Bernie Sanders: Tackling America’s Biggest “Rackets”

Merriam-Webster defines a racket as “a usually illegitimate enterprise made workable by bribery or intimidation.” Certainly, enough rackets operate in the United States, but three stand head and shoulders above the rest.

Health care, education and finance are the three rackets that have particularly significant effects in distorting the U.S. economy.

It is not by coincidence that these three industries are also the targets that Presidential candidate Bernie Sanders is attacking head-on in his Presidential bid.

The high cost of bedside manner

Sanders asserts that the U.S. health care system is rigged through a deeply flawed insurance system, which creates a maze of co-pays and in-network/out-of-network considerations.

This is not only a problem of often maddening inconvenience for those who are insured under the current system. It is a problem for the U.S. economy as a whole.

Health care accounts for 17.1% of U.S. GDP, according to the World Bank. This compares to 9.1% for the UK, 11.3% for Germany, 11.7% for France, 10.9% for Canada and 10.3% for Japan.

This indicates that the United States pays, on average, approximately 6% more of its GDP for health care than other developed economies. Six percent of U.S. GDP equates to a bit over one trillion dollars per year!

And here’s the thing about U.S. health care coverage: It doesn’t necessarily provide better outcomes than exist in other industrialized nations.

In fact, a 2014 report by the Commonwealth Fund ranked health care in the United States eleventh out of eleven industrialized nations surveyed.

The often-hyped “Best Health Care System in the World” charges each of its citizens approximately $5,425 per year more than the OECD median country.

And given the lack of disparity in outcomes, that’s a lot to pay for what is essentially “bedside” manner.

Taking outsized profits out of the equation

Sanders’ solution to the problems of both health care cost and health care inflation is to introduce a single payer system. Given the broad-based opposition to the Affordable Care Act, this seems like a pipedream.

But demanding a single payer system might allow the ACA to be amended to allow for a single payer option – or government payer option.

A single payer option would allow every American to enroll in the country’s Medicare program, which provides health care for those over 65 years of age. Such an option would give Americans a choice between buying private insurance and buying into a government run program.

This, in theory, would substantially suppress health care costs because it would have lower reimbursement rates than private insurance. As a result, consumers would weigh the costs and benefits of a less lavish government system against those of private systems.

Many would choose the less lavish alternative, creating a competitive paradigm, which many believe would result in lower costs overall.

A mountain of debt to start your career

A similar story unfolds when looking at the costs of higher education. The U.S. educational system leaves many young adults saddled with massive debt in exchange for a degree from an often-mediocre college that does little to ensure post-graduate employment.

According to the National Center for Education Statistics, the average annual cost of a four-year college in the 2012/13 academic year was $23,872, after income taxes.

This fixes the cost of a full four years close to $100,000, again after income tax.

Whether the student is getting the money from his or her parents or taking out a loan to cover costs, this means one is going to have to earn approximately $200,000 pre-tax in order to go to college.

Three kids equates to $600,000. This is a tough nut to crack in a country where the median family income is $52,000 before taxes! It is no wonder that total student debt now exceeds $1.3 trillion.

This is a heavy burden for the American middle class, especially when it is viewed within the context of education inflation, which at 39% over the past decade has exceeded inflation overall in the United States.

As with health care, Sanders’ concept of providing free tuition at public colleges may not be achievable.

But it might result in benefits and incentives that would make public colleges more broadly affordable. And those benefits and incentives would place greater emphasis on hard work and individual achievement.

Importantly, the choice between heavily subsidized public education and fully priced private college would result in a competitive choice that would help drive down the costs of college for all.

A target rich environment

The third leg in Sanders’ racket-busting agenda is finance. There is little disagreement that the U.S. financial sector has been egregious in its stewardship of America’s finances.

The market capitalization of America’s banks accounts for 113% of its GDP, which is more than in any other developed country.

England and Switzerland, both of which serve as international financial centers, have ratios of 90% and 65% respectively. Germany and France, which are more domestically oriented, have ratios of 31% and 46%.

Clearly, these and other statistics underscore the overemphasis on finance in the U.S. economy. This is partly due to finance wages, which are typically well above national norms.

Furthermore, bonus systems in finance create perverse incentives, especially when a 25-year-old derivatives trader can walk away with a $2 million bonus, or when a hedge fund operator can count his net worth in the billions or when senior bankers can expect eight figure bonuses, irrespective of their banks’ overall results.

Bernie Sanders wants to break up the big banks. This is a good threat, but without big banks to serve as international champions of global markets and without a banking system that is unafraid to assume risk, you end up with stagnant growth and diminished global reach.

Effective bank regulation that emphasizes prudent risk taking and holds bankers accountable for the outcome of those risks would certainly reduce the rents finance extracts from the economy.

The beginnings of a social bargain

Sanders may not be able to get all that he advocates for. But his calls for a single payer health care system might yield a single payer option, which would reduce health care costs overall.

His calls for free tuition at public colleges might rein in education inflation.

And his calls to “break up the big banks” might give way to a more rational regulatory structure, where risk-taking benefits the overall economy more than it lines the pockets of the bankers.

The Republicans are all-in in opposition to Sanders’ agenda. Hillary is too much ensnared in the politics of “triangulation” to make sense of it and, at the end of the day, taking on the rackets, however much it benefits America, does not necessarily benefit the Clintons.

In the meantime, America faces a stark choice on what to do with its three big “rackets” in the months ahead.