THE HIGH PRICE OF GETTING HIGH

Let me get to the point / Let's roll another joint / Turn the radio loud / I'm too alone to be proud. ~ Tom Petty 

State marijuana markets are becoming white as well as black. More states are passing laws or propositions that legalize recreational and/or medical marijuana; creating legal white, regulated markets. Currently, 29 states and the District of Columbia have laws broadly legalizing marijuana in some form.

Despite characterizations by advocates, there is no national market for marijuana because of strict federal rules and regulations from the Justice Department’s Drug Enforcement Administration (DEA). According to federal statute, no marijuana (not even a single preroll) can be legally transported across state lines. All markets for medical or recreational marijuana are thus legally confined to individual states. Each state has its own rules and regulations for cultivation, production, sale and use of marijuana.

The Department of Justice Secretary Jeffrey Beauregard Sessions has clearly expressed his distaste for marijuana of any sort. As Alabama Attorney General he strongly supported an Alabama law that would have established mandatory death sentences for a second drug trafficking conviction, including for dealing marijuana. It was never enacted. Other cannibas-related statements by Mr. Sessions include: “Good people don't smoke marijuana;” marijuana reform is a "very real danger;" and it is “not the kind of thing that ought to be legalized.” I’d say Mr. Sessions is the kettle calling the pot black.  

According to federal statute, marijuana remains classified as a Schedule I drug, along with heroin and peyote. Schedule I drugs are those that have “no accepted medical purpose and a high potential for abuse” according to the DEA. Classifying marijuana as a Schedule 1 drug is a farce. If Mr. Sessions believes marijuana’s Schedule I designation is correct, then alcohol should be added to the list of Schedule I drugs, because its “high potential for abuse” is a matter of demonstrable knowledge (just ask one of the 2 million AA members). Oops, then he’d be battling the alcoholic beverage industry  that had sales totaling $223.2 billion in 2016. Not gonna happen. Like all too many of the president’s cabinet who play follow the leader, Mr. Sessions espouses his faith in inconsistent, misbegotten policies. States’ rights are fine and dandy when they “enhance” religious freedom or school choice, but nasty when they relax outmoded federal policy.

I believe marijuana/cannibas legalization for recreational and medical use is worthy and worthwhile. There are several useful objectives that can be met with legalization. The potential benefits from shelving prohibition and establishing publicly-regulated (white) marijuana markets – that The Economist terms “reeferegulation” – include: protecting consumers, promoting improved health, reducing penal sentencing of non-violent (mostly black) youth, saving the police money, raising tax revenues and putting criminal black markets out of business, as well as extending personal liberty. Beyond direct marijuana sales are benefits involving increased property values and more jobs (both in government and in marijuana production and distribution). Hey Mr. President, perhaps you should provide training and travel vouchers for former coal miners from WV and WY to head for states that have already legalized weed, where jobs are budding.

I highlight in this blog how stakeholders in legalized marijuana markets – producers/distributors, consumers and particularly state regulators – have affected its white market price.

Marijuana’s market price is a crucial factor and serves as a foundation for several available policy choices to achieve the above-cited benefits, especially dousing criminal black-markets and raising tax revenue. Despite the lengthy and expensive War on Drugs conducted by the DEA, the black-market supply of marijuana has never been acutely compromised. Curiously, pro-legalization advocates now echo the same benefits – lower criminal activity and increased tax revenue – that champions of Prohibition repeal proclaimed over 80 years ago with passage of the 21st  Amendment.

As mentioned above, legalized marijuana markets continue to expand across the US and beyond. This coming January, California expects to begin establishing the nation’s largest recreational marijuana market alongside those already operating in Colorado, Washington State, Oregon, Alaska and Nevada. In these states the legalized market for marijuana operates proximate to the traditional, illegal black market.

One of the important, repeatedly-mentioned goals of legalization is to eliminate black market marijuana supplied by criminal enterprises, a crucial goal that states need to achieve if they want to avoid federal intervention under the 2013 Cole Memo. It is a basic policy challenge for the regulated white market price to reflect this goal.

Public agency intervention with taxing and regulating white-market marijuana is a balancing act. This involves both interceding with the demand of legalized marijuana and its supply. Public authorities in each of the eight states now dealing with white market marijuana have confronted this challenge differently. If the tax rate is set too high, thus escalating the retail price, demand for white-market marijuana may be stunted. If growers and distributors believe that authorities have imposed too many or too stringent licensing and related regulations and not permitted sufficient numbers of retail dispensaries, then the supply of legalized marijuana may be inadequate. In either case, post-legalization customers can return (or remain) where they were before, in the underground black market. Also, if the price of the newly-legalized marijuana is much higher than the black market “street weed,” marijuana consumers may stay with their traditional sources rather than switch to the white market. If this happens, optimistically-forecast marijuana tax revenues won’t be collected, as happened in Washington State.

