Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

Halleluiah. I have finally discovered the origin of our failed health care system.

I hear you asking incredulously: “Sure, sure, did you find the fountain of youth too?”

Oh please, reserve your judgment until you hear me out.

Origin of Our Health Care Fiasco

‎‎It all began when World War II finally ended in 1945 and the U.S. became the de facto leader of the free world. The U.S. dollar was accepted as the international currency (gold was in short supply) and America pledged to save many countries, especially those in Europe, by establishing the Marshall Plan.

An offshoot of this development was the birth in the U.S. of a novel culture that established a new socio-economic pattern of human behavior. It led people to believe that the true mark of a person’s affluence is neither to live within, nor up to, but beyond one’s means. Since it powerfully resonated with American consumers and quickly became the national norm, scores of institutions, such as credit and mortgage companies, sprung up to support people’s negative savings lifestyle.   

And with that, the die was cast for permanently establishing negative savings in American culture with little regard for saving for a rainy day. While that had both positive and negative effects on many sectors of society, surprisingly it even infiltrated our health care system. The result was devastating. Many no longer had any means to pay for their medical services when they desperately needed them. And that’s when the government, faced with the dilemma of dealing with neglected sick and dying patients, was compelled to instruct hospitals to provide urgently needed medical services to these people free of charge.

That solved one problem but created another: Who will pay for these services, since hospitals did not have the resources to cover them? With no other alternative in sight, and no financial assistance offered by the government, hospitals arbitrarily decided to pass on most of these costs to the insurance companies of other patients and to individual patients who could afford to pay more than the costs of the services they received.

And so, with scores of people below the poverty line without Medicaid coverage, and others who had not saved to cover their future medical costs, the richest country in the world wound up with the most discombobulated health care system the world could possibly imagine. 

New Universal Health Care System

After studying our health care system for a long time, and comparing it with alternative systems prevailing in other countries, I have devised a solid platform for establishing a new Health Care System (“New System”) in the U.S. supported by four strong pillars (constituents). As we will shortly observe, for the New System to function efficiently, each constituent must be willing or compelled to make a series of compromises. We will use an acronym, F-R-E-E, to present the essentials of the New System. 

F: Freedom to Choose

In 1991, while traveling in New Zealand, I had a conversation with the bus driver. After complimenting him for his beautiful country, I asked him about their health care system. Here’s how the conversation went:

Me: “Does your national health care system take care of all of your health care costs?”

Driver: “Absolutely. And we are proud of it.”

I was impressed, but still wanted to explore the subject a little further.

Me: “That is impressive. Are you saying that if you needed a triple by-pass, the government will pick up the entire tab, no questions asked?”

Driver: “You got that right.”

Me: “One final question. After you register for your triple by-pass, how long do you have to wait before the surgery is performed?”

Driver: “Three or four years.”

I silently muttered: “Oops! That ain’t going to cut it in America.”

People Not on Medicare

Americans immensely value their freedom to choose, and seriously object to the government forcing them to buy health insurance when they have to pay up front. You may recall that people on Obamacare complained about weekly premiums of only $5.00, even when they received subsidies. An alternative with favorable psychological overtones would be to allow each employer to let its employees choose their preferred health insurance company.  The employer would then deduct from its employees’ monthly paychecks their health insurance premiums (in a manner similar to 401(k) deductions) so the cost of buying health insurance is not openly perceived and hence acceptable. A slightly different version of this plan would need to be devised for self-employed people. Finally, for the poor and unemployed, a vastly different plan should be devised, relying heavily on taxes on the wealthy.

And so, I propose that for those not on Medicare, the New System would allow employees to be covered by the health insurance companies of their choice through an automatic payroll deduction system as described above.

Of course, for the New System to become fully functional, two caveats must be added. First, health insurance companies will have to be discouraged from using their monopoly power to charge exorbitant insurance premiums for their policies. There already are laws to prevent such practices, so these laws should be enforced. In this connection, it might also be prudent to learn from the highly successful private insurance models currently existing in Switzerland and Germany.

