July 5, 2016

Completing the American Welfare State, Part 1

While the public conversation is centered around Secretary Clinton's e-mails, no attention is being paid to what kind of welfare-state reforms she would like to impose on the United States. It may be worth keeping in mind that she was the ideological driving force behind President Clinton's attempt at single-payer reform in 1993 - the reform earned the "Hillarycare" nickname for a reason - and as recently as in May this year she declared that she once again wants the American people to accept single-payer idea. 

She is also a champion of general income security programs - known to Americans as "paid family leave" programs - and government-provided universal pre-school programs for all children in the country.

These three reforms - single-payer health care, general income security and universal preschool - are the only components missing from the American welfare state. Once added they will make our system of entitlements and income redistribution practically indistinguishable from European versions. As a result the characteristics that separate the American economy and society from Europe will wither away; within a generation, at most, there will no longer be such a thing as "American exceptionalism". 

It is striking how little attention is paid to this very, very important side of the presidential campaign. Therefore, all the more reason we take a closer look at what the "completion" of the American welfare state would mean.

Single-payer health care is the most important of the three aforementioned reforms. Secretary Clinton's position on this issue has remained the same throughout the decades; after a brief moment of veering off the straight and narrow path to socialized medicine, she has recently gotten back on her feet again. Reports the New York Times:
For months during the Democratic presidential nominating contest, Hillary Clinton has resisted calls from Senator Bernie Sanders to back a single-payer health system, arguing that the fight for government-run health care was a wrenching legislative battle that had already been lost. But as she tries to clinch the nomination, Mrs. Clinton is moving to the left on health care and this week took a significant step in her opponent’s direction, suggesting she would like to give people the option to buy into Medicare. “I’m also in favor of what’s called the public option, so that people can buy into Medicare at a certain age,” Mrs. Clinton said on Monday at a campaign event in Virginia. Mr. Sanders calls his single-payer health care plan “Medicare for all.” What Mrs. Clinton proposed was a sort of Medicare for more.
The plan to gradually expand Medicare is strictly in accordance with the gradualist approach that American single-payer proponents have applied so far. After the failure of his single-payer plan, president Clinton successfully pursued another, more limited but still significant expansion of government control over health care: the SCHIP program providing children of Medicaid-eligible parents with a separate insurance program. 

President George Bush Jr. made his contribution to the expansion of government health care with his significant Medicare expansion. Then came the Obama presidency and the Affordable Care Act.

It is reasonable that Secretary Clinton would choose to expand Medicare instead of Medicaid. The latter program has fallen into disrepute because of low doctor reimbursement rates, spotty access to health care in some areas and overall a slow but inevitable decline in the quality of health care people actually get. What Secretary Clinton fails to recognize, though, is that the same would happen to Medicare if working-age Americans enrolled en masse. This is especially true if those buying into the program are higher-risk than the average citizen - a not-inconceivable scenario given how perverted enrollment figures have been for the Affordable Care Act. Young, healthy individuals continue to go uninsured or remain on employer-provided plans outside the ACA exchanges while people with high health risks enroll to reap the benefits government promises them.

Should the United States succumb to the campaign to create a single-payer system, the costs of that program would be astronomical. The agency in charge of the program would have an annual budget in excess of $3 trillion. It would by far be the largest government agency in the world. Yet for some reason there are those who believe that a single-payer reform is not only desirable, but superior to any other alternative.

When it comes to government bureaucracies, a "paid family leave" program would demand a tax-funded administrative apparatus of proportions similar to a single-payer health care agency. 

For those who are unfamiliar with the paid-family-leave entitlement, let us review the issue in more detail. 

In the last legislative session the state of New York passed the most generous "paid family leave" entitlement act in the country. Its entitlement is defined as follows: 
  • Every working New Yorker is eligible for paid leave to care for a newborn or a sick relative; 
  • The Act guarantees 35 percent of the average salary, which comes out to $1,266 per week; 
  • The time cap is 12 weeks per year when the entitlement program is fully implemented; 
  • Funding is provided through a tax of 60 cents per work week per employed New Yorker. 

This type of entitlement program has proven to be a budgetary nightmare for many European welfare states. There are two reasons for that. First, the incentives not to work are typically stronger than the creators of these programs realize; demand for the entitlement simply exceeds what they anticipate. Secondly, the tax is all-too-often set unrealistically low, primarily to sell the entitlement to voters without scaring away those who think their taxes are high enough as it is. 

