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WASHINGTON – The unaffordable costs, tax increases and negative economic consequences of proposed one-size-fits-all new government health insurance systems – such as Medicare for All, Medicare buy-in and the public option – continue to make headlines. A new analysis from Penn Wharton reveals that Medicare for All could “could shrink U.S. GDP by as much as 24% by the year 2060,” Yahoo Finance reports.

… [T]he model warns, if the plan is deficit-financed – paid for by government borrowing – “the negative effects of larger deficits on labor supply, capital accumulation and GDP would significantly outweigh the positive effects on the economy that come from a larger and healthier workforce.”

Proudly titled "Medicare-for-All," the Sanders scheme would eliminate the private insurance industry and establish a single, federally run insurance pool open to all.

Sanders promises a healthcare utopia – a future of "no more co-pays, no more deductibles and no more fighting with insurance companies." During Sunday's debate, the candidate claimed that his health care plan would "save the average middle-class family thousands of dollars a year."

Replacing current programs with any of the five “single payer” options would, according to the CBO analysis, require massive taxpayer subsidies: between $1.5 trillion and $3 trillion in 2030 alone. Moreover, new demand would outstrip the limited supply of medical services, resulting in “congestion” in the system and “delays and foregone care.” Curious what that looks like? Check out Britain and Canada.

Americans will be left poorer, too. Whether the government health program is financed by an income tax or payroll tax, according to CBO, America’s gross domestic product, the nation’s total production of goods and services, would be “approximately 1 percent to 10 percent lower by 2030” than under current law.

The second example is Medicare, which began in 1965 and is a single-payer system for seniors, 65 years of age and older. Funding is through payroll taxes, premiums, and an ever-increasing percentage of money from federal general taxes. By 1990, spending in Medicare was seven times over the original budget. Medicare is not financially sustainable in its present form.

Like the VA system, Medicare has helped many people, but the cost of “Medicare for All” would devastate the overall economy. The non-partisan Committee for a Responsible Federal Budget (CRFB) analyzed Senator Sanders’ proposal from a financial standpoint. He calls for six new or expanded taxes. Everyone would pay 6.2% more in payroll tax and 2.2% more in income tax.

(Congressional Budget Office, “Effects of a Carbon Tax on the Economy and the Environment,” pg online @ https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/Carbon_One-Column.pdf //um-ef)

In the case of investment, increases in fossil-fuel prices because of a carbon tax would raise the cost of producing new physical capital. That increase in the cost of new capital would reduce the profits that the owners of capital earn on their investments, causing the overall level of investment to decline. (Lower returns on investment cause the same types of opposing forces described above for lower wages—they decrease the returns that people receive from saving and investing but increase the amount of saving and investing that people need to undertake to meet a given monetary goal. The first effect appears to generally outweigh the second, so taxes that reduce real returns on capital also reduce saving and investment.) The decrease in investment could be muted to the extent that a carbon tax motivated companies to replace capital equipment earlier than they would otherwise, such as replacing a coal-fired power plant with a wind or nuclear power plant. Because the new capital would replace scrapped capital, however, it would not increase the productive capacity of the economy. The generally negative impact on investment would begin when the carbon tax went into effect. Assuming that a significant delay occurred between when the tax was announced and when it took effect, anticipation of the tax might cause a slight increase in investment during the interim period if firms used that period to replace emissionintensive capital equipment. That additional investment could crowd out investment elsewhere in the economy. (Such crowding out would be greater the closer the economy was to operating at its maximum sustainable output during that interim period.)

(Congressional Budget Office, “Effects of a Carbon Tax on the Economy and the Environment,” pg online @ https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/Carbon_One-Column.pdf //um-ef)

