Florida v. Health and Human Services, if upheld by the Supreme Court, could go down as an important landmark in the history of American liberty. But that’s a big “if.”
Most people expected Judge C. Roger Vinson of the U.S. District Court for the Northern District of Florida to rule that the individual mandate was unconstitutional, based on his questions and comments during hearings on the case. Less expected was his decision to overturn the 2010 health care law in its entirety.
PPACA supporters, some of whom have yet to finish reading the ruling, are claiming it “ignores facts” and are comparing it to Bush v. Gore, by which they mean it is a baldly political, activist ruling. (Given that Bush v. Gore was a per curiam, i.e., unanimous, decision on its critical feature, the assertion that it was activist and political is worth debating, but that debate will have to wait.)
Indeed, Judge Vinson has penned a persuasive, well-researched, and tightly-reasoned opinion, one that will surely have some impact on what the Supreme Court eventually ends up doing. Judge Vinson marshals statements from both sides to show that PPACA indeed represents an unprecedented expansion of federal power, one that, if upheld, makes it difficult to argue that the Constitution restrains Congress in any way. Equally importantly, he points out that even the White House believes that the PPACA’s other provisions will destabilize the health insurance market without an individual mandate, thereby making it difficult to uphold the rest of PPACA in the mandate’s absence.
There are four key components to Judge Vinson’s opinion: (1) a ruling that the Patient Protection and Affordable Care Act’s dramatic expansion of Medicaid is not coercive to the states; (2) that the individual mandate exceeds Congressional powers to regulate interstate commerce; (3) that the individual mandate exceeds Congressional prerogatives to enact laws that are “necessary and proper” for executing its delegated powers; (4) that the individual mandate was essential to the functioning of other critical components of PPACA, and therefore the entire law must be overturned.
For a discussion of Virginia v. Sebelius, the other case in which the individual mandate was overturned, please read my discussion posted last December. As a reminder, in that case, Judge Henry Hudson overturned the individual mandate while explicitly leaving the rest of PPACA intact.
1. Medicaid expansion is not coercive to the States
Vinson quickly dismissed of one plank of the PPACA challenge: that PPACA violates the Spending Clause of the constitution, because it “coerces” the states to accept burdensome requirements as a condition of additional Medicaid funding. Vinson simply pointed out that Medicaid is a voluntary program that any state can choose to abandon; hence, there is no instance of federal coercion.
2. Failing to buy health insurance is not an act of interstate commerce
Vinson completely destroyed the argument that Congress, via its power to regulate interstate commerce, has the ability to force an individual to engage in economic activity. He points out (p. 25) that even supporters of expansive Congressional power concede that the Framers of the Constitution plainly intended the Commerce Clause to ensure that states did not get into trade wars with each other; i.e., the Clause regulates the movement of finished goods across state lines.
After the New Deal, especially in Wickard v. Filburn, the Supreme Court began expansively interpreting the Commerce Clause to regulate even the personal consumption of wheat by a farmer growing the crop on his own farm. Eventually, in United States v. Lopez, the Supremes began to outline limits to Congressional power under the Commerce Clause. Vinson goes on to point out that, if Congress has the power to force individuals to buy private health insurance, “it is not hyperbolizing to suggest that Congress could do almost anything it wanted” (p. 42):
It would be a radical departure from existing case law to hold that Congress can regulate inactivity under the Commerce Clause. If it has the power to compel an otherwise passive individual into a commercial transaction with a third party merely by asserting — as was done in the Act — that compelling the actual transaction is itself “commercial and economic in nature, and substantially affects interstate commerce” [see Act § 1501(a)(1)], it is not hyperbolizing to suggest that Congress could do almost anything it wanted. It is difficult to imagine that a nation which began, at least in part, as the result of opposition to a British mandate giving the East India Company a monopoly and imposing a nominal tax on all tea sold in America would have set out to create a government with the power to force people to buy tea in the first place. If Congress can penalize a passive individual for failing to engage in commerce, the enumeration of powers in the Constitution would have been in vain for it would be “difficult to perceive any limitation on federal power” [Lopez, supra, 514 U.S. at 564], and we would have a Constitution in name only. Surely this is not what the Founding Fathers could have intended.