The growth of legalized medical and recreational marijuana sales has been impressive. In 1996, California became the first state to legalize medical marijuana when voters approved Proposition 215. Five years ago recreational marijuana wasn't legal anywhere in the US. Yet in 2016, sales of legal weed grew to $6.6 billion (B), according to New Frontier Data that includes $4.7B for sales of medicinal marijuana (in 29 states and Washington DC) and $1.9B for recreational weed (in Colorado, Washington, Oregon and Alaska).

The table below presents several facets of the 8 state recreational marijuana markets where it’s been legalized so far. The table lists states in chronological order of legalization. Cannibas shops that sell legal recreational marijuana and “edibles” have been open for business in Colorado and Washington since 2014, in Oregon since 2015, in Alaska since Oct. 2016 and in Nevada since July. The industry as a whole is projected to exceed $24B in sales by 2025, an annual growth rate of 16%. Despite its widening legality, if you show up for work and flunk a drug test due to marijuana use in these states, you still can be fired.

The State of State Recreational Marijuana Markets

State	When Legalized	First Month Sales ($M)	Aver. Mkt. Price* ($/oz.)	Sales Tax Rate
Colorado	2014	$15	$242	22%
Washington	2014	$3.8	$324	37%
Washington DC	2014	NY	$600	0%**
Oregon	2015	$15	$210	17%
Alaska	2016	$0.75	$298	$50/oz.
Nevada	2016	$27.1	$270	15%
California	2016	NY	$250	15%
Massachusetts	2016	NY	$340	3.75%
Maine	2016	NY	$297	10%

Sources: Priceofweed.com, The Cannabist, Tax Foundation. NY: Not Yet.

*Price of “high-quality” marijuana. **Federal law prohibits DC from taxing weed.

From the table, first-month sales of marijuana and related products have varied quite a bit for the 5 states where legal retailing has occurred. Nevada’s first-month revenues are the largest so far, by a wide margin. Because only Nevada-grown marijuana can be legally sold there, many dispensaries soon closed their doors after opening them. They had no product to sell because demand had far outstripped supply. After July, legal supply has become more available for the increased number of dispensaries.

The last column shows each state’s tax rate on marijuana as of January 2017. These rates can include either retail sales or excise taxes on marijuana, but don’t include wholesale taxes, optional local taxes or standard sales tax.

Washington DC’s rate, 0%, an obvious outlier, was set by Congress. After DC voters approved legalization in a 2014 an initiative, conservative members of Congress, who at times seem to work in DC, were upset, especially Rep. Andy Harris (R-MD). Medical marijuana has been available in DC for almost two decades. Rep. Harris did not want legal recreational marijuana on the streets around or beyond his Longworth Building office. Luckily for him, the House of Representative holds complete fiscal power over DC’s budget. Republicans have passed annual spending bills since 2015 that contain a rider written by Rep. Harris that prohibits the DC Council from using any appropriated funds for taxing or regulating marijuana. If you come to or live in Washington DC, anyone over 21 can legally possess up to 2 oz. of marijuana, but you cannot legally buy or sell it anywhere in the District. So it goes.

Beyond DC, state sales taxes vary considerably. Washington State’s marijuana tax remains the highest (37%), even though it was reduced in 2016. Massachusetts’ 3.75% is the lowest. States’ marijuana tax rates have tended to diminish after the first two states – Colorado and Washington – allowed legal sales.

Looking at Colorado and Washington illustrates the trade-offs and consequences arising from “more lenient” versus ”stricter” regulation. Colorado initially set its marijuana taxes fairly low, at 28%. It also took a somewhat lenient approach to licensing sellers, meaning there were many of them. In 2016 there were 698 storefronts in Colorado that sold medical or retail marijuana, more than triple the number of Starbucks in the state. Colorado has more than 2.5 times the marijuana dispensaries than Washington State initially had, after accounting for the population of each state.

First-month total revenue in Colorado was $15M, four times higher than Washington State’s. Perhaps not surprisingly, Colorado is now the most popular spring vacation destination for US college students; the Colorado Cannibas Chamber of Commerce (yes!) has done its job. Beyond spring, almost one-quarter of Colorado’s 77M yearly visitors, and one-third of those between 25-34 years, said that availability of recreational marijuana was a reason they chose to visit the state.

In 2015 Washington initially set its taxes much higher, at an effective rate of 44%, and was much stricter with licenses for growers and retailers. Only 334 retail shops across the state were approved by the State Liquor and Cannibas Board. First-month sales were $3.8M. The Board hastily increased the total licensed retailers to 556 after it became obvious that there were too few outlets (and tax revenue). Given supply and demand and all that, Washington State’s legal marijuana prices were 67% higher than Colorado’s in 2014. Washington’s Board has since reduced the effective tax rate but it’s still the highest of any state. The legal white market marijuana price in the state is often higher than the black market price.

