An Extinct Proposal

October 31, 2021

By Steve Stofka

In the past 70 years, America has escalated its health care spending from 5% of GDP to 18% of GDP. Stack up all the money Americans spend on housing, cars, fuel, utilities and food and its less than what we spend on health care. Despite all this spending we have the worst rates of infant mortality and preventable death among developed countries. If we exclude the growth of health care spending in the past few decades, the U.S. economy has been stuck in the same rut that has trapped Japan. In that time, China’s economy has erupted from $.5T to $15T and is now the second largest economy, just $7T less than the U.S. We have averaged 2.4% annual real growth in the past three decades, less than the 3% growth of the post WW2 period. How do we get out of the rut?

Thirty years ago, William Clinton emerged the winner of a three man race for the Presidency. Responding to public concern over rising health care costs, he proposed a universal health care plan that received a hostile reception. Republican groups mounted an effective advertising campaign against a “takeover” of health care by government. Republicans rode that momentum to win control of the House in 1994, ending forty years of continuous Democratic control.

In the fall of that year, two economists proposed a Major Risk Insurance Plan that they estimated would lower health care spending by 20% (Feldstein & Gruber, 1994). However, the market continued to adopt HMOs as the dominant model to reduce costs. Today, the US spends far more than other developed countries and has worse health outcomes. Martin Feldstein was President of the NBER, the nation’s premier economic research institute. Jonathan Gruber was a former researcher with the NBER, an MIT professor with a lot of expertise in the economics of health care. Both had a lot of influence, but their proposal did not win converts.

Their study was based on earlier work by Feldstein and a data sample of six thousand respondents collected in 1987 that provided insight into the choices and value that people place on health care. Feldstein and Gruber concluded that the government could insure people under 65 against major health risks for a mere $150 per person, about $300 in current dollars.

Under their proposal people would be insured for half of their annual medical expenses until they spent 10% of their after-tax income, their maximum OOP, or out-of-pocket expense. This would eliminate or reduce the wastefulness of people being over-insured. Those with small copayments or “first dollar coverage” use more health care because it costs them little to nothing except their time. Many younger workers with employer provided health insurance have far more insurance than they use. Thinking that insurance is a “free” benefit, workers don’t realize that they are paying the insurance premium in the form of lower wages.

The proposal aimed for greater efficiency, more patient involvement and wider coverage. Jonathan Gruber would become instrumental in developing Romneycare and Obamacare, nursing both plans through the political butchery and swollen egos that all major legislation endures. The 10% OOP is a progressive feature that empowers and enables the poorest people to access the full benefits of the health care system after spending a small amount. Those with higher incomes pay more into the system. Because everyone has some skin in the game, they use the system more judiciously. However, sensible proposals are not sensational. They don’t dance and sparkle.

The health care and insurance industry relies on misinformation and the inefficiency in the American system for its profits. The burden of that inefficiency has become a ball and chain on the American economy.  Each generation comes to maturity thinking that it will solve the persistent problems that have bedeviled earlier generations. Those who efficiently rake in the profits protect those inefficiencies. Any system that favors the powerful few resists change. In a sense of frustration, people turn to a populist leader who claims that they can fix it because they know how the system really works. We are drawn to our myth builders like moths to the light of a flame.


Photo by Derek Finch on Unsplash

Feldstein, M., & Gruber, J. (1994, September 01). A Major Risk Approach to Health Insurance Reform. Retrieved October 31, 2021, from A bio of Martin Feldstein

A Generation’s Legacy

October 24, 2021

By Steve Stofka

There are two types of federal benefit programs: those that require “dues” to qualify for benefits and those that are means-tested. Social Security is an example of the first type. With some exceptions recipients must contribute to the program to qualify for benefits. Supplemental Security Income (SSI) and the SNAP food program are examples of the latter. A person’s circumstances, not their contributions, determine their qualification for benefits. Because people think of Social Security as an insurance program, not a government charity, it is the “third rail” of politics. Voters feel that they have paid into the system and deserve their promised benefits. The Boomer generation points to the $2.9 trillion in the Social Security Trust Fund as evidence they have indeed paid into the system. Talk of cutting benefits can earn a politician the boot. The question is: have workers paid in enough?

Our choices today are constrained by the priorities and choices of past generations. The Social Security program was created in 1935 to relieve seniors burdened with crushing poverty. The failure of thousands of banks prior to that time had wiped out the lifetime savings of many workers. With a commanding majority in the House and Senate, Democrats responded to the plight of many seniors. Those first generations received far more in benefits than they paid in contributions and created what is called a “legacy debt.”