Vinson destroys the arguments that health care is “unique,” and therefore the individual mandate is “uniquely justified.” The defendants argued that the mandate is necessary because (a) all people get sick eventually, and therefore can’t opt out of the health care market; (b) hospitals are required to provide health care services, regardless of a patient’s ability to pay; and (c) patients who obtain uncompensated care shift the cost of that care to others, thereby engaging in economic activity.
On the first point, that people can’t opt out of the health care market, Vinson points out that there are lots of markets people can’t opt out of, like the market for food, or the market for transportation, or the market for housing. Are mandates appropriate in those areas? (p. 46):
There are lots of markets — especially if defined broadly enough — that people cannot “opt out” of. For example, everyone must participate in the food market. Instead of attempting to control wheat supply by regulating the acreage and amount of wheat a farmer could grow as in Wickard, under this logic, Congress could more directly raise too low wheat prices merely by increasing demand through mandating that every adult purchase and consume wheat bread daily, rationalized on the grounds that because everyone must participate in the market for food, non-consumers of wheat bread adversely affect prices in the wheat market. Or, as was discussed during oral argument, Congress could require that people buy and consume broccoli at regular intervals, not only because the required purchases will positively impact interstate commerce, but also because people who eat healthier tend to be healthier, and are thus more productive and put less of a strain on the health care system. Similarly, because virtually no one can be divorced from the transportation market, Congress could require that everyone above a certain income threshold buy a General Motors automobile — now partially government-owned — because those who do not buy GM cars (or those who buy foreign cars) are adversely impacting commerce and a taxpayer-subsidized business.
I pause here to emphasize that the foregoing is not an irrelevant and fanciful “parade of horribles.” Rather, these are some of the serious concerns implicated by the individual mandate that are being discussed and debated by legal scholars. For example, in the course of defending the Constitutionality of the individual mandate, and responding to the same concerns identified above, often-cited law professor and dean of the University of California Irvine School of Law Erwin Chemerinsky has opined that although “what people choose to eat well might be regarded as a personal liberty” (and thus unregulable), “Congress could use its commerce power to require people to buy cars”…When I mentioned this to the defendants’ attorney at oral argument, he allowed for the possibility that “maybe Dean Chemerinsky is right.” See Tr. at 69. Therefore, the potential for this assertion of power has received at least some theoretical consideration and has not been ruled out as Constitutionally implausible.
On the latter two points, that the uninsured take advantage of uncompensated care, thereby engaging in “economic activity,” Vinson points out that the number of assumptions and inferences required to assert this exceed constitutional boundaries (p. 50):
The uninsured can only be said to have a substantial effect on interstate commerce in the manner as described by the defendants: (i) if they get sick or injured; (ii) if they are still uninsured at that specific point in time; (iii) if they seek medical care for that sickness or injury; (iv) if they are unable to pay for the medical care received; and (v) if they are unable or unwilling to make payment arrangements directly with the health care provider, or with assistance of family, friends, and charitable groups, and the costs are thereafter shifted to others. In my view, this is the sort of piling “inference upon inference” rejected in Lopez, supra, 514 U.S. at 567, and subsequently described in Morrison as “unworkable if we are to maintain the Constitution’s enumeration of powers.” Supra, 529 U.S. at 615.21.
Contrary to the assertions of some, Vinson does not ignore the fact that uncompensated care occurs. He simply points out that assuming that a specific individual will seek uncompensated care in the future is inappropriate. This points to the fact that Democrats could have sought a limited enrollment period, instead of an individual mandate, as a way of achieving most of their policy goals.
I do not mean to suggest that these inferences are illogical or unreasonable to draw. As did the majority in Lopez and Morrison, I do not dispute or question their underlying existence. Indeed, while $43 billion in uncompensated care from 2008 was only 2% of national health care expenditures for that year, it is clearly a large amount of money; and it demonstrates that a number of the uninsured are taking the five sequential steps. And when they do, Congress plainly has the power to regulate them at that time (or even at the time that they initially seek medical care), a fact with which the plaintiffs agree. But, to cast the net wide enough to reach everyone in the present, with the expectation that they will (or could) take those steps in the future, goes beyond the existing “outer limits” of the Commerce Clause and would, I believe, require inferential leaps of the sort rejected in Lopez.