All this is well and good, but it still is only part of the story. To say that insurance companies should be prevented from charging exorbitant premiums for their policies is not to deny manufacturers a “fair” price for their newly-invented, super expensive medical instruments and miracle drugs. Consequently, active government participation should be instituted (at present it is prohibited) to ensure that companies are properly reimbursed, while consumer prices are simultaneously controlled to keep them at an affordable level.

In addition, the currently prevailing practice of our hospitals offering free health care services to patients who cannot afford to pay will have to be discontinued. Partly this is because the availability of free hospital services encourages many people to ignore their health care risks and divert their savings to buy luxurious items like Nike shoes and fancy iPhones. Worse still, left with no other choice to cover these free services, hospitals routinely over-bill insurance companies and other patients, a grossly unfair and untenable practice.

But discontinuing free hospital health care services provides only half of the solution. The other half is the creation of a tax-favored medical savings plan to which each person should be allowed to contribute a percentage (say, 5%) of their gross income. (Special treatment for people below the poverty line is discussed below.) People, including those with health insurance, can use this plan to pay for their health care services. That way, hospitals would not need to provide free health care services and, in turn, would not be compelled to overcharge anyone for the free services they provide today.   

People on Medicare

For these people, the health care situation is a little less complicated. Medicare covers 80% of all medical costs. People have the option to buy Medicare Supplement Insurance to cover the 20% balance. Many reasonably priced Medicare Supplement Insurance plans are available to cover this balance. 

R: Respectable Coverage

A close examination of current insurance policies reveals that insurance companies have a tendency to overcharge for premiums paid by employers, who typically cover 100% of the health care insurance premiums of their employees. Those who are not covered by an employer plan often find health insurance premiums to be rather steep.

There are three solutions to the problem faced by the latter group. 1) The government should work with insurance companies to come up with a more moderate insurance premium system palatable to everyone. 2) People should be encouraged to consider lowering their insurance premiums by accepting a co-pay (say, 10%) arrangement.  3) People can select HMO-type plans where the costs are lowered even further by requiring patients to use only designated health care providers.

The bottom line should be clear: Provide quality medical services at a cost that people consider reasonable and affordable.

E: Empathy for the Needy

Hojat Spendorfer defines empathy in medicine “as a predominantly cognitive attribute that involves understanding, rather than feeling, of a patient’s concerns, experiences, pain, and suffering combined with a capacity to communicate this understanding and an intention to help.” This view of empathy is universally accepted as the rock bed of the medical profession.

I am, however, referring to a different kind of empathy that is urgently needed for the needy, the poor, the unfortunate, and the segregated members of our society. More specifically, these are people who are disabled, born with deformities, or suffer from incurable illness, and are too poor to pay for health insurance.  They deserve our sympathy, our understanding and, most importantly, our financial assistance.

That brings us to the issue of how best to provide financial assistance for these people.  I suggest that this is where a special government-financed program comparable to Medicaid is justified. Of course, to make sure that this system is not misused, extreme care must be exercised so people are prevented from taking advantage of the generosity of others.   

E: Essential Collaboration between Public/Private Sectors

The nuance of this last pillar is least understood because little is publicly known about the relatively few people that are devastated by medical conditions of such a magnitude. 

Consider, if you will, the situation of three patients I know of.  The first is a person whose ability to survive depends on the use of a special medicine (being used on a trial basis) that costs $10,000 a month. Another young patient with a messed-up intestinal system needs to spend each year upwards of $200,000 worth of medical care and medicine merely to survive. A third person desperately needs a special medicine, just approved for the general public, to prevent his internal system from tying up in knots; but each pill—yes each pill—costs $100,000. There are numerous other patients with similar serious illnesses who will never be covered by regular insurance and are destined to painfully slip away.

The New System would not leave these helpless people uncovered. I suggest that, in collaboration with the private sector (consisting of physicians, insurance companies, and other related health insurance specialists), the government set up a funded plan to provide affordable health insurance coverage for these people.

Bottom Line

I remain optimistic that my proposed New System would provide a viable alternative to our current broken down health care system. Clearly the New System, presented here only in a rudimentary form, will need careful fine-tuning and refinement in order to make it functional and universally acceptable. However, after studying over a long period of time various health insurance models existing in the world, I have become convinced that the New System is worthy of serious consideration.

