Aftershock: The Next Economy and America's Future (17 page)

The main reason for the soaring costs and poor results is the way our system is organized. We are the only advanced nation
whose citizens largely depend on private, for-profit insurers. The result is complicated, expensive, and inequitable.
A study by the Harvard Medical School and the Canadian Institute for Health Information shows that over 30 percent of U.S. health care spending—more than $1,000 per person each year—goes for administrative costs. This is nearly twice the percentage of administrative costs in Canada.
Medicare’s administrative costs (in the range of 3 percent) are well below such costs of large companies that self-insure (5 to 10 percent of premiums), companies in the small-group market (25 to 27 percent of premiums), and individual insurance (40 percent).
In a more “apples to apples” comparison, the Congressional Budget Office has found that administrative costs under Medicare are less than 2 percent of expenditures, compared with 11 percent for private plans under Medicare Advantage, the private-insurance option under Medicare. Allowing Medicare to use its bargaining power with drug companies and health care providers would bring down medical costs even further. Estimates of how much would be saved by extending Medicare to cover the entire population range from $58 billion to $400 billion a year, enough to subsidize coverage for many if not all Americans who need it and constrain the costs of co-payments and premiums for everyone else, without busting the federal budget or imposing higher taxes.

Making Medicare available to all Americans is not a very large step when you consider that by 2010, even before the new legislation was implemented, almost half of Americans received some form of public health care (older Americans through Medicare; poorer Americans through Medicaid and the Children’s Health Insurance Program; veterans through the Veterans Health Administration; government workers as well as members of Congress through a health plan open to federal employees). Nor is it a pie-in-the-sky idea politically. I believe most Americans would support it. They supported the so-called public option.
In a poll
conducted for NBC News and
The Wall Street Journal
in June 2009, 76 percent of Americans said it was either “extremely” or “quite” important to “give people a choice of both a public plan administered by the federal government and a private plan for their health insurance.” Once the 2010 health bill is implemented and its costs become apparent, the public will be readier to support Medicare for all.

Public goods
. There should be a sizable increase in public goods such as public transportation, public parks and recreational facilities, and public museums and libraries. And they should be free of charge to users (the trend in recent years toward “user fees” should be reversed). Such public goods improve the quality of life for many people who cannot afford the equivalent private goods—their own cars, manicured gardens, art collections, books, and health club memberships, for example. In this way, public goods partly make up for stagnant or declining wages.

Public goods typically do not use up lots of scarce resources or cause as much environmental damage as their private equivalents, and they generate jobs and add to overall demand in the economy. Making them free maximizes these societal benefits.
For instance, an expanded system of free public transportation, including high-speed rail, would dramatically reduce traffic congestion—estimated to cost Americans more than $85 billion a year in wasted hours and gas—and cut carbon emissions. The benefits are easily worth the cost.

Money out of politics
. Finally, and not least, we are all painfully aware of the failures of our democracy. As inequality has widened, money flowing from large corporations, Wall Street, and their executives and traders has increasingly distorted political decision
making. We need strong campaign-finance laws, more generous public financing of elections (matching dollar for dollar whatever an opponent raises privately), stricter limits on campaign contributions, and limits on so-called issue advertising, which is partisan advertising under a different name. Recent Supreme Court decisions protect some of these activities as forms of free speech under the First Amendment to the Constitution. Ultimately, these decisions must be overturned.

In the meantime, we should require that all political contributions go through “blind trusts” so that no candidate can ever know who contributed what. Political corruption occurs when officials favor certain parties over others because the favored parties have provided, or are likely to provide, generous campaign donations. The money is the quid pro quo for the political favor. A law requiring that all political contributions go through blind trusts that would maintain the anonymity of donors (with criminal penalties for disclosure) would not prevent any person or group from
claiming
they made or will make a generous donation. It is likely that the number of persons and groups making such claims would increase dramatically, because officials will never be able to check on the veracity of such claims. That is the point. The inability to check will undermine the credibility of all such claims, thereby making it impossible for any person or group to “collect” on their donation by getting favorable treatment. The
quid
would be severed from the
quo
.

This is not an unrealistic agenda. It is practical and doable. And given how concentrated income and wealth have become in America, it is commonsensical. It would begin to move the pendulum back toward more shared prosperity.

But to implement it would require cooperation at all levels of society. Though that may seem unlikely now, a major crisis could well unite those at the grass roots who seek positive reform rather than “kill the cow” reactionary politics with the leaders of labor, big business, and Wall Street. Theodore Roosevelt and Woodrow Wilson discovered this in the first decade of the twentieth century as they struggled to implement reforms with the help of progressive organizations at the state and local levels. They were marginally successful, but the economic and political crises of their era were not large enough to compel major reform on the national level. That had to await Franklin D. Roosevelt, who presided over an economic crisis so perilous it hurled the nation toward the New Deal.

Barack Obama discovered much the same phenomenon in the first months of his administration, when the economy teetered on the brink. But with the immediate crisis contained, political support for large-scale reform slackened. Obama might still have succeeded if he had framed the challenge accurately. But in reassuring the public that jobs would return, he missed a key opportunity to expose the longer-term trend and its dangers. By averting the immediate financial crisis and then claiming that the economy was on the mend, he left us with a diffuse set of ongoing
economic problems that seemed unrelated and inexplicable—rather like the citizens of a village whose fire chief succeeds in protecting the biggest office buildings but leaves smaller fires simmering all over town. Without a broad understanding of how one problem connects to another, the public can neither see nor react to the overall conflagration. It feels the heat coming from many places—housing foreclosures, continued high unemployment, lower earnings, less economic security, widening inequality, soaring pay on Wall Street and in executive suites—but is bewildered, anxious, and, in many cases, angry.

