Healthcare Costs Reveal Economic Failure: Time To Steer Investment Into Innovation

Healthcare, or health insurance to be more precise, makes up a large portion of the employer-derived income 178 million Americans rely upon.  Costing annauly somewhere around $18,000 for an average family, health insurance represents up to a fourth of what someone with a median income of $52,000 actually makes with coverage and taxes.  Recognizing the bottom 90% of Americans make an average of $30,000 per year, health insurance is a major living expense that they can only afford with help.  Prior to Obamacare reforms, more and more Americans were losing their employer-sponsored health insurance, experiencing increased out-of-pocket-expenses, and losing benefits.  Today, the trend has largely been supplanted by a growing reliance on government subsidies in the form of tax credit and expanded government-sponsored health insurance, e.g. Medicaid. 
 
As a portion of income, this means the income people drive from work and the economy is stagnating and, even, shrinking.  Ideally, the loss of employer-sponsored health insurance would translate into increased cash payments.  By not taxing health benefits and affording employers generous tax incentives for providing their employees health insurance, however, government has distorted the value of healthcare for decades, thereby allowing employers to pay their employees less in actual dollars by providing health benefits.  Because health benefits are also somewhat of an equalized payroll expense for all employees, lower-valued workers cannot expect to capture the cost of their health insurance in their pay checks.  This means a loss of employer-sponsored health insurance is a major loss of income for workers.  The trend away from employer-sponsored healthcare also underscores the failure of the economy to deliver average Americans the income they need to maintain a modern lifestyle.   

Unfortunately, the US is geographically divided into an increasing number of extremely wealthy communities and extremely poor communities with a diminishing number of middle income communities.  Fewer employers are sponsoring health insurance due to increases in health insurance costs, but businesses are also suffering from the same growing income inequality that effects people.  In other words, many businesses are not earning enough to pay their employees more.  To summarize, the US economy is failing to properly distribute wealth to the businesses, individuals, and communities that make up the vast landmass that is the United States.  For the future of the nation, this is a major problem.  Issues like healthcare can be eased by using tax dollars and socialist redistribution of wealth, but the long-term survival of the nation requires an economy that functions properly by properly distributes wealth.
 
That said, the overall economy is doing so well that the Federal Reserve feels compelled to raise interest rates, which is expected to dampen economic activity.  Where the Fed’s efforts are aimed at sectors of the economy that might be on the verge of growing at an unstable rate, including the financial sector which benefits from the most easy money low-interest rates created, there is likely little the Fed can do to help the areas of the economy and country struggling to catch up.  The stimulus package of the Obama Administration and the two stimulus packages of the George W. Bush Administration demonstrate the limited capacity of the government to build the economy.  With tax reform and other policy shifts on the horizon, assuming Republicans can settle on a policy agenda that is agreeable with Democrats enough to disarm crippling opposition, there is an opportunity to restructure the economy to help the areas of the economy most important to job creation and business development.
 
The economy must become the top priority of public policy.  Reducing regulation, slashing taxes, and ending tariff-free trade will not, however, be enough to accelerate and sustain economic growth.  Ultimately, an economy must provide for the needs of the population it serves or it cannot be sustained.  Today, it does not.  Thanks to a widening income gap and a growing number of poor, an increasing amount of wealth is being concentrated into the hands of a shrinking minority.  The world is lush with need, yet the human resources and intellectual capital needed to address the need exists.  Opportunities turn into prosperity when there are needs to be fulfilled and when enterprising individuals, with ideas, skills, and ambition, have access to the proper resources.  Unfortunately, countless opportunities to solve problems and foster prosperity are lost, because those with the insights to solve these issues are blocked from seizing opportunities and harnessing their talents. 
 
Businesses, industries, and economies depend on three kinds of capital: financial, intellectual, and labor.  The investment of financial capital provides businesses with the money they need to open their doors, maintain their operations, and expand as their customer bases grow.  This is why investors and banks are so important.  It is also why the investment of financial capital is rewarded with either a share of a business or interest payments.  The need for the investment of intellectual and labor capital is not, however, always appreciated or properly rewarded.  To restructure the economy to benefit average Americans, intellectual and labor capital need to be cultivated.  Over the past few decades, the financial sector of the economy has been a persistent bright spot, in part, because policymakers crafted policies to cultivate financial capital.  One such policy has been a reduced capital gains tax, which offers a window into ways labor and intellectual capital can also be cultivated..  
 
For average American investors, a lower rate for capital gains tax serves as a long-term incentive to invest their money in order to ensure their financial future.  It helps them build wealth for retirement while fueling the continued economic growth of the country.  Because stock markets afford individuals a convenient vehicle for investment, versus directly risking their savings in a local business venture, most people invest in the national and global economies through a 401K retirement plan, an IRA, mutual funds, bonds, CDs, and other financial instruments. This means that money is funneled into investments that have more stringent reporting requirements, with the greatest benefits and risks going to those who invest in segments expected to grow the fastest. The benefit to the economy is a readily available, broad base source of capital that can be used to expand economic activities on Wall Street and on Main Street.  
 
Unfortunately, the financial sector does not employ a great deal of labor compared to the greatly diminished manufacturing sector; a vibrant financial sector does not directly create many jobs. Consequently, steering too much money into the financial sector may hurt the economy as a whole.  After all, it diverts money away from the economic activities that directly benefit most Americans.  Growing economic disparity, stagnating and shrinking wages, and lackluster job creation as the capital gains tax has been cut hints at the validity of this argument.  People need well-paying jobs to sustain strong consumer spending, i.e. the lifeblood of the economy, and build their investment portfolios, i.e. get access the benefits of economic growth and supply the economy with capital, i.e. while enjoying a comfortable lifestyle.  When people lose their ability to both afford a comfortable lifestyle and invest for their futures, the economy is in trouble. 
 
From the 1970′s until about 2008, average income Americans were able to compensate for diminishing wages and lost financial opportunities by working longer hours, living on multiple incomes, decreasing family size, forgoing certain luxuries, relying on state support, and, in the case of the growing poor classes, forgoing necessities, thus ultimately hurting themselves in the future.  Today’s economy is built on increasing returns to those who can afford to be investors. For wealthier Americans, a lower tax rate for unearned income is not an incentive to invest.  It essentially affords them a windfall for money they would have invested anyway.  This translates into a situation where an excess of capital is driven toward investments with the highest payouts, thus creating economic bubbles.  In turn, Wall Street firms and affluent individuals have been increasingly able to use extremes in the markets to siphon capital out of the economy, especially with their use of exotic financial instruments.
 
Consequently, U.S. policymakers should cap the benefits of the lower capital gains tax rate, so it can act primarily as an incentive for middle-income households. Paying down the National Debt is one option for spending the increased revenue resulting from limiting capital gains, while shifting the tax savings associated with reducing the capital gains tax discount is another.  Cutting overall tax rates would be nice, but governments might consider subsidizing another type of capital that would drive growth where it is most needed, i.e. intellectual capital. Innovations and the spread of new technology can create good paying jobs by sparking novel industries.  Coupled with improved patent laws, offering a tax discount on par with current capital gains tax deductions for royalty payments on novel technologies and other innovations would make them far more valuable. By making patents and other intellectual property more valuable, financial capital would be steered toward innovation, thus ultimately cultivating new industries and jobs.