Debate on Cutting Public-Sector Jobs

This is a Facebook debate I was having with a friend about the impact of hospital staff cuts in public Louisiana hospitals. (Link to the article: http://itsoureconomy.us/2013/07/hospital-privatization-in-louisiana-leads-to-hundreds-of-lost-jobs-lower-pay-less-benefits/).

Michael Ramos: However, everyone who utilizes these hospitals will likely rake in that saved money that would have been spent on employee salaries, and the hospitals themselves will also actually have an incentive to become more efficient and make money, unlike when they were government entities. It also saves taxpayers money on supporting that inefficient government structure while replacing it was a far more efficient and less costly private company. This is in no way a negative thing, unless you like inefficiency and wasting money. If you do, just pay everyone to dig ditches and contribute nothing to the economy with their work. Jobs aren’t what allow the economy to work, if they’re redundant or useless, which you don’t realize when you just use raw numbers.

L. Larry Liu: What is your assumption? That the taxpayers, who have extra money in their pocket will go out and spend it somewhere else to create more jobs in other fields? That might seem viable, but there is not much historical evidence for it. It is perfectly possible for companies to create more jobs, but then they would also find no reason to hoard the $2 trillion in their cash balance if they were so confident about hiring.

What is going in Louisiana is very simple: the state reduces its workforce to reduce overall labor costs. The state-sector is one of the few that still provides strong benefits and high wages, i.e. a middle class lifestyle. If the state takes it away, then these workers will be forced to find jobs in private companies, who will offer these experienced workers a much worse deal. These workers will have lower wages, and will buy less in the local economy.

Sure, there will be more surpluses in the corporate headquarter, and they can allocate it elsewhere in the economy. Preferably as executive compensation. But do not think that more middle class jobs are created in other sectors of the economy. Two thirds of the jobs that have been lost since the recession are middle class jobs. Only one fourth that were gained were middle class, the overwhelming majority in the low-income sector. Explain to the taxpayers how they have benefited from this situation. Many people have been working more hours for lower wages (i.e. the average family), and you celebrate some savings to taxpayers.

Reading the abstract of this book might offer some larger context to you:http://www.routledge.com/books/details/9780415538602/

Michael Ramos: Of course my assumption is that taxpayers will use their extra money to buy things. When people earn a Christmas bonus, do they store it all in a bank, or do they use it to buy themselves something? Much more often than not, people prefer to spend their additional money, which is how the economy works. If they save it by investing in their 401K, that still helps bring about growth, since companies use that money to expand/take risks and either produce innovative products that can improve our standard of living/improve production efficiency, or compete with other companies and thus lower costs, which allows consumers to purchase even more goods. There is also tremendous amount of evidence that lower tax rates correlate with economic growth, and it seems extremely odd to me that you could even claim to be unaware of that. If your healthcare costs suddenly halved, you might finally be able to buy that new computer you’ve been wanting, or even buy a pool, depending on how expensive your healthcare is. If you believe wasting taxpayer dollars on inflated and inefficient public salaries, and especially that it’s worth it to make the consumer waste even more money to support inefficiency, than you have to be highly unaware of how the economy grows. You logic, if taken to an extreme, suggests that we should just have the government hire everyone at vastly inflated wages, regardless of whether or not they’re actually doing anything useful. FDR actually did some of that when he hired citizens to dig ditches and then fill them up again. These policies don’t actually fix economies, and you should realize that merely paying people an income for doing nothing doesn’t cause growth, because nothing of value is being made or done.

And above all, savings to consumers are what matter for economic growth, and that’s exactly what lowering hospital prices does.

To give a real life example, if a hospital is charging $150 for a procedure performed by 3 people, but only one needs to do the work and the others stand by idly chatting, you could save the patient $100 by firing the two useless employees and have them instead get jobs where they actually do something to contribute to the economy. The $50 they each lose is given to the consumer instead, and since prices are lower, he’ll be more likely to utilize more of those procedures in the future, simply because they cost less, assuming that they provide him some sort of benefit. This actually grows the economy, which doesn’t occur when you pay people to do inefficient, or even useless work.