3. The Necessary and Proper clause does not allow Congress to impose an individual mandate
Many Constitutional analysts, on both sides of the jurisprudential aisle, were unhappy with Judge Hudson’s exploration of the Necessary and Proper clause in Virginia v. Sebelius. Judge Vinson spends more intellectual energy in this area, pointing out that the Constitution only allows Congress to “make all Laws which shall be necessary and proper for carrying into Execution the foregoing Powers” that were explicitly laid out in the Constitution (p. 58).
Vinson points out that advocates of the law assert that the mandate is essential because without it, the law’s requirement that insurers take all comers, without regard to preexisting conditions, would “[bankrupt] the health insurance industry.” But that doesn’t rise to the level of Constitutional justification (p. 60):
Thus, rather than being used to implement or facilitate enforcement of the Act’s insurance industry reforms, the individual mandate is actually being used as the means to avoid the adverse consequences of the Act itself. Such an application of the Necessary and Proper Clause would have the perverse effect of enabling Congress to pass ill conceived, or economically disruptive statutes, secure in the knowledge that the more dysfunctional the results of the statute are, the more essential or “necessary” the statutory fix would be. Under such a rationale, the more harm the statute does, the more power Congress could assume for itself under the Necessary and Proper Clause. This result would, of course, expand the Necessary and Proper Clause far beyond its original meaning, and allow Congress to exceed the powers specifically enumerated in Article I. Surely this is not what the Founders anticipated, nor how that Clause should operate.
4. The individual mandate is not severable from the rest of PPACA
First off, PPACA lacked the typical severability clause, which specifies that if any one provision of a law is overturned, the rest of the law should remain intact. He notes (p. 67) that
The lack of a severability clause in this case is significant because one had been included in an earlier version of the Act, but it was removed in the bill that subsequently became law…In other words, the severability clause was intentionally left out of the Act. The absence of a severability clause is further significant because the individual mandate was controversial all during the progress of the legislation and Congress was undoubtedly well aware that legal challenges were coming. Indeed, as noted earlier, even before the Act became law, several states had passed statutes declaring the individual mandate unconstitutional and purporting to exempt their residents from it.
Vinson points out that it is advocates of PPACA who have repeatedly argued that the individual mandate is necessary for the proper functioning of the law. “In fact, [the defendants] refer to it as an ‘essential’ part of the Act at least fourteen times in their motion to dismiss.”
While Vinson acknowledges the general principle that courts should presume that the remainder of a law should stand, if they find a particular provision unconstitutional, he points out that this is not a “rigid and inflexible rule” (p. 65):
The standard for determining whether an unconstitutional statutory provision can be severed from the remainder of the statute is well-established, and it consists of a two-part test. First, after finding the challenged provision unconstitutional, the court must determine if the other provisions can function independently and remain “fully operative as a law.” See Free Enterprise Fund, supra, 130 S. Ct. at 3161. In a statute that is approximately 2,700 pages long and has several hundred sections — certain of which have only a remote and tangential connection to health care — it stands to reason that some (perhaps even most) of the remaining provisions can stand alone and function independently of the individual mandate.
Clearly, as Vinson goes on to describe, and Peter Suderman pointed out in the wake of Virginia v. Sebelius, the entire structure of PPACA hinges on the individual mandate. Here is the logic: (a) the law requires insurers to cover everyone, regardless of whether or not they have pre-existing conditions; (b) the individual mandate is necessary, so that people don’t opt out of insurance until they get sick, defeating the point of insurance and bankrupting the insurers; (c) it’s unfair to force people to buy an expensive product like health insurance without subsidizing the costs for people with lower incomes; (d) paying for those subsidies requires cutting spending and/or raising taxes elsewhere.
That, in a nutshell, covers about 80 to 90 percent of PPACA’s architecture. Vinson makes the quite plausible case, endorsed not only by the law’s advocates but the text of the law itself, that most of PPACA would not work without the mandate (pp. 68-70):
Moreover, the defendants have conceded that the Act’s health insurance reforms cannot survive without the individual mandate, which is extremely significant because the various insurance provisions, in turn, are the very heart of the Act itself. The health insurance reform provisions were cited repeatedly during the health care debate, and they were instrumental in passing the Act. In speech after speech President Obama emphasized that the legislative goal was “health insurance reform” and stressed how important it was that Congress fundamentally reform how health insurance companies do business, and “protect every American from the worst practices of the insurance industry.” See, for example, Remarks of President Obama, The State of the Union, delivered Jan. 27, 2009.28 Meanwhile, the Act’s supporters in the Senate and House similarly spoke repeatedly and often of the legislative efforts as being the means to comprehensively reform the health insurance industry…
Congress has also acknowledged in the Act itself that the individual mandate is absolutely “essential” to the Act’s overarching goal of expanding the availability of affordable health insurance coverage and protecting individuals with pre-existing medical conditions: “[I]f there were no [individual mandate], many individuals would wait to purchase health insurance until they needed care . . . The [individual mandate] is essential to creating effective health insurance markets in which improved health insurance products that are guaranteed issue and do not exclude coverage of pre-existing conditions can be sold.” Act § 501(a)(2)(I) (emphasis added).
