More on Health Benefits for Congressional Staff

Uwe E. Reinhardt has written a postscript to his post of last Friday on the fight over the federal contribution to health coverage for Congressional employees under the Affordable Care Act, setting the record straight on the legislative history.

More Companies to Call Emerging Markets Home

Emerging markets will be the headquarters to thousands more of the world’s largest companies â€" as many as half â€" in the next decade or two, a study published by the McKinsey Global Institute said Thursday.

The world’s emerging markets now account for about one-third of global gross domestic product but are home to only about one-quarter of the 8,000 companies that each generates revenue of more than $1 billion a year.

As emerging economies in Asia and elsewhere continue to outpace the relatively modest growth seen in the developing world, their share of large companies, too, will rise. About 70 percent of the 7,000 new companies that are likely to grow to the $1 billion-revenue mark by 2025 will come from emerging markets in Asia and elsewhere, the report estimated.

The projected increases also reflect the growing role that emerging markets are playing in the global economy â€" not just as sources of cheap labor but also as consumers of goods and services.

Between 1980 and 2000, just 5 percent of the world’s 500 largest companies came from emerging markets. That ratio has now risen to about 25 percent and is expected to climb to as much as 50 percent by 2025, the report said. The greater China region alone could become home to the headquarters of about a quarter of the 500 largest companies in the world, the study estimated.

“The world’s competitive landscape will be transformed over the next 10 to 15 years by the rise of a formidable new breed of large emerging-market companies,” said Richard Dobbs, one of the report’s authors. “The long-established dominance of Western multinationals is about to be challenged.”

By 2025, the report said, “some of the global leaders in many industries may be companies we have not yet heard of, and many are likely to be based in cities that we could not point to on a map.”

The Loss of U.S. Pre-eminence

Simon Johnson, former chief economist of the International Monetary Fund, is the Ronald A. Kurtz Professor of Entrepreneurship at the M.I.T. Sloan School of Management and co-author of “White House Burning: The Founding Fathers, Our National Debt, and Why It Matters to You.”

The United States became a superpower in the 1940s and, 70 years later, stands on the brink of losing that status. It rose to global pre-eminence at short notice, and its decline can occur just as abruptly. This week’s partial government shutdown both reminds us that the United States has reached such a precarious position and shows us exactly how things can now unravel as it approaches the really big confrontation over the debt ceiling.

Isolationism was a powerful idea in the 1930s and through Dec. 7, 1941. The United States felt burned by its involvement in World War I; the Senate had refused to ratify the Treaty of Versailles. By the end of 1945, the United States had created a vast military, won victories around the world and decisively tipped the balance in the largest global conflict to date. All of this was based on the political consensus that while the nation should be careful with government finances, it was acceptable to borrow heavily under extraordinary circumstances. Smart fiscal policy helped to underpin its emergent global ambition.

Now really stupid fiscal policy threatens to bring the United States down. The primary cause of any public finance crisis is not the ability of people to pay their taxes, it’s their willingness to pay their taxes â€" or, as in the current situation in the United States, the willingness of their elected representatives to finance the government. And this willingness is always tied closely to the legitimacy of the government. Does enough of the population think that the people with political power won it in a fair manner and, consequently, are they willing to accept policies with which they do not necessarily agree?

The United States faces a serious fiscal crisis not because of the continuing sequester or the partial government shutdown per se, but rather because of what those experiences indicate about what will be considered acceptable tactics in the imminent fiscal confrontation over raising the debt ceiling.

As some point in mid-October â€" on the 17th, according to the latest estimates â€" the Treasury will reach the legal limit on its ability to borrow. If Congress refuses to increase the legal limit on the amount of debt outstanding, the Treasury will be unable to pay its bills.

Precisely how this would play out is subject to some debate, but there is no question that it would involve a great deal of uncertainty, in the best case, or a catastrophic default that can safely be regarded as the worst case.

Today’s optimists are those who think the current partial government shutdown will allow the Republican Party to work out some internal issues â€" and actually make a showdown over the debt less likely. Perhaps the political base will be satisfied by a demonstration of dissatisfaction against carrying out the Affordable Care Act, or perhaps their elected representatives will heed what opinion polls show them.

Realists also like to point out that when the United States has big fiscal confrontations â€" for example, over the debt ceiling in the summer of 2011 â€" it tends to destabilize the rest of the world more than it hurts the United States. Interest rates on Treasury debt tend to go down in the face of potential fiscal mayhem. The United States is the only country in the history of the world for which that is true.

