Why Does Healthcare Cost So Much in the United States?

Most Americans believe that we should have a healthcare system that provides care to all of us. We do not have such a system, and one of the reasons we do not is that our healthcare is too expensive. Healthcare in the United States costs far more than healthcare in other developed countries but does not deliver better results. Books have been written to answer the question of why our system is so expensive, and in this article, I have tried to summarize their findings in a useful way.

There are five fundamental reasons why our healthcare has become so expensive, and they are:

1.       The enormous advances in medicine that have taken place since World War II have pushed up the price of healthcare.

2.       Our third-party payment systems were introduced and later modified without planning or effective cost controls. They pay “fee for service” for healthcare in a fragmented and uncoordinated market. 

3.       Healthcare organizations and medical practices have come to be governed by a business ideology that gives priority to maximizing revenue and market share over all other goals.

4.       Our system does not contain incentives for patients to make good use of primary care or to adopt health lifestyles. Health care providers are paid for treating sick people rather than for keeping them healthy.

5.       Our government has intervened in the healthcare market in ways that were badly thought-out and distorted by politics.

Advances in Medicine

Healthcare is expensive in all countries because modern drugs and medical procedures are expensive. Improvements in pharmaceuticals, in anesthesia, in diagnostic techniques and in surgery that have been made since WWII have made it possible to cure diseases that we could not cure before that time, but those advances have come at a cost.  We must recognize that if we want to have the medical science of the twenty-first century, we will have to pay more for healthcare than we did in 1940.

However, not all of the cost of healthcare in the United States may be accounted for by the advances in medical science. The process of innovation in medicine has interacted with the other four causes to inflate our healthcare costs far beyond those faced by other countries.

  

The Emergence of Third Party Payment without Planning or Cost Controls

Employers began to offer health insurance during World War II because wartime wage controls prevented companies from offering higher wages to attract employees in the tight wartime labor market.  After the war, health insurance gradually became a standard part of the benefits that large companies offered to their employees, and most Americans now expect that most of their medical bills will be paid by health insurance that they obtain through their jobs. Furthermore, this became a tax-exempt form of income with the tax reform act of 1954.

Health insurance or any system of third-party payment changes fundamentally the nature of competition in the healthcare market.  If I am sick and have good health insurance, I do not care how much it costs to cure me. I want the best care delivered in the most agreeable way, and therefore, a hospital seeking my business focuses on providing all of the latest technology and on making its patients as comfortable as possible. So, we have a private room for every patient, and we have too many MRI machines or CAT scan machines in each community. These investments have to be paid for, and because the hospital’s bills are paid by insurance companies rather than by the patients, the hospitals in many communities can simply raise their prices.  The ability of hospitals to raise prices has also been enhanced by the emergence of large hospital and clinic chains that dominate local healthcare markets.

Third-party payment creates similar incentives for pharmaceutical companies. They concentrate their research on drugs that will bring high profits, and they raise prices to inflate those profits. The patients of course want the latest and greatest drugs to cure their illnesses, and they do not care about cost when they do not have to pay.

The effect of third-party payment is magnified for doctors by the “fee for service” payment model.  When doctors are paid a fee for each service that they provide, they can increase their incomes by providing more and more services, even when the services do not help the patients, and if the patients do not care how much they are charged, the opportunity to bill for unneeded services is greatly enhanced. So, we find doctors performing unnecessary tests and unnecessary surgeries.  

In addition, the doctors find ever more creative ways to bill for their services in order to maximize their incomes. For example, they use “physician extenders” like nurse practitioners or physician’s assistants, and the patient is billed both for the time of the extender and for that of the physician who “supervises” her. 

The insurance companies resist these trends, but their resistance is weak and uncoordinated. Because of anti-trust law, they do not band together to negotiate with the hospitals. Instead, each insurance company negotiates as it can, but the companies individually are often not strong enough to hold down prices. To save money in this situation, the insurance companies have adopted several strategies. First, they employ people to scrutinize each claim in order to deny any claims that they can deny. Second, they raise the price of the insurance they sell.  Finally, they sell policies with high deductibles and co-pays to encourage patients to choose the most cost-effective treatments.