In other words, the individual mandate is indisputably necessary to the Act’s insurance market reforms, which are, in turn, indisputably necessary to the purpose of the Act. This is obviously a very different situation than in Alaska Airlines, Inc., supra, 480 U.S. at 694 n.18 and 696 (unconstitutional provision severed from rest of statute where the provision was “uncontroversial,” and the debate on the final bill demonstrated its “relative unimportance”), and is more in line with the situation alluded to in New York, supra, 505 U.S. at 187 (suggesting by implication that the entire legislation should be struck when “the purpose of the Act is . . . defeated by the invalidation” of one of its provisions).
In order to overturn Judge Vinson’s ruling upon appeal, it will be necessary for the government to rebut itself: to disprove its own arguments that the individual mandate is essential to PPACA.
What will happen in the end? It all depends on Anthony Kennedy. Based on Kennedy’s history of splitting the difference, a strong possibility is that Kennedy overturns the individual mandate and other closely related provisions, while upholding other aspects of PPACA. But Judge Vinson has made a persuasive case that we’re better off starting from scratch.
* Rick Hess is being too hard on Amy Chua, architect of the great pre-publication PR coup of all time. Yes, the book is all about her. Specifically, it is about the way she grew and changed over time, and the sources of her idiosyncratic anxieties around parenting.
* Who got the wage gains from 2000 to 2009? Michael Mandel has a chart.
* I greatly enjoyed Arnold Kling’s thoughts on The Great Stagnation.
* As a pre-commitment mechanism, let me note that I’m hoping to write about (a) Australia, (b) self-employment, (c) whether we’re defining the technology boomlet accurately, and (d) a really intriguing LRB essay.
Joshua Tucker asks clarifying questions about whether 2011 might prove to be another 1989. I’ll just note that a very smart friend of mine predicted that something like this would happen in 2011 in the fall of 2010, drawing on an analogy to 1979. The question I found most interesting was the following:
One fundamental difference that I can not help noting between 1989 and 2011, however, is the lack of a powerful external actor enforcing the non-democratic regimes in the Middle East. East-Central European communist propaganda notwithstanding, few probably doubted by the 1980s the most of the region would throw off communism if Moscow ever gave them the opportunity to do so. Thus perhaps the most crucial information transmitted by the success of the Polish and Hungarian revolutions was precisely the fact that the Russians were not planning on intervening. I’m not sure there is anything analogous in place in the Middle East.
Critics of the U.S., and in particular people of an Islamist and pro-Hamas bent, would suggest that we’re playing the Soviet role. Suffice it to say, I don’t think that’s the right way of looking at the U.S. relationship with Egypt since 1979.
One question that is on everyone mind concerns what a genuinely post-Mubarak Egypt might look like. Omar Suleiman is the candidate of continuity, and let’s posit that he won’t be able to pivot hard enough to satisfy the emerging opposition’s evident desire for a clean break. I’m reminded of the unrest in Serbia a few years back, when there was a small number of middle-class urban liberals alongside a motley crew of aspiring integral nationalists and tracksuit-wearing street thugs. And then there was the crisis in post-invasion Iraq, when exiled elites struggled to gain the allegiance of impoverished Iraqis scarred by life under Saddam.
