage for an epic battle between those that regard the bill as essential to improving access to health care by many millions of uninsured Americans and those that regard the bill as not only an objectionable takeover by the government of the nation's health care sector but an unacceptable intrusion into their personal life and health care decisions.

Beyond this great debate is the very manner by which legislation of this importance and sweeping ramifications has been put together and foisted upon the American people. In a matter of a few months a few dozen people in Congress meeting in secret with representatives of a few special interests cobbled together several bills to restructure one-sixth of the U.S. economy. During these discussions, the details of the bills under discussion, to the degree they were known, changed from day to day as special interests had their influence on the evolving text and the compromises necessary to induce key legislators to support a bill were introduced. It is generally agreed that both the House and Senate bills are almost incomprehensible and many of their details, most notably key elements of their financing, remain to be defined by later legislation.

The very manner by which these bills were put together precluded any substantive discussion by the House and the Senate (not to mention the country at large) of the important questions entailed in such a major change in public policy and how it might impact the country. Here are some of the questions that should have had a through airing by the Congress and public before this legislation is approved:

• Does improving access and the delivery of health care require a big, new government-dominated system or can the existing set of more informal arrangements be improved to deal with problems all agree need to be addressed?

• Is it financially and technically possible to cover all those not now covered by some form of health care insurance? Should non-Americans such as legal and illegal residents be included in any program to widen access to health care? Does the government have the Constitutional power to mandate its citizens to purchases health insurance?

• Exactly what should be covered in any government-supported health care program? Will it cover preventive care, mental health, abortion, chiropractors, elective services such as plastic surgery, and a host of other kinds of non-essential health care needs?

• Can a nation already deeply in debt and facing the prospect of huge increases in existing entitlement expenditures afford an expansion of expensive government-supported health care services? How, exactly, will any needed revenues be obtained? Who, exactly, will be the source of these revenues? What, honestly and with credibility, will be the costs of this legislation and its impact on the deficit? Given the huge deficits involved, Why should future generations pay for the health care of this generation?

• Given the large increase in taxes now being discussed, Why, as a matter of political responsibility, should the people to be taxed be forced to pay for the health care of people they do not know and have not way of comparing the needs of these people against the needs of their own families? Why will they be placed in criminal jeopardy if they fail to meet the demands being imposed upon them?

• How can the rapid rise in health care costs be restrained in a way that does not destroy the incentives of the health care industry in general and providers in particular to deliver quality health care services? How can we expand our existing health care capacity to meet the nation's growing demand for health care at least cost?

Proponents of the legislation now before the Congress claim these questions have been answered. But of course they have not and could not have been adequately answered in the short time Congress has been discussing health care reform.

In its haste, Congress is on its way to introducing an expensive disaster that will set this country back decades in the quality and availability of the health care now enjoyed by most Americans. Restructuring a large part of any economy, after all, is a process that should be undertaken in small steps over many years as it involves great complexities and hidden interrelationships that no one understands.

I for one am amazed that Congress does not see that even the most committed central planners of the old Soviet Union would not try and restructure their economy in this irresponsible way.

Thursday, November 19, 2009

Global Imbalances and the President's Trip to China by Dr. Douglas O. Walker

It has now been more than two months since Dr. Pingfan Hong, Chief of Global Economic Monitoring of the United Nations Secretariat, visited Regent and spoke to faculty and students on the ongoing problem of huge global imbalances that threaten the stability of the world economy. He pointed out that the outsized and unsustainable trade deficits and surpluses that describe trade between the United States and China are central to this problem, and must be eliminated if there is to be a sustained recovery from the Global Financial Crisis and the past pace of world growth is to be restored. He also suggested some ways that China could contribute to reducing the imbalances by increasing its import demand and promoting higher domestic consumption within its economy. In the case of the United States, he noted that the U.S. must reduce its import demand significantly, most notably by reducing its extraordinarily large fiscal deficits.

Dr. Hong emphasized difficult adjustments on the part of both countries would be required to restructure patterns of production, consumption, employment, and trade in such as way as to establish a stable foundation for long-term growth. Because of the precarious state of the world economy these adjustments should begin immediately. A video of Dr. Hong's presentation and comments of other participants can be seen here.

President Obama is now in China and high on the agenda is the question of China-U.S. trade and progress toward reducing the large trade imbalance between the two countries. It is useful to quickly review where we are in addressing the problem outlined by Dr. Hong to see if any progress has been made.

