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.