In 1965 the program was expanded and in 1975 benefits were indexed to inflation. By that time, the sum of contributions exceeded benefits paid so that the trust fund had a reserve of 56% of benefits expected to be paid that year. By 1983, the reserve stood at only 18% of that year’s anticipated benefits. High inflation during the 1970s and some miscalculations in computing inflation adjustments to beneficiaries had depleted reserves. At that time, the Boomer generation ranged in age from 20 to 37, about the same as the Millennial generation today. By 2008, the first of the Boomer generation would be eligible for benefits. A commission recommended accelerating tax increases to build up the trust fund in anticipation of this demographic bulge. When the great financial crisis hit in 2008, the trust funds had 358% in reserves. It should have been much more.

Economists and politicians have remarked on the slow wage growth of the past decades. The cause of that slow growth is a matter of political perspective, but one thing is certain. Labor productivity has slowed as well and there is no consensus on the cause of that. In the chart below, I’ve smoothed out some data from the Bureau of Labor Statistics on Labor Productivity to show the long term trends. I set the 70-year average of 2.2% annual growth at zero to show the periods of below average productivity. The chart shows the two decades of below average growth from 1975 to 1995.

Labor Productivity – 70 year average of 2.2% annual growth set to zero

In a 2001 paper William Nordhaus (2001, 2), a researcher at the National Bureau of Economic Research (NBER) noted “after growing rapidly for a quarter century, productivity came to a virtual halt in the early 1970s.” Nordhaus attributed the growth of the late 1990s to the “new economy,” the communications technology and software development at the dawn of the internet. The productivity surge lasted about a decade, succumbing to the drag of low productivity in the service sector in general.

Because many service jobs have low productivity growth, America has given up the robust growth of the modern industrial age in the post-WW2 period. Low wage growth means less taxes to fund benefits and political tension. Since 2010, Social Security has been tapping the trust funds to pay benefits as the Boomers retire. By 2034, the trust funds will be depleted and the trustees estimate that each year’s taxes will be enough to pay about ¾ of promised benefits unless taxes are raised or general taxes are used to pay benefits. As much as workers have paid in SS taxes, it wasn’t enough. The Social Security trustees estimate that an additional 2.83% in taxes would cure the problem for another 75 years but politicians don’t have the courage to push taxes higher.

The program was created during the depths of the Depression. The generation that enjoyed SS benefits far above their contributions has passed on, leaving their legacy debt with us. They believed that the future would be like the past, that strong productivity and wage growth could pay inflation adjusted benefits for 15-20 years of retirement. Across a divided country and a divided Congress, we must put down the word weapons and ask ourselves “What are we going to do?”


Photo by Markus Spiske on Unsplash

Nordhaus, W. D. (2001, January 01). Productivity growth and the New Economy. Retrieved October 24, 2021, from

SSA. (2021). Social Security – Trust Fund Ratios. Retrieved October 24, 2021, from

The How and Why of Identity

October 17, 2021

by Steve Stofka

A current topic of controversy is a popular comedy special on Netflix featuring the acerbic wit of Dave Chappelle. In this last of several Netflix specials, Mr. Chappelle airs many grievances, one of which involves previous remarks he made about transgender people. Hannah Gadsby, an Australian comedian with a quiver of arrows and the skill of a markswoman, targets the bias and bigotry in our culture. Recently she has aimed at some remarks by Netflix executives who defended Mr. Chappelle’s humor. Ms. Gadsby leads a growing audience of voices who worry that the Chappelle special could inflame hate attacks against people with a non-mainstream sexual orientation or gender identity.

In past centuries society has regarded non-straight orientation as a behavior outside accepted norms and ostracized those individuals as deviants. Social scientists have now recognized the importance of biology in sexual orientation and gender identity. Recent jurisprudence and law have accorded equal access to marriage, property and employment regardless of sexual orientation or gender identity.

Black people have long been ostracized for their skin color and there is no dispute whether skin color is biological or behavioral. Decades of law and jurisprudence have not been able to undo the bigotry and bias against those with black skin. Two comedians, each from a marginalized group, confront each other and the larger society over the nature and construction of identity. This is an enduring debate.

2400 years ago Aristotle attributed the falling of objects to their nature. People accepted that view until Galileo showed that it was a dynamic of forces, not an inherent nature that made things fall. Explanations that attribute causes to nature – the within – are attempts to answer the question of why. Explanations that investigate the dynamic between things answer the question of how. In the 17th century John Locke argued that people had a natural right to private property that no king could dispose of without violating a natural law. That was why society had an obligation to protect property rights. The how of that natural right involved a dynamic between God, Adam and Eve when He turned them out of the Garden of Eden and set them to toil the earth for their food.