As a consequence, Washington’s legal sales accounted for only about 30% of the state’s total estimated cannibas market (both the white and black markets), whereas Colorado’s legal sales met about 70% of total estimated demand in Colorado. Hence, a strong majority of Washington marijuana users continued to buy from existing black market sellers after legalization. This outcome was not only due to Washington State’s early higher prices but because there were fewer licensed sellers, especially when compared to Colorado. Price differences remain; Colorado’s current average market price is $82/oz. less expensive than Washington’s.

Lower marijuana tax rates may reduce overall tax revenues, but essentially can increase the market share of legal marijuana relative to the total demand, and make life harder for black market suppliers.

The crowd-sourced average market price for “high-quality” marijuana, posted by priceofweed.com, also varies considerably. The table shows that Oregon has the lowest market price, $210/oz. Washington DC’s price of $600/oz. stands out as the highest, but remember DC as yet has no legalized recreational marijuana sales due to Congress’ restrictions. It’s a fair assumption that in DC the quantity of marijuana demanded strongly exceeds the quantity supplied, hence high market prices.

In general, market prices in eastern states exceed those in western states. The average market price in northeastern states – DC, DE, MA, ME, NY, PA and VT – is $376/oz. The average price in western states – AK, AZ, CA, CO, NV, OR and WA – is $270/oz. A fair amount of premium-priced California marijuana ends up on the East Coast as well as points in between.

The chart below shows how US wholesale prices have dropped between April 2015 and June 2017, as state-legalized marijuana sales have dramatically expanded. 

Source: Cannabis Benchmarks. Wholesale price in dollars per pound.

The marijuana harvest usually occurs each fall, as shown with price decreases on the chart for the latter part 2015 and 2016. The expanding legal markets in Oregon, Colorado and Nevada contributed to the dramatic reduction in the 2016 fourth quarter price according to Cannabis Benchmarks. Wholesale cannabis prices dropped 18.6% in the first half of 2017.

The “biggest Kahuna” California market for legalized recreational marijuana is to begin in less than three months. But all is not going smoothly in the Golden State. Taxing white market marijuana is not likely an issue – the prospective marijuana tax rate for consumers is 15%. One concern centers on the long-time existence of a sizable black market whose suppliers have been loath to adopt new supply-side regulations. Another problem is that localities have important responsibilities for establishing rules and licensing retail dispensaries, but local and county governments are behind schedule in these essential duties.

Voter approval of Proposition 64 legalized recreational marijuana last November. It also decriminalized the possession of certain amounts of marijuana (it’s now a misdemeanor, not a felony), allowed individuals to grow six plants at home, set rules for the sale and cultivation of regulated plants, and sought to better manage the largely unregulated medical cannabis system. Unlike other states that embarked on creating a white market for marijuana, California has had a well-known, substantial black market that produces high-grade weed. California’s newly-enfranchised marijuana regulators face a unique conundrum that can be summed up in two words: Emerald Triangle.

Growers in Northern California’s Emerald Triangle region have produced large amounts of mostly outdoor, superior marijuana for decades. It’s the largest cannibas-producing area in the US. According to Arcview, its market value is about $7B. Many connoisseurs believe it’s the best in the world and are quite willing to pay high prices. California produces seven times more marijuana than it consumes, according to one estimate. Because the potential rewards are so significant, the Emerald Triangle along with the rest of California is almost certain to remain a major (illegal) exporter to other states even after the white market becomes established. However, the huge wildfires in Northern California aren't just destroying homes and vineyards; cannibas cropland is also going up in flames. For cultivators whose crop hasn't been directly destroyed, the fires' heavy smoke will reduce the value of their crop.  

So far only about 3,500 marijuana growers in the Emerald Triangle have applied for permits to farm within the white market. This number sounds like a lot of cultivators and would be in virtually any other region. But it represents just 11% of all growers in the Emerald Triangle. Many cultivators/growers have been dissuaded by what they consider significant effort needed to obtain a permit, as well as the fees, taxes and enduring regulatory requirements. If they stay beyond the new, white market system, these growers probably face lighter punishments and avoid paying taxes, fees and the costs of meeting environmental standards. The way one local grower put it, “Why do I have to get permits? My parents didn’t have to and my grandparents certainly didn’t have to.” Confirming this reluctance, Bruce Smith, a lieutenant with the Mendocino County Sheriff’s Office who leads the county’s efforts to shut down illegal marijuana farms stated, “The vast majority aren’t permitted.”

If these trifling levels of white-market participation continue through January, California may face the ironic circumstance of producing an insufficient amount of legal marijuana, despite being the nation’s largest domestic producer. That situation won’t reflect much balance between demand and supply; legal prices will likely spike and make the task of slaying the black market marijuana dragon difficult.

Can California sufficiently merge its large, existing black market with its nascent white market? It’s the key question that will influence the success of California’s initial foray into legal recreational marijuana. This issue hopefully can be resolved through discussions with growers, regulators, sellers and consumers before the New Year. Paraphrasing the late, great Tom Petty, I doubt if these discussion participants will be too alone, but they may be too proud. 
A Coda on Greedy Weed Bureaucrats.

