Lawrence Summers Enters the Lists

Dr. Lawrence Summers, the economic voice of the Democratic establishment, has an op-ed in the Washington Post sharply criticizing Elizabeth Warren’s “Medicare For All” plan. His criticisms are, first, that it’s the most ambitious plan in the world:

However, no other country offers as broad coverage as Medicare-for-all would or claims to provide universal health insurance without taxing its middle class. With respect to the admirably detailed plan the Massachusetts senator laid out, there will, I suspect, be serious questions about the accuracy of her arithmetic, the impact on labor markets, the feasibility of applying Warren’s full set of proposed taxes to the rich, and the financial and economic impacts of the plan.

It won’t generate as much revenue as she thinks it will:

Whatever the merits of these arguments, it is hard to see a defense for assuming — as the Warren proposal does — that wealth taxes can be doubled with no impact on avoidance, or that annual capital gains taxes can be levied without reducing the wealth tax base. The estimates are also infected by erroneous transcription of the CBO’s 10-year growth estimates and by a general failure to take account of interactions between the different tax measures proposed.

Its effects on the labor market will be extremely disruptive:

Second, there will be large labor market effects: Warren’s plan will discourage hiring, particularly of low-skilled workers, by firms that currently provide generous benefits. These firms will face the most burdensome taxes when they increase hiring and will gain the greatest cost savings by laying off workers. In addition, workers’ incentives to take jobs will be dulled because they will no longer be compensated with health benefits (which will become available regardless of what they do). There are further potential economic perversities as well: To cut costs, firms will be incentivized to get below the 50-employee threshold and scale back on current health benefits. And all the efforts that employers have engaged in to contain costs and to encourage prevention will become pointless.

To that I would add that companies that self-insure may well end up spending a lot more, something that will certainly be resisted. 40% of all employer-sponsored plans are self-insurance.

The plan will have an extreme effect on taxes:

The sum of all the new taxes on the wealthy proposed by Warren is of comparable magnitude: adding together around $310 billion a year in new wealth taxes; $330 billion a year in corporate taxes from her new proposals and her previous real corporate profits taxes; $240 billion a year from her new capital gains and finance tax proposals; at least $90 billion from her across-the-board 14.8 percent taxes of labor and investment income; and $190 billion in increased compliance. This totals nearly $1.2 trillion — more than millionaires’ total after-tax income.

There will be run-on economic and financial effects:

Recognizing that some of these taxes fall on salary income or non-corporate business, it is reasonable to estimate that investors will pay an extra $500 billion to $600 billion in taxes related to corporate profits. Then, Medicare-for-all proponents cite a severe hit to health industry profits, currently on track to be over $200 billion this year. Then, there will be the broader impacts of overhauling regulation, often to serve vital social interests, in initiatives such as banning fracking and reforming the energy industry, stepping up financial regulation, a major increase in antitrust enforcement and the regulation of technology companies, and filling corporate board seats with labor representatives. It is hard to see an argument that investors’ claim on profits would fall less than a third. The figure could be considerably greater.

Because of abnormally high valuations, along with increased uncertainty and volatility, loss of business confidence and selling pressure from those in distress, the market would likely fall more than proportionally to earnings. Accurate market predictions are impossible and will in any event depend not on what is proposed but on what the market expects will actually take place. There is, however, the real risk of economic contraction following a sharp market decline, especially given that the current very low level of interest rates puts the Fed in a weak position to pursue counter-cyclical policy.

A summary of his observations is that as campaign rhetoric Sen. Warren’s plan is fine. As serious policy it would be catastrophic.

Those are somewhat different from the criticisms I have lodged but they’re interesting.

6 comments… add one
  • steve Link

    “A summary of his observations is that as campaign rhetoric Sen. Warren’s plan is fine. As serious policy it would be catastrophic.”

    I think that about nails it. We learned from the last election that hyperbolic rhetoric plays well with the electorate.


  • Andy Link

    I haven’t studied all the plans closely, but Warren’s seem to me to be by far the worst plan – ironic considering she is supposed to be the detail-oriented “wonky” candidate.

    She manages to combine the worse features of Sander’s plan (which simultaneously promotes the least-desirable features of socialism and crony capitalism) with a funding scheme that is transparently moronic. I expect politicians to bend the truth or make rosy assumptions, but it’s hard to believe that Warren and whoever helped her write this were unaware of the gaping flaws.

  • it’s hard to believe that Warren and whoever helped her write this were unaware of the gaping flaws.

    Possibilities include

    a) get elected first; back pedal later
    b) they were otherwise indifferent to the “gaping flaws”
    c) tunnel vision

    My concern is somewhat different—people, the economy, our legal system, etc. just don’t work the way they think they do.

  • TarsTarkas Link

    Dave, IMO there will be no Emily Litella retraction for Warren. IMO she will actually attempt to put her MFA plan into effect, and anybody who objects hates children, the sick, and especially the first female President of the USA because they’re misogynist pigs (or gender traitors). You can bet she’ll have a plan for them. You might also want to bet that she’s also a strong believer in MMT to pay for it all.

  • Grey Shambler Link

    “first female President of the USA”
    I just don’t see the charisma with her, students buried in loan debt, welfare mothers, credit card debtors, may vote for her, or more probably, not vote at all. Her vision thing seems to be revenge of the losers. Her message for America is not positive and uplifting. I’d bet the house she’s not the one.

  • Andy Link

    “IMO she will actually attempt to put her MFA plan into effect,”

    The thing is – she can’t. It’s virtue signaling – the office doesn’t have the power and her “plan” will never pass Congress (much less the Senate).

    “I’d bet the house she’s not the one.”

    I tend to agree – her plan will probably be unintentional seppuku.

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