Why? In 2017, private insurance paid
about a third of America’s medical bills — $1.2 trillion, or 6 percent of GDP. Having the government pay those bills directly, without a revenue offset, would therefore be a spending increase — a fiscal stimulus — of 6 percent of GDP.
Suppose — as MMTers tend to assume — that interest rates nonetheless didn’t rise. Then this stimulus would have a multiplier effect, probably raising GDP, other things equal, by 9 percent.
Unemployment would fall somewhat less than this, because tighter labor markets would pull more people into the work force. That’s why “Okun’s Law,” the relationship between growth and changes in unemployment, has a slope less than 1 — usually estimated at around 0.5, although when I run the regression on recent data I get around 0.8. But even so, to increase GDP by 9 percent we’d have to see the unemployment rate fall by more than 4 points, that is, go negative — which of course isn’t possible.
And don’t tell me that we can pull lots of people who were previously out of the work force into employment; Okun’s Law already takes that effect into account.
But if the economy can’t expand as much as a multiplier says it “should” after an unfunded introduction of Medicare for All, what would happen? Inflation. Big time. Either that or the Fed would have to raise interest rates by a lot, crowding out a lot of private investment. That might be justifiable if the public spending itself takes the form of investment, say infrastructure. It’s less defensible if it’s for social insurance, no matter how pressing the need.
And if you think that the magic of heterodox monetary thinking somehow means that deficit spending is never inflationary, or crowding out never happens, or something, you don’t understand the functional finance that MMT advocates themselves claim underlies their doctrine.
Now, I am not saying that we can’t afford Medicare for All, just that it would have to be paid for with new taxes. You can certainly argue that most people would come out ahead, because those taxes would end up being less than the insurance premiums they and/or their employers currently pay. In fact, that’s probably true. Whether you could convince people to trade their private coverage for public insurance is another question, but that gets into political judgment rather than economics.
The point for now, however, is that rejecting conventional concerns about debt doesn’t actually do very much, if anything, to make paying for progressive initiatives look easier. Even if you consider debt a meaningless number, the size of the things progressives are proposing means that pursuing those initiatives without an offsetting increase in revenue would create a lot of inflationary pressure. There needs to be new revenue to achieve what progressives, myself included, want to achieve.
Again, I’m not arguing against an ambitious agenda. But heterodox monetary theory won’t let you avoid the reality that this agenda will have to be tax-and-spend, not just spend.
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