Imagine going to a fast-food restaurant and unknowingly consuming food contaminated with toxic chemicals. Or buying cooking oil laden with carcinogens. Or purchasing medicine that makes you sick because it contains excessive levels of the heavy metal chromium.

Sadly, these are not hypothetical situations but real problems discovered in recent years in China. The Chinese financial newspaper Caixin Online declares that “these publicized food safety scandals represent only a fraction of [the] unsafe food production practices.” Caixin concludes that food safety in China is “governed by the law of the jungle.”

China’s food safety problems are not limited to small mom-and-pop businesses. The bad fast-food referred to above was the result of a toxic chemical being added to chicken served at McDonald’s and KFC restaurants. The carcinogenic food oil was found in Wal-Mart. A big business is not a guarantee of a safe product.

In the early 20^th century, the United States faced food and drug crises similar to the ones in China today. These crises in the United States led to the creation of the Food and Drug Administration and to dramatic improvements in American health and life expectancy. While the United States still has its share of contaminated food, the rate of problems in the United States is far below that of China. As Caixin states, “the size and severity of the food safety crisis” in China “is unique.” There is less toxic food in the United States, in part, because we have a stronger regulatory and enforcement system.

These days, conservatives regularly condemn regulation, but the fact of the matter is that regulations save lives. Last month, my colleague Ross Eisenbrey illustrated how good Occupational Safety and Health Administration (OSHA) standards save lives in the workplace. Experts in China believe that achieving real food safety there will require much more action and involvement by the Chinese government.

In a column about the Supreme Court’s health care decision today, David Brooks offers up a series of recommendations about how to improve the nation’s health care system that he’s positive are not already in the Affordable Care Act (ACA). It’s worth quoting at length because it’s so revealing:

“Crucially, we haven’t addressed the structural perversities that are driving the health care system to bankruptcy. Obamacare or no Obamacare, American health care is still distorted by the fee-for-service system that rewards quantity over quality and creates a gigantic incentive for inefficiency and waste. Obamacare or no Obamacare, the system is still distorted by the tax exclusion for employer-provided plans that prevents transparency, hides the relationship between cost and value and encourages overspending. … Republicans tend to believe that the perverse incentives can only be corrected if we repeal Obamacare and move to a defined-benefit plan — if we get rid of the employer tax credit and give people subsidies to select their own plans within regulated markets.”

Let’s take these in turn:

“Obamacare or no Obamacare, American health care is still distorted by the fee-for-service system that rewards quantity over quality … inefficiency and waste”

Actually, no. The ACA has introduced pretty sweeping reforms to payment delivery; see the Independent Payments Advisory Board (IPAB), created precisely to engage the issues Brooks raises.

“Obamacare or no Obamacare, the system is still distorted by the tax exclusion for employer-provided plans that prevents transparency…”

Again, no. The ACA does indeed limit the value of this tax exclusion over time. Read more

Social Security is a hybrid between a pay-as-you-go and an advance-funded pension system, with most benefits paid out of current taxes but some potentially paid out of trust fund savings. Under ordinary circumstances, the trust fund serves more like a checking than a saving account, though substantial savings may be amassed in advance of bigger-than-usual outlays like the Baby Boomer retirement. This (mostly) pay-as-you-go design allowed Social Security to start paying out benefits shortly after its inception and helps insulate the system from financial market fluctuations.

Nobel Prize-winning economist Robert Solow highlighted the system’s pay-as-you-go properties in a characteristically simple and elegant model presented at a National Academy of Social Insurance gathering last week. Headlining a panel on the Baby Boomers, Solow framed a discussion in terms of basic economic constraints (math-phobes can skip the equations):

1. Labor Productivity x Hours Worked Per Worker x Active Workers = Gross National Product

2. Gross National Product = Labor Income + Capital Income

3. Labor Income = Active Worker Share + Retiree Share

Where:

Labor Income = Wage x Hours Worked Per Worker x Active Workers

Active Worker Share = Labor Income – Social Security Taxes

Retiree Share = Social Security Benefit x Retirees

With some rearranging, it follows from Equation 3 that:

4. (Social Security Benefit/Wage) = (Active Workers/Retirees) x (Social Security Taxes/Labor Income)