Assuming we see the rise of an illiberal Egyptian regime, is that reason enough to hope for the survival of the regime built by Mubarak or his handpicked successor Suleiman? In 2004, Reuel Marc Gerecht, a terrific with a deep knowledge of how the U.S. national intelligence community views the Arab Middle East, made the case for backing democracy in the region in his excellent book The Islamic Paradox, recognizing that it would empower anti-U.S. and anti-Israeli forces. I eagerly await his take on the current crisis. But here is some of what he had to say about Egypt over six years ago:
In Egypt, where the fundamentalist movement is much older, varied, and the culture is less violent, a democratic alternative to the Mubarak regime is constantly discussed.62 Even if many Egyptians believe change will be slow in coming and the state can- not be violently overturned, certainly a substantial number of Egyptians, perhaps even a majority within the elite, appear to find the current political system corrupt and unsustainable. Egyptians, who are an open people, addicted to movies, magazines, and the outside world, have watched the awful bloodshed in Algeria, the horrific takfir violence of homegrown militants who slaughtered foreigners like cattle, and the revolution and reform movement in Iran. Despite the go-slow approach of Mubarak’s opposition, worldly Egypt is probably the Arab country that has the best chance of quickly marrying fundamentalism and democracy.
It is certainly possible that fundamentalists, if they gained power in Egypt, would try to end representative government. The democratic ethic, although much more common in Egypt than many Westerners believe, is not as well anchored as it is among the Shiites of Iran or in the fatwas of Grand Ayatollah Sistani. But the United States would still be better off with this alternative than with a secular dictatorship, like Mubarak’s, which oppresses and feeds fundamentalism. Without Mubarak or the general who is likely to succeed him, evolution starts. The Iranian model comes into play. Fundamentalists become fundamentalist critics. They become responsible for their own spiritual destiny, in addi- tion to potholes, sewage pipes, imports, exports, and the nation’s credit rating. The State Department talks about encouraging “generational” change. But time moves quickly now. Given how rapidly bin Ladenism went from an idea to an operational reality, we are of course lucky this is so. In twenty years, the Iranian revolution collapsed and the clerical regime, not the United States, became the principal focus of the people’s anger. The same process is unavoidable in Egypt and elsewhere in the Muslim world, if Islamic activists become dictators or elected representa- tives wielding real power.
As for what the United States should do in the region, Gerecht made the following case:
But the United States really has no alternative to switching its allegiances from the rulers to the ruled. To do otherwise is to run against the growing Muslim belief that political legitimacy can come only from the ballot box. It is also to run against the American democratic ethic, which is the wellspring of our national soul. The United States should use its bully pulpit and its economic muscle to encourage those who want change and punish those who do not. In doing so, we will undoubtedly aid those who hate us and we may well hurt true friends. We should be generous in opening our borders to those secular Muslims who cannot stom- ach the democratic transition. Westernized women who grew up under secular dictatorships may find it very rough going. Many Israelis and their American supporters may rise in horror contemplating replacing peace-treaty-signing dictators with fundamentalists who may partly build a democratic consensus on anti-Zionism. But down this uneasy path lies an end to bin Ladenism and the specter of an American city attacked with weapons of mass destruction. Although he certainly did not intend to, Ayatollah Khomeini and his holy warriors illuminated the way. All the other roads lead us back to 9/11.
Read the whole thing. It’s a book, but a short one. (Given the number of bozos I encounter who insist that Mubarak was a favorite of the “neocons,” it is perhaps worth noting that Gerecht has been the Weekly Standard‘s go-to person on Middle Eastern affairs for at least a decade. There are many “neocons,” and they tend to believe different things.) I do wonder how the rise of Hamas in Gaza might impact our calculations, and I’m interested to hear about the conversation in Israel regarding the strategic impact of a potential transition in Egypt.
No matter how it turns out, openly siding with the protesters against the government will mean that the Egyptian alliance as we have known it will be dead or severely damaged. That has to be considered in connection with its effects on other U.S. allies and interests in the region. I am not as concerned with containing and checking Iranian influence as many Americans are, but overthrowing the current regime in Egypt will make it more difficult for Egypt to contribute to the goal of containing Iranian influence. Trying and failing to overthrow the regime will make Egypt look for other, more reliable patrons (it has done so before), and there are other major powers that wouldn’t mind making Egypt into a client state. They aren’t going to have any concerns about how Mubarak and his successors govern the place, and they probably aren’t going to be concerned about growing Iranian influence.