New information became available on Halloween about the expected total taxes to be charged on California's legalized, recreational marijuana. One knowledgeable policy analyst said that high marijuana tax rates "will prevent the minimization of the black market,” a clear policy goal of marijuana legalization. Minimizing California's sizeable black market for marijuana is not likely.

The expected price of California’s recreational marijuana sold legally after January 1st keeps growing. Why? In large part because marijuana is California’s single biggest cash crop. Cannibas’ production value is roughly 50% greater than that of grapes, the state’s second most lucrative crop. Thus, local authorities see legalization as a big new revenue-enhancement opportunity. They are proposing multiple large taxes on marijuana consumers, distributors and growers. Revenue-hungry municipal and state agencies will, in effect, feed the black market by increasing the tax-inclusive price of legal, recreational marijuana. The price of getting high in the Golden State is getting higher.

The fundamental economic relationship that tax authorities may have forgotten is this: high prices of legal marijuana will reduce its sales and will allow California’s existing, large black market weed to prosper. This is in spite of the relatively price inelastic nature of the demand for cannibas.

A new study issued by Fitch Ratings and reported by CNN on Halloween notes the breadth and height of these expected taxes on California recreational marijuana. They are shown in the table below.

California’s Proposed Taxes and Costs for Recreational Marijuana

Tax Type	Tax Rate or Level
Consumer sales tax	22.25% to 24.25% (includes 15% state excise tax)
Local business/distributor tax	1% to 20% of gross receipts or $1 to $50 per square foot of plants
Grower’s tax	$9.25/oz. flowers and $2.75/oz. leaves
Grower’s cost for registration and environmental compliance	$100,000 (est.)

Source: Fitch Ratings and CNN

These proposed consumer and distributor tax rates may total 45%. Notice also the hefty potential costs of growers registering and complying with the state’s environmental regulations. Such substantial “entrance fees” for the thousands of California’s illegal growers will act as a large disincentive for them to enter the legal market.

These sizable tax rates have a familiar ring to them. My experience with public authorities in several states’ municipalities is few have any systematic sense about how consumers or businesses may respond to their tax increases. They seem to believe that if for example they increase a tax by 10%, then tax revenues will also increase by 10%. This is a naïve expectation, especially when there is a substitute good not subject to the tax, Emerald Triangle cannibas.

The authorities appear to believe businesses and consumers have virtually no sensitivity to high taxes; they will supply and buy the same amount of marijuana regardless of the taxes’ rate. This is a mistaken belief.

The tax-induced high prices of legal recreational marijuana in California will be good news for growers of black market weed. There will certainly be new buyers of marijuana after the New Year who will pay the high legal price because it’s legal and a less risky transaction. However, it’s also likely that other consumers (including many existing buyers of Emerald Triangle marijuana) or price-sensitive shoppers will buy from black-market suppliers and doubtlessly enjoy lower prices, just like happened in Washington State.

California’s marijuana policy-makers should learn about and/or remember Washington State’s, Oregon’s and Colorado’s early legalization experiences that forced these states to lower their initial,-uncompetitive, high tax rates. Given their fiscal greediness, I’m not sanguine that California’s marijuana tax authorities will remember basic economics or other states’ experiences. Time will tell as January 1st approaches.

GOLDEN MEDICARE FOR ALL

Will it be another Democratic Cross of Gold?

Oh my, until Tuesday we again faced a Republican radical alternative to the Affordable Care Act (ACA). One more repeal effort with great feeling, but no wisdom.

This time the Republican folly was the Graham-Cassidy bill, which had virtually nothing to do with healthcare and everything to do with febrile efforts to resurrect states’ rights, block grants, keeping donors contented and passing anything that has “healthcare” somewhere in its first sentence or two. The announcements that Senators Rand Paul, John McCain and Susan Collins would not support this latest Republican effort to dismantle the ACA is what passes the low threshold of good news for the 319 million (M)  people who have some type of healthcare coverage.

However, Graham-Cassidy is not the only radical idea that Congress has for replacing the ACA. Nope, on September 13 Senator Bernie Sanders introduced his “Medicare for All Act of 2017” proposal that would end the ACA, replace it by expanding Medicare and provide it to every American, not just to those of us who are 65 or older. It would also increase the services now provided by Medicare to include dental, vision and hearing aid coverage. In 2015 (the latest year data are available) Medicare covered 43.3M people, representing 13.4% of Americans. The goal of expanding healthcare coverage to be universal is worthy; it’s the objective of the ACA.

The progressive left-side of the Democratic Party has enthusiastically supported Sen. Sanders’ new, universal healthcare proposal for the nation. These supporters include 16 other senators who are co-sponsoring his proposal, six of whom are up for election next fall, and 119 Democratic Representatives in the House. Sen. Sanders’ proposal, like the previous one he created nearly four years ago, has zero chance of being considered in this Republican-led Congress because by themselves the minority Democrats have no legislative power.