I would love to know where you stand on this critical issue.   

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Travis Smith provided technical support for this article. Valuable qualitative changes to the blog were suggested by Emeritus Professor David Doane and Dr. Larry Seymour, a retired surgeon and a fellow Trillium Woods resident. The blog was professionally edited by Charles Gauck.  However, the author takes full responsibility for the contents of this blog. 

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If you’re enjoying what you’re reading, please consider recommending it to friends you like, and even those you don’t like. They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

PART I

If you think we are engaging in all-too-familiar partisan politics, please think again.  

We will divide this blog into three parts. In Part I, we will begin our presentation by observing “What’s Right with America.” Then in Part II, we will undertake the sensitive issue:  “What’s Wrong with America.” Finally, In Part III entitled “Bottom Line,” ignoring individual party affiliations, we will reveal our choice for the next president of the United States. If interested, please come along and enjoy the ride. 

  WHAT’S RIGHT WITH AMERICA: G-R-E-A-T

In the interest of space and time limitations, I will limit my discussion to five topics, and use the acronym GREAT in making my presentation.

G: Gift of Freedom

The discussion on freedom always begins with the First Amendment. Our government promises total freedom of religion, speech, the press, and peaceful assembly. But hidden behind this version is the one articulated by Comedian Yakov Smirnoff: Half of the word “American” consists of two other powerful words: “I can.” It is this unshakeable faith in ourselves and our freedom to take risks to achieve our loftiest goals that truly sets us apart. We enjoy this freedom because our government is of the people, by the people, and for the people. “We the People” must make sure that our government remains true to its ideals.

In this context, the freedom of press deserves special mention. Our media’s uncontrolled act of washing dirty linen in public startles us and the world. But every day it is on full display for the people of the world to see so they can be critical of all that they see and hear. That is the rarest form of freedom that exists today in America. 

R: Right Hand Extended to People in Need

The compassion and generosity of the American people are always evident after a disaster. But a help of a different kind is far more powerful and effective than disaster relief. Perhaps a reference to my personal experience will make this claim acceptable.

In 1957, when I was a student at the University of Florida, at the end of our first day’s lecture, Professor John Webb sat down on the desk facing us and said in a somber voice: “Boys and girls, during your stay in this country you might be dazzled by all the wealth that surrounds us. But that is nowhere near our major strength, which is articulated by the following philosophy: “In America, no one stands quite as tall as when he or she stoops down to help somebody.”

Since then, numerous times over the last six decades, I have personally experienced this feature of the American philosophy. In fact, I can say without equivocation that the person I have finally become is the direct result of Americans from all walks of life generously extending their helping hands with compassion. 

Here is one specific example of such assistance to which all of you can relate. After I established my website, I urgently needed a talented individual who would be willing to critique my weekly blogs and offer suggestions for improvement. And guess what? Without any expectations of remuneration or recognition, Travis Smith, a noted financial consultant and an extremely busy individual with his own professional work, voluntarily offered that assistance. Please rest assured that the quality of blogs you read is vastly improved as a direct result of Travis’ painstaking contributions. But if you were to ask him why he devotes so much of his valuable personal time to a task unrelated to his profession, I guess he would say that Sid tries to make America a better place and I wish to meaningfully contribute toward his goal.  Other individuals, such as emeritus professor David Doane and Charles Gauck, a fellow Trillium Woods resident, also provide valuable assistance voluntarily, which only revalidates my claim.

E: Essential Connection between Failure and Success

Freedom to succeed is universally applauded, while failure is generally condemned. And yet, it is the latter that, if heroically challenged, can become a stepping stone to success. This point requires elaboration.

In many parts of the world, failure at any level—personal, business and social—is critically treated with disgrace and shame. The result is predictable. Most people are unable or unwilling to take risks where failure is a distinct possibility. Such an action adversely affects these societies in the long run, but that fact hardly changes the deep-rooted cultural history of these countries. 

