This commentary originally appeared in The Morning Consult on October 23, 2015.
As the U.S. presidential election draws closer, politicians and voters are considering different ways to reignite a depressed labor market. At the heart of this is a debate between liberal institutions that forcefully redistribute resources and free market institutions that allow individuals to satisfy their own desires through voluntary transactions.
Though the liberal approach of expanding the federal government fails to achieve desired results, there is a free market solution that provides a beacon of hope: the Texas model.
The U.S. was once the envy of the world as it held the bronze prize in economic freedom in 2000, according to the Fraser Institute. After years of government intervention in the economy and our daily lives, this ranking recently slipped to 16th behind Taiwan, leaving lackluster economic growth and job creation as the new norm. This decline precipitated from policies attempting to stabilize the economy through unprecedented fiscal and monetary actions. In fact, the current recovery looks to be one of the weakest on record with no relief in sight. The direction of public policy must radically change.
Federal spending has increased by 27 percent since the fourth quarter of 2008, when the financial crisis took its greatest toll. This spending included bailing out banks and an almost trillion-dollar stimulus package contributing to a 70 percent increase in the national debt to $18.2 trillion. This debt now exceeds all of the country’s economic output. Though the sequester recently restrained spending, it doesn’t correct the massive increase beforehand.
In December 2008, the Federal Reserve took historic action by lowering the federal funds rate to the current range of zero to 0.25 percent and conducted three rounds of bond-buying programs called quantitative easing. These actions were primarily intended to keep interest rates low to stimulate the economy.
A common benchmark for the direction of the federal funds rate is the Taylor rule, named after the economist John Taylor, that calculates the rate based on economic measures. The rule indicates that the Fed left the rate too low for too long during the mid-2000s, contributing to the housing market boom and bust, and has now left it lower than it should have been since 2010—with the current calculated rate of two percent. After the previous lessons of failed policies, the Fed would be wise to return to a more rules-based approach that misallocates fewer resources.
Supporters of this monetary policy argue, including former Chairman Ben Bernanke, that inflation remains low and the labor market is near full employment. It’s helpful to examine the period from December 2008 to August 2014 when the last round of quantitative easing essentially ended. During this period, the Fed’s assets, called the monetary base, increased by a massive 155 percent leading to a 75 percent increase in the money supply.
Indeed, if you just consider the increase in the consumer price index, price inflation increased by 12 percent over six years for an annual average of only 2 percent—in line with the Fed’s implicit target. However, other asset prices did inflate to the tune of 135 percent in oil prices, 58 percent in gold prices, and 124 percent in the S&P 500. There was certainly asset price inflation.
Supporters also cheer the drop in the unemployment rate from 10 percent in October 2009 down to 5.1 percent in September 2015. But this misses the large number of people who have dropped out of the labor force and those working part time but would like a full-time job, which when added to the total unemployed brings the current underutilization rate to a whopping 10 percent.
Collectively, these policies have misdiagnosed the U.S. economy. There is less economic activity with fewer dollars in the private sector due to higher taxes, more government debt, and more dollars flowing to unsustainable projects from excessive monetary easing. It’s no wonder that the U.S. has dropped so far in its ranking of economic freedom and Americans have been left to suffer.
Fortunately, the system of federalism provides an opportunity for a laboratory of state competition within an umbrella of federal policies. In search of a more free market model that would reward risk-taking and entrepreneurial activity, the Texas Public Policy Foundation recently released a paper comparing economic freedom and labor market measures among the largest states—California, Texas, Florida, and New York—and U.S. averages during the last 15 years.
With the highest ranking of economic freedom and the best labor market results compared with the largest states, Texas acts as a model. This top ranking isn’t an accident as Texas has kept taxes low, never enacted a personal income tax, and passed sensible regulations. These factors combined define the Texas model.
This model helped support the creation of 73 percent of all new nonfarm jobs in the U.S. from January 2000 to December 2014. Though critics often shrug these off as low-paying jobs, the inflation-adjusted private pay has been 67 percent higher than the U.S. average since 2000.
Despite the rhetoric about income inequality, data show that Texas has had more equal income distribution since 2000 with fewer redistributionary policies than other large states. Further, the supplemental poverty measure, which considers cost of living differences among states and government transfer programs, shows that Texas’ rate matches the U.S. average and is the lowest among these states.
No matter how you slice it, the Texas model is one that supports prosperity. But even with this success, Texas could advance it’s lead even further by eliminating the state’s onerous business margins tax and effectively limiting state spending.
If they are really serious about renewing the American dream, the presidential candidates should trash their current policies and consider similar free market measures associated with the Texas model.