L. Larry Liu:  I will grant you the point that the money that is saved has to go somewhere. But here you have to look at the class content: who collects the money? It is perfectly possible for the state to use the savings to give tax breaks to privateindividuals. But suppose they give the money in the form of tax breaks to companies in order to lure more businesses into the state. Suppose the other states are also lowering taxes. Then you have lower government revenues across the board financed out of a diminution of the public sector payroll, which you find wasteful. The private sector then absorbs the profits. Now who gets to have his hand on the profits? The corporate executive and the major shareholders, not necessarily the American consumer. What is the class significance of it? It is that the rich may lend the money to the poor to keep consumption going, which is what we did since the 1990s, and it does not work, because of the financial bubbles it produces. Or the rich speculate on assets like houses, wheat, gold, silver, you name it without improving the economy, because overall demand is so weak, and there is no point in making investments if communities are too impoverished to purchase more commodities.

You make it appear as if every consumer will be the beneficiary of the cost savings. Yet, we know that it is in the health care system that patients as consumers have the least say with regard to how much they need to pay for their medical treatment. The costs are continuing to increase, and the minuscule cost savings that are achieved are happening on the backs of the nurses and doctors that lose their jobs. The reason for that should be obvious to you as well: the middlemen insurance and pharmaceutical companies are making billions of dollars in profits and take care of their shareholders and chief executives rather than patients, taxpayers or hospital staff.

You make an audacious claim in saying that 2 out of 3 of these nurses are chatting with each other, and blowing a hole in the wallet of the patients. The truth of the matter is that most nurses are working their ass off, and they have to work very long hours especially given the fact that many of the private hospitals that employ them are squeezing labor costs and adding to the workload of an overburdened nursing staff. Please do not give me any imaginary story about lazy workers (who certainly exist, but not as numerous as you imagine).

If your fairytale story about the economy were true, then where are all the improvements in the standard of living of the American people? A majority of people now believe that their children will have a worse time attaining the American Dream than themselves. Two thirds of the jobs that were lost since 2008 are in the middle-income sector, while two-thirds of those created are in the low-income sector. Can you tell me where these cost savings went? (I gave you the answer in paragraph 1). Certainly not into the pockets of the American people.

And now let me pick apart your statement about tax cuts and economic growth. If you reduce the value-added tax, then consumers (high or low income) will see savings, and they might purchase more goods. This will stimulate the economy, but the trade-off is lower government revenues and a squeeze on services, like infrastructure maintenance or education and R&D. If the economy grows faster than the loss in tax revenue, then the government should go ahead with the tax cuts, but that is often a tough call to make. In any case, tax cuts should be applied especially to lower income people, because the stimulating effect is greater, because they save less money (if any at all).

However, if you do tax cuts on the rich, like Ronald Reagan and George W. Bush have done, then there is NO correlation between economic growth and the cut in the marginal income tax rate (the rate that applies only to top earners). The government reduces revenues, which it could apply to social programs, and does nothing useful in return for the economy. The reason is obvious: rich people will speculate their additional capital rather than increase real consumption in the economy. There is only so many Rolls Royce a rich man can drive. Another reason is that corporate executives have fewer incentives with a lower tax rate to keep the funds in their company and instead transfer it into their own bank account. This selfish decision has fatal effects for the firm’s future viability, because important investments in plants, equipment and research are simply not made. Yet, this nonsense ideology about tax cuts for the rich helping us all, which is epitomized in the Laffer curve (this man is worth a ‘laugh’, which has the same pronunciation as this economist’s name), continues to live on among us.

And let me also make a comment on wasteful workers. Should we hire people, who dig out things that have no social value? Not necessarily. I should firstly remark that this society has enormous social needs, which are not satisfied with the current political-economic priorities. For example, a report by the Association of Civil Engineers claims that the US has to spend at least $2 trillion for infrastructure maintenance just to maintain it at the current level (!). There is a huge need for maintaining our infrastructure, which businesses need to ship their goods to different areas. If we maintained our electricity grid better, we could also save money for electricity through efficiency increases in delivery. I have no objection to such measures, and strongly encourage it. Doing these crucial public projects makes the nation more competitive while providing employment to millions of people, who are out of work, because the capitalists are too pessimistic about hiring them. Better to hold on to the $2 trillion in corporate cash.