Solow emphasized that most of the factors in his simple model were determined outside the Social Security system, with the obvious exceptions of the first and last terms in Equation 4.1 This suggests that a decline in the worker-beneficiary ratio requires a reduction in benefits, an increase in the effective tax rate, or both. Read more

A story in Tuesday’s Wall Street Journal  highlights a truth about the economy that Washington’s policy makers have chosen to ignore. The value of our currency relative to our competitor nations’ currencies is a huge driver of factory location. Despite its positive connotations, a strong dollar is bad for U.S. exports and U.S. manufacturers. For years, Japan bought U.S. treasurys as a way to cheapen its own currency and strengthen ours, just as China does. The result was that Japanese imports to the U.S. were artificially cheaper and Japanese cars built in Japan had a price advantage even overseas, when competing with U.S.-built cars. (The same would be true for refrigerators or construction equipment, or any other manufactured goods.)

But lately, Japan has been unable to prevent its currency from strengthening against the dollar, so much so that the advantage has been flipped, and it is beginning to make more sense for Japanese automakers to build their cars in the U.S. than in Japan. As a result, Nissan is closing plants in Japan and moving lines to Tennessee and Mississippi, and Honda plans to export cars from the U.S. in large numbers—150,000 a year by 2017.

What is true for Japan is true in spades for China, which for years has maintained a weak yuan relative to the dollar. Other countries in Asia have also followed China’s lead. If China let its currency strengthen, products made in China would be much more expensive here, leading many producers to move manufacturing operations back to the U.S. By the same token, products made in the U.S. get an immediate price advantage and would once again be competitive in world markets.

The Obama administration and Congress should agree to legislation that would force China and other Asia currency manipulators to give up their tactics and give our manufacturers a fair chance to compete. As EPI’s senior trade economist Robert Scott has shown, no other single legislative action is likely to create more jobs, do more to correct our trade deficit, or do more for our budget deficit.

China Labor Watch just released a new report investigating working conditions at 10 of Apple’s suppliers in China, including the Foxconn factory in Shenzhen. The New York-based group was able to collect this information even though local authorities in China sometimes literally kicked its investigators out of town. As others have also determined, including the Fair Labor Association in a study sponsored by Apple, CLW found working conditions at the Foxconn factory to be severe, with workers employed long hours at low pay under harsh living conditions. The CLW report also breaks new ground in three areas.  The report finds:

• Deplorable labor practices are not just characteristic of Foxconn factories, but exist in factories throughout Apple’s supply chain. The report documents, for instance, that employees in most of the factories typically work 11 hours a day and can only take one day off a month (low wage levels and management pressure compel them to work such hours); that employee dorms are frequently overcrowded, dirty and lacking in facilities; and that there is little ability for workers at Apple suppliers to push for reasonable working conditions on their own.
• As bad as working conditions at Foxconn are, they are even worse at some of the other factories in China that supply Apple. The report flags the three Riteng factories investigated as particularly difficult places to work. The table below includes key findings from the report. It indicates: Riteng workers typically work 12 hours per day nearly every day of the year (including weekends and holidays), compared to 10 hours per day at the Foxconn factories, with some days off.  The average wage for the Riteng workers amounts to $1.28 per hour, or well below the already quite low average hourly wage of $1.65 for Foxconn workers. Health and safety conditions are much worse at the Riteng factories than at the Foxconn factory, and living conditions are worse for the Riteng workers as well.

Table 1

Riteng vs. Foxconn

	Riteng (Shanghai)	Foxconn (Shenzhen)
Approximate number of workers	20,000	120,000
Percent of workers that are dispatched	50%	8%
Average number of hours worked per day	11.8	10
Average number of days worked per month	29.4	23.9
Average hourly wage (RMB)	8.2	10.5
Average hourly wage in U.S. dollars	$1.28	$1.65
Percent rating factory’s performance on work safety and health as ‘bad’	50%	2%
Percent rating dorm conditions as ‘bad’ or ‘very bad’	76%	21%
Percent indicating food is unsanitary	67%	39%

Source: China Labor Watch

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• Certain serious labor problems have so far been neglected in the discussion of work practices at Apple suppliers in China.  In particular, the new report documents the troubling yet common practice by Apple suppliers of using dispatched labor. This practice enables factories to reduce the compensation and benefits they provide to their workers, makes it even easier to compel workers to work exceptionally long overtime hours, and creates damaging uncertainty over who is responsible for any worker injuries.

