The Solution to Medicare and Social Security

My favorite radio station is public radio WLRN.  One show I enjoy most is On Point, hosted by the brilliant Meghan Chakrabarti.

Sadly, while she and her guests often lament the state of health care in America and the looming insolvency of Social Security, they never seem to offer a solution other than cutting benefits and/or making Americans pay more.

We can do better;

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The Real Limits on Federal Spending:
Healthcare, Poverty, and Inflation

Real resources are limited. Dollars are unlimited.

Two propositions should start any discussion of federal spending, healthcare, poverty, and inflation.

1. No American should be unable to obtain needed healthcare because they lack money.
2. No American should be forced to live in poverty merely because private income is inadequate.

These are not questions of whether the United States can “find” enough dollars. The federal government, as the issuer of the U.S. dollar, never can run short of dollars.

Alan Greenspan, Former Federal Reserve Chairman: “A government cannot become insolvent with respect to obligations in its own currency. Nothing prevents the federal government from creating as much money as it wants and paying it to somebody. The United States can pay any debt it has because we can always print the money to do that.”

The genuine economic question is whether the nation has enough real goods and services to satisfy the demand those dollars create.

That distinction changes almost everything. Federal finance commonly is discussed as though the federal government were a household, business, city, or state. Such users of the dollar must obtain dollars before they can spend them. The federal government creates the dollars it spends. Its meaningful limit therefore is not a shortage of dollars. The limit is inflation, and inflation ultimately is a problem of insufficient supply.

Inflation Is a Supply Problem

Prices rise when supply is insufficient relative to demand. When the shortage involves a product of limited importance, the result may be merely a higher price for that product. A shortage of a particular luxury handbag does not cause general inflation. But shortages of widely used necessities and inputs can spread price increases throughout the economy.

Energy is the obvious example. Oil and natural gas affect transportation, agriculture, manufacturing, chemicals, plastics, heating, electricity, and distribution. When energy becomes scarce, its higher cost is passed through to the prices of thousands of other goods and services.

Food shortages can have similarly broad effects. So can serious shortages of housing, labor, steel, shipping capacity, computer chips, or other resources that are used throughout the economy.

Wars, droughts, pandemics, crop failures, embargoes, OPEC restrictions, natural disasters, monopoly restrictions, labor shortages, housing shortages, and supply-chain failures all can create inflationary pressures without any need for “excessive” federal spending. The common element is not too many federal dollars. It is inadequate availability of important goods and services.

This is why the familiar phrase “government spending causes inflation” is misleading. It treats all federal spending as economically identical simply because it is all denominated in dollars. But the effect of spending depends on what it buys.

The Crucial Question: What Does the Spending Buy?

Suppose there is a serious oil shortage. Gasoline prices rise, transportation costs rise, and those costs work their way into food, manufactured goods, construction, and countless other prices. The federal government could respond by eliminating gasoline taxes or sending consumers checks.

Those actions would help people pay the higher prices, but they would not produce another barrel of oil. Indeed, by supporting demand for the same inadequate supply, they could let prices rise even further.

Now suppose the federal government spends the same number of dollars to attack the shortage itself: encouraging additional production where practical, expanding refining capacity, improving pipelines and distribution, developing substitute sources of energy, increasing efficiency, or removing some other bottleneck responsible for the shortage.

The number of federal dollars spent might be identical, yet the economic effect would be entirely different. The first form of spending finances competition for a shortage. The second increases the supply and therefore attacks the source of the inflation.

The important distinction, then, is not simply more federal spending versus less federal spending. It is spending that leaves shortages untouched versus spending that prevents or cures shortages. Federal spending can be inflationary, neutral, or anti-inflationary depending on its effect on the supply of the goods and services people need.

Healthcare: Financing Is Not Producing

Healthcare illustrates the distinction especially well. Millions of Americans cannot comfortably afford medical care, and public discussion treats this as though the nation lacks the dollars needed to pay doctors and hospitals. It does not.

The federal government can create all the dollars necessary to pay for healthcare. The real limitation is whether the country has enough doctors, nurses, technicians, hospitals, clinics, ambulances, laboratories, medicines, equipment, nursing facilities, home-health workers, and other medical resources.

Medicare for All therefore should have two inseparable parts. The first is financial: make necessary healthcare available regardless of the patient’s ability to pay. No one should avoid a physician, skip a prescription, postpone surgery, or face financial ruin because of illness.

The second part is productive: expand the healthcare supply enough to meet the demand created when financial barriers are removed. The federal government should finance medical education, nursing education, residency programs, training for technicians and other healthcare workers, and incentives to enter specialties and geographic areas suffering shortages. It should support construction and modernization of hospitals, clinics, laboratories, nursing facilities, and other medical infrastructure. It should finance medical research and the development and production of medicines, equipment, diagnostic systems, and treatments.

