Of Wants, Needs, Economic Sustainability and Even Healthcare Reform

A Social Domestic Healthcare Initiative?

By Somnath Basu PhD, MBA [www.clunet.edu/cif]

[Director California Institute of Finance]

Necessities, conveniences and luxuries are an articulation of the hierarchy within wants and needs. The scale and scope of this hierarchy seems quite seamless at the surface. Food, micro waved dinners to gourmet meals. Transportation needs become personal transportation needs and then into Ferraris. Family picnics are replaced by TVs and then by exotic vacations. Home rentals needs change to the wanting of mansions.

As we move up each of the needs totem poles, our monetary requirements stretch endlessly; otherwise if we were all able to bask in everlasting luxury, the end of capitalism and free markets would be in sight. The ideal of everlasting luxury forever too is therefore necessarily unachievable but something that is pursuable, forever. In this vein of reasoning, all of society’s resources and endeavors must go towards attaining this ideal. What then are the limitations of such pursuits?

The above concept of needs and wants also defines layers of society by their consumption abilities. It also defines the pressures imposed upon the growth of GDP from large sections of society to increase their consumption. It is a single-minded pursuit by the upper middle-class of society to strive towards the entering the class of the wealthy, followed by the middle class seeking upper-middle class status, etc. The wealthy comprise a group who are small in number (10% or less) but who account for more than 67% of the ownership and consumption of resources and production, respectively. As large numbers of people start striving to break into the next higher classes of citizenry, pressures increase for GDP to grow. Over time, the wealthy get wealthier, some new entrants appear in each socio-economic group while the general population at large become poorer and more frustrated from this sum-zero game. At some point, the sustainability of the economic system is tested and then broken; societies develop, peak and then wither through strife.

GDP Pressures

For the event of the entire upper-middle class citizenry of joining the class of the wealthy to happen, the GDP would probably need to grow at about a rate of 10 – 12% per year, for each of the next 10 to 20 years! We can easily deduce that for the remaining 80% of the population, the ideal is mostly unachievable. Thus, it may be useful to ask ourselves what is a desirable benchmark for our way of life? “How much money do we need to be happy?” may be another variable approach. Clearly, there are social costs arising from our relentless pursuits of wealth.

To properly assess the cost-benefits of our economic system we need to explore two issues at the heart of the situation. One is the production of wealth. The second is its distribution. Clearly, distributing some wealth inequally is preferred to distributing nothing equally. The question then becomes one of society’s tolerances of inequality. Thought another way, how is enough provided at each level of society such that there is strive and not strife, such that the entire society is better off.

The Elderly

One victim to the current economic system is the elderly. In relentlessly pursuing growth and consumption of luxuries over anything else, we often forget to save for the years where we are no more productive, in a GDP sense.  The retirement woes of the generation of unprepared baby boomers can be seen in articles and papers in many depressing data forms. The main reason we fall victim to being unprepared for retirement is the need to spend every penny we earn on consumption so as not to forget that we are striving to attain the ranks of the upper echelons of society and which demands that our consumption and lifestyles mimic those we aspire to emulate. Using this example, we can take a closer look at some of our spending patterns and understand the pressures we impose upon our savings, GDP growth and the limitations inherent in such growth.

 

What is Enough?

We spend about 17% on transportation, another 15% on food, and about 35% on housing. This is the national average. If collectively we wished to move into the class of the wealthy, we would impose immense pressure on GDP, one that would clearly not be sustainable. That begs the question as to what’s enough. There is somewhere along these lines of reasoning a place of social well being, where the pressures of producing wealth do not dominate our lifestyles.

Global Considerations

On another plane an argument can be made for the prolongation of our imperial life cycle. As with any cycle, micro or macro, our rein at the top of the global economic cycle is waning; the question then becomes as to what course of action can slow down our descent. It is the respite we need where we can also plan for our grandchildren and beyond, rather than be engrossed in current mindless consumption and the bequest of their repercussions for generations to come. Slowing down consumption is one way of prolonging our place near the top; our “apparent” successor, China, depends mostly on us to buy the goods that they produce on our behalf. Developing fully China’s own middle markets for consumption and reducing its dependency on our consumption will take more than one lifetime for the Chinese. On the same note, let us not give away our technological supremacy to India either. In pursuit of the bottom line and exporting many technical and business jobs to India in the name of bottom line economics will also eventually impoverish our own citizens.

American Economics Nobel laureates

A recent study conducted by two American Economics Nobel laureates (Joseph Stiglitz and Amartya Kumar Sen) examined the very issue of GDP focus on behalf of the Government of France. Their findings were of a similar vein where they questioned the government’s fixation with GDP and society’s need for a balanced, sustainable and comfortable lifestyle. They found that using only GDP as the benchmark lead to myopia of sorts amongst government officials that people are happy and satisfied or that their relentless pursuit of GDP growth does not matter to them. The scientists also found that a need exists among people to also have an achievable benchmark of happiness and satisfaction with life without the mires of just GDP alone.

In a sense, if people can be liberated from the necessary requirements of basic living (food, shelter, basic healthcare and retirement), the self-induced pressures to outperform economically, along with the accompanying social malaises, would not be necessary; our lifestyles would also possibly change in very meaningful and simplifying ways as we seek more sustainable allocations of our land, labor and capital.

While the idea above may sound utopian at first, it may be useful to note that there are some societies in the world (primarily Scandinavia) where a much smaller version of such a system exists. First, a visit to any of those countries will persuade any American that their style of life is no less than ours. This is in spite of lesser wages and a staggering (income and sales) tax burden. However, ironically, it is the latter reason (high tax rate) that allows the citizens in Scandinavia to enjoy free education (up to any academic level and including boarding, lodging and international studies!), adequate and free healthcare, subsidized and efficient transportation and a basic pension for all upon retirement. However, this magic is mainly because of a small and highly efficient government giving back probably 90 cents for every dollar worth of taxes collected. Now, that is public good.