In recent months, stories about when the next iPhone will be released or whether Apple will add a television to its product line have helped push the troubling issues concerning how Apple’s products are made to the sidelines. The new CLW report is a needed reminder that those issues should not be forgotten. Apple has the responsibility to ensure that basic labor standards are met not just at Foxconn factories, but also at the factories of other suppliers that have received less media attention. And, as I summarized previously, Apple easily has the resources to advance any necessary changes.

Following the Supreme Court’s ruling in favor of the Patient Protection and Affordable Care Act (ACA) and its lynchpin—the individual mandate—my colleague Josh Bivens noted all the ways conservatives have tried to keep health care from being delivered efficiently, notably by blocking government from using its monopsony power and economies of scale wisely. This, of course, is difficult to square with conservatives’ professed concerns about public debt, because rapidly rising health costs are, by far, the single biggest impediment to stabilizing long-run public debt (if the economy operates at full potential over this long-run). Political opportunism aside, reasonable policy should unequivocally aim to lower health care cost-growth; so here’s some evidence worth revisiting on the comparative efficiency of public versus private provision of health care.

The United States has a patchwork health care system of universal single-payer insurance for seniors (Medicare), publicly funded health coverage for the disabled and poor children and seniors (Medicaid and SCHIP), a rapidly unraveling system of employer-sponsored health insurance, fragmented private self-insurance markets, and 49 million non-elderly Americans (under the age of 65) without any health insurance. It’s important to note that the ACA was already a preemptive compromise with those opposed to a much more expansive role of government in directly financing health care. This, of course, doesn’t stop its opponents from lambasting it as a “government takeover,” but the ACA actually preserved the basic (inelegant) structure of American health care, seeking to fill in its gaps rather than a total overhaul. This makes its cost-containment provisions subject to much variability—some may work very well to restrain growth while others might not. And it also means that a clear, evidence-based tool for restraining these costs was left on the table: direct public provision of care and financing of costs.

By using its monopsony power and economies of scale gained by insuring tens of millions of people, public health programs have done a better job at restraining costs than private insurers. For example, since 1970, cost growth in inflation-adjusted Medicare spending per beneficiary has averaged 4.5 percent annually, versus 5.7 percent for private insurers.1 This underlying trend has been remarkably consistent over time: The 10-year rolling average of annual per enrollee cost growth for all benefits provided by private health insurers has exceeded that of Medicare in 28 of the past 31 years.

This divergent rate of cost growth compounds markedly over time. Since 1969, cumulative growth in private insurance spending per beneficiary has increased 60.8 percent more than that of Medicare.

And as I noted a while back, the Congressional Budget Office has estimated that Medicare is 11 percent cheaper than an actuarially equivalent private insurance plan, an efficiency premium that will similarly compound with time: Fee-for-service Medicare is projected to be at least 29 percent cheaper than an equivalent private insurance plan by 2030 (relative to CBO’s alternative fiscal scenario for the long-term budget outlook).

The ACA is projected to expand coverage to some 30-33 million additional non-elderly Americans by the end of the decade, a critical step for risk-pooling, increasing cost-saving preventive care, and decreasing uncompensated care costs passed along to providers and policy holders. It also included ambitious reforms to control costs (particularly the Independent Payment Advisory Board, or IPAB), but too many provisions leveraging the public sector’s ability to directly contain costs—notably offering a public insurance option (e.g., Medicare buy-in) and negotiating Medicare Part D prescription drug prices with pharmaceutical companies (as is done for Medicaid)—were lobbied out of the bill. Even though stronger cost-containments could have been included, the Supreme Court’s ruling in favor of the ACA is a major victory for long-run fiscal sustainability, as health reform is projected to reduce annual long-run budget deficits by roughly half-a-percentage point of GDP.