As prices of both healthcare and health insurance keep rising, patients are less and less able to afford their insurance and more and more people are uninsured. Those who are insured find that as deductibles and co-pays rise, the insurance covers an ever smaller share of their medical bills.

The distorting effect of third-party payment is magnified by the fact that often neither doctors nor patients know the prices of drugs or medical services, and information about prices is very hard to obtain for several reasons. First, each insurance company negotiates separately with each health care provider. So, the price depends on the patient’s insurance.  Second, healthcare providers are very reluctant to tell either patients or doctors what the prices of specific services are.  Third, doctors are not trained to think about prices when they prescribe treatments. Thus, even in cases where a patient or a doctor might choose an inexpensive but effective treatment over a more expensive one, he or she lacks the information to make that decision. 

The Rise of the Ideology of Maximizing Revenue and Market Share

American health care providers have come to accept a variation of an idea famously expressed by the economist Milton Friedman in an article in The New York Times Magazine, where he said,

… there is one and only one social responsibility of business—to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition without deception or fraud.

Most health care providers are at least nominally non-profit organizations. So, they don’t strive to maximize profit, but they do strive to maximize revenue and market share. This approach is in direct conflict with the traditional ideology of medicine, which stresses the physician’s duty to care for patients and with the traditional mission of hospitals, which were charitable institutions designed to provide beds and nursing care to patients.

The idea that the main  responsibility of a health care provider is to maximize its revenue and market share has become widely accepted as we can see by the fact that the CEO’s of such organizations are rewarded mainly for advancing those goals, although measures of the quality of care are also considered in some healthcare organizations. Since the health care providers are non-profit organizations, their administrators use the revenue to raise their salaries and to build luxurious facilities.

Many doctors are bothered by the idea that maximizing their incomes is their only responsibility, but they have little choice but to go along. If they join a large healthcare organization, they are pressured to maximize the money they bring into it. If they stay outside of large organizations, the doctors in many markets find that their costs go up and their incomes go down because they are “outside of the networks” within which patients covered by insurance must often seek their care

The idea that the only goal is to maximize revenue and market share  magnifies the effects of third-party payments. The idea justifies the use of any charges that are not actually fraudulent or illegal, and it justifies raising prices to levels that cannot be justified by the need to cover costs. A recent case that illustrates the problem concerns the AIDS drug Daraprim. The rights to Daraprim were purchased by Turing Pharmaceuticals, which had been founded by a hedge fund manager named Martin Shkreli. After purchasing the rights to the drug, the company raised the price of a dose from $13.50 to $750.00, and if a company’s only responsibility is to maximize its revenues, it was fully justified in doing so. This is a particularly egregious example, but it is not atypical. In her book, An American Sickness, Dr. Rosenthal tells us about the many strategies used by doctors and hospitals to maximize their incomes.

They invent charges in order to inflate their bills. For example, a hospital may charge a “facility fee” for the use of an operating room in addition to the charges for all of the materials that are used in an operation. This is as if an automobile dealer were to add a facility fee to the price of a new car in order to cover the use of his showroom. Doctors have been quick to follow suit. A surgeon may establish an ambulatory surgery center where she, too, may charge a facility fee.  

Insufficient Incentives to Use Primary Care or to Choose Healthy Lifestyles

Our healthcare system does not do enough to encourage people to use primary care. Good primary care is very inexpensive. It can help people to avoid getting sick, and it can catch illnesses before they require hospitalization. Often, health insurance does not cover primary care, and this is especially true for policies with high deductibles or co-pays.  Moreover, this country has many people who have no health insurance at all, and they can receive free care mainly in hospital emergency rooms.  Consequently, we rely too much on emergency rooms and hospitalization, which are the most expensive parts of our healthcare system.

Our system also does too little to encourage people to live in healthy ways. A large part of the cost of healthcare in the United States is due to the need to care for people with chronic conditions like diabetes or obesity.  We can reduce the frequency of such conditions by encouraging people to live in healthy ways, but our health care providers are incentivized to treat sick people rather than to keep them well. That, too, raises the cost of healthcare in our country.