The primary costs of a carbon tax would consist mainly of two types of economic consequences: output effects and substitution effects. Output effects would occur when higher fossil-fuel prices reduced real wages and the profits on investment, causing the economy’s total output to be lower than it would be otherwise. Substitution effects would occur when shifts in the mix of goods and services consumed, and in the way those goods and services were produced, changed the relative demand for labor and for physical capital (such as factories and heavy equipment used to produce electricity). Those changes would further affect real wages and profits on investment. Output Effects. A carbon tax would reduce the economy’s output by decreasing two things necessary to produce goods and services: the supply of labor and the amount of investment (see Figure1).10 In the case of labor, increases in fossil-fuel prices, and resulting increases in prices of goods and services, would diminish the purchasing power of people’s earnings—that is, real wages would fall. The decline in real wages would have the net effect of causing people to work less, thus reducing the overall supply of labor. The impact of lower real wages on the supply of labor is the net result of two countervailing forces: On the one hand, lower wages provide an incentive for people to work less and spend more time on activities that do not generate earnings—for example, one parent might choose to stay home with children rather than work outside the home because lower earnings would no longer make outside employment worthwhile. On the other hand, because lower wages reduce people’s after-tax income, they create an incentive for people to work more to maintain the same standard of living. Research studies indicate that the first effect generally outweighs the second effect and that, overall, taxes that reduce real wages also reduce the labor supply.

When examining the effects of changes in government consumption on consumer confidence, we note that these are positive, but invariably insignificant. When we decompose this component into wage and non-wage government consumptions, we get more informative results (columns 7–9). Increases in the government wage bill (increasing wages and/or public sector employment) have a negative and at times significant effect. This clearly indicates that consumers perceive additional spending on the public wage-bill as an additional unproductive burden, which will have to be repaid by means of higher future taxes or reduced productive spending. Conversely, additional non-wage related government consumption spending has a positive and significant effect on consumer sentiment. This may be so for two reasons: on the one hand it boosts demand (by directly increasing government spending), i.e. kick-starting economic activity at times of recession (whereas public investment might have a much more delayed effect due to implementation lags); on the other hand, it is probably perceived as being reversible or implying only a temporary increase in the size of the public sector (contrary to permanently higher public employment or wages), thus generating a positive effect on consumer sentiment.

The United States Federal Reserve has a  from Congress: maintain price stability and pursue maximum employment. A  announced in August 2020 by Federal Reserve Chair Jerome Powell called for a more inclusive employment mandate aimed at boosting employment for workers in low- and moderate-income communities, often people of color. This is in keeping with the Fed’s response to the pandemic’s effect on the economy, which has used aggressive bond purchases and other tools to keep the labor market as tight as possible, thereby preventing a landslide into recession-level unemployment.

However, as fears of inflation increase, we are at a possible inflection point regarding the future of this strategy. In August 2021  increased 5.3 percent before seasonal adjustment year over year. June 2021 saw the biggest , 5.4 percent, since August 2008, which translated into negative real wages for workers. This rise in inflation likely reflects temporary supply chain disruptions and the uneven reopening of sectors such as hospitality due to the ongoing pandemic. But inflation could linger longer than initially expected and even potentially increase. And while the Fed publicly maintains that current inflation is not a pressing concern (perhaps to not spook Wall Street), private doubts might lead the Fed to reconsider its approach.

Suppose that an MMT regime is implemented and inflation rises. The MMT prescription is to then raise taxes. Would Congress vote to increase taxes at a time when prices are already rising? Would the president also sign the legislation to increases taxes? It is difficult to imagine that the answer to these questions is yes, particularly with the current political gridlock in Washington, DC. Moreover, even if Congress possessed the political will to handle inflation responsibly, Congress would likely face serious informational challenges. Under the current regime, the Federal Open Market Committee (FOMC) meets roughly every six weeks to adjust its stance on monetary policy. If inflation were to become high, the FOMC would adjust monetary policy at its next scheduled meeting (or even call an emergency meeting if necessary). The Fed has decades of experience in learning how its policy tools affect the inflation rate. If inflation became a function of fiscal policy, Congress would have to learn how to adjust taxes in order to control inflation. This involves a learning curve that could prove very costly while inflation is doing serious damage to the economy. This is especially true if a zero-interest-rate policy were adopted, which would reduce the impact of tax changes on inflation.

It is true that MMT recognizes the risk of inflation, but it assumes that the inflation genie can only get out of the bottle when the economy reaches full employment. But even then we should not worry, because in this case the government can easily reduce inflation by increasing taxes. Here come a few questions. First, when will it be known that the economy has achieved unobservable potential output and it is time to increase taxes? Second, why would an increase in taxes, which is transfer of money from the private to the public sector, halt inflation with the money supply unchanged? Third, what about asset price inflation and exchange rate depreciation? What about all the controversies about the Philips curve? And last but not least: why should we believe that government with unlimited monetary sovereignty will stop printing money and politely increase unpopular taxes as soon as the inflation rate exceeds an arbitrarily determined value?