The ACA is a momentous step toward more efficient and comprehensive health care coverage in the United States, but reform will undoubtedly remain a work in progress—particularly as the various cost-containment provisions in the ACA are evaluated and successes merit replication. Our experience over the last 40 years should guide policymakers as they inevitably go back to the drawing board on health care reform; and the evidence over this time overwhelmingly suggests that public provision of health care is more effective at containing excess cost growth and more efficient than private insurance provision.

1. Data from the Centers for Medicare and Medicaid Services’ National Health Expenditure Accounts Table 16, adjusted to constant 2011 dollars using CPI-U-RS.

The individual mandate lives! Excellent.

For uninsured Americans anyway. But for those of us who had comments ready in case it was struck down, it’s kind of inconvenient.

So, in the interest of recycling, I do want to keep something front-and-center about this particular conservative attack (opposition to the mandate) on health reform: Whatever it’s premised upon, the practical impact of opposing the mandate (and since this is true of all recent conservative ideas on health care one might be forgiven for thinking that it’s a strategy, not a quirk) is simply to make health care more expensive.

And why are conservatives dedicated to making sure Americans pay too much for health insurance? Sometimes, it’s just the price of shoveling subsidies to corporations as part of any health reform. Other times, it’s making sure that Americans don’t see government doing things too efficiently and outperforming the private sector (witness the fevered desire to “reform” Medicare by privatizing it—which will predictably make it more expensive). In the end, I guess you don’t need to believe me when I say that that’s the goal of conservative health reform; but when it’s the practical impact of everything they propose, then I think my argument is looking pretty good.

Anyway, here’s my quick primer on the mandate and why opposing it was simply another exercise in making sure Americans paid too much for health insurance.

A key barrier to individuals gaining coverage if they’re not employed by a large company (which has the clout and the legal protections to force insurance companies to cover all their employees as a group, rather than just cherry-pick the healthy ones) is insurance companies refusing to cover those with pre-existing conditions—or even just those that may become sick (and hence expensive to insure) sometime in the future. The Affordable Care Act (ACA) dealt with this by mandating insurance companies offer coverage to everybody who comes to their door (“guaranteed issue,” in the jargon of reform), and to make this a real, not just a notional “offer,” mandating that these companies charge each beneficiary the same premium (“community rating,” in the jargon, with some variation allowed by age and smoking status). These provisions, again, keep insurance companies from being able to cherry-pick just the healthy to cover.

But, if I could get insured whenever I wanted and at the same rate as everybody else, shouldn’t I just choose to not pay premiums while I’m healthy and then buy coverage after I’m already sick? This would be a big problem for insurance companies, as their pool of covered beneficiaries would be a pretty unhealthy group. And since the ACA provides subsidies to help make coverage affordable, this means that the per-beneficiary level of subsidy would be pretty high, as only unhealthy people would be receiving subsidies.

The answer to this “free-rider” problem? Make sure people carry insurance even while healthy, to make for a larger, more predictable, and healthier insurance pool to keep costs down. This is what the mandate is for.

Essentially, the ACA imposes some restrictions on insurance companies (guaranteed issue and community rating) but then gives them something in return to make sure these restrictions don’t lead to them having to cover an unhealthy pool of beneficiaries (that something in return is the mandate) and rising costs.

So the mandate makes reform more efficient. This means it must be opposed by conservatives, because they have all along been determined to make any health reform as inefficient as possible. Remember the 2006 Medicare Part D legislation that cost way too much because it barred the government from bargaining with pharmaceutical companies over drug prices? And which subsidized private HMOs to cover Medicare beneficiaries? Remember the public option, which would’ve saved the public money but was taken out of the ACA in the early stages? Remember the voucherization of Medicare called for in the Ryan budget, which would insure that Americans spend far more to cover health costs in the future?

This was no grand constitutional issue, this was just conservatives doing what they reflexively do when it comes to health reform: trying to make sure it’s as inefficient as possible.

The Affordable Care Act (ACA) is valuable legislation for a host of reasons, but most notably, it provides coverage for millions of Americans who would not have been able to secure insurance, and therefore, health care when they need it. The Supreme Court decision to uphold ACA was also important because it gives clarity and certainty to states and private industry that they should start preparing for the main provision to kick in in 2014. It resolves any uncertainty that was felt throughout the country by the important players, and now provides the necessary push for its implementation.