Poorly Thought Out and Politically Distorted Government Intervention

The increased cost of healthcare has created hardships for people who cannot afford insurance that really covers the cost of the care they need. This problem has become so serious that the inability to pay inflated medical bills has become the principal cause of personal bankruptcy in the United States. To alleviate the hardships experienced by our citizens, the federal government has stepped in with programs designed to pay for care for people who cannot afford it.

The most important of these is Medicare, which pays for care for old people.  It doesn’t cover the whole cost, but people may buy reasonably priced Medicare supplement insurance that covers most of the part not covered. Medicare has been extremely successful in providing care, but it has been much less successful in controlling the cost of care. In fact, in some ways, it has contributed to the problem.

Medicare has enough market power to set the amount that it will pay for any particular service, and any doctor or hospital that wants to treat Medicare patients must accept what Medicare pays. So, the program is able to control its own costs to some degree, but Medicare pays “fee-for-service.” So, the program is still vulnerable to bills that are inflated by charges for unnecessary services. In addition, it cannot control what the doctors and hospitals do to recover the income that they lose by treating Medicare patients.  That income is recovered through inflated charges that are paid by non-Medicare patients. As we have seen, the healthcare market places few constraints on the ability of healthcare providers to inflate their prices or to invent new ways to bill for their services, and the use of such methods drives up the cost of care in the system as a whole.

Medicare has also been unable to control the cost of drugs but in this case, the reason is political. When Medicare Part D, which pays for prescription drugs, was created, the drug companies lobbied successfully for a provision in the law that prohibited Medicare from bargaining with them over drug prices. Medicare had to accept whatever prices the companies set. Some patients may choose a Medicare Advantage Plan or a private drug coverage plan that is permitted to bargain with the drug companies, but no such plan has the bargaining power that Medicare is prohibited from having. Of course, that means that the drug companies are able inflate their prices at will as we have seen in the case of Daraprim.

The political resistance to practical measures to control the cost of care has also affected the Affordable Care Act otherwise known as Obamacare. President Obama’s proposal originally included national negotiation of drug prices along with other provisions to control costs, but most such provisions were stripped from the bill in order to get it passed with the support of powerful organizations like PhrMA, the AMA and the American Hospital Association. 

Thinking about a Solution

How can we solve the problem of the ever increasing cost of healthcare? How can we create a system that provides care for all of us at a cost we can afford to pay?  I will not attempt to offer a detailed prescription for a solution, but I can suggest some principles that can form its basis.

First, we must accept the need for non-market methods to control costs. We cannot provide care for all citizens without such methods. The cost of modern healthcare would be too high for most of us to afford without health insurance, and so, we must find ways to counter the price inflation that third-party payment systems introduce into the market.  Every country with a successful system of universal healthcare has had to use non-market methods for controlling costs, and there is no reason to believe that we can be an exception.

Non-market methods might include dictation of prices by government in the way that Medicare dictates prices now, or the methods might include national or perhaps state-level negotiations of common prices for drugs or for “bundled prices” for medical or surgical treatments. (A “bundled price” is a single price for – say – removing a gall bladder, and that single price would replace the detailed list of charges for individual services that now appear on a bill for gall bladder removal.) National negotiations and bundled prices are used in several countries.  Effective managed competition could also be part of a solution.

Second, our system must encourage hospitals and doctors to strive for high quality care rather than for maximum revenue and market share.  Some incentives of this kind are already included in the Affordable Care Act. For example, a hospital may be penalized if it has too high a readmission rate.

Third, we need a system that encourages people to make good use of primary care. Good primary care reduces the need for emergency care and for hospitalization, which are the most expensive parts of our healthcare system.  Some encouragement for people to use primary care is already included in the Affordable Care Act. For example, the act requires that certain kinds of screening tests – like colonoscopies - be offered free to patients.  We might also reduce costs by requiring primary care physicians to act as gatekeepers to the rest of the healthcare system as is done today in the United Kingdom.