I’m more pessimistic. The United States won its global predominance in a short period, but based on a long haul of industrial development, productivity gain and fiscal prudence. Now the groundwork has been laid for its decline with political polarization, a longstanding tax revolt and a well-orchestrated campaign to undermine the legitimacy of the federal government.

The tax revolt has gone through many phases, including the rise and fall of Newt Gingrich â€" with his messages and tactics of the mid-1990s, including a partial government shutdown. And when the Republicans controlled the presidency, the Senate and the House in the 2000s, the United States ended up with a much bigger deficit and more debt â€" which, paradoxically, further fed the turn against the federal government from the right.

The silence of much of the business and financial elite on the debt ceiling â€" as well as on the sequester and the government shutdown â€" is somewhat shocking. This is a group that is usually quite vocal in promoting its self-interest. It benefited greatly from the expansion of the global economy after 1945, and that shifting perception of what business needs was part of the pressure that encouraged the Republican Party to become much more international in its orientation. The trajectory of current fiscal policy will hurt the pocketbooks of this elite.

The Constitution was designed with multiple safeguards to protect the voices of relatively small groups. This is entirely appropriate. But consequently, if a well-financed and highly motivated group of members of Congress decides that the United States should default on its debts, then the United States will default.

If the business elite cannot speak truth to the Republican Party â€" and persuade its leadership and enough members of Congress to return to a more moderate stand â€" there is not much hope for the United States in today’s global economy.

Buy Low, Sell High

My It’s the Economy column for the next issue of The New York Times Magazine looks at one venue through which the financial crisis helped the rich get richer and simultaneously wounded the middle class: real estate.

There’s a perception out there that the housing bubble was primarily driven by homes at the high end. Supposedly too many Americans tried to reproduce Versailles, building and buying homes with zillions of bathrooms, shoe closets, Jacuzzis and eight-car garages. Yes, there were highly telegenic examples of lavish McMansions. But in fact the homes that went into foreclosure between 2007 and 2012 were primarily in the lowest-price tier when they were purchased, and most were located in middle- and lower-income areas, according to calculations from Redfin, a technology-powered real estate brokerage.

Source: Redfin. Chart shows percentage of overall foreclosures for properties in the given home price tier. Home price tiers were assigned by placing all properties into thee even groups based on their non-foreclosure transaction prices between January 1990 and December 2005.  Price tiers were assigned by metro, because prices vary so widely across the country.  For example, a home selling for $300,000 in Seattle in June 2003 would be in Seattle’s upper tier, while a home selling for $300,000 in San Francisco in June 2003 would be in San Francisco’s lower tier.

In other words, middle- and lower-income families bought at inflated prices; lost their homes; ended up paying record-high housing rents because so many people lost the ability to own at once, pushing rents up; and of course ended up with their credit scarred for the better part of a decade.

During the bust, tight credit disproportionately benefited higher-income people, since you needed plenty of cash on hand to win fierce bidding wars. If you talk to brokers and real estate experts about the bust years, you’ll find that when housing prices and mortgage rates were at record levels of affordability, middle-class clients were largely shut out of the action because either they couldn’t get loans at all, or they were outbid by investors who could pay all cash.

Now that housing prices are coming back, investors who bought at fire-sale prices are able to flip those houses for big profits. As I write in the magazine column, there are homes around the country that lost half their value during foreclosure, and then recovered it almost entirely when they were subsequently resold. Redfin calculates that of the 87,062 foreclosures in the last five years in which homes were bought by corporate investors and have already been flipped, about a quarter were sold for at least $100,000 more than what the investor originally paid. (That $100,000-plus markup most likely isn’t pure profit, though, as we don’t know how much these investors spent on upgrades or renovations.)

To be clear, it’s hard to blame investors for buying low and selling high. That’s what smart capitalists always do if they can, and to do otherwise would make little financial sense, for both real estate buyers and their shareholders.

The housing bubble and subsequent bust left the country with winners and losers, as is always the case in capitalism. It just happens that the winners were disproportionately wealthier people, and the losers were disproportionately middle- and lower-income families. Reasonable people can disagree about whether that outcome is a result of public policy, financial expertise or deliberate malfeasance â€" or perhaps some combination of the three.