If the government is overthrown, it will probably have a good effect on reducing the suffering of the people in Gaza by ending the Egyptian part of the blockade, but it would make it easier for Hamas to operate. If the U.S. helps bring the regime down, the message will be that the U.S. pulled the plug on one of the only two Arab states to make peace with Israel. What are the odds that any other Arab state is going to see the benefits of formally recognizing Israel after that? As for Egypt itself, the fall of the regime could unleash terrible religious violence. The Christians of Iraq have already paid a terrible price as a result of the “liberation” of their country. The Copts and other Christians are at risk of facing similar treatment.
I am curious as to which states Larison has in mind as potential patrons for Egypt. I can’t imagine Russia or Iran can afford it, China might be able to but sponsoring an Egyptian regime would be fraught with danger. Perhaps the new Egypt could draw from all of the above and others. But would this reduce Egyptian antagonism towards Iran, which could have deeper roots? It’s hard to say. What is fairly clear, unfortunately, is that Israel will become more vulnerable as events unfold.
@CineversityTV: Egyptian protester says American gov’t gives our dictators tear gas and guns, but American friends gave us proxies #jan25
This reminded me of a Samuel P. Huntington essay published in Foreign Affairs in 1997, “The Erosion of American National Interests.” Though information wants to be free, the Council on Foreign Relations doesn’t want the information in which it has a proprietary interest to be free, so you’ll have to buy the article to read it. I often think back to the ideas Huntington introduced in that essay, which made a big impression on me at the time, yet I take a far more sanguine view of the developments that he astutely identified.
From the slightly overheated summary:
A nation’s interests derive from its identity. But without an enemy to define itself against, America’s identity has disintegrated. This breakdown intensified with the rise of multiculturalism and the ebbing of assimilation. Lacking a national identity, America has been pursuing commercial or ethnic interests as its foreign policy. Instead of putting American resources toward these sub-national uses, the United States should scale back its involvement in the world until a threat reinvigorates our national purpose.
“Disintegration” is rather strong, but those of you who are familiar with Huntington’s broad views on the evolution of American national identity will recall that, later in life he saw its Anglo-Protestant ethno-religious core as vitally important. (For a good sympathetic account of Huntington’s views, I recommend this excellent review essay by Ross Douthat. Briefly, I think that while Ross’s perspective is less dour than Huntington’s, I still think it’s too dour.) He believed that this core was losing its cultural hegemony due to the rising self-assertion of culturally distinct minority groups, including, most significantly, Hispanophone migrants from Latin America and their descendants as well as smaller so-called “diaspora minorities,” which he described as follows:
The growing role of ethnic groups in shaping American foreign policy is reinforced by the waves of recent immigration and by the arguments for diversity and multiculturalism. In addition, the greater wealth of ethnic communities and the dramatic improvements in communications and transportation now make it much easier for ethnic groups to remain in touch with their home countries. As a result, these groups are being transformed from cultural communities within the boundaries of a state into diasporas that transcend these boundaries. State-based diasporas, that is, trans-state cultural communities that control at least one state, are increasingly important and increasingly identify with the interests of their homeland. “Full assimilation into their host societies,” a leading expert, Gabriel Sheffer, has observed in Survival “has become unfashionable among both established and incipient state-based diasporas . . . many diasporal communities neither confront overwhelming pressure to assimilate nor feel any marked advantage in assimilating into their host societies or even obtaining citizenship there.” Since the United States is the premier immigrant country in the world, it is most affected by the shifts from assimilation to diversity and from ethnic group to diaspora. [Emphasis added.]
Think of the affluent South Asian migrants Devesh Kapur describes in his new book Diaspora, Development, and Democracy, who retain a strong identification with their native country, are embedded in “brain circulation” networks that transfer knowledge capital and cultural practices across borders, and are willing to use their economic muscle to intervene in the U.S. political system on behalf of what they perceive to be Indian or Pakistani national interests. In a similar vein, Americans of Armenian, Irish, Lebanese, Palestinian Arab, and Jewish origin have often served as activists on behalf of states with which they feel a strong ethnic and ideological affiliation. It is also true that this brand of diaspora activism has been by no means monolithic, e.g., the U.S. Jewish community is divided over Israel along many dimensions. Most Jewish Americans aren’t deeply engaged in issues surrounding Israel, just as most Asian Indian Americans are not deeply engaged in India’s nuclear program. And those who are deeply engaged find themselves on different sides of the same issues.