In his special Mr. Chappelle adopts a realist approach, arguing that gender is an unalterable fact of nature. An alternative perspective is that gender is a construction of biological, social and psychological factors. The nature vs. dynamic identity debate exists in many fields. Some people claim that only gold has real value as a money, regarding paper money as a mass illusion of value. Economists argue that the value of something is what you will give up for it, a value based on a dynamic. Karl Marx thought the fundamental value of any good was the labor that went into producing or harvesting it. Mainstream economists assume that the value of a good is its utility to the user, a fluid construct of preference, time and price. The debate over sexual orientation and gender identity is another manifestation of this conflict of perspectives.

Some comedians walk the dark alleys of our society and psyche. In the 1960s, Lenny Bruce and George Carlin questioned mainstream values. In a brash and vulgar style, Bruce openly flouted speech prohibitions and police often arrested him during his act. His notoriety helped bring these laws to the Supreme Court where they were ruled unconstitutional. In the 1970s, Richard Pryor offended many with his off-color remarks as he dug deep to unearth the hatred and hypocrisy that rotted our culture. In other cultures today, comedians who ridicule authority figures are arrested. Caustic remarks are against the law. Liberal societies tolerate a wide range of speech and views. Those are the two choices on the menu: authoritarian or liberal. I’ll take the liberal, please.


Photo by ANGELO CASTO on Unsplash

The Weight of History

October 10, 2021

by Steve Stofka

In 1992, several months after a brutal beating by L.A. police officers during an arrest for drunk driving, Rodney King pleaded “Can we all get along?” From his apartment balcony nearby, George Holliday had filmed the incident. Despite the evidence shown in the film, a jury without any black members acquitted the officers and Los Angeles erupted into riots. Mr. Holliday, 61 and in good health, died in September from Covid. He told a friend that he didn’t want to get vaccinated so that he could develop antibodies to the disease (Williams & Chan, 2021). How did vaccines become a lightning rod of disagreement? Mr. King died in 2012 but his words haunt every meeting where human beings gather to negotiate a solution to a problem. Why are there so many irresolvable problems?

Myth and religion have provided answers to this question. The Judaic version is that two people in the Garden of Eden broke a pact with God and all humankind had to suffer. The ancient Greeks thought that the gods of Mt. Olympus amused themselves with the human drama, stirring up trouble when there was too much peace. Animistic traditions believe that the gods take an active part in our daily lives as well. Evangelical and Pentecostal Christians hold a similar belief but limit the agency to one God.

Constant turmoil is necessary for change, and change is the key characteristic of our world. Whether it is the gods on Mt. Olympus enjoying the human soap opera, or a God in heaven answering a prayer for relief from pain, we seek an explanation that features agency. What we fear is the senseless turmoil of random change. We want there to be a clearly identifiable cause and what we find are an abundance of causes for a single event, an overdetermined system.

The system of international relations is characterized by anarchy, the lack of a central authority to enforce the rules. We often see the same anarchy in a republican system of government. In the U.S. system, Congress itself is the higher authority and within that governing body is a Senate with features similar to the Security Council of the UN. The U.S. is one of five members of that council, the P5, who have a veto vote that can kill any resolution. In the Senate, the leader of the majority party can kill any legislation, no matter how popular, by refusing to bring it up for a vote. Should it come to a vote, one Senator’s vote can effectively kill the legislation. This governing structure has enfeebled  both the UN and the Senate. Why did the U.S. adopt the anarchy of the international system?

Writing over three hundred years ago John Locke argued that men in power could not be trusted (Locke, 1988, 395). The U.S. Constitution embodies Locke’s principles and especially this foundational distrust of power in the hands of people. The Constitution constructed the House on the democratic principle of majority vote and majority will. The founders built the Senate like an international organization of nation-states, each state having separate interests and cultures, each state capable of wielding effective, if not outright, veto power. Founded on distrust and the autocratic power of one Senator’s vote, the Senate has become an ineffective political body, a classroom where adults gather to practice the art of international politics. Unable to govern itself, the Senate hobbles the rest of the country with the chains of its ineffectiveness.

Students of history study the flaws of the Roman Senate that led to monarchy and the eventual downfall of the Roman republic. Students of future centuries will study the foundation of distrust that crippled the U.S. Senate at a crucial time in the nation’s history. They will learn that human institutions can become powerless if they attempt to strike an even balance of power. Will they learn from our mistakes? We leave so many lessons that succeeding generations ignore, thinking that they are different or that their circumstances are different. If we could only learn, we might improve our institutions and our lives and construct a more lasting peace.