Since the fourth quarter of 2008, both China's surpluses and U.S. deficits have been smaller than in recent years, reduced by the collapse of world trade and the improvement in the household and business saving rate in the U.S. This is consistent with reducing global imbalances and the improvement is of course welcome, if not the way it was attained. However, the Wall Street Journal reported the other day renewed strength in America's import demand and a higher trade deficit in August and September as the recession starts to wind down. This quick response by import demand to an upturn in economic activity would seem to imply the improvement is related to transitory factors such as the steep decline in U.S. economic activity due to the recession. Given its rapid reversal when conditions in the U.S. improved slightly there is little reason to believe any long-term adjustment in the pattern of U.S. trade is taking place. Similarly, the Chinese insistence on a weak-currency policy would seem to indicate that China is not taking steps needed to restructure its trade.

News reports on the President's trip to China indicate that little or no progress between the two countries has been made on the contentious issues surrounding their mutual trade. Clearly, neither side is prepared at this time to deal with the deep-rooted problems that at once define and threaten their prosperity.

The failure of both China and the U.S. to do anything significant about their trade imbalance is not surprising. For both countries very large changes are needed to create patterns of production and consumption and exports and imports that are compatible with a rapidly changing world economy. This does not mean that Dr. Hong was wrong to warn us of the consequences of global imbalances of the magnitude we have seen in recent years.

It simply means we should not be surprised if soaring U.S. trade deficits and huge Chinese trade surpluses continue to weigh on the world economy and place it in great risk of another crisis such as we are now enduring.

RSG World Economic Brief for November 2009 by Dr. Douglas O. Walker

Please see the actual brief in the gray box to the right. This month’s brief reviews economic conditions in a number of countries and points out three key developments of recent months:
  • Significant changes are taking place in the pattern of foreign purchases of U.S. government and corporate assets, with the previous rapid pace of foreign accumulation of U.S. assets declining dramatically at the summer’s end. This is in response to an increase in private saving in the U.S. as households and business rebuild their balance sheets. 
  • There are signs that the world economy is starting to recover from the deepest contraction of the post-World War II period. An increasing number of countries are reporting positive growth since the second quarter of 2009. International trade and commodity prices have also strengthened in recent months. The global recovery, however, is seen as fragile, and financial conditions across the world remain in a state of distress. Forecasts for countries and regions are given in the Brief.
  • Prices on world oil markets have stopped their recent rise and may have begun to fall again. Some of the recent rise was attributable to financial transactions unrelated to oil fundamentals rather than supply and demand considerations in this key market, which may be unfavorable at this time to high oil prices.
Thanks to Erick Poorbaugh for the excellent Brief.

Wednesday, November 11, 2009

Our Prosperity and Posterity by James A. Davids

Life in post-Revolution America was rough and bears some semblance to today. The new nation was deeply in debt because of governmental spending, and foreign lenders refused to accept our paper money, insisting instead on gold. When debtors could not pay their loans, the banks started a wave of foreclosures in Massachusetts, took possession of farms and homes, and jailed debtors. Hundreds of people coalesced around Daniel Shays, a Revolutionary War veteran, who led his “army” in shutting down courts to stop foreclosures and then freeing imprisoned debtors. Neither the national or state government was willing or able to respond, so a group of Bostonians paid for an armed militia to go to western Massachusetts, reopen the courts, and defeat and arrest Shays and his army. Within a few months of this incident, the Constitutional Convention began in Philadelphia.

Shays’ Rebellion must have been on the mind of those gathered in Philadelphia during the summer of 1787, since the Preamble states that the Constitution’s purposes include “to insure domestic Tranquility,” and to “secure the Blessings of Liberty to ourselves and our Posterity . . .” These “Blessings of Liberty” included personal and economic freedom so Americans and their posterity could pursue “happiness” (the acquisition of property), which was identified as an “unalienable” right in the Declaration of Independence eleven years previously.

Regarding securing economic freedom for their posterity, the Founding Generation and their immediate successors unlike today paid off their national debt. Primarily because of the Revolutionary War, the national debt in 1791 stood at $75 million. This debt grew but by 1835, America was debt free. The Civil War caused the national debt to climb for the first time into the billions ($2.7 billion after the war), but this debt stayed rather stable until World War I pushed the national debt to $22 billion. The debt was paid down in the 1920s to $16 billion, until the social spending of the New Deal and World War II exploded the debt 1600% to an amount equal to the value of all goods and services produced in the U.S. in one year. With the rapid expansion of the economy after World War II, the percentage of debt to GDP fell while the debt increased primarily due to inflation. The debt passed $1 trillion in 1982, doubled to $2 trillion in 1986, and then added another trillion dollars in debt in 1990, 1992, 1996, 2002, 2004, 2006, 2007, and 2008. This raging appetite for debt continues. The Congressional Budget Office in March estimated that the current $10 trillion debt would double in ten years based on President Obama’s budget.