Fourth, we need a system that encourages people to live in ways that promote health.  Much of the cost of healthcare in the United States is due to the cost of caring for people with chronic conditions like diabetes or obesity, and the frequency of such conditions can be reduced by encouraging people to adopt healthy lifestyles.  Ways to do this are not hard to find. For example, my Medicare supplement insurance pays for membership at a gym on the theory that regular exercise will make me less likely to need expensive medical care.

Finally, the system must provide patients and doctors with accurate information about prices in order to enable them to make decisions based on costs.

For more specific ideas about how we can build a better healthcare system, you can look at the books by T. R. Reid and Elisabeth Rosenthal in the list of sources. Mr. Reid’s book is a survey of the healthcare systems that are used in several countries around the world. A briefer version of the survey may be found in a video called “Sick around the World” that was originally presented in the "Frontline” program on PBS. You can watch the video on YouTube at https://www.youtube.com/watch?v=NSpnpexPN5k. 

Dr. Rosenthal’s book is a comprehensive review of the way that our current healthcare system has evolved over the last several decades. The book also contains her detailed prescriptions for turning it into a system that provides good care at prices that we can afford.

Sources

1.       T.R. Reid, The Healing of America, Penguin Books, London, 2009

2.       Elisabeth Rosenthal, An American Sickness, Penguin Press, New York, 2017

3.      Milton Friedman, “The Social Responsibility of Business is to Increase its Profits” The New York Times Magazine, September 13, 1970. http://umich.edu/~thecore/doc/Friedman.pdf

4.       Andrew Pollack, “Drug Goes From $13.50 to $750, Overnight,” New York Times, September 20, 2015, https://www.nytimes.com/2015/09/21/business/a-huge-overnight-increase-in-a-drugs-price-raises-protests.html

5.       [Author not known], “More Americans Say Government Should Ensure Health Care Coverage,” Pew Research Center, http://www.pewresearch.org/fact-tank/2017/01/13/more-americans-say-government-should-ensure-health-care-coverage/

6.       Melanie Evans, “Bonuses Still Tied to Better Financials,” Modern Healthcare, April 26, 2014, http://www.modernhealthcare.com/article/20140426/MAGAZINE/304269985

7.       [Author not known], “Medical Bills Leading Cause of Bankruptcy Harvard Study Finds,” Consumer Affairs, February 2, 2005, https://www.consumeraffairs.com/news04/2005/bankruptcy_study.html

8.       Alain Enthoven, “History and Principles of Managed Competition,” Health Affairs, Vol. 12, Issue 1,   https://www.gsb.stanford.edu/faculty-research/publications/history-principles-managed-competition

Our Roads and Bridges are the Responsibility of Our State Community

Our Legislators Don’t Understand the Role of Our State Government

Our state legislature is having a hard time agreeing on a budget this year, especially when it comes to paying for and roads and bridges. One legislator says he won’t vote for the budget unless it eliminates the requirement to pay the prevailing wage for workers who work on road projects. Another legislator says that we should eliminate bonding as a means of paying for our roads. Our governor says that that he won’t agree to raise the gasoline tax or the vehicle registration fee.

All of these positions stem from a doctrinaire belief that the most important thing for our state to do is to lower taxes. People who hold this belief refuse to see that our state government has an important role in providing an environment in which all of us can thrive and that we must all share in its cost. Our roads and bridges make it possible for us to get to work. They make it possible for our factories to ship their products to markets all over the world. They make it possible for tourists from Chicago to spend their money in northern Wisconsin. We all know that our transportation network could never be built and maintained by the private sector alone. Much of the work is done by private contractors, but the planning and funding comes from the state.

All of Us Benefit and All of Us Should Pay

As a community we all benefit from our roads and bridges, and so it is only fair that we should pay for them as a community through our taxes. We have done so for many years through the gas tax.  However, the gas tax at its current level is no longer sufficient to pay for our community’s roads and bridges, and so we have to reconsider the way we pay for them. We can find a way if we recognize that our state government is not something imposed on us. It is the means by which we act together to accomplish things like building roads that we cannot accomplish as individuals.