Finally, I would like to point out another worrying shortcoming of MMT: it seems to mistakenly identify money with capital. It is true that the state has potentially extraordinary power to print money, but money is not real capital. Banknotes or electronic records are not real wealth — they are means of exchange, as Hume or Smith have already pointed out. Only the quantity of goods and services that we can afford is important. The government can pump any amount of money into the economy — but it cannot remove the fundamental scarcity of resources and magically create new goods. Supporters of MMT complain about the scarcity of goods — but this does not stem from class interests. It is a fundamental problem of economics and its raison d’etre. The increase in money supply does not solve this problem. Inflation and the accompanying Cantillon effect ultimately only redistribute resources from one group of people to another.

After more than $20 trillion in stimulus plans since 2020, the economy is going into stagnation with elevated inflation.

Global governments announced more than $12 trillion in stimulus measures in 2020 alone, and central banks bloated their balance sheet by $8 trillion.

First, in our current monetary system with interest paid on reserves, any money the government prints to pay a bill will likely end up in the banking system as reserves, and the government (via the Fed) will need to pay interest on those reserves. That is, when the government prints money to pay a bill, it is, in effect, borrowing. The money can stay as reserves forever, but interest accrues over time. An MMT proponent will point out that the interest can be paid by printing yet more money. But the ever-expanding monetary base will have further ramifications. Aggregate demand will increase due to a wealth effect, eventually spurring inflation.

Second, if sufficient interest is not paid on reserves, the expansion in the monetary base will increase bank lending and the money supply. Interest rates must then fall to induce people to hold the expanded money supply, again putting upward pressure on aggregate demand and inflation.

The explosion in government debt and government money creation during the coronavirus crisis has revived interest in the once heretical doctrine known as Modern Monetary Theory or MMT. Believers in MMT have long advocated for more spending and more money printing and have claimed that the current crisis demonstrates that such changes do not bring any danger of government default or create any threat of inflation.

In reality, MMT is just a revival of the old fallacy that we can get something for nothing. Its believers trumpet the false idea that money, not the actual economy, determines how much of the good things of life we can have. In reality, the only way to ensure economic growth is by savings and investment, which are inhibited, not encouraged, by too much printing and too much debt. The coronavirus has not changed these timeless truths.

