National Healthcare Might Require a Tax Cut


Recently I heard a great argument by the Modern Monetary Theory (MMT) people with regard to National Healthcare. The argument comes from Warren Mosler, one of the original MMT theorist, hedge fund founder, and automobile enthusiast. His argument is National Healthcare might require a tax cut.

In order to understand this argument, it is important to understand the MMT view of money, its inflationary and deflationary impacts, and how it is created. There are different kinds of money and they are created in different ways, but it all begins with the public sector. In the public sector there are two actors: the U.S. Treasury Department and the Federal Reserve. The Federal Reserve System is actually privately owned by large banks within corresponding Reserve Districts, but for all practical purposes, it is a publicly controlled entity: created, overseen, and regulated by Congress.

Money creation begins with the Treasury Department. When the U.S. Treasury spends, it creates new money; when it taxes, it destroys money. The supply of money should be calibrated in a manner which neither supplies too much money, which is inflationary, or too little money, which is deflationary. The levels of Treasury spending, i.e., money creation; and taxation, i.e., money destruction, should be determined in a manner which enables economic growth without inflationary build-ups. Spending need not be matched by taxation and borrowing. Borrowing need not occur in order to fund deficit spending but might be useful for interest rate targeting and other purposes. Deficits are only a concern if they result in inflationary pressures, other than that, the deficit is merely an accounting entry. Money is also created when the Federal Reserve purchases securities from the non-commercial banking sector, and also when commercial banks create loans. These latter two sources of money creation are not important for our purposes.

Now to Mosler’s genius argument. U.S. national healthcare cost are roughly 19% of GDP. This is close to double the healthcare cost of the United Kingdom (U.K.) where healthcare costs are approximately 11% of GDP. If the U.S., as a result of national healthcare, were able to reduce healthcare spending to a level close to that spent in the U.K.: 11%, then the U.S. would experience a GDP reduction of 8% (19%-11%). Stated differently, income to this sector of the economy would be reduced by 8%. A reduction of GDP of this magnitude would have a highly deflationary effect on the U.S. economy. To reinflate the currency, a new flow of money would need to be introduced to the economy. The easiest way to achieve this would be through increased deficit spending which can occur in one of two ways: either through an increase in Treasury spending, i.e. new money creation, or through a reduction in taxes, i.e., less money destruction. Under this scenario, increased deficit spending would be used to fight the deflationary pressures associated with the reduction in healthcare cost. This all works because deficits are only a concern if they create inflationary pressures. Therefore, a national healthcare system might, as time progresses and healthcare costs are reduced, require a tax cut, not a tax increase, as is currently believed, in order to overcome deflationary pressures associated healthcare cost reductions achieved through a national healthcare plan.

This is an interesting argument which warrants serious consideration.

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