The Tax Burden Should be Apportioned Fairly

We should also accept that the cost of our roads and bridges should be apportioned as fairly as possible.  Apportioning the cost fairly means that those who use the roads the most should pay the most. To do this, we can increase the gas tax, or we can move to a tax based on mileage.  I favor the latter because such a tax would fall equally on drivers of electric cars and drivers of gas-powered cars. We could also increase the registration fee. We should not solve our problem by eliminating the “prevailing wage” rule in order to reduce the wages of the workers who build and maintain our roads. That would be unfair because it would not apportion the majority of the cost to those who receive the majority of the benefits.

Apportioning the cost fairly also means that future users of our roads and bridges should bear a part of their cost.  It makes no sense to pay the whole cost in one year when the benefits will be spread over decades. So, we should use bonding to pay for roads and bridges. However, we should not use it as a substitute for raising taxes. We current users have to pay our share, too, and in addition, if we are going to borrow more money, we will need more tax revenue to pay our debt. We can pay for our roads and bridges in a sensible way if we stop focusing on reducing taxes and recognize that if our state community needs roads and bridges, we must pay for them with state taxes. Once we accept that principle, we will be able to focus on apportioning the cost in the fairest possible way.

Social Security: Fairness, Community and Sustainability

Social Security Must Be Reformed

Social Security must be reformed. As the system is now constituted, it is not financially sustainable because it pays out more than it takes in. If nothing is done, beneficiaries will face cuts in their benefits as soon as 2033.  What can we do to put Social Security on a firm footing and meet the commitments we have made?

We Do Not Duck Our Responsibilities

We have to find a way because we are not people who would duck our responsibility to care for the old people among us. We will not abandon the people who nurtured us and worked hard to build the world in which we live.  Some people in our society can earn and save enough on their own to provide a comfortable old age, but not everyone earns enough to do so, and it would be wrong for us to abandon them in their time of need. So, we need Social Security.

We Recognize that Social Security Benefits Are Earned

Moreover, we have a responsibility to fix Social Security in a way that preserves the benefits that people have worked for. We have to do this because Social Security benefits are earned.  They are contractual. They are not charitable contributions. A worker and his/her employers pay into Social Security throughout his/her working life. An individual’s “account” may be seen as a combination of a savings account (the worker’s share) and deferred compensation (the employer’s share), and people who have worked hard all of their lives have a right to the benefits they have earned. If we cannot pay those benefits because we have allowed the system to fail, we will have cheated them, and our American community cannot be based on cheating.

We Must Be Financially Realistic

On the other hand, we have to be realistic because Social Security benefits are paid in the real world with real money. We cannot promise benefits that we cannot pay, and we have to recognize that, as things now stand, we will not be able to meet our commitments indefinitely.

To solve this problem, there are only two things we can do:

1.       We can increase the program’s revenue.

2.       We can modify the benefit formula to reduce the program’s benefits.

A Possible Solution

There are many ways for us to increase revenue or to reduce benefits, and to test out various possibilities, I used “The Reformer: an Interactive Tool to Fix Social Security,” which is on the web site of the Committee for a Responsible Federal Budget. This interactive tool allowed me to try various alternative “fixes” both individually and in combination to see what it would take to fix Social Security in a way that was financially realistic while honoring our responsibilities to be honest with our workers and to care for the old people among us. The tool allowed me to try increasing the Social Security tax or decreasing the benefits, and as I did so, I had to face the moral question behind each choice? Who should pay higher taxes to increase Social Security’s revenue?  Whose benefits should be decreased? Should everyone pay higher taxes, or should the increases be concentrated on those with high incomes? Should everyone’s benefits be reduced or only the benefits of the rich? Should we use our money to pay benefits only to those who really need them, or should we pay benefits to everyone who has earned them?

Here are choices that I made among the alternatives that the web site gave me, and these choices would make Social Security solvent for 75 years and beyond. I started with revenue increases because our responsibility to meet our contractual commitments requires us to avoid reducing earned benefits when we can.