Simply giving people more ability to pay for a fixed quantity of healthcare could increase medical prices. But that is not an argument against Medicare for All. It is an argument against designing Medicare for All as nothing more than an insurance program. The answer to a healthcare shortage is to finance both access to healthcare and the production of healthcare.

The question “How can we afford Medicare for All?” therefore confuses dollars with resources. The federal government can afford the dollars. The nation must produce the healthcare.

Social Security and Poverty

The same principle applies to poverty, although the spending is less narrowly directed. No one in a wealthy nation should be forced to live in poverty because retirement, disability, unemployment, or low wages leave him or her without adequate income. A Social Security benefit sufficient to establish an income floor could eliminate much financial poverty immediately. Again, the federal government’s ability to create dollars is not the obstacle.

The inflation question is what recipients will buy and whether the economy can supply it. Additional income may increase demand for food, housing, medical care, transportation, home assistance, nursing care, recreation, and many other goods and services. Where supply can expand readily, additional demand can lead to additional production. Where supply is constrained, prices may rise.

That does not mean the government should preserve poverty in order to suppress demand. It means the government should identify the shortages and attack them. If affordable housing is scarce, increase the housing supply. If nursing-home beds are scarce, encourage construction and staffing of nursing facilities. If home-health workers are scarce, finance training and compensation sufficient to attract more workers. If transportation for the elderly is inadequate, expand it. If medical personnel are scarce, train more.

Reducing poverty by increasing income while simultaneously expanding the supply of the goods and services whose demand will rise is a far more humane anti-inflation policy than keeping people poor so they cannot bid for scarce resources.

The Wrong Cure for Inflation

Traditional anti-inflation policy often attempts to reduce demand. Higher interest rates, spending cuts, and tax increases can make borrowing and purchasing more difficult. If enough people are prevented from buying homes, cars, medical care, or other goods and services, price pressures may decline.

But this does not cure the underlying shortage. It can achieve balance by reducing the public’s ability to buy rather than by increasing the nation’s ability to produce.

If there are too few houses, one solution is to make mortgages so expensive that fewer families can buy houses. Another is to increase the housing supply. If energy is scarce, one solution is to suppress economic activity until energy demand falls. Another is to increase energy availability and efficiency. If medical services are scarce, one solution is to make medical care unaffordable for some people. Another is to produce more medical care.

The second approach grows the economy. The first just restrains it.

The Federal Budget Should Ask a Different Question

Federal programs commonly are judged by asking, “How much will this add to the deficit?” For a Monetarily Sovereign government, that question focuses attention on the wrong scarcity. Dollars are not the scarce resource. Every major federal spending proposal instead should be accompanied by a real-resource and inflation analysis.

The questions should be: What additional goods and services will this program cause people or government to demand? Are those goods and services available in sufficient quantity? Where are the likely shortages and bottlenecks? How rapidly can supply expand? What additional federal spending, incentives, research, training, construction, regulatory changes, or other measures would expand that supply?

Under such an approach,

• Medicare for All would be paired with expansion of medical capacity. Social Security for All would be paired with attention to housing, elder care, healthcare, transportation, and other likely constraints.
• Housing assistance would be paired with housing construction.
• Infrastructure spending would include measures to ensure adequate supplies of skilled workers, machinery, steel, concrete, and other necessary resources.

The federal budget then would cease being primarily an exercise in pretending the government might run out of its own dollars. It would become an exercise in managing the nation’s real resources.

The Gap

This has another important consequence. The income/wealth/power Gap between the rich and the rest is not narrowed merely by telling people that desirable programs are “unaffordable.” For the federal government, affordability in dollars is not the issue. The real issue is whether increased purchasing power can be matched by increased production.

A government that understands its Monetary Sovereignty can use federal spending to provide healthcare, prevent poverty, improve education, build infrastructure, support scientific research, and expand productive capacity. Properly directed, such spending can narrow the Gap while reducing, rather than increasing, the shortages that cause inflation.

Two Principles

Much of America’s unnecessary economic suffering rests on confusion about two basic facts.

1. First, the federal government never can run short of U.S. dollars. Taxes may serve important economic and social purposes, but the federal government does not need to collect dollars before it can create and spend dollars.
2. Second, the true constraint on federal spending is not the number of dollars created. It is the availability of real resources. Inflation occurs when important supplies are inadequate for the demand placed upon them. Therefore, the intelligent response to inflation is to identify the shortages and cure them.

Those two principles lead to a very different conception of federal economic policy. We do not need to choose between adequate Social Security and stable prices, or between universal healthcare and stable prices. We need to finance what people require while simultaneously financing the productive capacity necessary to provide it.

The United States does not need to ration dollars. It needs to prevent shortages.

Rodger Malcolm Mitchell