The Price of Policy

May 15, 2020

Modern society has suffered major upheaval during the last five decades.  While the transition has been slow and methodical, it has upset the balance of society in a major way.   With the COVID Crash that is now uncovering the errors in policy, it might be appropriate to ask ‘what is the price of policy’?

To begin it is important to look at long term trends to better understand their implications.   Much of the data here relates to trends in the United States, but similar trends are occurring elsewhere in the world.

To begin it is important to understand President Reagan and Reaganomics.  His policies spurred growth in the US beginning in 1981 with significant tax cuts for the wealthy.  This allowed those with higher incomes to spend more and of course it worked.  Since 1981, the United States and indeed much of the world, has undergone a massive increase in spending.  In the US today, consumers spending is three times what it was when Reagonomics was announced.

During this time, governments have increased the burden of taxes on individuals through income tax and social insurance taxes, while corporate income taxes have remained at all time lows.

Sources of Tax Revenue

This process has been undertaken while sovereign debt has increased from 30% to over 100% (and that was before the COVID crash).

Debt as pct of GDP

For decades people have been discussing the lack of support for many in society, whether it be the sick, the uneducated and a wide variety of misfortune.   During this process many of the strong, well educated and financially secure have held tightly to the idea that they shouldn’t have to give up the fruits of their labor for the benefits of the weak, slow, sick and less educated members of society.   It’s a compelling argument.

The outcome has been policies that have dramatically harmed society in general, and the COVID crash is laying bare the difficulties of a society that is overly focused on the most productive members.

Over the past few days Alexandra Ocasio-Cortez (AOC), a congressional representative from New York, provided a piercing response to a Bill Gates tweet.   It is a precious look at how far away from society the billionaires have migrated.   Bill Gates suggests a way for billionaires to donate money to help society and AOC, mockingly, suggests a tax, administered by the government with centralized spending powers.

AOC tweet re Bill Gates

So what is the cost of bad policy?   Over the long period that has promoted Reaganomics and ‘trickle down economics’, tax revenues have been dramatically insufficient to cover the costs of government and as such large portions of government have been privatized.  The education system, health care, road ways, airports, trains, public utilities, prisons and much more are areas that government has transitioned to private services.  While it is not clear that service has been improved or that money was saved in many of these situations, it is clear that the transition of these services to private enterprise has not resulted in any long term improvement in government finances.

Since this is the COVID crash the effects on healthcare are quickly becoming critical despite not getting a great deal of attention.   Spending on healthcare on the US has risen from about 8.5% of GDP in 1980 to well over 18% currently.

The cost of building a modern hospital is around $1.5 million per bed for a nicely equipped hospital and operating costs of around $2,000 per day per bed.   So a 500 bed hospital would cost approximately $750 million to build and $365 million per year to operate.   The most recent data suggests that in 2018 the US had about 6,146 hospitals with 924,000 staffed beds.   The total expenses for the entire system was $1 trillion.

Put in context with the almost $6 trillion of public money being invested during the current crisis, if the price of healthcare were brought down to the world average of 10% of GDP, that would mean the US could cover all of their citizens with excellent healthcare for $2 trillion (this number includes all healthcare, not just hospitals).

What about education?  In the 2015-2016 school year there were about 133,000 K-12 schools in the US.  They serve about 5,751,000 students and spending is about $12,756 per pupil on average.  So a year of school costs about $73 billion.

There are many other aspects of life to consider as well, including infrastructure, safety and transportation, but the overriding consideration is that policy choices are guiding how the public’s money is being deployed and the discrepancies are showing tremendous gaps between policy and necessity during this COVID crash.

While trillions of dollars have gone to prop up asset prices, average citizens in countries around the world are faced with tremendous difficulties in matters of health and  finance that will need to be corrected in the not too distant future.

In countries such as China, selecting leaders is not a choice for the people, however many democracies get the opportunity to select the leaders with policy ideals surrounding their best interests.   With the US election coming soon, it will be watched intently following the COVID crash and what some are suggesting is one of the most bungled responses to a crisis in the history of the world.

One thing to consider is that policies that protect citizens over an arbitrary push for growth and increased commerce may start to regain some importance.   While it is not clear to everyone, and the data is still muddled, the benefits of a heavy debt load in spurring growth may not outweigh the costs to society, even in the short term.

The bad news of course is that Japan and the EU are becoming clear examples that unending growth may not be a reasonable expectation.   Note that Japan’s growth has stagnated for decades while their debt levels have remained at well over 200% of GDP and they have become the poster for the ‘L’ shaped recovery that is the worry of economists and politicians following the COVID crash.

Historical_GDP_growth_of_Japan
Source: wikimedia

Of course the EU has been in much the same situation, with growth rates since the great recession in 2008-2009 remaining very low, even with interest rates at and below zero along with massive support for financial assets.

EU27,_EA17_and_US_GDP_growth_rates_2013Q2
Source: Europa.eu

The question on voter’s minds might now be, where should our tax dollars be invested?  Higher asset prices are actually hurting the average citizen in most countries, forcing up costs for accommodation, food and transportation.   So should the money be invested in the actions that do support the average person.   Healthcare, public transport, local businesses and more?  If so, will the lower growth provide enough profit to fill government coffers and pay for the programs wanted by voters, particularly those on the ‘left’ of the political spectrum?

There is a lot to pack into these questions, but there is little room for any other conclusion than the current policy decisions in most major economies have not benefited the average person.   Despite the nature of this crisis (it is exogenous, not a fault of these policies themselves), the chosen policies have not protected the people when the crisis did arrive.

With the number of disasters experienced in the past decade (fires, storms, global warming, disease, etc.), it is time for policy decisions to take into account that the financial system is only one aspect of society that needs protection.

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