The expansion of insurance is particularly important now as a growing share of Americans are without health coverage. Historically, Americans under age 65 have received insurance through the workplace, but since 2000, that valuable source of coverage has declined every year for 11 years running, a total decline of over 10 percentage points, as shown below.

These statistics are already bleak, but without the valuable health care legislation, the situation could have gotten much worse. Because of the ACA, more than 30 million people will get health insurance in coming years that would not have received it—making them more likely to get needed medical care and less likely to come under severe financial distress when they do.

Specifically, the fact that the Supreme Court upheld the individual mandate is one of the reasons so many more people get insured, making the law more cost-effective. The effect of the decision with regards to Medicaid is unclear, but could potentially lead to fewer of the most vulnerable Americans getting access to affordable health care.

In sum, the Supreme Court decision today reaffirms the constitutionality of the health care legislation and its valuable provisions, providing a necessary safety net for millions of Americans. It also provides the added motivation for the implementation of health reform to move full-speed ahead.

In the New York Times  this past weekend, Ezekiel Emanuel laid out a proposal to allow Social Security retirees to donate a portion of their benefits to a fund that would invest in a child’s health, education, and living standards. While this is obviously a positive idea, the premise of his proposal leaves something to be desired. In fact, Emanuel’s article presents a false choice to the American people: that we must choose between a strong social insurance system or investing in children.

Emanuel’s proposal would allow Social Security recipients to voluntarily forgo their benefits—he suggests plausibly for three years after reaching the full retirement age—and divert those benefits into a “Children’s Opportunity Bequest and Fund” to help either their own grandchildren or any other child identified by their Social Security number. Over at Slate, Matt Yglesias pointed out the obvious: Wealthy grandparents don’t necessarily need a special fund to pass excess cash to their grandchildren or to charitable organizations (charitable giving is already incentivized as an itemized tax deduction). Beyond this point, I take issue with the way Emanuel presents Social Security—as a transfer of wealth to the elderly that is taking away from our kids.

Emanuel’s entire basis for propagating the policy is centered on the notion that “many Social Security recipients are quite well-to-do.” Well yes, some are. But most are not, and advancing the myth that Social Security recipients are rich only serves to fuel the fire for cutting or changing the program.

Social Security recipients are not, on the whole, well-off. The average annual retirement benefit for retired workers was $14,106 in 2010, just above the federal poverty line for an individual living alone. These benefits, while modest, go a long way towards keeping elderly Americans out of poverty and ensuring that many enjoy an adequate, albeit modest, standard of living. For more than half of the over-65 population, Social Security constitutes more than 50 percent of their income. In 2010 the program lifted 14 million seniors and 6 million younger Americans out of poverty.

The figure below (from the forthcoming edition of EPI’s The State of Working America) shows how Social Security has helped dramatically lower elderly poverty rates. Notably, elderly poverty did not shoot up during the Great Recession—many thanks to Social Security. Rather than a program that makes well-off seniors even richer, Social Security prevents seniors’ standard of living from falling even farther behind that of working-age Americans. Though there are wealthy recipients who don’t rely on Social Security for a significant part of their retirement income, they are relatively few in number, and reducing their benefits would provide somewhat modest cost savings while undermining political support for this broad-based, contributory, social insurance system.

In his article, Emanuel states that “this huge transfer of wealth is harming our children.” This is patently false. The children of today and tomorrow are not harmed or threatened by a strong social insurance system that will provide the bulk of their retirement income and protect them from the hazards and vicissitudes of life. America’s children are instead harmed by politicians that chronically undervalue and underinvest in their health, nutrition, and education—particularly for lower-income households and communities. They are disadvantaged, for instance, by the cuts to nondefense discretionary (NDD) spending enacted by the Budget Control Act. And children would fare much worse under the deep cuts to NDD spending, Medicaid, the Affordable Care Act, food stamps, and other income support programs proposed by the House Republican Budget Resolution. If lawmakers were willing to invest in all children, they could take the necessary steps to do so, and those investments would generate tangible returns. EPI has illustrated a way to do so in our budget blueprint, Investing in America’s Economy, and the Congressional Progressive Caucus (CPC) has done so in the Budget for All. Both plans would finance trillions in increased public investment while achieving fiscal sustainability.