By sharp contrast, America has carefully established the consequences of failure to ensure that people know in advance what is involved in taking risks. If they fail, they know exactly what price they will have to pay. Once that price is paid, however, the past is buried and they can begin their new life with little, if any, stigma attached to it. The price for failure in marriage is divorce, and business failure is erased with bankruptcy. It is this failure mechanism that is at the heart of people willing to accept risks. In fact, we can do no better than to repeat the prescient words of Theodore Roosevelt: “It is far better to dare mighty things, than to take rank with those timid spirits who know neither victory nor defeat.”

Incidentally, if you wish to find people in America who have devoted their entire lives by taking enormous risks and succeeded big, you don’t have to go too far.  Steve Wozniak and Steve Jobs started to build computers in the garage of Jobs’ parents, which became the precursor for Apple Computers. Two brothers and bicycle shop owners, Wilbur and Orville Wright of Dayton, Ohio, looked at the sky and said: “Why not?” That’s when the aviation industry was born. And Thomas Edison, a scientist, voluntarily accepted the impossible task of inventing a light bulb and failed 1,600 times before he finally succeeded.   Interestingly, challenging his success, someone asked Edison, “Sir, now that you have invented the light bulb, are you humble enough to admit that you actually failed 1,600 times before you succeeded?” Edison replied with a smile, “No, I did not fail. In fact, I learned 1,600 ways of how not to make a light bulb.”

 A: All-important Emphasis on Science, Technology and Art

Kelvin Droegemeier beautifully described the superiority of America in science and technology: “As we mark fifty years since the Apollo 11 mission landed Americans on the Moon, capturing the imagination of the world, our Nation is again on the verge of a new bold era in science and technology. Breakthroughs in medicine, communications, transportation, physics, engineering, biology, and many other fields, will help tackle the greatest challenges of our time and allow Americans to live safer, healthier, and more economically prosperous lives.” With the active help of researchers participating in a collaborative effort to keep the wheels of progress moving, it is all but certain that America will continue to lead in this area.

In addition to these fields, in America, considerable emphasis is placed on developing various forms of art, both native and foreign. It requires a certain degree of ingenuity and affluence to contribute to this area, and both features seem to be thriving in America.

T: The Young are in Charge of Their Own Destiny 

This, too, is one of the major strengths of America. In many cultures, the destiny of the young is handed over to them. Children of doctors or engineers, for instance, are influenced by parents to become doctors or engineers. Business people encourage their children to get into business. And children of people working in clerical positions are delighted when they are offered a permanent clerical post.

America dances to a different tune. When asked what they want their children to become, parents routinely respond, “Whatever they wish to be.” In essence, children in America are encouraged to take a blank sheet and draw the picture that best defines their talents and ambitions. American children find the prospect of becoming artists of their own destiny a valuable opportunity.

Even though it might be a stretch, I submit that the option to write one’s own destiny is at the root of our impressive standard of living. It is no secret that most Americans now take for granted the standard of living they enjoy. In America the construction workers buy Starbucks coffee for $5, house maids live in three bedroom homes accentuated with TV sets, modern kitchens with microwave ovens and air conditioning, and drive comfortable cars. Equally impressive, even a school teacher can afford to take a golf vacation in Hawaii. Such an incredible feat is accomplished by the highest income generated by the combined efforts of all people regarding of their ethnicity, religion, or culture. All this, indeed, appears to be an unrealistic dream in much of the rest of the world. (The problem of income inequality in America is discussed in Part II.) 

Note: Please close this blog and open the new blog for Parts II and III.

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Travis Smith provided technical support for this article. The blog was also professionally edited by Charles Gauck.  However, the author takes full responsibility for the contents of this blog.

Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends. They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, OU, Michigan

PART II

WHAT’S WRONG WITH AMERICA: L-O-S-E-R

In this part i will discuss what’s wrong with America. Here again, for the sake of fairness and space constraints, i will limit our discussion only to five issues. And in this case, for emphasis, i will use the acronym, LOSER, for my presentation. 