Nevertheless, his 2017 Medicare for All plan is rapidly becoming a necessary political talisman for liberal Democrats, reflecting a leftward shift of the Democratic Party. Its supporters are a rising political clan that has defiantly stuck its single-payer healthcare flag into the political sandbox. These Democrats reflexively prefer the Medicare for All designation rather than “single-payer” because Medicare is a well-regarded, very popular government program; even right-wing Tea Partiers have usually avoided directly denouncing Medicare. In contrast, single-payer frankly connotes BIG government, something that may appeal to long-devoted progressives, but far fewer others. So Medicare for All it is.

These are relatively cheery times for Bernie’s single-payer healthcare backers. Because it has yet to be an actual piece of legislation, no one needs to provide many details about how it would be structured or financed and no one needs to round up Congressional votes.

The proposed bill proffers nothing about how Medicare for All would be funded. His proposed Act says that American healthcare will be greatly improved, offers a basic description of the plan and how this improvement would be implemented. As now described, Bernie’s plan would phase in the provision of universal healthcare to these hundreds of millions of people over a four-year period. To say this four-year implementation effort would be a challenge is to significantly downplay the extent of the new healthcare market’s likely turmoil.

Sen. Sanders has separately provided funding “options” that added up to $1.62 trillion (T) dollars per year during its first decade. I’ll talk about these later. Critics say this funding level is wholly inadequate. They have a point, in 2015 the US spent $3.2T on healthcare ($9,990 per person), representing an all too impressive 17.8% of our GDP. Sen. Sanders’ funding options would cover just 50.6% of current healthcare expenditures.

I believe Bernie’s’ new Medicare for All plan can serve an important purpose to muster Democrats into action amid the Republican’s fusillade of ill-considered efforts to replace Obamacare. The Graham-Cassidy bill is merely the latest and most contemptable, which is saying something, but not the last. However, I fear that by making Medicare for All the official Democratic plan for fixing American healthcare (that in this case means completely retreating from the ACA), it could become a modern-day Cross of Gold for Democrats in next year’s elections.

At the July 1896 Democratic National Convention William Jennings Bryan delivered one of the greatest political speeches in American history, his Cross of Gold speech. The defining issue of that year’s presidential campaign was how to get the American economy out of the continuing, severe depression that starting in 1893 and bring the nation back to prosperity. The Bank Panic of 1896 (when many depositors simultaneously asked for their checking account funds in cash) was emblematic of the severe economic troubles that beset most Americans that year. The previous three years were equally bleak. There was a bank panic in 1893, one-quarter of US railroads – then the new technology sector – declared bankruptcy (including the Pennsylvania Railroad), Wall Street stocks dropped precipitously, a series of violent labor strikes occurred and unemployment rose to between 12% and 14.5% in the election year, unemployment in some cities was twice as high. And we think the 2007-09 recession was bad.

William Jennings Bryan was a populist who supported “free silver,” farmers and factory workers. He decried big business and the gold standard that he believed had largely caused the bank panics and depression. His mesmerizing nomination speech at the Convention concluded with the often-quoted phrase, “You shall not crucify mankind upon a cross of gold.”

His speech propelled him to the Democratic presidential nomination. He lost to Republican William McKinley on November 3 by 95 Electoral College votes. William Harpine, a noted historian who has studied Bryan’s candidacy and the 1896 campaign, said “Bryan's speech cast a net for the true believers, but only for the true believers. By appealing in such an uncompromising way to the agrarian elements and to the [American] West, Bryan neglected the national audience who would vote in the November election.” In a real sense, Bryan’s populist Cross of Gold speech was the glittery vein that led to the realigning 1896 election, which kept the Democrats outside the White House for 28 of the next 36 years.

The 2016 election was certainly a realigning one, at least in the initial nine-months of Mr. Trump’s besotted presidency. If the Democrats rearrange their policy priorities around a progressive, true-believer single-payer healthcare system, I find it all too straightforward to believe it would inimically affect their electoral chances in 2018 and perhaps beyond.

As a slogan, Medicare for All sounds more enticing than any of the Republicans’ ideas to “enhance” healthcare. But in many ways it’s a far more radical departure from ACA than any alternative yet considered. It would fundamentally restructure our healthcare system by placing the federal government completely in charge as the “single payer.” In its expanded role, single-payer healthcare will require far more tax revenues.

Under Medicare for All the 178M people who have healthcare plans either through their employer or the individual market and the 112M on either Medicare, Medicaid or another public program, there would no longer be health insurance companies or the current health exchanges providing it. Private health insurance companies like Aetna, UnitedHealth, Kaiser and Anthem (Blue Cross/Blue Shield) would entirely disappear and the over 500,000 people who work in the health insurance industry would mostly be out of their jobs. When implemented, only the federal government would provide and pay for individuals’ healthcare. Most beneficially, the 29M people who remain uninsured would receive healthcare (it’s “for All,” after all).