This is not just a rhetorical statement. Hard numbers verify that the New York paid-family-leave act is a fiscal disaster in the making. To begin with, the maximum benefit per eligible person comes out to 12 weeks times a weekly benefit of $1,266. This amounts to $15,192 per annum. 

This is what one person can take out of the entitlement program. The next question is: how much does one person contribute to the system?

The tax funding the program is set to 60 cents per week. Multiplied by 52 weeks that equals $31.20 per annum. 

At the aggregate level, the maximum revenue that the state can take in over one fiscal year is $31.20 per working New Yorker, times 9,403,100, which was the total amount of working New Yorkers in December 2015. This comes out to $293.4 million available to pay for the Paid Family Leave program. 

Since there is no cap on how many New Yorkers can use the entitlement program, we have to assume that at least in theory all of them would want to use it. If they all took 12 weeks off as the entitlement program allows, at the average replacement amount of $1,266 per week, then the total cost to the state would be... wait for it... 

$142.8 billion.

For every dollar coming in from the tax, $487 go out in the form of entitlements. And that assumes that the tax is paid even for the weeks people are on leave from work enjoying the paid-family-leave entitlement! 

But is it really realistic to assume that all New Yorkers would use this entitlement - and use it to the max? 

Probably not. But here is the problem: the law passed by the New York state legislature and signed by Governor Cuomo does not restrict the number of people who can use the entitlement in any other way than to "working New Yorkers". That means, plain and simple, the same 9.4 million people who also pay the tax for the entitlement program. 

To drive home this point from another angle, suppose only mothers of newborn babies would use the paid-family-leave entitlement program. Some 250,000 babies are born in New York state each year. If 250,000 mothers take 12 weeks off in one year at $1,266 per week, the state will have to dole out $3.8 billion per year. 

As mentioned earlier, with a 60-cent-per-week tax to pay for the program the state of New York can look forward to $293.4 million per year in revenue. That is enough to pay 7.7 percent of the new mothers for their 12 full weeks of leave. 

The money could also be used equally among the new mothers. That would give each one of them 6.5 days of paid leave. 

That is it. And there is not a dime left for anyone who wants to be home and care for a sick relative. Of which, sadly, there would be plenty; who does not have a relative in need of help due to illness of one kind or another?

New York is not the only state that is fooling around with paid-family-leave programs. Here is a report from Vermont in January this year. Wcax.com explains
"When does the straw break the camel's back?" asked Sen. Kevin Mullin, R-Rutland County. Mullin listened to two hours of testimony Tuesday on a bill that would require companies to offer paid sick leave. "I'm not really sure that government needs to tell everyone how to be a good employer," Mullin said. The chair of the Vermont Senate's economic development committee admits he's unsure if he'll support the bill that the House passed last year.
He has very good reasons to be unsure. This may seem to be an insignificant reform in terms of the money involved, but as any student of government spending knows, once a spending program exists it can only change in one direction. Back to wcax.com:
"An employee under this bill would earn one hour of paid sick time for every 40 hours that they work," Legislative Counsel Damien Leonard said. The bill-- that says workers could earn up to 24 hours per year in paid sick leave-- passed despite significant Republican opposition. It exempts seasonal or temporary workers. 
A measly 24 hours per year is nothing to pass a law about. The purpose of this law is to get the entitlement itself established. Once it is in place it will basically be a matter of budgetary technicalities to increase the mandate from the equivalent of three work days per year to five, ten, twelve... whatever legislators think employers can afford. 

Technically, the cost for the sick-leave mandate is borne entirely by the employers. They simply continue paying the employee his wage or salary even as the employee is home sick. However, it is a small step from mandatory sick leave to a general income security program. That program would no longer be a matter of employer-employee relations, but would require the intervention of a new government agency dedicated to the administration of a general income security program. 

No state, and certainly not Vermont, can afford to burden its employers with the taxes needed to pay for general income security.

There is more on this. The U.S. Department of Labor is sponsoring a paid-leave program in the District of Columbia. Stay tuned for a report on that experiment - which by the way is yet another unmitigated fiscal disaster in the making. 

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