This radical money policy would easily pay for Bernie Sanders' Medicare for all
Who's ready for some money printing?
Last week, Bernie Sanders' Medicare-for-all dream got a lot more real. Long consigned to the fringes of politics, Sanders' bill now has at least 15 cosponsors in the Senate. Admittedly, the bill is quite utopian, which has opened it up to criticism. But it should be understood as the opening bid in what will surely be a long and painful bargaining process.
That said, Sanders does have at least one big problem on his hands. Ironically, it's not a problem created by his leftism or idealism. Rather, it's created by the important way he actually agrees with the centrist political establishment.
Namely, how will Medicare for all be paid for?
Sanders has released some ideas for new taxes. But he tends to be pretty cagey on the question. At the same time, he doesn't really deny that his proposal needs to be paid for, leaving him defenseless to charges of unseriousness.
Well, you know what? He should deny it.
It would be totally justifiable on the economics. But it would also drastically expand Sanders' options for building a majority coalition of legislators.
Sanders' Medicare-for-all vision is extremely ambitious, even compared to the international systems he cites as guideposts. It covers basically all forms of health care, and demands essentially no out-of-pocket spending from patients. That's a great deal for individual Americans. But it also means tons of spending.
Now, single-payer advocates argue that instead of telling patients to make do with less, the system could just tell providers to make do with less. With its new dominant bargaining position, the government could force hospitals, doctors, device manufacturers, drug companies, and other providers to accept lower reimbursement rates. And the prices providers currently charge in America are indeed crazy high compared to most countries.
The problem is the health-care sector has grown accustomed to those high prices. If they dropped suddenly, it would cause massive upheaval: hospitals would close, doctors would go out of business, etc. It would be many, many orders of magnitude more disruptive than the arrival of ObamaCare. So you could just demure from squeezing prices, too: Start by paying roughly the same reimbursement rates the health-care sector enjoys now. Then ratchet them down very slowly over time.
But again, that means you start out spending a ton of money.
The government already forks over 7 percent of GDP on health care each year. The private sector contributes another 10 percent, for a total of 17 percent of GDP annually. Under Sanders' plan, that total would increase somewhat, because of the coverage expansion. But mainly we're talking about switching that 10 percent from private spending into the public spending column. That would bring America's total annual government spending to about 48 percent of GDP. That's high, but well within the bounds of other advanced Western economies.
The problem is that 10 percent of GDP is roughly $1.9 trillion. If you concede that this spending should be matched by $1.9 trillion in new annual tax revenue, you've just created an enormous political problem for yourself.
Most people assume the money the government spends has to come from somewhere, just like household spending. But your household can't print U.S. dollars. The federal government can. It's a difficult idea to grasp, but "raising revenue" through taxes isn't actually necessary. The government could technically just print new dollars to finance every cent it spends. It can never run out of money.
Where the federal government runs into problems is inflation. If it pumps out too much new money, the economy overheats and damaging levels of inflation ensue. But how much new money the economy can absorb without affecting prices changes dramatically over time. When the economy is in a slump, it can absorb a lot of new money. When it's at full employment and wages are rising fast, it can absorb very little.
Despite eight years of recovery from the Great Recession, the U.S. economy remains in a very deep hole. No one really knows how deep. But there's good reason to think the annual hole is still well in excess of $2 trillion. In other words, the economy could probably absorb $2 trillion in new money every single year without sparking inflation. That's right around Medicare-for-all's public shortfall.
Now, it would still be prudent for Sanders to match some of the new spending with new taxes because as the economy improves, there will be less wiggle room to spend. But he hardly needs to match all of it. Reasonable assumptions suggest his plan would already result in a bit over $1 trillion in new revenue.
Furthermore, once Sander's maximalist opening bid has gone through the legislative bargaining process, it will almost certainly include some cost-sharing, more limited coverage, and an initial squeeze for providers. All of which would bring that $1.9 trillion figure down. (Adopting Canada or Britain's cost-sharing levels would knock at least $250 billion off the federal price tag all by itself.) So now we're only adding $500 or $600 billion in new deficit spending, and quite possibly less.
Now, all that new deficit spending ought to stimulate the economy, bringing us closer to maximum output. And at maximum output, we really should try to match all spending with tax revenue. But how long would it take before dropping that extra money into a $2 trillion (or more ) became unsustainable? It's unclear. There are a lot of forces pushing the economy up and down at a given moment, and we've already been deficit spending hundreds of billions annually for many years with little inflation to show for it.
There are a few things to keep in mind, however: As the economy improves, tax receipts go up due to higher incomes, and the deficit closes to some degree even without Congress altering tax law. Plus, hiking taxes when the economy is going gangbusters will be much easier politically than it is now. Finally, tax hikes aren't our only option for keeping the economy from overheating. The Federal Reserve could also hike interest rates. It isn't ideal, but it makes much more sense — and is far less damaging — when the economy is at full steam.
So we have options, and can figure out how to eventually raise taxes enough when (and if) it becomes necessary.
Sanders probably realizes all this. One of his chief economic advisors during the 2016 campaign was University of Missouri-Kansas City economics professor Stephanie Kelton. Along with her fellow economists in the Modern Monetary Theory movement, Kelton has been pushing exactly these points for years.
Perhaps Sanders thinks this argument is too radical for Americans to absorb. But transitioning America's fractured and super-expensive health-care system to Medicare for all is a far bigger challenge than building such a system from scratch. If Sanders wants to take that challenge on, he needs to confront the fact that most Americans fundamentally misunderstand the way public financing works.