L: Learning to Fix our Health Care System

The roots of our health care problem are buried inside our free enterprise system. Our free society allows us to buy any good or service we want, provided we are willing to pay for it. Following that simple rule, someone paying for only a coach class ticket never complains when another person is willing to pay for a first class ticket and enjoy unbelievable amenities. This philosophy of denying you what you are unwilling or unable to pay for is universally accepted in a free society.

But that peace is shattered when health care services enter into the picture. As citizens of an affluent society, we refuse to let anyone die or remain sick without medical assistance. So, after a great deal of preliminary skirmishing, the country finally adopted a law that guarantees free medical care to anyone who cannot afford it. And that’s when the country’s health care dilemma was born. Subsequently, the issue became even more complex due to the exorbitant cost of advanced medicines and medical procedures. On one side, patients argue that medical companies are using monopoly powers to gouge helpless patients by charging exorbitant prices. On the other side, medical companies justify charging high prices on the ground that it’s the only way they can recoup their huge investments in conducting expensive and time-consuming research.

After decades of painstaking efforts to discover an acceptable national health plan, Congress enacted the Affordable Care Act (also known as Obamacare) as a hybrid national health plan. Unfortunately, politics got in the way, which ruined the chances of finding an improved Obamacare – or at least a more acceptable substitute. Today, some 30 million Americans have no health insurance. The wealthy often still get better medical care, and some Americans are only one broken leg or arm from bankruptcy. It’s little wonder that a recent Gallup poll found that almost three-fourths of the American population feels that the health care system is in a “state of crisis,” and 30% is petrified by the medical expenses they cannot afford to pay. Finally, the Organization for Economic Co-operation and Development (OECD) reports that its “disease burden,” a number that measures the number of years lost to disability and premature death, is significantly higher in America than in any other comparable country.

I believe it is our collective duty to select a president who will use his bully pulpit to muster sufficient resources to install a decent universal health care system in America.

O: Our Dysfunctional Political System

During most of the 20^th century and into the 21^st century, the two-party political system in America has functioned efficiently, reflected in our phenomenal growth in the GDP and rapid improvements in the standard of living of our citizens. Even during the crisis periods covering World War II, the Vietnam War, a presidential resignation, cold war with Russia, and 9/11, our political system pulled through and emerged triumphant. As Antonio and Brulle succinctly put it: “For more than a century, American political debates have ensued over two competing policy regimes, market liberalism, stressing unfettered capitalism, strong property rights, and a minimal social safety net, and social liberalism, favoring modest state intervention, redistribution, and welfare provision. . . . Both regimes embrace liberal democratic rights (e.g. freedom of speech, assembly, religion), albeit with distinct twists, reflecting different ideologies as well as different political alliances and compromises.”  According to Pew Research, Republicans and Democrats now are more divided along ideological lines – and partisan antipathy is deeper and more extensive than at any point in recent history. And that is not all. A new survey of 10,000 adults nationwide finds that these divisions are greatest among those who actively participate in the political process.

This is the political climate the next president will face. So we wish to ensure that the next president will use the power of his presidency to convince both parties that compromise is in the eyes of the beholder and should be embraced by all parties for the good of the country. 

S: Serious Problems of Income Inequality

A free enterprise system encourages everyone to take risks, and allows a successful risk taker to keep the wealth accumulated in the process. But does that fully explain why some people are super rich while others find it hard to make both ends meet?  I claim it does not.

According to the U.S. Bureau of Labor Statistics, the problem of inequality continues to worsen. Data show that the rich got richer through the recovery from the 2008 financial crisis. And between 1993 and 2015, the average family income grew by 25.7%. The top 1% of the population received 52% of that growth.

The social and economic implications of this worsening income inequality phenomenon are worrisome. For one thing, as the rich got richer faster, their piece of the pie grew larger. The wealthiest 1% of people increased their share of total income by 10%. Everyone else saw their piece of the pie shrink by 1%-2%. In addition, even though the income going to the poor improved, they fell further behind when compared to the richest. Also, during the same period, despite a 15% increase in worker productivity, average wages remained flat. By contrast, corporate profits over the same period increased by 13% per year.

Although not evident, this trend impacts inequality in many other areas like political power, education, wealth, health care, housing, and social status. Income equality is a major factor in managing quality of life, and income inequality adversely affects that quality.  