Regardless, Huntington’s main point was that a large and growing number of “ethnic” Americans, i.e., Americans who don’t identify primarily with the Anglo-Protestant core, are part of cultural networks that extend beyond the borders of the U.S., and that this will shape our foreign policy in ways that he finds less than salutary. He came up with a characteristically great way of describing his essential anxiety:
During its first phase as a hegemonic power, the United States expended billions of dollars each year attempting to influence government decisions, elections, and political outcomes in other countries. These efforts clearly exceeded those of any other government, except possibly the Soviet Union, and almost certainly exceeded the total resources expended by foreign governments to influence American politics. Now this balance has changed dramatically, and the shoe is on the other foot. American activities designed to influence foreign governments have either stopped or been greatly reduced. Foreign aid is down and is concentrated on a few countries. Covert intervention is rare, and the money spent trying to influence elections and other outcomes in foreign countries is only a vestige of what it once was. The efforts of foreign institutions to influence American decision-making, in contrast, have increased significantly. The United States has thus become less of an actor and more of an arena. [Emphasis added.]
There really is a sense in which foreign commercial interests invest in shaping political outcomes in the United States. While the president and his allies sowed hysteria about the supposed foreign control over the U.S. Chamber of Commerce and its affiliates, multinationals that invest in the U.S. exercise considerable indirect influence through their employees, clients, and customers, and there is a sense in which foreign debt-holders have implicit influence over U.S. policymakers.
But the real fragmentation that has made the U.S. less of an actor and more of an area — a dead-on description, in my view — actually isn’t ethnic in nature. It is normative in nature, which brings us back to that tweet Julian pointed me towards.
In the contemporary United States, the entire population does not feel as though the national security apparatus speaks for them. This was always true, of course. But now the dissenting minority can actually exercise “soft power” of its own, through the deployment of philanthropic resources, knowledge capital, etc. Americans aren’t just embedded in diaspora-based “brain circulation” networks. They are embedded in free software “brain circulation” networks, the WikiLeaks movement, social enterprise networks, increasingly cosmopolitan evangelical religious networks, and many other networks that are based on shared affinities, ideologies, etc., and not on shared ethnolinguistic background or nationalist loyalties.
Here is the bigger question: Is it obvious that this is a problem to be solved? Do we want the United States to be an agent rather than an arena? In some respects, the answer is yes. I can imagine someone replying to this post by saying, “Well, Al Qaeda is a trans-national network too. Indeed, it is arguably the paradigmatic stateless ideological network, you nincompoop.” And there’s some truth to that. But Al Qaeda and other networks of deranged fanatics aren’t, in my view, the paradigmatic example. One could argue that they “engage” in the arena of American public deliberation by sowing fear, and by drawing us into quagmires and other massive policy overreactions. So we want to be enough of an agent to effectively combat Al Qaeda and groups and movements like it.
That doesn’t mean, however, that re-transforming the United States into an agent (if we ever were an agent, pace Huntington) by achieving and enforcing a broad political consensus is the way that we will defeat the Al Qaeda movement. We can’t do that. We aren’t going to get any less diverse or any less embedded in global networks, because doing so would make us vastly poorer.
And that is also why it’s not just the United States that has gone or will go from agent to arena. I’d suggest that all of the advanced market democracies are in various stages of doing the same, and indeed that sprawling emerging market democracies like India and Indonesia and Brazil have been arenas for a long time. While many in the Asian Indian community in the U.S. lobbied Congress for the U.S.-India nuclear deal, Communists in India’s parliament fought hard against it. India and Indonesia are countries with far more ethnic, religious, and linguistic diversity than the U.S., and Brazil has its own fault lines relating to ethnicity, color, and historical levels of development, etc. An authoritarian government can create the illusion of agent-ness for a while, but markets, density, and free elections will inevitably undermine that.
While midcentury markets were homogenizing — that is one of the reasons nostalgists of the left like Jeremy Rifkin lament the death of the Golden Age of postwar consumer capitalism — contemporary markets drive differentiation by catering to and helping to articulate and manufacture niche desires, and, in a similar vein, novelty-seeking infovores do something similar by creating non-commercial ways to consume. This also creates new ideological possibilities.