Shutdown Savings and the Debt Ceiling

Could the government shutdown now under way actually help avert, or at least delay, the much bigger threat of a debt default by Washington?

After all, with much of the government shuttered and not spending, the logic goes, there will be more cash left in government coffers, thus extending the day of reckoning for the debt ceiling.

It’s an appealing theory. Unfortunately, it doesn’t hold in practice.

That’s because the government will continue spending on what are considered mandatory programs like Social Security, Medicare and interest on the debt during the shutdown. On the other hand, the savings from shuttered “discretionary” programs won’t be enough to move the needle substantially.

The Treasury said last week that Congress had until Oct. 17 to raise the ceiling for how much the federal government can borrow, or risk leaving the country on the precipice of default. If the debt ceiling isn’t raised by then, the Treasury estimates it will be left with about $30 billion in cash, which would quickly be used up.

“It might buy us a day or two on the debt ceiling,” said Paul Edelstein, director of United States financial economics at IHS. Meanwhile, Treasury officials have also said a brief shutdown was unlikely to “materially” affect the Treasury’s Oct. 17 forecast.

What about a shutdown that went on, say, for a week? A report by the economics team at Goldman Sachs issued on Sept. 29 concluded that wouldn’t do much to delay the doomsday clock, either:

Federal salary payments might decline by around $2 billion, and payments to contractors could decline by a few billion more over the course of a week. Since the Treasury’s projection that it will exhaust its borrowing capacity by the October 17 deadline is based on debt issuance expectations, not only on cash flows, a shutdown over a limited period would probably not affect that deadline. It could delay by a few days the date on which the Treasury would deplete its remaining cash balance after October 17. However, even with a week-long shutdown, our projections imply that it is very unlikely that the Treasury would be able to stretch its cash balances past October 31, because of the large payments scheduled to be made that day.

On Tuesday, Wall Street’s focus was on the shutdown, which is being treated by investors as another exercise in Washington kabuki. Indeed, the stock market rose nearly 1 percent after dropping on Monday as the shutdown deadline approached.

A longer shutdown that is linked to the debt ceiling issue is a different story, said Michelle Girard, chief United States economist at RBS.   “If you move past the one-week time frame, it has bigger ramifications,” she said. “If it’s a one-week thing, it won’t have much of an impact.”

The Tax Equation in the Health Care Law

Casey B. Mulligan is an economics professor at the University of Chicago. He is the author of “The Redistribution Recession: How Labor Market Distortions Contracted the Economy.”

In more ways than one, the new health insurance “marketplaces” are a big deal for low-wage workers.

Beginning this week, families can use the Affordable Care Act’s marketplaces to enroll for health insurance coverage that begins Jan. 1, and in many cases receive federal assistance with their premiums and other health costs on the basis of their expected income for calendar year 2014.

Because people who work part time or are unemployed for part of the year have less annual income than people who work full time and all year, working less means qualifying for more generous subsidies. By working part time or not at all, participants in the marketplaces will also create fewer penalties for employers who don’t make affordable coverage available once those penalties go into effect in 2015. (Employers are penalized only for full-time employees and only during the months that they are on the payroll.)

These new rules will make it less rewarding to be a full-time worker and a little less burdensome to be unemployed or underemployed. In my testimony in June before the Subcommittee on Human Resources of the House Ways and Means Committee, I quantified these new disincentives in terms of marginal tax rates â€" the percentage of compensation lost from paying taxes and replacing benefits associated with not working. The group I looked at was non-elderly household heads and spouses whose earnings abilities - that is, the amount that they earn when they are working full time - are in the middle of the distribution, earning roughly $800 per week when the work is full time.

Such workers (hereafter “midwage workers”) will see their marginal tax rates increase by an average of five percentage points between now and 2016, taking into account that many people will not take part in programs for which they are eligible for help. Before the Affordable Care Act, the compensation for each additional hour of work by a midwage worker was, on average, split 55 percent for the employee and 45 percent for the government (the government got its part by receiving more taxes from the employee, and paying fewer benefits, such as unemployment insurance payouts and food stamps, to the employee). Under the act, the split will be 50-50.

The unemployment rate, the employment rate and the propensity to work full time are usually measured nationwide, with every adult counting in the average regardless of whether he or she is a low-wage worker, a high-wage worker or somewhere in between. It’s worth giving attention to midwage workers because, by definition, much of the population is fairly close to the middle.