Legislation to improve America’s health care system illustrates the paradox. Initially, the public was strongly supportive. But the president and Democratic leaders failed to link the reform of health care to the long-term economic crisis faced by most Americans, and to a broader agenda of getting the nation back to more widely shared prosperity. As unemployment rose through 2009, the public understandably focused its attention on the losses of jobs and earnings, and threats to their homes and savings. Without a larger framework, fixing health care appeared tangential to these more immediate problems. Consequently, the broad public was not as actively supportive of health care reform as it needed to be in order to weaken the hold of vested interests. As I’ve pointed out, in order to gain passage, the White House and Democratic leaders brokered deals with Big Pharma and private health insurers, who demanded in return that any so-called reform improve their profitability. The resulting legislation does not adequately control future costs, and it will require that Americans pay more for their health insurance than they would have had the deals not been made.

Much the same occurred with efforts to reform the financial system. The White House and Democratic leaders could have described those efforts as means to overhaul economic institutions that bestow outsized rewards on a relative few, while imposing
extraordinary costs and risks on almost everyone else. Instead, they defined the goal narrowly, as reducing risks to the financial system created by particular practices on Wall Street. The solution thereby shriveled to a set of technical fixes for how the Street should conduct its business. Once the worst of the financial crisis seemed to have passed, the public basically lost interest.

In these respects, the Obama administration postponed the day of economic reckoning. Now that middle-class coping mechanisms are exhausted, though, that postponement cannot last for long. Americans need to understand what has happened, and why. And they must understand the real choice ahead.

An aftershock in the form of another deep recession might be enough to spur reform. But a slower aftershock—characterized by several years of high unemployment, languishing or declining wages, and slow growth—may not be enough to upend vested interests “that can too readily hold on to their power and increasingly anachronistic views,” as Marriner Eccles described them in the 1920s and early 1930s. A slower aftershock is more likely to unleash a political backlash as, over time, more Americans grow skeptical that established institutions will respond to their needs. Yet even under these circumstances, reform could still be galvanized. The early stirring of backlash may be enough to convince established interests that reform is necessary in order to forestall worse repercussions.

Sooner or later, the chief executives of America’s largest corporations and Wall Street banks will become concerned about the lackluster economy. Their firms cannot generate profits, year after year, if the American middle class cannot afford to purchase the products and services these firms offer. None but the most globalized American firms will be able to gain enough from foreign markets to make up for the shortfall at home.

The CEOs will also notice the public’s increasing anger. Before, the CEOs would have been largely insulated from it. The anger would not have spilled over into their gated communities, vacation retreats, office parks, and well-secured office towers. But at some point in the not-too-distant future it will spill over. Perhaps the CEOs will experience a growing number of troubling incidents (limousines purposefully scratched, enraged people showing up at their Park Avenue and Wall Street office buildings). The executives will hire more security guards to protect their offices and their homes, but this will not allay their concerns. It will become apparent to many of them, as it did to Eccles after the Crash of 1929, that if they “resisted any change designed to benefit all the people, [they] could be consumed by the poisons of social lag [they] had helped create.”

The CEOs will also detect a change of mood in Washington. For years, these CEOs and the executives they supervise have showered politicians with contributions. The contributions have proved to be good investments, generating significant returns in the form of lower taxes and of legislation favoring their companies. Yet in the years to come the contributions will become less potent. Although the Supreme Court has allowed an unlimited amount of corporate political money to influence politics, the CEOs will discover this to be a double-edged sword. Vast corporate expenditures will ignite an even greater backlash as more Americans conclude that big business and Wall Street are exerting ever growing control over politics.

The CEOs will note an increasing number of bills introduced to raise tariffs and reduce trade, restrict immigration, and limit global investment. Any such moves could have devastating effects on their firms’ bottom lines, as well as on their own incomes. The CEOs will also have to contend with legislative proposals to prevent them from firing employees or outsourcing abroad. Top executives on Wall Street will eventually confront attempts to
break up their banks and narrowly constrain their investments. CEOs, executives, traders, hedge-fund managers, and others with high incomes will encounter more bills to cap their earnings and their bonuses, limit their wealth, and impose confiscatory taxes.

If nothing is done to counter present trends, the major fault line in American politics will no longer be between Democrats and Republicans, liberals and conservatives. It will be between the “establishment”—political insiders, power brokers, the heads of American business, Wall Street, and the mainstream media—and an increasingly mad-as-hell populace determined to “take back America” from them. Eventually, the Independence Party, or its equivalent, will prevail.

When they understand where all this is heading, the powerful interests that have so far resisted change are likely to see that the alternative is far worse. They will support reforms that lead us back to a fairer distribution of income, wealth, and opportunity. But the longer they take to come around, the larger and more virulent the backlash they will have to contend with.

As I said at the outset of this book, a virtual pendulum underlies the American political economy. We swing from eras in which the benefits of economic growth are concentrated in fewer hands to those in which the gains are more broadly shared, and then back again. We are approaching the end of one such cycle and the start of the next. The Great Prosperity of 1947 to 1975 was followed by three decades of retrenchment, ending in the Great Recession.