With Medicare for All, doctors, nurses, hospitals, pharmaceutical companies and their customers would face a completely different market with one supplier, different stakeholders, incentives, operational requirements and regulations. Despite the potential benefits that supporters proclaim, with a brand-new national healthcare system, the psychic pain and frustration during its initial operation will be substantial. If you doubt this, just remember the flawed roll-out of the ACA’s website access to HHS health exchange.

Under Sen. Sanders’ plan, individual’s health insurance premium payments would drop to zero for virtually all people and businesses who offer health insurance for their employees. This is good, very good. In their stead, the government would pay for all healthcare expenses via higher taxes.

Unfortunately, these clear savings may not be that obvious for many people. That’s because the millions of employees whose healthcare is connected with their job, don’t directly write a monthly premium check to their healthcare provider. Instead, it’s indirect and automatically deducted from their paycheck, via the firm’s payroll system. Virtually all (96%) of US employees receive their paychecks from a payroll service’s direct-deposit service.

If employers decide to increase wages/salaries by the full amount of their premium savings, take-home pay would be larger, less the increased federal tax withheld.[1] This is good. But it’s not apparent in Sen. Sanders’ Act that employers would be obligated to do that. Thus, the premium savings may not be all that obvious. However, increases in nearly everyone’s federal taxes would be much more noticeable, if only from the media’s likely substantial attention.  

How does Sen. Sanders suggest his Medicare for All plan would be paid for? Federal taxes would broadly expand and rise for almost everyone and every business, substantially for some higher-income people and businesses. The payment options Sen. Sanders’ proposes include a 7.5% payroll tax increase paid by businesses (except for small businesses) that could likely reduce people’s premium savings, a 4% personal income tax premium, probably more for high-income households, a broader and increased estate tax, a new “wealth tax” levied on the Top 0.1%, a financial transactions tax and a “one-time” tax on overseas corporate profits.

Unlike now, his Medicare for All program would operate with an annual budget, a significant change. Establishing a yearly Medicare budget represents a fundamental modification that would soon force tradeoffs between services offered and expenses, to stay within budget. Such a Medicare budget would be subject to political forces that have been highly skewed away from cost-cutting or limiting what medical procedures are available to patients. Additionally, because 80% of US healthcare system spending is on medical care provided by doctors and hospitals, it’s likely that cutting healthcare costs will be as torturous and painful as it has been under ACA. Because of their prominence, reductions in doctors’ and other healthcare processionals’ compensation would be prime targets for savings.

The American Medical Association (representing doctors’ interests), the American Hospital Association (representing hospitals’ interests) and other medical/health lobbies have been very effective in preserving their clients’ well-being for decades. As an example, an American family doctor’s average salary is $207,000, about 160% higher than an English general practitioner’s operating within the UK single-payer system. Effecting cost reductions and improved efficiencies with Medicare for All will be exceptionally tough, just as it has been with ACA. For these reasons Bernie’s Medicare for All will likely remain fairly pricy.

Thus, if Medicare for All ever sees the legislative light of day, the adage, healthcare policy always involves tax policy will hold. Creating the required new and increased taxes will be highly contentious and broadly disliked. It is the rare citizen who gladly pays more taxes, especially new ones.

Governments have imposed taxes since at least Egyptian times, when Pharaohs used tax collectors then known as scribes to amass needed money, including from taxes on cooking oil. More recently, American history is replete with citizens protesting taxes, including the famous Boston Tea Party in 1773, when the words were uttered, “no taxation without representation” to dispute British taxes on tea. Our Revolution started two years later.

In June the media broadly announced the results of a Kaiser Family Foundation Health Tracking Poll that indicated there was a modest increase in the public’s support for single-payer health insurance to a majority; 55% of respondents said they were in favor of a government-based national health plan (single-payer/Medicare-for-all), 40% were opposed. Less reported was that the slim, “in favor” majority was quite fragile and disappeared when those people in favor were told that opponents might state such a plan would either ”give the government too much control over healthcare” or “require many Americans to pay more in taxes.” Respondents in favor of Medicare for all then changed their mind; opposition to single-payer increased and became a 62% majority of respondents (from hearing about more government control) and increased to 60% (from more taxes).

Significant popular opposition to single-payer healthcare and its perceived large costs have halted each of three liberal, blue states – California, Colorado and Vermont – from implementing their state-wide universal healthcare plans. A single-payer bill, the Healthy California Act, was introduced in the California Legislature this spring but was later dropped after the bill’s hefty anticipated costs – $400B per year – became known and opposition grew. I have previously discussed California’s fractured initial foray into single-payer healthcare. A Colorado single-payer referendum last November was decisively voted down 79% to 21%. Issues included an additional 10% payroll tax to fund ColoradoCare and how Medicare patients would be served.

Finally, in 2011 Bernie’s home state legislature passed the structure for a Vermont single-payer healthcare system, the first and only state to do so at this point. But three years later the legislature abandoned the effort because they couldn’t figure out how to finance it. Experts had estimated that the system would require state taxes to double, roughly $2B in extra tax revenues.