An inevitable consequence of growing income inequality is a political backlash involving demands for higher taxes on the rich, more spending on the working class, and higher wages.  While that has not taken place, statistics show that after the economy recovered from the 2008 financial crises, improvements were recorded on several fronts. The unemployment rate in November 2019 dropped to 3.5%, a level not seen since the 1960s. At the same time, household incomes also rebounded as did consumer confidence.

But that still tells only one side of the story. Not all economic indicators appear promising. Household incomes have grown only modestly in this century, and household wealth has not returned to its pre-recession level. Economic inequality, measured by the gaps in income or wealth between richer and poorer households, continues to widen.

In this scenario, if we had a unifying political system, we might have expected to see a demand for higher taxes on the wealthy, more spending on the working class, higher wages, and a real effort to reduce income inequality. Instead, what we witnessed was a reduction in tax rates on corporations and high income earners, an effort to discourage unions, and general approval of the prevailing minimum wage which, adjusted for inflation, is lower in 2020 than it was in the 1960s.

We wish to make sure that the next president will recognize the evils of widening income inequality and address this problem with Godspeed. 

E: Ever-growing Foreign Debt

As a general rule, even during a recession or while fighting a war, our government is responsible for fully funding social programs like Medicare, Medicaid, and Social Security. So, when the collected taxes fall short of the necessary outlays, the government has little choice but to generate massive budget deficits to keep these programs (and others) alive while simultaneously taking care of the financial crisis. Using the same logic, the government should attempt to have a budget surplus in times of economic boom, and use that surplus during hard times.

Unfortunately, recent leaders ignored this lesson and have continued to increase government debt exponentially even during expansionary periods. As of March 2020, the U.S. debt-to-GDP ratio was 82%. That figure is the highest since 1948.

The government is authorized to borrow money as long as it does not cross the debt ceiling approved by Congress. But even if it is legal, unchecked government spending has far reaching adverse consequences. The debt is like a bill that currently averages $67,000 for every single American. If you’re a family of three, that’s over $200,000.  Thus, the deteriorating federal debt problem is like a hidden cancer cell that secretly affects various parts of a patient’s body. But the risk is real and failure to recognize this condition can be fatal.   

We wish for the next president to commit to finding a permanent solution to this on-going debt problem.  

R: Radical Approach to Reorganizing Education

Education, both at the school and college levels, was facing a crisis even before the coronavirus hit. The exorbitant cost of education is only part of the problem. Thus far, the system crushed by college tuition and student debt has survived largely due to the federal government’s deep involvement in the student loan business. But now that the pandemic has brought the educational system to the brink of collapse, we can no longer assume that the problem does not exist.  As Megan McArdle aptly put it: “A pandemic is an essentializing force; it strips away the frosting of rhetoric and habit and forces us to confront bare realities.”

After an in-depth study of our post-secondary educational system, the venerable Heritage Foundation has made several important observations. Many students graduate ill-prepared to earn a living and pay off the debt they’ve accumulated getting their degrees. Almost two-fifths don’t finish within six years. Students are often subject to indoctrination into socialist ideology. They face hostility toward opinions that don’t conform to the predominantly leftist thinking on campus. Many students get immersed in identity politics that pit students of different backgrounds against one another. The list goes on and on. Despite these problems, however, colleges and universities continue to raise tuition largely because of the easy availability of federal student loans. And the result is frightening. Federal loans account for much of the $1.5 trillion in outstanding student loan debt and more than a million borrowers are in default.

While that study listed a lot of issues faced by our educational system, it does not stop there.  From 1987 to 2012, America’s higher education system added more than half a million administrators (and not teachers), doubling the number of administrators relative to the number of faculty. And while faculty salaries have increased at a rapid pace, less than 30% of tuition goes to actually paying educators. Other rising costs are attributed to extravagant buildings, ballooning athletic budgets, and luxurious campus housing and grounds.

What I have said thus far is limited to colleges and universities. Education of K-12 students presents its own challenges. And let us not forget that the coronavirus crisis has turned our entire educational system upside down.