Peace is not conducive to change and it is the uneven path of change that we must walk. No, Rodney, we can’t all get along. Like donkeys each generation carries the lessons of history on its back but looks forward, unable to truly see and understand what it carries.


Photo by Florian GIORGIO on Unsplash

Locke, John. 1988. Two Treatises of Government: a Critical Edition. ed. Peter Laslett. Cambridge, MA: Cambridge University Press.

Williams, D., & Chan, S. (2021, September 21). Man who filmed Rodney King’s 1991 beating by police dies of covid-19, Friend says. Retrieved October 09, 2021, from


October 3, 2021

by Steve Stofka

This week I enjoyed a video (CFR, 2019) on the 2008 financial crisis that aired on HBO in 2019. VICE reporters interviewed former Fed chairman Ben Bernanke, and former Secretaries of the Treasury Hank Paulson and Tim Geithner, key policymakers during the crisis. They regretted the devastating effect that the crisis had on so many families. They understood the public anger at the bailouts of Wall Street. They attributed the rise of populism to the public perception that there was one rule for the elites on Wall Street who had created the crisis and those on Main Street who suffered the consequences. As I watched the financial Trinity of Paulson, Geithner and Bernanke, I thought they still don’t get it.

A prominent feature of the global political system is anarchy, the lack of a central authority governing all the states. Until the 2008 crisis, the public thought that national institutions supervised the global financial system to make sure that the players in that system did not endanger the public. The Trinity were in control of institutions that were charged with the safety of the public trust. Each of them believed in a light supervisory touch, thinking that the financial system was mostly self-regulating because the players kept each other in check. The crisis demonstrated the fault of that thinking.

Realism is one of the two dominant methods of analysis in international relations. Realists focus on the strength and distribution of military power among states who have competing interests. The force in the financial system is not military weapons but the ability to leverage capital. National governments bestow those weapons of power on their financial institutions. Each of the big investment banks serves their own interests and are supposed to follow the rules. Central banks and supervisory institutions rely on a balance of power between the big financial players to self-regulate this system.

In the global political system, there is no central ruling authority. In the American financial system, the financial industry lobbies against any oversight or regulatory power. They want anarchy – to be left alone until their risk taking reaches critical mass and threatens the global system as it did in 2008. Then the players rush to the Fed or the White House for a bailout. Despite the financial power that Paulson, Bernanke and Geithner had at their fingertips, they felt impotent during the crisis. It was not comforting to watch each of them make gestures of futility as they spoke, arguing that they had to follow the law. Why? The people who ran the investment banks that took extraordinary risks did not play by the rules.

As the crisis unfolded, the public watched the anarchy on display. The big investment banks have the equivalent of nuclear weapons given to them by their governments and there is little effective supervision. The Trinity blamed “liar loans” for contributing to the crisis. Prospective homeowners were told by mortgage companies that they did not have to document their income. Many low-income families welcomed the chance to own their own home for the first time in their lives. They believed the government was supervising these mortgage companies because the mortgages were being bought by government institutions. Even if it sounded too good to be true, the government must know what it was doing. That belief was about to be shaken to its foundation.

The 2000s were marked by a string of government follies. The public was shocked to learn that the nation’s security agencies had been alerted to the threat of the 9-11 attackers. A lack of communication and coordination between agencies had let the attackers slip through the security net. Following that revelation, the Department of Homeland Security was created to coordinate federal agencies. In 2002, the public learned that no one had been supervising the nation’s largest accounting firms. As the giant Arthur Anderson imploded, investors wondered whether the financial statements of the nation’s largest companies were fiction. Enron and some dot-com companies blew up. After demonstrating American military power and technology in the invasion of Iraq, the mismanagement of the war became apparent. The fumbling federal response to Hurricane Katrina confirmed the impotence of the Federal government. Five consecutive years and five government failures.

After all that, the American public still trusted the imprint of the federal government on a mortgage. The financial crisis was the last in a string of government failures that caused a large loss of trust in government. Government institutions like the Fed and the Treasury had trusted Wall Street but not Main Street. Government had broken a bond of trust with the public and these three had been partly responsible for that broken pact. Breaking trust is difficult to understand or acknowledge.


Photo by Aimee Vogelsang on Unsplash

CFR. (2019, May 01). Panic: The untold story of the 2008 Financial Crisis | full vice special report | HBO. Retrieved October 03, 2021, from