A U.S. Fiscal Stimulus That Also Addresses Healthcare

December 2, 2008

The U.S. recession starts its second year this month. The severity of the slump accelerated sharply in the present quarter in America as well as in other advanced economies. The recession already is longer than the 10-month average for all postwar downturns and will become the longest one in May. The cycle is loaded with various feedback loops, which threaten to create fresh energy. Monetary officials have not achieved much after throwing everything but the kitchen sink at the problem. Politicians from all sides of the spectrum agree that it’s time for fiscal policy to take a broader crack at the downturn, but there will of course be disagreement over what measures might achieve the best returns. With amounts of $500-700 billion already entered into the public discussion, one cannot dismiss the possibility of the final figure being close to a trillion dollars.

In a consumption-led recession, rising unemployment becomes a critical issue. The jobless rate has risen to 6.5% already from a low of 4.4% in March 2007 and 5.0% last December when the recession began. Other than a single month at 9.0% in May 1975, the only time since 1948 with a jobless rate of 9% or greater was a period of 19 months surrounding the postwar high of 10.8% in November-December 1982. Less jobs means less income to fund discretionary consumer spending and risks accelerating distress like home foreclosures associated with fixed household costs. The process feeds itself because reduced consumption curtails corporate revenues, resulting in more layoffs and fewer new hires. Applying a tourniquet to the labor market pain offers one potential key to ending the recession. Unemployment insurance will probably be extended as one remedy.

Layoffs often affect healthcare coverage. COBRA was designed in an era of much lower healthcare premiums as an opportunity to provide continuous coverage in case health conditions develop that could impede the later reinstatement of insurance. Workers going on COBRA face much bigger jumps in their monthly out-of-pocket healthcare costs than envisaged when the system was established, or that existed when the jobless rate last surpassed 9.0% in the early 1980’s. It’s an expense that strikes when cash flow is depleted by the loss of regular income. The drag on discretional personal consumption is multiplied. For families burdened with a mortgage, the spike in healthcare coverage can be the last straw in a process that ends with another home foreclosure.

The U.S. Labor Department is expected to announce a drop of more than 300,000 jobs during November at the end of this week, and the pace of reductions is only now warming up. Many months of outsized declines appear to lie ahead. The jobless rate gets to 9% or higher through a combination of a recession that is severe in magnitude and long in duration. This recession has both. The herd of forecasters has drifted to a view that positive growth returns after mid-2009, but a lagging indicator like the labor market probably would bottom considerably later. The jobless rate peaked in June 2003 in the last cycle, more than a year and a half after the recession had ended. There’s little assurance that the consensus timing for the end of this recession is correct. Given how different this cycle is from all others in our lifetimes, precedent is not an especially good guide to the future, and it would actually be surprising if a recovery began as soon as hoped. Healthcare cost and coverage looms as a major problem not far ahead.

President-Elect Obama identified healthcare has one of the must corrosive long-term problems that America faces. The problem has two main dimensions, the huge number of people without insurance and projections for continuing rapidly spiraling costs. Each of these would be ameliorated by allocating some of the fiscal stimulus to reducing the burden that going on COBRA can present. Healthcare costs as a percent of GDP are twice as high as such were in 1982, when unemployment surpassed 10%. This jump in the resources allocation to healthcare did not put America on the top of the rankings for expected lifespan — far from it — so in a basic sense the much higher relative cost of U.S. healthcare failed to deliver. Subsidizing the inflated premiums faced by workers on COBRA would not only reach a pressure point of the self-feeding recession process, but it might also move the United States one step away from an unsustainable employer-provided healthcare system that has become overly reliant on managed care.



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