Here is a good reason why the health care system is too expensive: http://www.beckershospitalreview.com/compensation-issues/hospital-and-health-system-executive-compensation-in-2013-8-trends-to-monitor.html

Michael Ramos:

In response to our last discussion:
Whether the state gives the money to individuals in terms of lowered tax rates (increasing their standard of living and growing their economic spending) or to companies (which then use it to hire people or innovate with risky new ideas/technology), I can guarantee you that the citizen and the company will use that money far more efficiently than the federal government ever will, due to the fact that they actually have incentives not to waste the money. Government will just tax more if they use the money inefficiently (like hiring people who do little to nothing i.e. redundant jobs, or overpaying for simple jobs, or just engaging in crony capitalism like hiring the less efficient but politically connected company who donated the most money to your campaign).

Companies make the jobs Larry, and if you taxed businesses highly enough, there would be no companies. 100% tax rate on a company means I’m better off working by myself and for myself, and even if it’s only a 90% tax, my profit margin is so low that I probably won’t take any major risks to make more money/innovate; I might go out of business if I did. A higher tax rate increases the risk without increasing the benefit, and when that tax is high enough, business stop improving themselves or go out of business, and the economy suffers as a result.

You mention insurers and Pharmaceuticals as making a rich windfall off consumers, but in insurers have extremely low profit margins despite the fact that separating them by state lines reduces competition massively. Pharmaceuticals do make money, but that is solely because they innovate massively. They spend billions on researching, testing, and making new drugs, and billions more on lawsuits for side-effects that happen decades later. If they didn’t have their high level of profits when they succeed, there is no way in hell they would stay in business given their utterly stupendous levels of risk, and innovation would suffer. The consumer is ultimately the one who benefits from these new drugs, and your idea of taxing the companies to oblivion would stop all new drugs and cost many consumers their lives (in terms of the delay in researching new medicines, and the number of companies willing to take that risk. Every year that the cure for cancer is delayed has a tremendous cost)

If you’re curious why so many new jobs are low-income, I’d postulate that government regulation and taxes play a gigantic role. Did you notice that part-time jobs (under 30 hours) have risen massively in the past year or two? Did you notice that Obamacare doesn’t apply to part-time workers? I wonder how many full-time jobs had to be lost to satisfy fiscal liberals who believe that their policies help inequity instead of worsening it (in addition to actively inhibiting economic growth)

And although this is tangential, the story I gave you was hypothetical Larry. 2 of the 3 nurses are redundant, and I know that because they don’t actually exist. Whether or not most actual nurses have redundant jobs is irrelevant, and it bothers me that you’d waste time trying to make an issue of something that I have not even stated an opinion on. My dad is a cardiologist, and he actually has seen lazy nurses (including one who sued the hospital for reading her thoughts; they settled with her due to court costs and promised to stop) if you want to argue that they don’t exist. I am aware that nurses are taking over the roles that doctors used to fill in many cases, I just want you to be aware that there are redundant people in every occupation Larry, and you should not pretend that 100% of any occupation is filled with hardworkers. There are lazy people in every occupation, and a hell of a lot more of them in careers where they can’t be fired for incompetence, as often happens with the government, but much less with the private sector.

L. Larry Liu:

Michael,

Thank you for taking the time to write a lengthy response. Is government going to be more or less effective in allocating capital? I don’t know exactly to be quite honest with you. But what I do know is that the companies are far from allocating their capital into productive investments. How is it going to help me to know that private individuals and companies will allocate their funds more efficiently if they do not want to allocate it to productive investments, such as more infrastructure projects, better schools and hospitals etc. If your definition of efficiency simply means to do the most output with the least input, then your argument might be right, and the government should not be trusted. If you mean by efficiency that we have full employment and do not waste the resources of workers, who lie idly at home doing nothing, because highly profitable corporations prefer to avoid investments due to overall lack of demand, then the private corporations are ineffective entities. My argument hinges on the second definition and not the first.

The government will tax people more, and to such extent can become inefficient behemoths. However, I am afraid that if you have an enormous social crisis following great unemployment, low wages and misery for the working poor, there are few alternatives to using the taxing power of the government to stimulate the economy.

The 100% corporate tax is a proposal, which I have never formulated, and it would be enormously inaccurate to think that my objective would fall in line with that analysis. 90% is also very high. I understand that companies are the goose that lay the golden egg, and we shall not kill the goose. A 35% corporate tax is acceptable, if that were actually enforced. It is certainly correct that high taxes on corporations will deter investments, but only if the tax regime is enforced so haphazardly rather than systematically, and if there are subsequently alternatives to investment options (i.e. overseas). If by accounting tricks, such as using a postal box in the Cayman Islands where no corporate taxes apply, the corporate tax burden is dramatically minimized, then it would be preposterous to warn about the impending extinction of corporations, which I do not have in mind anyway.