With this proposal, Emanuel pits social insurance against other priorities. As EPI and the CPC have shown, this is unnecessary and only serves to undermine programs that are already under attack. It also promotes the idea that hugely important investments should be left to the charitable resolve of the well-off. Investing in our children does not require wealthy Social Security recipients to voluntarily forgo Social Security benefits; it requires the wealthy, of all ages, to pay their fair share in taxes. Investing in our children and other national priorities will require reforming and modernizing our tax code to address the discrepancy between these priorities and the revenues needed to fund them.

In sum, this article pits the young against the old, and in doing so, steers the discussion of public investment—both what we can accomplish and who should be paying for it—way off course.

The U.S. Bureau of Economic Analysis (BEA) recently announced that the U.S. net international investment position (NIIP) was -$4 trillion at year-end in 2011 (see figure, below). The NIIP stood at -$2.5 trillion at year-end 2010. The $1.6 trillion increase in the net debt was largely caused by price changes of -$802 billion (on domestic and foreign holdings of stocks and bonds) and by net financial flows of -$556 billion. Net financial flows were largely explained by financing of the $466 billion U.S. current account deficit in 2011. The current account is the broadest measure of the U.S. trade deficit. While the costs of financing the NIIP were relatively small in 2011, they could rise rapidly if interest rates return to more normal levels in the future.

The United States has been borrowing hundreds of billions of dollars per year for more than a decade to finance its growing trade deficits. However, until 2011, the U.S. NIIP has not declined proportionately, as shown in the figure below, primarily because of gains in the prices of foreign stocks, the decline of the dollar (which made foreign currency holdings more valuable), and frequent accounting revisions (which have found more and more U.S. investments abroad).

Last year, several of those factors moved against the United States as the NIIP declined $1.6 trillion to -$4 trillion. That’s real money. Foreign investors (primarily foreign central banks) held $5.7 trillion in treasuries and other government securities at the end of 2011. The United States paid, on average, about 2.3 percent in interest on all of those securities. These low rates are caused by the still-depressed U.S. economy operating far below potential, and are unlikely to rise unless the U.S. economy begins operating much closer to full-employment. But, if this recovery happens and the NIIP remains roughly as large as it is today, then debt service costs could rise significantly. For example, if the average cost of government debt rises to 4.5 percent, it would add another $124 billion to the U.S. government deficit. If this rise in U.S. borrowing costs, furthermore, was not matched by a rise in global interest rates, then this would actually cause a net decline in U.S. GDP, as income flows out of the country to service debt increased and were not matched by increased inflows that paid U.S. owners of foreign assets.1

The U.S. NIIP represents a potential claim against future national income, and the size of this potential claim is growing dramatically as shown in the figure above. Each year that we allow large trade deficits to continue is another year that adds to this claim on future incomes—yet this actual intergenerational transfer is often ignored while a non-existent intergenerational transfer (that one allegedly caused by rising federal budget deficits) attracts much attention from pundits and economic commentators.2

Sources:

Board of Governors of the Federal Reserve System.  2012. “Selected Interest Rates (Daily) – H.15:  Historical Data.”

U.S. Bureau of Economic Analysis (BEA).  2012. “International Economic Accounts: Balance of Payments.”

U.S. Bureau of Economic Analysis.  2012. “International Economic Accounts: International Investment Position.”

Endnotes

1. Average rate of return on U.S. government securities in 2011 calculated from data in the current account (BEA 2012a) and the NIIP (BEA 2012b). Return on seven-year treasury securities used for comparison. The average return on seven-year treasuries was 2.16 percent in 2011 (Board of Governors of the Federal Reserve System 2012). Their average return in the pre-recession period of 2000-2007 was 4.52 percent.

2. Interest payments on government debt owed to U.S. citizens only reallocate income from taxpayers to domestic bondholders. Foreign holdings of U.S. securities represent claims on future income, which are qualitatively different. Interest payments on foreign holdings reduce U.S. GDP, while interest paid to domestic holdings does not. Given the existence of substantial unemployment and the predominance of deficit opponents in Congress, increases in the government debt due to financial outflows could result in further spending cuts, which would cause a further decline in U.S. GDP.