But is also informative to look at low-wage workers, because they are more likely to fall into poverty and their employment patterns may be more sensitive to incentives.

It turns out that low-wage workers will also see a reduction in their reward to work over the next couple of years, and to a greater degree than workers in the middle will. The chart below compares the five-percentage-point result for midwage workers and its components, with the tax-rate changes for low-wage workers (by which I mean workers who earn roughly $550 per week when they work full time, which is roughly twice minimum wage).

Work incentives for low-wage workers are eroded more than 10 percent of their compensation over the next couple of years, compared with 5 percent for midwage workers. Before the Affordable Care Act, the compensation for each additional hour of work by a low-wage worker, as with midwage workers, was split 50 percent, on average, for employee and 50 percent for the government. Under the law, it will be 39-61.

One reason that low-wage workers will have a greater shift in their incentives is that, because they earn less, a given dollar amount is a greater percentage of their compensation than it would be for a midwage worker.

More important, low-wage workers will qualify for larger dollar subsidies in the marketplaces than midwage workers will. Working full time or spending fewer weeks unemployed will mean less, or even zero, assistance with health expenses.

In other words, some good news from the new marketplaces is that low-wage workers will be given a lot of assistance with their health expenses. But that assistance has the unfortunate consequence of higher income taxes on low-wage people: working more rather than less will not pay as well under the Affordable Care Act than it does now.

Remember Sequestration?

Congressional Republicans have insisted on defunding, delaying or repealing the Affordable Care Act as a condition of keeping the government running. Congressional Democrats have refused to negotiate over the health care law, and much of the federal government has shut down.

This is being cast as a catastrophe for the G.O.P., whose internal party divisions have been laid bare in weeks of tense budget negotiations. But in many ways, the shutdown represents a victory for Republican budget priorities. Conservatives have made the choice between the budget and the health law. That means there has been very little wrangling over the budget itself â€" indeed, many Democrats would go ahead and pass a bill financing the government at current levels.

What would be so bad about that, from a Democratic perspective? It might mean locking in the $1 trillion in long-term budget cuts known as sequestration.

Federal agencies â€" from the National Cancer Institute to the State Department to the Commodity Futures Trading Commission â€" are operating on very thin budgets, in historical terms. In the fiscal year that just ended, they had to absorb about $29 billion in sudden budget reductions, with children left out of Head Start and research projects unfunded. The Pentagon took the worst of the blow, with defense absorbing about $43 billion in cuts in the 2013 budget year.

Congressional Research Service Source: Congressional Research Service calculations based on Office of Management and Budget data for 2014 fiscal year. Notes: 2012 fiscal year values estimated; values for fiscal years 2013 through 2018 reflect president’s budget proposals.

These cuts were never meant to happen. Sequestration was never supposed to go into effect. It was intended to force Congress to come to the table and negotiate a smarter package of deficit reduction, probably one focusing on the fast-growing programs like Medicare that pose a long-term budget problem. (As you can see on the chart above, which comes from a Congressional Research Service report, mandatory spending is the fast-growing budget category, and debt service costs are expected to start growing, too.)

The idea was that both Republicans and Democrats would hate the cuts so much that they would never let them stick. But Republicans interested in a slimmer government have learned to love them, at least a little. Many members would prefer to see the defense cuts reduced and entitlement programs trimmed. But they have not argued for shunting more money to, say, the Departments of Education and Health and Human Services. Many Democrats, on the other hand, want the cuts repealed, restoring billions of dollars to those federal agencies.

“Non-defense discretionary spending” has been squeezed, and nobody in Washington is talking about taking the vise off. Normally, Washington spends about 3.2 to 3.8 percent of economic output on that spending category. The Congressional Budget Office expects the figure to fall to about 2.7 percent by 2023.

Congressional Research Service Source: Congressional Research Service analysis of Office of Management and Budget historical data and March 2012 Congressional Budget Office data.

The White House and Democrats on Capitol Hill have pushed for restoring spending on certain priorities. The Senate, controlled by Democrats, passed a $3.7 trillion budget back in March that repealed sequestration and replaced it with a mix of tax increases and spending cuts. But the House budget, also passed in March, made many of the sequestration cuts deeper. The divisions between the two parties are deep, and right now finding the votes to continue financing the government at last year’s levels seems the most likely path forward.