This commentary originally appreared in Forbes on October 15, 2015.
Most across the political spectrum agree that the government should provide some degree of access to healthcare for the poor and disabled. Disagreements tend to be over to what extent that access should be provided and whether people should be forced to purchase health insurance, as is the ongoing conversation at the heart of Obamacare.
To increase the number of insured people, Obamacare mandated that everyone have some form of health insurance or pay a $95 penalty the first year, increasing steeply thereafter. While this “individual mandate” clearly imposes costs on an individual’s budget and liberty, the U.S. Supreme Court did give states the option to expand Medicaid—the federal-state healthcare program for the poor and disabled.
Obamacare also introduced online federal insurance exchanges that include subsidies to help lower-income people purchase private health insurance and has drastically increased the eligibility criteria for those qualifying for Medicaid.
The Census Bureau recently reported that one year after Obamacare began the number of uninsured fell by 8.8 million to 33 million. This reduction seems rather minimal when individuals are forced to purchase health insurance or pay a penalty along with a decade cost of at least $1 trillion.
Critics blame the less than impressive decline on the 20 states that have not expanded Medicaid. However, these states are actually better equipped to care for those most in need because the states that have expanded Medicaid have seen much higher costs than projected. For example, Ohio’s expansion cost of $4 billion has been $1.5 billion greater than initially projected because per-member costs and enrollment were substantially higher than first thought.
The federal government has held a large carrot in front of states to pressure them to expand Medicaid by paying 100% of the increase in costs for the first three years through 2016. That share will gradually decline to 90% of the costs by 2020 and likely lower thereafter, leaving less of a stick to fall back on later.
This carrot and stick approach gives critics ammunition to claim that states that haven’t expanded are costing them dollars. The Kansas Hospital Association, which is in favor of Medicaid expansion, has a ticker on its website showing that the state’s choice not to expand has cost Kansas almost $750 million since January 1, 2014. This completely overlooks the fact that the state will face a growing share of the long-term costs, putting many Kansans’ on the program at risk.
Federal payments for Medicaid are based on matching state dollars depending on the state’s average per capita income. These payments range from 50% of the cost in Wyoming, to 57.13% in Texas, to 74.17% in Mississippi. The National Association of State Budget Officers recently noted that for the first time Medicaid represented a majority of federal funds to states in 2014.
In general, healthcare spending under Medicaid is rising at an unsustainable pace. Unless other budget priorities are forfeited, taxpayers may soon have to pay higher taxes. This has been the case in Texas.
While Texas didn’t expand Medicaid, the costs continue to skyrocket and during the last budget cycle increased healthcare spending to more than education spending for the first time in Texas history. The states’ share of General Revenue appropriations to Medicaid has increased by 42% to 23% in just over a decade.
Texas is now faced with how to best meet the needs of those on Medicaid and patients on the program are not receiving adequate care. Research shows that Medicaid patients have poor access to care and poor health outcomes. On the other hand, patients with private health insurance top both categories.
Considering these costs, the Texas Public Policy Foundation devised the Texas Medicaid Reform Model that first requires a federal block grant for Medicaid instead of matching funds. This would allow the state to allocate federal and state funds to assist non-disabled risk groups (i.e. kids, pregnant women, and adults eligible for TANF) purchase private health insurance based on a sliding scale determined by the federal poverty level (FPL).
As an enrollee’s income falls into a lower FPL category, the subsidy amount for monthly private health insurance premiums would increase until the subsidy covered 100% of the premium for the zero to 50% FPL range. At higher income levels for each risk group up to their maximum FPL under the current Medicaid program, enrollees would be required to contribute to the cost of their private coverage.
We based the coverage cost on gold or silver plans under the federal exchange. Enrollee contributions would be no more than 5% of their income on healthcare in most cases, which is substantially lower than the 8% maximum under Obamacare.
Using data from the Texas Health and Human Services Commission (HHSC) from 2013 to 2023, our cost estimates from our reform model compared with HHSC’s data show that Texas could save at least $4 billion per year, increasing to around $6 billion by 2023. Cost-savings will likely be much higher as more competition in the private health insurance market bid down prices and patients have more control over their future healthcare needs.
This patient-centered, market-based model should be a path forward for other states to follow so patients will be in the driver’s seat when it comes to controlling their healthcare costs. For the poor and disabled insured through Medicaid but who receive fewer positive outcomes and limited access to care and all taxpayers who pay more for this program than private coverage under our proposal, the time for reform is now.
Ph.D. Economist at the Texas Public Policy Foundation. Blog posts are publications by the author.