                                               Increases in Social Security’s Revenue

Type of Revenue Increase	Percent of the Shortfall Closed in the 75th Year
Increase the payroll tax by 1.4% (The site allowed me to choose the amount. At the median US income of about $50,000, a worker would pay an additional $700/year.)	50%
Subject all wages to the payroll tax. (Today, only wages up $118,500 are taxed. The cut-off point rises with inflation.)	71%
Cover newly-hired state and local workers. (Today, state and local governments can opt out of Social Security.)	6%
Increase the taxation of benefits (Today only a portion of Social Security benefits are taxed.)	8%
Diversify the investments in the Trust Fund to increase returns (This means investing in the stock market.)	19%

The first two items listed would make Social Security solvent for the next 75 years, and it was tempting to stop there, but with only these two changes, there would still be a gap after 75 years, which meant that Social Security would not be fully solvent. So, I added the remaining three revenue-increasing items. Unfortunately, they still did not fully close the funding gap beyond the 75^th year. In order to make the program fully solvent, I turned to modifications of the benefit formula. Here are the choices I made.

                                          Modifications of the Benefit Formula

Type of Modification	Percent of the Shortfall Closed in the 75th Year
Slow initial benefit growth for the top 20% of earners (This affects the formula by which a person’s initial benefits are calculated.)	3%
Modify Cost of Living Adjustments by indexing COLAs to the chained CPI	20%

      Taken together, these revenue increases and modifications of the benefit formula would completely close the funding gap and would make Social Security safe indefinitely, but they are all politically controversial.  Radical rightists are generally opposed to tax increases, while progressives generally oppose reductions in benefits, but the truth is that, without using both approaches, we cannot make Social Security fully solvent while meeting our moral responsibilities to care for the old and to honor our contractual commitments.[1]  The fact that our commitments are contractual means that we have to be honest with our workers about what they will receive. Promising benefits that we cannot pay would be equivalent to promising the workers a salary that we could not pay. If we did that, we would be guilty of fraud.

My first choice in benefit cuts was in line with our current practice. Today, we “bend the curve” in benefit calculations to avoid paying very large benefits to a few people and to be able to pay a minimum benefit to the very poor. The need to bend the curve will increase if we tax all wages because otherwise, a few people who earned very high incomes during their working years, would receive outlandishly high benefits. A more extreme version of this approach would be to “means test” Social Security benefits and deny them entirely to people with retirement incomes above a certain level, but doing that would change Social Security from an earned benefit program to a welfare program, and that would be a mistake.

My second choice in benefit cuts was to use the “chained CPI” to calculate annual cost-of-living increases. This has recently been controversial, but it is the least bad of the alternatives presented on the interactive website, and I could not make Social Security fully solvent beyond the 75^th year without some reduction in the cost-of-living increases. So, I chose this one on the principle that we should not make promises that we cannot keep. People need to know what they can depend on and what they need to provide for themselves. 

In making my choices for increasing revenue and reducing benefits, I tried to apportion the costs fairly. The tax increase of 1.4% would be shared by everyone, but collecting Social Security taxes on all wages would affect only those with high incomes. On the benefit side, slowing the increase in the initial benefit for the top 20% of earners would affect only those with high incomes, but using the chained CPI would affect everyone.

Diversifying the trust fund’s investment portfolio was an easy choice because it caused no one to pay higher taxes or to lose benefits, but it is politically controversial because it would convert the Social Security Trust Fund into the largest stockholder in many companies, and that would be a big change in the structure of our economy. However, most state pension funds invest in the stock market, and they receive higher returns than those received by the Social Security Trust Fund. Wisconsin’s pension fund provides a successful example of an honest, well-managed, fully funded application of this approach.

The choices I have listed represent my attempt to put Social Security on a firm financial footing while recognizing that we are a community that recognizes its responsibility to care for its members who are old, and that we are a community that respects contractual commitments and does not renege on its promises. I invite my readers to try their own, alternative solutions.

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[1] Actually, there is a way to achieve what we want without reducing benefits, but it would require a major change in the structure of Social Security: we would have collect Social Security taxes on non-wage income like interest, dividends or capital gains. However, that would be beyond the scope of this discussion, which is about the things we can do within the structure of the program that we have.