I would strongly suggest that the next president consider the fixing of the broken education system to be a top priority. 

Bottom Line

Now that we have said our piece, we are ready to pick our candidate for the next president of the United States. We hereby pick the person who will further the causes listed under “What’s Right with America,” while devoting his energy toward solving the problems identified under “What’s Wrong with America.”

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Travis Smith provided technical support for this article. The blog was also professionally edited by Charles Gauck.  However, the author takes full responsibility for the contents of this blog. 

Feedback
If you’re enjoying what you’re reading, please consider recommending it to friends. They can sign up at sid.mittra1@gmail.com. If you want to share your thoughts on this or any other blog, or on my blogs in general, please email me at sid.mittra1@gmail.com.

Sid Mittra
Ph.D., Economics
Emeritus Professor, Michigan

Today we plan to have fun playing an interesting game in which there will be no winners. If it piques your interest, please come along. 

The game relates to predicting where the U.S. economy will be at the end of 2020, in December of 2021, and at the end of ten years in 2030. There are so many unknowns to this forecasting game that the task might appear to be a crapshoot. But that is really not the case. Despite the uncertainties our forecasting techniques do allow us to make “reasonable” predictions about the future.   

Period 1: January 2020 to December 2020

The U.S. economy was chugging along nicely from January 2020 until March 2020. Then coronavirus virtually took over the country, practically bringing it to its knees. For the first time since the longest boom in U.S. history started, our GDP declined by -5% during the first quarter and a whopping -34.7% during the second quarter. But well before the second quarter ended, it appeared that the economic decline was slowly bottoming out and we were on our way to recovery. If that turns out to be true, then this will make the current recession the shortest in U.S. history.

There are three reasons for this optimism. First, recessions are typically created by a decline in consumer demand for goods and services. Subsequently, as demand increases, production of goods and services starts to rise to meet the increasing demand and the GDP begins to reverse its downward trend. 

However, the current recession is anything but normal. During the current recession, the level of demand that sustained the previous GDP growth does not appear to have shrunk much. It has merely been bottled up by executive order to fight the pandemic. As soon as the virus bottoms out and gates are opened, consumer demand is ready to hit the economy like a tsunami.

Second, the Federal Reserve and the government have vowed to spare no efforts in flooding the economy with liquidity while keeping the cost of borrowing near zero. These actions have also created an atmosphere of rapid expansion and growth.

Third, even though the crisis has had devastating impact on small businesses, many of which are bound to go under, the giant corporations like Facebook, Microsoft, Yahoo, Amazon and many others have continued their impressive growth even during this crisis. In fact, they will likely benefit, albeit indirectly, from the closing of many small businesses. The stock market is currently reacting to this phenomenon by continuing to rise (the S&P 500 Index is currently down by only about -5% from its all-time high) even though doom and gloom continues to blanket the economy.

Based on these observations, I forecast that the GDP will turn positive both in the third and fourth quarters of this year, although the gains will be minuscule. My generous forecasting is based on a number of recently recorded developments. The economy appeared to bottom out in May with hopeful signs of coronavirus getting under control. Unemployment dramatically dropped to 1.9 million from substantially higher levels in the past months. Mortgage applications, encouraged by low interest rates, significantly rose. Traveling by air and car recorded significant increases. Consumption of oil and petroleum products was up. And personal services industry—restaurants, hair salons and bars—began to show signs of life.

An additional factor that weighed heavily on my prediction was this: Both political parties showed so much enthusiasm in favor of pumping trillions of dollars of liquidity into the economy that the GDP had had no place to go but up.  And that is not all. Congress is about to approve a legislation that would pump in another $1 trillion into the economy. The White House has also been pushing for a payroll tax cut, a capital-gains-tax holiday, and new deductions to encourage spending on dining and entertainment.

I realize, of course, that a number of things could go terribly wrong which will prolog the recession through the end of the year and beyond. These include: second wave of coronavirus in the fall, failure in school openings in the fall, inadequacy of the size of stimulus packages to sustain consumer demand, and so on. But judging from the way the economy is moving and the resiliency of the American people in the face of this crisis, I forecast that GDP will turn positive both in the third and fourth quarters of this year, although the gains will be miniscule. 