WHAT IS FISCAL STIMULUS? Fiscal stimulus is a term for tax cuts or new government spending that increase aggregate demand. Almost any deficit-increasing policy—reduced corporate taxes, more generous food stamps, added infrastructure spending—can stimulate demand, but the precise impacts depend on the structure of the package and the timing. For example, tax cuts aimed at the poor can boost the economy more in the near-term than tax cuts for the rich because the poor tend to spend a higher percentage of what they receive than the wealthy. In contrast, a decision today to build a new nuclear submarine five years in the future won’t have much effect on demand in the short-term at all. WHEN IS FISCAL STIMULUS WARRANTED? Fiscal stimulus can be helpful when unemployment is high and economic output is less than its potential. When the economy is at full employment, or close to it, fiscal stimulus is more likely to lead to higher prices than to higher output. In that case, the Federal Reserve is likely to raise interest rates to keep higher government spending or lower taxes from producing an unwelcome increase in inflation. DOES IT MAKE SENSE RIGHT NOW? The current unemployment rate in the U.S. (4.7%) is near what economists think of as “full employment”, and GDP growth in 2016 likely was close to what many economists think of as its potential rate (1.8 to 2.0%), roughly defined as the rate at which the labor force grows plus the rate at which productivity (output per hour of work) grows. As a result, the U.S. does not appear to require additional stimulus right now. At least, that was Chair Yellen’s take at the Federal Reserve’s December 2016 press conference. When asked about fiscal stimulus, she said that it was “not obviously needed,” given the “solid labor market.” Other Fed officials have made similar comments since Donald Trump’s election brought more talk of stimulus. For instance, Loretta Mester, president of the Federal Reserve Bank of Cleveland, said earlier this month that “I think we’re basically at full employment… and I think that inflation is going to be moving back up to 2 percent over the next couple of years. So I don’t see a need of the kind of fiscal policy just to stimulate aggregate demand….” HOW ABOUT SPENDING ON PUBLIC INVESTMENT? The Fed clearly would prefer that any fiscal expansion be aimed at increasing the long-run potential growth rate. John Williams, president of the Federal Reserve Bank of San Francisco, recently stated: “Today I don’t think we need short-term fiscal stimulus. What we need is really better policies and investments in the long-term health of the economy.” Increased government spending on investment—bridge projects, scientific research, education—raises the level of future GDP, whereas spending on consumption does not. So as Williams suggests, even when fiscal stimulus doesn’t make sense for near-term support for the economy, increased spending on public investment might. (For a Hutchins Center explainer on public investment, see here.) As Governor Lael Brainard said at the Hutchins Center recently: Changes in fiscal policy that raise the level or growth rate of productivity or that induce greater labor force participation and higher levels of skill and education in the workforce raise the nation’s productive capacity and result in more sustainable increases in output and living standards. The higher productivity and workforce levels engendered by these policies would likely increase investment opportunities and raise expectations of future income growth, sustainably boosting the levels of investment and consumption and, as a result, the longer-run neutral rate. Such policies are more likely to be sustainable because the boost to GDP that they provide continues to accumulate over time, limiting increases in the debt-to-GDP ratio and preserving fiscal space. [Fiscal space is how much more debt a government can take on before it runs into trouble.] Some economists, such as Douglas Elmendorf, dean of the Harvard Kennedy School of Government, and Louise Sheiner—one of the authors of this post—have argued that now is a particularly good time for the government to undertake more investment because interest rates are so low, which makes borrowing to finance that investment much cheaper. IS FEDERAL RESERVE INTEREST RATE POLICY LIKELY TO RESPOND DIFFERENTLY TO TAX CUTS AND SPENDING INCREASES IF THEY ARE LARGELY AIMED AT INCREASING INVESTMENT AS OPPOSED TO CONSUMPTION? It is entirely possible that the Fed could respond the same way to two packages that look quite different—one aimed at stimulating aggregate demand in the short term, and one aimed at improving the economy’s growth potential in the long run—because government spending intended to boost the economy’s productive capacity in the long run will generally also increase short-run aggregate demand. Government spending acts as fiscal stimulus whether the government is buying food or a supercomputer that may lead to scientific breakthroughs and greater growth potential. More generally, whether the Federal Reserve will increase interest rates in response to a fiscal stimulus package depends on both the timing of the effects and the magnitude of those effects. Inflationary pressures come from increases in aggregate demand not met by increases in aggregate supply. So if President Trump and Congress fashion a tax-and-spending package that increases both demand and supply by the same amount at the same time, that wouldn’t be inflationary. The Fed would not respond by raising interest rates. But such a policy would be unusual. Most investments take time to build and time to bear fruit. Consider the time it takes to develop a new air traffic control system and the time it takes for airlines to adapt to it, or the lag between improved education funding and a more skilled workforce. IF FISCAL STIMULUS MEANS TIGHTER MONETARY POLICY IN THE SHORT TERM, IS THERE ANY REASON TO DO IT? Spending increases and tax cuts would lead to greater deficits, and thus to an increase in the national debt. A larger debt, among other impacts, could make it harder for the federal government to borrow still more to provide fiscal stimulus during the next downturn. But a deficit-widening package of spending increases and tax cuts probably would lead the Federal Reserve to raise rates more than it otherwise would, and that would give it more room to cut rates in a downturn. In effect, fiscal space would be traded for monetary policy space.

A state, MMT argues, finances its spending by creating money, not from taxes or borrowing. As nations cannot go bankrupt when they can print their own currency, deficits and debt don’t matter. Accordingly, governments should spend to ensure full employment, guaranteeing a job for everyone willing to work. Alternatively, though not formally part of MMT, governments can fund universal basic income (UBI) schemes, providing every individual an unconditional flat-rate payment irrespective of circumstances.

While no government or central bank overtly advocates MMT, since the 2008 global financial crisis and, more recently, the pandemic, policymakers have adopted many of its tenets by stealth. Popular one-off payments and increased welfare entitlements, which could become permanent, increasingly support economic activity. As the graph below highlights, central banks now buy a high percentage of new government debt, effectively financing this additional spending by money creation.