Although the Cold War, Vietnam and Iraq Wars, and other overseas ventures have consumed considerable resources, we have not had a world war for 60 years. Rather, our continuing huge budget deficits and resulting mountains of debt are attributable to expensive social programs passed largely by Democrats (who failed to raise taxes to cover the new expenses) and tax cuts passed largely by Republicans (who failed to cut spending). In other words, for the past 25 years our leaders have borrowed money so we could spend it on ourselves either for retirement benefits, prescription drugs, health care for the elderly, or simply more consumer spending – a continuing legacy of the “Me Generation.” The debt, and the burgeoning interest on the debt, we leave to our children and grandchildren.

By adding “…and our posterity” to the Constitution’s Preamble, the Founders placed upon themselves and all subsequent generations (certainly including us) a profound moral duty which we have sorely neglected. Such neglect is reason enough for the rise of future Daniel Shays. Whereas the Founders in gaining independence sacrificed their prosperity for their posterity, we have sacrificed our posterity for our prosperity.

Some Advice from our European Colleagues: Stay Home if You’re Sick by Dr. Mary Manjikian

Europeans like Obama a lot. And that worries some Americans. Throughout the Obama campaign, one theme his opponents raised was the idea that deep down, Obama wanted American to be more like Europe. For many conservatives, that invoked the specter of socialized medicine, trade unions run amok, shorter work days, longer vacations and the end of America’s competitiveness in the global economy. It meant that Obama envisioned a softer, more feminized America which no longer carried the same weight in foreign affairs. Instead of owning its position of leadership in the world, many feared, America would likely give up its values, ideals and history, in an attempt to be popular in the international system. And popularity might be achievable, but it could come at the cost of self-respect and dignity.

As the current debate over health care shows, this theme of what and how much to borrow from Europe still dominates politics and both sides have valid points. But I’d like to suggest that Americans have already begun adopting one positive European innovation. The radical European idea sweeping America? It’s called “staying home when you’re sick” -- and it just might catch on in your neighborhood.

Some brief comparisons: Last year the average American federal employee took less than three days of sick leave while the average European took eleven. And most European nations offer paid sick leave for all workers, while somewhere between 34 - 50 fifty percent of Americans get no paid sick leave. Are these Americans who report to work no matter what simply healthier than Europeans? No. Rather, employer organizations point to a pattern of ‘presenteeism’ in America. Presenteeism refers to the hours of lost productivity generated when sick workers come to work anyway where they do little, make expensive mistakes for the company when they are under the weather and spread contagion, leading to even more lost work time.

I first learned about “staying home when you’re sick” when I reported to work at the American Embassy in The Hague, Netherlands as a young foreign service officer. Despite a nasty flu I’d picked up while travelling, I came in to the office -- mostly to demonstrate my commitment to the organization, no matter what. My Dutch colleagues politely explained that one was granted sick leave for a reason and that infecting your colleagues was considered rude rather than admirable. I went home to rest until I felt better.

As we cope with swine flu this winter, many American businesses have begun issuing guidance to their workers that sounds suspiciously European. Businesses are even acknowledging that many working parents save sick leave to use with sick children and simply soldier on when they themselves are ill. The federal government recently reminded workers not to endanger themselves or colleagues by reporting for work when ill, and even called for flexibility in situations where employees may have sick children or a flu-related school closing to cope with.

It will be interesting to look at the statistics next spring when the flu has passed. Will businesses report lost income due to increased use of sick leave, or will they report that they now have healthier, more productive workers as a result? Will we indeed find out that this is an idea borrowed from Europe which makes sense in the United States as well? It just may be that ‘staying home when you’re sick’ is a European idea whose time has come in America as well.

Friday, November 6, 2009

The Healthcare Bill and the Poor by Dr. Douglas O. Walker

It is not easy to help the poor and the lower middle-class through public policy.