 

 

Social Security, Student Loans and the Paradox of Thrift

A Contradiction at the Heart of Our Economy

      We have a deep contradiction at the heart of our economy and our society. Our economy cannot grow or provide jobs for people unless most of us spend more than we can afford and unless most of us fail to save adequately for retirement. Put simply, we have a choice as a society between high unemployment and poverty in old age. Why is this so?

Why We Must Spend

      Consumer spending is a large portion of economic activity in the United States. Although there is disagreement among economists over the exact percentage, everyone understands that consumer spending is important and that if it is not robust, our economy will suffer. If consumer spending is strong, businesses become optimistic, and they hire workers. If consumer spending is weak, businesses become pessimistic and lay off workers.

     Thus, in order for our economy to be healthy, we must spend, and this season is the time when we spend the most. A great deal of advertising effort goes into persuading us to spend, and we have become used to the idea that we can use credit cards to spread the cost over several months. We run up debts during the holidays and the interest on our debts adds to the cost of the gifts that we give. Holiday giving is not the only time we spend, of course. We buy cars. We furnish our houses. We acquire electronic gadgets, and we take expensive vacations. All of these contribute to the economic health of our economy and persuade businesses to create jobs.

We are Unprepared for Retirement

       But what about our individual economic health? It is well known that most Americans are woefully unprepared for retirement. Most of us don’t save enough to build healthy nest eggs, and many of us are facing difficult times in old age. So, while our economy is healthy, many among us are not healthy economically because we do not save enough.  We could save more and spend less, but if all or even most of us did that, consumer spending would decline dramatically, and we might well face a big recession. That contradiction between individual thrift and societal well-being is called “the Paradox of Thrift,” and it tells us that if we all saved as we should, our economy would suffer. Many people would lose their jobs and become unable to save just because they and everyone else had tried to save.  So, we have to keep on spending.

Spending is Threatened by Our Aging Society

       Unfortunately, healthy consumer spending is threatened by demographic trends. Our society is getting older as the baby boomers retire, and many of them are not prepared for retirement. They don’t have enough saved. People who don’t have much money can’t spend much. So, as the baby boomers retire, we can expect consumer spending to decline. We will be able to maintain consumer spending to some degree by loosening credit requirements and allowing people to finance their purchases with credit cards even though we know perfectly well that they will probably never be able to pay their debts. However, we saw in 2008 that this is not really a good idea. How can we balance the health of our economy with the need to provide for a comfortable retirement? How can we have sufficient consumer spending without impoverishing our senior citizens or our workers?

How Can We Maintain the Spending That We Need? 

      There are a couple of things that we can do, and we must do them together. First, we can strengthen and expand Social Security into a real, national pension system that provides people with a reasonable standard of living in old age.  If we do that, our seniors will be able to live comfortably and spend money. They will not buy the things that young people buy, but they will take their grandchildren on vacations and buy new cars.

      However, expanding Social Security will require working people to save more than they are saving now, and that will have a negative effect on consumer spending. We can minimize that effect if we finance the expansion of Social Security by raising the maximum income on which Social Security taxes are paid. This will concentrate the effect at higher income levels where people already save a higher portion of their income than poorer people do.

     Second, we can reduce the interest rates on student loans. This will have the effect of reducing the sizes of the monthly payments that recent graduates have to make, and that will free up more of their money to be spent. They will be able to buy houses and furnish them. They will be able to replace their cars.  They will be able to increase their spending on holiday gifts.

We Should Act in Our Own Interest

      I am not advocating these changes for humanitarian reasons, although I could do so. I am not suggesting that we expand Social Security because old people deserve a comfortable retirement, nor am I not saying that we should reduce the interest rates on student loans because the current rates place an unfair hardship on recent graduates. I am saying that we should do these things for a purely selfish reason, which is that if we do not do them, our economy will suffer, and all of us will suffer with it.

The Downton Abbey Solution

In recent decades, the top 0.1 percent of our people have come to own an ever increasing share of the wealth and income in our country, and in this way  our income distribution has come to resemble more and more the distribution that characterized the Gilded Age just before World War I. If we are going to permit the emergence of a society like that of the Gilded Age, perhaps, we should consider adopting some of that era’s social practices, especially those that dealt with the problem of unemployment. We can see those practices in an early episode of the television series Downton Abbey. In that episode, Matthew, a distant middle class relative who has become the heir to Downton Abbey, has trouble adjusting to aristocratic life. Specifically, he is annoyed at the attentions of his valet who insists on helping him to dress. Matthew wants to get rid of the valet because he can dress himself perfectly well, but when he expresses this to the Earl, he answers, “Would you really deprive a man of his livelihood because you can dress yourself?”