Period 2: January 2021 to December 2022

New data on the significant resurgence of the virus starting in June, and no signs of an effective vaccine are the two main reasons that persuade me to predict that the first half of 2021 will be recorded as a down period. There is plenty of information that supports this forecast for next year. For a variety of reasons, the U.S. economy which barely crawled into the positive territory during the last half of 2020 will stall as we move into the year 2021. Scores of small companies, and even many large companies, that were operating at well below full capacity in 2020 will begin to permanently fold.  With additional stimulus packages no longer on the books, millions of workers will wonder if their old jobs will ever come back. With the prevalence of such a pessimistic outlook, consumers will start to hold cash, slowing down economic activity even further.  Finally, drastically reduced state and local budgets will undoubtedly result in further reduction in services and increased layoffs.

On the basis of these negative factors I predict that the GDP will operate in a negative territory for the first half of 2021. 

I assume that by the second half of 2021 several activities will have been reinstated so the situation will get back to something approaching normal. Here are my predictions for the second half of 2021.

First, by then coronavirus will have been effectively contained as the country is persuaded to wear masks, maintain social distances, and observe healthy practices like washing hands.

Second, the big winners will be restaurant and personal services (hair salons and gyms) as people feel comfortable getting out and enjoying themselves. .

Third, work-from-home practices will considerably slow down as preferences for regular offices are revived, leading to rapid increases in office rents. 

Fourth, by that time an effective vaccine for coronavirus will have been invented, thereby ending this nightmare.

Fifth, as the economy gets back to normal, consumer confidence will be revived, resulting in a significant increase in consumer expenditure, and in turn, GDP.

Based on these factors I predict that during the first half of 2021 the GDP will decline but in the second half GDP will show a modest increase, albeit far lower than its normal potential.   

Period 3: Decade ending in December 2030

Recognizing that I have neither the expertise nor the experience to make such a long-term prediction, I have decided to base my prediction based on forecasting by the prestigious Goldman Sachs which recently published a 10-year prediction of the stock market which can be used as a proxy for the performance of the economy. After taking into account the stock and bond markets, dividend growth and the economy, David Kostin, strategist for Goldman Sachs made the following prediction for the decade ending in 2030: “S&P 500 will deliver an average annualized total return of 6% during the next 10 years, We estimate 25% of the return will come from dividends and 75% from price gains. “

I was blown away by that prediction, since the general expectation is that during the next decade the market will return slightly higher than was predicted in the previous decade. So, I checked Goldman Sachs’ prediction for the previous ten years: “In July 2012, we predicted US equities would generate an 8% annualized return during the coming 10 years, with a range of 4%-12%. S&P 500 actually returned 13.6% annually.”

Fortunately, by way of an explanation Kostin stated that each year the S&P 500 (and Dow Jones as well) excludes from the index many poorly performing companies and includes a number of high achievers. As Kostin put it: “To put the index turnover in the context of long-term US equity returns, consider that since we published our original forecast eight years ago, 170 new constituents have entered the index while an identical number of stocks exited the benchmark. The new companies now represent 17% of the S&P 500 index capitalization. Examples of current constituents that were not in the S&P 500 index in 2012 include: Facebook (FB, entered index in Dec-2013), Paypal (PYPL, Jul-2015), Broadcom (AVGO, May-2014), and ServiceNow (NOW, Nov-2019).” This explanation made it clear that comparing Sachs’ past prediction with the actual performance of S&P was like comparing apples and oranges.

Based on this analysis, I accept Goldman Sachs’ forecast of an annualized 6% return over the next ten years ending in 2030. I hasten to add, however, that I remain optimistic that the market will return more than what is being forecast now.

Bottom Line

I stated in the beginning that today we will play a game in which there are no winners. I hope you recognize that there are so many unknowns and variables present, it is virtually impossible to make accurate predictions about the performance of the economy. While I accept that, I claim that there is some value to playing this game, especially since the analysis is based on respectable and academically sound information. 

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Travis Smith provided technical support for this article. However, the author takes full responsibility for the contents of this blog.

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