Almost always, efforts by government to do so end up adding to the burdens on the poor and putting obstacles in their way to a better life. For this reason, measures intended to lift their incomes and provide them with services must be carefully crafted to ensure that they do not do more harm than good.

An example is the health care reform bill now being discussed in Congress. At the present time, there are several versions of the bill making their way through Congress and contention over the drafting of the bill is high, so it is not clear exactly what the final bill will look like. One idea being discussed is providing subsidies for health insurance to low-income individuals and families. In a recent blog entry, Professor Gregory Mankiw of Harvard focused on one aspect of the Baucus bill recently passed by the Senate Finance Committee and pointed to one of many problems hidden in the approach to subsidized health care in the bill.
Here the problem before the policymakers trying to help the poor afford health insurance with means-tested subsidies: Because the cost of comprehensive health care is expensive and beyond the ability of low-income families to afford full coverage, the bill proposes subsidizing its cost to low-income families, and the poorer the family, the greater the subsidy.

There is no problem with a subsidy if the family remains poor and its income does not change. In this case, the subsidy continues unchanged. However, means-tested subsidies do affect incentives to work and earn more income. If the family earns more income, for example, its subsidy is reduced, and the cut in the subsidy falls faster than the rise in the family’s income until the family’s income has risen to the point where it no longer qualifies for a subsidy.
On first appearance, this seem fair since low-income families should be subsidized more than high-income families, and at some point the subsidy should end.
Now we ask the question, "How does the reduction in the subsidy affect the family's income if the family works harder and earns more income? In other words, if the family’s income rises, what happens to the taxes and fees it must pay to the government.

In the case illustrated by Mankiw, he points out on the basis of the provisions of the Baucus bill if a family earning $54,000 receives a $12,000 increase in pay its health care insurance premium increases by $2,800, or about 23 per cent of his pay raise. This also sets in motion other changes to the family's tax obligations:

A higher pay check means higher Federal income taxes. A family earning $54,000 a year is in a 25 per cent marginal tax bracket. 25 per cent of the addition $12,000 means $3,000 in extra Federal income tax.

It also means higher Social Security and Medicare contributions of 7.65 per cent (actually, double this figure, since the employee pays the employers share in the form of lower wages, not considered here). This amounts to a deduction of another $918 from the $12,000 pay raise. So far, the government has taxed $6,718 out of the $12,000 raise.

But there are yet more taxes. Here in Virginia we have a state income tax. The additional tax attributable to a pay raise that lifts a family’s income by $12,000 from $54,000 a year to $66,000 a year generates another $788 in tax owed to the state of Virginia.

Even this is not the end of it. Virginia has a general sales tax rate of 5 per cent (4 to the state, 1 to the city). If the family decides to spend the approximately $4,500 left after paying the mandatory health care insurance premium, the Federal income tax, the mandatory Social Security and Medicare contributions, and the state income taxes, another $225 will have to be paid in sales taxes.

And there is yet more. Embedded in the price of all products purchased are taxes and fees paid by producers, from the corporate income tax to property taxes on commercial property to the import tariffs and duties on goods and services imported into the country. These taxes are either shifted forward to the consumer or backward to the factors employed. A good estimate of these added costs to the consumer is another 5 per cent of their additional consumption expenditures, or another $225.

Given all these deductions for taxes and fees, the actual amount of additional purchasing power to the example family from a $12,000 raise in pay is only about $4,000, or one-third of the supposed increase their increase in income.

In other words, provisions of the Baucus bill cause the government to take two-thirds of any additional income of a family with a modest income of $54,000. Similar results in terms of percentages would occur at lower levels of family income.

It is of course important to extend access to health care to all segments of the population. But how this is done is the critical question. It is not enough to simply put out a program without considering its unintended consequences. Often attempts to help people through public policy end up setting them back.

As now written, the Baucus health care reform bill is an example. It leads to confiscatory rates of taxation on families of modest incomes. Marginal rates can be even higher, it should be noted, on families with higher incomes in some versions of the health care bill now under discussion.

The problems go beyond a poorly designed health care bill. The simple fact is the high general level of taxation in this country has reached the point of oppression, especially on the poor, because implicit tax rates on the poor are much higher than those on the wealthy.

Means-tested provisions of income and services to the poor often create 'poverty traps' that make it difficult for the poor to raise their after-tax income. In doing so they discourage work and lead to efforts to hide income and earn income off-the-books, often through illegal activities. Health care legislation now being considered by Congress is a perfect example of the unintended consequences of poorly thought out public policy.