Could Medicare for All be another Democratic cross of gold? I believe it’s a risky, radical policy position for Democrats to take because it would run completely counter to the tamer, more broadly-accepted approach of improving the existing ACA. Appealing to voters for at least a $162B tax increase for the initial decade of Medicare for All will be an election-losing fantasy that, like William Jennings Bryan’s defeat, could lead to longer-term negative consequences. Democrats should remember what happened 121 years ago. Lashing themselves to a cross of golden healthcare is a mistake.

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[1] It’s not clear whether the Medicare for All Act’s increased payroll tax would preserve the substantial tax-break businesses have long received by paying for employees’ healthcare expenses with pre-tax dollars. This tax-break has been estimated to be $250B per year, probably the government’s largest single subsidy, more than 60% larger than the mortgage interest deduction subsidy. 

DREAMING AND OUR LABOR MARKET

Where there is a worker, there lies a nation. ~ Evita Peron

Once again I have begun working with IB and AP Economics class students at my local high school. We offer them information about “resource (or factor) markets,” that includes the labor market. The economy’s factor markets encompass the three factors of production: land, labor and capital that provide businesses with needed inputs to produce final goods and services that are sold in the product markets. This is the simplistic, informative and distinctive Circular-Flow Diagram that you may remember from your Econ 101 days. Our white-board explanation describes the demand for and supply of labor is a straightforward function of the price of labor – the wages or income earned by employees.

This blog examines several aspects of the US labor market including one slender slice of it that has gained recent prominence, the roughly 800,000 Dreamers. I also examine the current status of the nation’s labor market and President Trump’s record on creating jobs.

A “Dreamer” refers to a child who was brought into the US (under the age of 16) usually by a parent or relative without legal permission, who has lived in the US continuously since June 2007, completed high-school and attended at least two years of post-high school education or served honorably in the military and is currently under the age of 35 years old. In August 2012 President Obama implemented a new immigration program, through executive action, that deferred deportation for these people. This program is called DACA, Deferred Action for Childhood Arrivals.

On September 5th Mr. Trump ended the DACA program, despite tweeting that he “loved” Dreamers. Go figure. In a specious attempt to justify his boss’ decision, Jefferson Beauregard Sessions, the Attorney General, perjured himself in wrongly stating that Dreamers are stealing jobs from Americans. An average of 30,000 Dreamers could lose their jobs every month if DACA were repealed or work permit renewals were held up, according to a report issued by an advocacy group.

The president called on Congress to pass legislation within six months to continue the DACA program. Last week he surprisingly announced that he had agreed with Senator Chuck Schumer and Representative Nancy Pelosi on legislation to extend DACA. Or did he? Characteristically, the President later contradicted himself regarding his discussions with the Democratic leaders about DACA. The unforeseen sunlight of a possible bipartisan agreement on legitimizing DACA proved temporary and has faded into all too usual leaden fog of this presidency.

Dreamers’ futures thus remain nightmarish and utterly uncertain due to the heartless action of the president. Their prospects are now completely dependent on our plagued, legislatively-barren Congress for speedy remedy.

Beyond Dreamers, how is the US labor market doing? Overall, it’s in reasonably decent shape, as shown in the table below. Our labor market reflects the accrued benefits of our now five year old expansion, longer than the post-WWII average of 4.8 years.

US Labor Market

Characteristic\Time Period	August 2017	August 2016
Size of labor force	160,571,000 (3.7%)	154,763,000
Unemployment rate - U - (Overall)	4.4%	4.9%
U (Youth, 16-24 years)	8.9%	10.2%
U (Not finished high school)	6.0%	7.3%
U (Completed high school)	5.1%	5.1%
U (With a BA or higher degree)	2.4%	2.7%
Average hourly earnings	$26.39/hr (2.5%)	$25.74/hr

Source: Bureau of Labor Statistics (BLS). Figures in parentheses indicate yearly increase.

The US labor force has grown by 3.7% during the past 12 months; already-low unemployment rates have dropped a bit in August for all the age and education-level categories, except for people who have completed high school and not gone to college. Youth unemployment has declined, but remains at a stubbornly elevated rate, as it has since the Great Recession. The 4.4% overall unemployment rate indicates the economy is in close proximity to full employment.

Illustrating the budding tightness of our labor market, hourly earnings have increased 2.5% during the past 12 months, equivalent to $54,891 per year. For the second year in a row, median household income increased in 2016 to $59,039 (3.2% from 2015), after adjusting for inflation. The August labor force participation rate, which measures the share of the work force (16 years and older) that is currently employed or seeking employment, was 62.9%, virtually unchanged over the last year.

Many economists expect that in the coming decade the US will be facing an entirely new challenge with respect to our workforce – a lack of workers – caused by two factors. The first factor centers on demographic changes in the labor force. Boomers are now retiring in droves and, due to ever-lower US birth rates, there are fewer younger working-age people who will be replacing them.