(Congressional Budget Office, “Effects of a Carbon Tax on the Economy and the Environment,” pg online @ https://www.cbo.gov/sites/default/files/113th-congress-2013-2014/reports/Carbon_One-Column.pdf //um-ef)

Using the Revenues to Offset Effects on Certain Groups. As noted above, the burden of a carbon tax would fall disproportionately on low-income households, workers and investors in emission-intensive industries, and people in areas where the local economy relies on such industries or on electricity generated from emission-intensive fuels. Lawmakers could partly or fully offset the burden imposed on those groups by returning some or most of the carbon tax revenues to them through tax credits or other programs. For example, carbon tax revenues could be directed to low-income households in the form of fixed (lump-sum) payments. (Households who are eligible for benefits under the Supplemental Nutrition Assistance Program, formerly known as the Food Stamp program, could receive an additional fixed amount of benefits, for instance.) Such payments could help offset the increase in living expenses that those households would experience because of a carbon tax.30 However, unlike using carbon tax revenues to reduce deficits or marginal tax rates, using them to provide relief from the tax’s effects on certain groups would generally not lessen the total economic costs of a carbon tax, including the reduction in total output. For example, lump-sum payments to low-income households would not provide benefits to the broader economy under normal economic conditions, because those payments would not increase people’s incentives to work or invest and thus would not lead to greater economic productivity.31 Conversely, using the revenues to cut marginal tax rates on corporate or individual income would benefit the economy more broadly but would probably have limited value to low-income households, who typically owe little, if any, income tax. As a result, lawmakers could face a trade-off between using carbon tax revenues to minimize the tax’s adverse effects on the economy as a whole and using them to minimize the tax’s impact on disproportionately affected groups.

Unfortunately, UBI proponents fail to realize that removing risk, though beneficial to a small number of entrepreneurs, would encourage a deluge of low-quality ventures, distorting markets and leaving the majority worse off.

Since UBI would mostly cover labour costs, it is fair to assume that, with respect to improving entrepreneurial accessibility, its benefits would be concentrated in service-based industries with low capital costs. An income subsidy can free up your time, but it can’t lease you an industrial kitchen or buy you much inventory. It would also mostly foster micro-businesses. Larger teams would be difficult to sustain because doing so would require everyone to agree to subsisting on poverty-level incomes for an undetermined length of time. The larger the team, the less sense of ownership each member has of the overall project, reducing its attractiveness relative to a more traditional, better-paying job.

Fifth, who decides the target employment rate or UBI payment level? Unemployment, inflation and output gaps are difficult to accurately measure in practice. Effects on employment incentives, workforce participation and productivity are untested. How will policymakers control the process or what would happen if MMT failed?

The theory delegates management of MMT operations to politicians, rather than unelected economic mandarins. But financially challenged elected representatives may be poorly equipped for the task. Political considerations and cronyism may influence decisions.

A state, MMT argues, finances its spending by creating money, not from taxes or borrowing. As nations cannot go bankrupt when they can print their own currency, deficits and debt don’t matter. Accordingly, governments should spend to ensure full employment, guaranteeing a job for everyone willing to work. Alternatively, though not formally part of MMT, governments can fund universal basic income (UBI) schemes, providing every individual an unconditional flat-rate payment irrespective of circumstances.

While no government or central bank overtly advocates MMT, since the 2008 global financial crisis and, more recently, the pandemic, policymakers have adopted many of its tenets by stealth. Popular one-off payments and increased welfare entitlements, which could become permanent, increasingly support economic activity. As the graph below highlights, central banks now buy a high percentage of new government debt, effectively financing this additional spending by money creation.

Boyce ’19 [Paul Boyce; 05-05-2019; “Universal Basic Income Is a Pandora’s Box”; Business Economics graduate from UK; FEE Stories; \\pairie]

Previous experiments with UBI may suggest it would work, but they in no way represent the scale of $12,000. There is no conclusive evidence to suggest this would work in practice. While the late Milton Friedman is a source of inspiration, he only suggested a modest $300 negative income tax in 1962. In today’s money, this is equivalent to $2,500—far short of the proposed sum.