The most important argument I want to make, however, is that corporate taxes are necessary particularly in the current political-economic framework, because enormous surpluses sit in the corporate treasuries, while many countries are suffering from sovereign debt crises and low economic growth. The corporations have cleverly created an externality, which they hope that someone else (the middle class, working class, poor) will have to pay for and not them. If any of the fiscal crises should be resolved, then the surpluses in corporate treasuries should be used for productive uses. I do not mean to say that individual corporations have caused sovereign debt crises, but I do mean to say that the credit of the one sector (corporations) is countered by the debit of another sector (government, working people). If you find the discussion in this paragraph irrelevant, then I would suggest that you are missing out on an important component of contemporary problems.

With regard to the low profit margins of the health insurance industry one quote might be instructive, “In the first three quarters of 2011, the five largest publicly traded insurers reported their best three-quarter performance of the past decade, Bloomberg found. The companies’ average operating margin widened to 8.65 percent in 2011, compared with 6.9 percent in the 18 months before the law was passed, surpassing Wall Street analysts’ expectations.” http://www.nationaljournal.com/healthcare/report-health-insurance-profits-rise-despite-health-care-reform-20120105 Separating by state-line is going to be a drop in the bucket, because even if that limitation would be lifted, we simply create a larger market with the same number of health insurers, who carry out the same collusion they practiced with state-line divisions. The solution to affordable health care still remains the single-payer option, which has worked in many countries in Europe.

Your story about pharmaceutical corporations is even more terrifying. The many “innovations”, which the drug companies are producing are for medicine that in large parts contain small changes to current medicine, which is necessary in order to receive new patents on basically old products. It is similar with the college publishing industry, which charges students $200 for school books that contain small changes with new editions every year. Now, there is some important innovation, which the drug companies are also coming up with, and they produce real health results. But I should perhaps remind you that only a fraction of the reported R&D costs are actually applied by corporations, explaining the high profit margins for pharmaceutical companies. As far as I understand, the profit margins take into account the R&D budget of the companies. I quote, “In Forbes’ list of the world’s leading companies, pharmaceutical companies have profit margins averaging 20 percent, whereas the average profit margin for the 2,000 leading companies worldwide is 8 percent.” http://www.rxrights.org/your-thoughts/where-are-drug-company-profits-really-going This makes the pharmaceutical industry not the great innovators, but rather the great rent-seekers, especially since Medicare Part D was passed (where the corporations buy the government to receive rent protection, i.e. windfall subsidies and profits).

Your appeal to dying patients is, therefore, also inaccurate. The greatest death panels are the pharmaceutical companies themselves, who force desperate patients to deplete their entire savings, and go into deep debt in order to buy the medicine in order to survive. Do not misunderstand me: some profit is necessary to function, but the excessive profit margins, which is also enforced by unruly shareholders, is providing more harm than good for society. You also write about the risk of pharma firms. But where is the risk if they receive enormous public subsidies through Medicare Part D?

With regard to the effects of Obamacare on employment, I will actually agree with you. The proximate impact of Obamacare was the fact that many companies that have an abundant low-wage labor supply (i.e. Walmart, McDonalds etc.) will cut back on the full-time hours of workers. For those that are already full-time and with benefits, the consequences are smaller, but more robust coverage will likely bring companies to reduce hours, but only if there is a huge labor supply available. But let us not be fooled here: the essential dilemma with health care is that the capitalists outside of the health care sector do not want to pay more contributions to the health care capitalists. They will try to roll over the cost to the society if they can, and Obamacare allows that to happen with the health care exchanges. Obamacare is a failure to the extent that it does not provide comprehensive health insurance coverage at a lower cost. This objective can only be reached with the implementation of the single-payer health care system, which would make the employer cost to employee health care equivalent to the current contributions into the social security system, which is cheaper than under current configurations.

Lazy workers are a problem in every organization. However, I just don’t see this to be the essential problem in a slack labor market, where people have to work harder with lower wages or else face unemployment and misery. Some workers in the protected sector (especially in the government) are exempt from that, but their privileges are naturally under attack thanks to ALEC lobbying (e.g. http://www.motherjones.com/politics/2012/05/alec-unions-think-tanks).

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