The point is that those who can afford to employ servants have an obligation to do so in order to provide jobs for people. This version of noblesse oblige is, in the Earl’s view, the only real justification for the existence of a wealthy, privileged class, and in fact, the wealthy class in Britain performed this role admirably.  In 1900, domestic service was Britain’s largest class of employment and included approximately 1.5 million people. (Today, only about 65,000 people are in domestic service in Britain on a much larger population base.)

Many features of the lives of the wealthy revolved around the fact that they employed large staffs of servants. For example, wealthy people changed their clothes often. They had morning clothes and evening clothes, and they engaged in activities like tennis or fox hunting that required special outfits.  In those days, there were no wash-and-wear fabrics. So, all that clothing had to be cared for by servants including washing maids, valets and lady’s maids. Wealthy people traveled by horse and by horse-drawn vehicles, too, and a staff was required to care for the horses and to drive the carriages. When automobiles arrived, they were driven by chauffeurs.  Meals were elaborate and they were served elaborately. So, kitchen staff was needed as well as a staff to serve at the dining table. Individuals did not choose this way of living. They followed a tradition that obliged them to maintain a certain style, and that style required a large staff of servants. In effect, their social position required them to employ those staffs, and more than a million people in Britain depended on the livelihoods that were thus created.

Our distribution of wealth may soon resemble that of early twentieth century Britain, and perhaps we should also learn something from its social rules. Perhaps we should begin to view our “top 0. 1%” as people who have an obligation to create employment. Here are some suggestions for rules for the top 0.1% updated to fit our twenty-first century world. 

1.       No person in the top 0.1% should drive his or her own car, and when such people arrive in public places driving themselves, they should be widely booed, and their social solecism should be reported in the press. Their friends should refuse to associate with them, and they should be refused admission to the trendiest clubs.

2.       No person in the top 0.1% should be able to cook. Anyone who can cook should be regarded as a low class person unworthy of participation in exclusive social events and should be barred from exclusive resorts and hotels. It should be clear that respectable people employ cooks and kitchen maids.

3.       Outdoor barbecues are a special case and require a separate cook. Clearly, barbecuing is beneath the dignity of a professional cook, and no such person would consent to work in a house that did not employ a specialized person for outdoor grilling. 

4.       No person in the top 0.1% should be seen carrying packages. Such people should carry purses, canes and gloves to indicate that they do not need to carry their own packages, and the men should remove their hats indoors to further encumber their hands. When such people shop, they should be accompanied by servants who carry their packages for them. It goes without saying that carrying packages is beneath the dignity of a chauffeur. 

5.       It should be considered unacceptable for a person in the top 0.1% to answer the door or the telephone in his or her house. Respectable people employ butlers for that purpose, and people in the top 0.1% who insist on answering their own doors or telephones should be shunned socially. 

6.       No parent in the top 0.1% should ever be seen in a public place with his or her children unless the children’s nanny is also present. Clearly, the responsibility to care for children precludes a nanny from functioning as a chauffeur, and carrying packages is beneath a nanny’s dignity. Thus, a woman who goes shopping with her children will need at least three servants to accompany her. 

7.       Only a nanny may take children to school, and since she cannot function as a chauffeur, she and the children must be driven by the family’s chauffeur. (It goes without saying that such people never take buses or subways.)  If the children have books, notebooks or other materials to take to school with them, a third servant must accompany them to carry these things for them. If a child arrived at school without being properly attended, other children of the top 0.1% would know immediately that he or she was not a member of their social class and would shun and bully the child.

I could go on, but you get the idea. If we are going to allow a very high concentration of wealth, it should carry with it a responsibility to use at least part of it to employ a large number of servants so that the wealth may be redistributed through regular, market mechanisms.