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The First Issue

What are the issues for us to scale to such a system? Obviously, the first is not having such a big and unwieldy government. Unfortunately, a lean, mean and highly efficient government is not foreseeable for us either in the near future and neither are higher tax rates. Higher tax rates just drives high income individuals and businesses underground and is not a market solution. Can our society at large demanding such a welfare state, be willing participants in such a system and demand such a government? If it did, we certainly could sail smoother through our busy impersonal lives. Having the GDP monkey off our backs will certainly calm us; consider the intense polarization in political thought around the globe arising from inequities of both consumption and thought. A sustainable solution that creates a safety net for all citizens would indeed be desirable for any society.

The Second Issue

This brings back the second issue, the issue of wealth distribution among society. Even when a non-market system (such as taxes) does not work in making society more egalitarian, a reallocation of wealth is somewhat desirable but no tools exist to make this happen. Possibly, the only market solution is philanthropy where suppliers provide capital for fulfilling social needs.

In the true sense of a long run, the ethical decision of philanthropy is also utilitarian; the value of the family name pays back handsomely to the family over the years. It is well known that where moderately large inheritances are left purely to the children and family inheritors, the family descends into decadence and the wealth is squandered in about three generations.

Of Relentless Pursuits

In a society where economic demarcation lines cannot be drawn but exist, the population at large will go towards a state of constant strife for higher status and eventually self-destruct. In other words, a mass population fed on this idea of relentless pursuit of income or wealth will eventually not be able to sustain itself and disintegrate and decay in its social fabric. In the long run, keeping people distracted by wars, economic woes or other narrow global or domestic events will not keep people placated forever; people have a way of collectively being heard.

Our Global Role

While the above may seem like a commentary on our own social system, it is not. The recent financial disasters have taught us that going into the future, no solution can remain purely domestic in nature. This world, through the unifying effect of the financial disaster, has learnt like never before, that any sustainable solution has to be global in nature. Now, more than at any time before, we must shed any feeling of ethnocentrism and nationalism and prepare to enter and lead the world through global solutions. After all, in relation to the about 5.5 other billion people, our way of life is still grand and we remain the Mecca of all aspiring global citizens.

Politics

As a political nation, we have shown that we are more enlightened than any other nation when we elected the Mr. Barack H. Obama as the President of the country. Ask this simple question: which Caucasian majority country will next vote a non-Caucasian to its highest seat? Nowhere, not in our lifetimes, I think.

Yet by electing President Obama, we sent a clear signal to the rest of the world about our system of meritocracy which very few societies can show and also not brag about.  Through this action we have also shown that we have the political will and dedication to bring around changes in shape to global economic systems as well.

A social domestic healthcare initiative, even if it be a non-market solution, is one in the right vein, though only time will tell if we executed the policy correctly or not.

 

 

Editor’s Note: Somnath Basu PhD is program director of the California Institute of Finance in the School of Business at California Lutheran University where he’s also a professor of finance. He can be reached at (805) 493 3980 or basu@callutheran.edu. See the agebander at work at www.agebander.com

Assessment

As for myself, I would be willing to pay the costs for a social safety net. If I was assured of some basic amenities by way of food, lodging, healthcare and retirement, I would be quite willing to do the requisite work to pay the appropriate cost and spend the rest of my time in a warm sunny beach and eventually experience the liberating feeling of retirement and enjoy each day as the holiday it is.

Conclusion

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4 Responses

  1. On Health Reform

    [VA Podiatrist Fears Consequences of Proposed Senate Payroll Tax]

    The Senate provision, part of a broad bill that extends jobless benefits and renews expired tax cuts, would subject more of the profits of lawyers, accountants, and other professionals to a 2.9% Medicare tax.

    There are about 4 million S-corporations in the U.S., not all of which would be subject to the new taxes. The taxes would apply only to certain professionals including doctors, lawyers, athletes, performing artists, and investment advisers.

    Dr. Joseph Smith, a Virginia podiatrist, said he could pay an additional $6,000 in payroll taxes as a result of the change. He paid himself a salary of $71,500 in 2009, and took an additional $48,500 as a dividend.

    His accountant, Nick Potocska, said Smith’s salary is not unusual since he works almost exclusively with Medicare patients, who pay less than patients covered by private insurance.

    Source: Margaret Vaughan, Dow Jones [6/10/10]

    Like

  2. Visiting the Doctor Less Often

    Dr. Basu, did you know that insured Americans are using fewer medical services, raising questions about whether patients are consuming less health care as they pick up a greater share of the costs; and/or the recession takes its toll?

    Others say that consumers are beginning to forgo elective procedures like knee replacements for similar reasons.

    Of course, this continued weak demand could eventually put downward pressure on spiraling health-care costs, a long-sought goal of policy makers. It could even force insurers to lower premiums.

    http://online.wsj.com/article/SB10001424052748703940904575395603432726626.html

    What do you think? Is medicine ready for a more reasonable supply-demand economy with fewer externalities, and more patient financial skin in the game?

    Ralph

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  3. Dr. Basu – My primary physician is from India; my cardiologist is from Romania; my dermatologist from Russia; my internist from Pakistan; and my dentist from China.

    Plus, I remember an old story about the AMA deliberately restricting U.S. medical school openings, in order to hold the number of doctors down to keep their salaries up … supply and demand.

    Mike

    Like

  4. Dr. Basu,

    Even more timely words today … with the AHCA.

    Indu

    Like

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