A statistic that illustrates this change is the Age Dependency Ratio (ADR). This ratio represents the percentage of non-working age population (people younger than 15 or older than 64) – to the working-age population (those between the ages 15 and 64). According to the UN’s Population Division, the US ADR in 2015 was 51.2%, meaning that the non-working age population in 2015 represented a slim majority of the working-age population; more people were of non-working age than working age. By 2040 the ADR will increase to 64.9%, which means relatively fewer workers will carry an increased and heavier burden to provide schooling and care for more non-working aged folks.

The second factor, Trumpian immigration, trade and fiscal policies, will exacerbate the labor force challenge of fewer workers and reduce potential macroeconomic growth. Closing our borders to immigrants – even skilled H-1B workers – as the president and conservative Republicans have done, means fewer potential workers will be available to US employers. Threatening to tear up trade agreements – like NAFTA and South Korea’s – will reduce US exports (that require US workers to produce them) after our trading partners retaliate. Republican fantasies about reducing corporate taxes to spur economic growth are just that. Empirical evidence that shows a strong, causal relationship between increases in GDP and lower tax rates is lacking. Mark Zandi, the chief economist at Moody’s Analytics, told a New York Times columnist, “Over the next 20 to 25 years, a labor shortage is going to put a binding constraint on growth,” unless appropriate policies are put in place.

Wherever he campaigned, Mr. Trump focused on jobs. He said “I am going to be the greatest jobs president that God ever created.” So far, he hasn’t met that absurd standard. During his first five months in office the economy added on average 172,600 jobs per month. That's good, but not quite as many as the average number of jobs added during President Barack Obama's last five months in office, 181,600. In fact, the president has emphasized increasing jobs in sectors that are very unlikely to produce many new workers – coal mining and manufacturing.

Mr. Trump has loudly emphasized his dedication to increasing jobs in coal mining, something that would require him and his administrators to reverse years of economically-driven decline in coal usage by electric utilities and other industries. The current number of workers in coal mining represents only 29% of its peak employment in January 1985. Except for the principal resident of 1600 Pennsylvania Avenue, coal’s declining market position is broadly understood to be based on advances in non-fossil energy technologies (solar and wind) and, more prominently, on the large declines in the price of natural gas, a cleaner substitute fuel. It hasn’t been a political war on coal as the president alleges; it’s been a market-based economic one that coal has been steadily losing.

Coal-related jobs have been declining since 2011. Scott Pruitt, the Voldemortian head of the EPA, erroneously stated that Mr. Trump’s efforts have increased coal sector jobs by 50,000 workers. That’s impossible. The BLS says there are 53,420 workers in the entire coal mining sector and that there have been only 700 coal mining jobs added since the president took office in January. It’s yet another example of the president and his senior cronies being deceitfully fact-free.

Perhaps unknown to our never-connect-the-dots, zero-sum president, there are three times as many people working in the solar and wind power industries as work in the coal industry according to a January Dept. of Energy report. If the president were truly interested in job development, he should be promoting renewable energy and take (undue) credit for the solar industry’s impressive 25% growth in jobs during the past year. That’s highly unlikely since Mr. Trump seems to be stuck in a coal seam where the sun doesn't shine.

In addition to coal miners, manufacturing jobs are near and dear to the president’s heart. He wants firms to hire more manufacturing workers, a fine but exigent goal. Just like coal jobs, US manufacturing employment has steadily declined over the past six decades. Since the 1950s manufacturers have substituted capital equipment – using advanced, additive automation and other technologies – for lower-skilled labor. As a consequence, today’s manufacturers use far fewer workers, who are more highly-skilled operators of computer-based machinery, than the assemblers, wrench-handlers and welders of yore. Despite hiring fewer workers, US manufacturers have increasingly produced higher-valued, greater output.

Diversified Engineering & Plastics (DEP), a small auto parts manufacturer located near Detroit, typifies the trials now facing smaller manufacturers. Diversified has 78 employees; more than a decade ago it had 300 workers. Hiring qualified personnel is a constant struggle for Anita-Maria Quillen, DEP’s president. According to her, “I’ve noticed their [Millennials’] sense of responsibility to come to work is nonexistent.” After two days of orientation, her new hires are sent for a drug test. Sixty percent never show up for the test.

Diversified’s clients are much larger “Tier One” firms that directly supply parts to auto/truck/motorcycle makers. As she put it, “Tier Ones are eating whole peanuts. We take the crumbs.” Ms. Quillen works in a mature market where lower costs are always a priority. Carmakers are “constantly pushing costs down, down, down,” she said. “But meanwhile people want $15 an hour for minimum wage.” A typical DEP machine operator makes $9.50 to $11.50 an hour. Smaller manufacturers like DEP in the auto sector and in other industries are caught in a tightening vise. They find it tough to boost their employment unless they further improve productivity and raise wages that their clients are loath to pay for. 

In these trying times, it’s valuable to remember John Locke’s words, “All wealth is the product of labor.”