Competitiveness: two tales of systemic reform with Trump and Macron

I just finished reading an illuminating article by Andrew Ross Sorkin on healthcare and it got me to thinking about a review of structural reforms by Dani Rodrik which encapsulates the problem with fixes to ‘competitiveness’.

The message: target reforms like a laser or they won’t work.

Let me start with Sorkin first. Sorkin notes Warren Buffett’s claim that healthcare costs are the big kahuna when it comes to competitiveness. And he checks Buffet’s claim that corporate taxes as a percentage of GDP are much lower than healthcare costs carried by US-based corporations. Here’s how Andrew puts it:

“When American business talks about strangling our competitiveness, or that sort of thing, they’re talking about something that as a percentage of G.D.P. has gone down,” Mr. Buffett said. “While medical costs, which are borne to a great extent by business,” have swelled.

He is right: In 1960, corporate taxes in the United States were about 4 percent of G.D.P., which is probably the best way to measure the burden on businesses. Then the percentage fell steadily, reaching its bottom in 1983 before rising slightly over the last several decades. Today, it is 1.9 percent.

In the meantime, health care costs as a percent of G.D.P. have skyrocketed, significantly diverging with those of other industrial countries. Our health care costs stand at 17.1 percent of G.D.P., up from 13.1 percent in 1995.

The figure in Germany is only 11.3 percent, up from 9.4 percent during the same period. Japan’s is 10.2 percent, up from 6.6 percent. Britain’s health care costs are 9.1 percent of G.D.P., up from 6.7 percent in 1995. And China’s is only at 5.5 percent, up from 3.5 percent.

The key:

Corporations spend $12,591 on average for coverage of a family of four, up 54 percent since 2005, according to a study by the Kaiser Family Foundation.

The pro-growth solution, of course, is to reduce that cost burden – without shifting it onto workers or taxpayers. How to make this reform is the real question because the numbers here are much higher than they are for corporate taxes.

And this gets at a truism that Dani Rodrik elicited in a review of structural reform efforts he co-authored: You gotta do the right reforms if you want the right results. Otherwise you may get no improvement – or even retrogression.

Here’s how Rodrik puts it (pdf version here):

Structural reform as a remedy for slow (or no) growth has been around since at least the early 1980s. At that time, the World Bank began to insst on economywide liberalizing reforms as the quid pro quo for developing countries in Asia, Africa and the Middle East in return for “structural adjustment” loans…

Oddly, though, debate over the reforms pressed on Greece and other crisis-battered countries on the periphery of Europe did not benefit from lessons learned in these other settings…

…One meta-study of 46 different research papers on post-socialist economies found that the impact of structural reform varied across the board. The model estimate impact was statistically insignificant, meaning that it was impossible to conclude with any confidence whether the effects were positive or negative.

Think about that for a second. We have 35 years of data across a variety of economies about what works and what doesn’t work. And yet, when it comes to implementing reforms we simply throw the kitchen sink at the situation, enforcing a broad-based an open-ended liberalization of labor, capital flows, and regulations – no prioritization at all.

What works and what doesn’t? Here’s Rodrik again:

Ultimately, the choice of reforms boils down to one of two approaches. The conventional strucural reform agenda relies on a “big bang” — as many changes as possible as quickly as feasible. Politically, this approach typically exploits a window of opportunity created by economic crisis that reformers fear will close when normal times return. The costs of big-bang reform — higher unemployment, slower recovery — are tolerated in order to reap what is hoped will be sizable benefits down the line…

[…]

The second approach is less ambitious, consisting of sequential targeting of binding constraints. The political strategy underpinning this style of reform is the expectation that early wins will create political support for reforms (and reformers) ver time. When binding constraints are successfully targeted, the early growth payoffs can be quite spectacular.

Bottom line: In France, Emmanuel Macron needs to think about his political capital. Does he go big bang and risk being seen as the successor to François Hollande, the most unpopular President in modern French history, when the short-term results are negative? Or does Macron go for the easy wins and build capital?

In the US, all of the nonsense about regulation and taxes as the big problem in America is corporatism masquerading as liberty. Warren Buffett detailed how taking that same animus to healthcare just ends up as a massive tax cut for the rich and does nothing for ordinary wage earners.  And Andrew Ross Sorkin’s numbers show you that healthcare costs are a bigger burden both on the economy and on employers in the US. Republican fixes to Obamacare won’t change any of that.

About 

Edward Harrison is the founder of Credit Writedowns and a former career diplomat, investment banker and technology executive with over twenty five years of business experience. He has also been a regular economic and financial commentator on BBC World News, CNBC Television, Business News Network, CBC, Fox Television and RT Television. He speaks six languages and reads another five, skills he uses to provide a more global perspective. Edward holds an MBA in Finance from Columbia University and a BA in Economics from Dartmouth College.