So when idiots on the Internet tell me that America is to blame for Hosni Mubarak, I have to ask, which America and which Americans? The America that Egyptian authorities are blaming for sponsoring and protecting a handful of young Egyptian democracy activists who may well be at the center of the disturbance? U.S. think tanks like the American Enterprise Institute that publish books like Reuel Marc Gerecht’s The Islamic Paradox that make the explicit case that (a) democratization in the Arab Middle East will lead to anti-U.S. and anti-Israel governments and that (b) this is nevertheless a crucial first step to more decent, humane societies in the region that the United States government should support?
Or is the slow-moving machinery of diplomacy, which, to preserve a diplomatic triumph of 1979 and fearing the political and security consequences of rapid change, hasn’t been able to respond as nimbly and quickly as civil society? Indeed, it’s the very fact that government is so slow-moving, consensus-oriented, and resistant to change that I think it is so important that we reduce its carbon footprint, mindshare, and power.
Trulia has a beautiful and useful interactive map illustrating its Rent:Buy ratios across major U.S. metros. Observe the extraordinarily high cost of housing in New York city, my hometown. Michael Bloomberg famously described New York city as a “luxury good,” making the point that while firms and households do indeed pay more to be in New York, they also get more. That is true to a point. For people who seek novelty and cultural stimulation, New York’s density and diversity are very valuable. The quality of public services in New York is uneven, but people will take a lot of abuse to live here because the city benefits from the accretion of cultural capital and human capital over hundreds of years. New York’s greatest amenities can’t be easily moved, so New York’s public officials can extract a lot of rents.
But there is a danger in pricing out upwardly mobile middle class families, including many for whom novelty and cultural stimulation are lower priorities than reasonable commutes, jobs, and decent schools. As Edward Glaeser observes in his wonderful forthcoming bookTriumph of the City, reducing onerous land-use regulations in New York would, over time, bring housing costs in high-rise developments down to their construction costs, effectively halving the cost of a 1,200 square foot apartment. One can imagine a dramatic increase in New York city’s population as more novelty-lovers could afford to live in its dense core and as fewer middle-earners were deterred by high prices. A bigger Big Apple would have tremendous environmental benefits, as New Yorkers are highly energy efficient and leave a strikingly small carbon footprint relative to their compatriots. I mean, don’t hold your breath. NIMBYism will likely prevent us from achieving this utopia of sanity. But it would be great to see a mayoral candidate calling for a New York of 12 million people by 2025.
Glaeser also observes that after we correct for price differences, a two-earner family earning $60,000 in Houston has $31,250 after taxes, transportation and housing costs as opposed to $19,750 for a two-earner family earning $70,000 in Queens.
So: is it remotely surprising that a middle-class Queens resident might see the world differently from a middle-class Houston resident? Is it meaningful to suggest that these two families have the same economic interests? It is easy to imagine the Queens family wanting more transfers while the Houston family just wants to keep taxes low.
I disagree with almost everything in this post by my friend Mike Konczal, but I think it’s a good illustration of how many smart people on the left think about class relations and the future of the state:
One working definition of an approach to liberalism is “It’s best to just maximize growth rates, pre-tax distribution be damned, and then fund wicked-good social insurance with huge revenues from an optimal tax scheme” (Karl Smith, Wilkinson). I’d ask where are all these increasingly wickedly-well funded programs? We just had to bribe the top 3% with massive tax cuts for the next two years in order to keep unemployment insurance extensions in place for another year. Unemployment benefit extension are a net job creator and should have been a no-brainer, but it couldn’t pass without a massive bribe. This doesn’t include the brutal battle for extending health care to an additional 30 million+ people. This is even after the Federal Reserve created an alphabet soup of wicked-good safety net for the top 3% of the financial system, it’s difficult to get extra benefits for working-people in the largest post-war downturn.
A few quick thoughts:
(1) Is the top 3% a coherent group with a coherent class interest? Many of its members, I assume, favored rolling back the high-income rate reductions, for a variety of reasons relating to sources of income, ideological affiliations and preferences, etc. I believe that marginal tax rates and average tax rates are different, and that raising average tax rates for the rich is a more effective way of generating revenue while limiting the excess burden of taxation.
I’ll happily acknowledge that I could be wrong about this, but rather than see the debate over higher MTRs vs. higher ATRs as a proxy war between social classes, I actually see it as a “framing war.” We have two big political coalitions in this country that have a realistic shot at controlling the regulatory apparatus that distributes rewards and burdens. Both include many rich people, but the rich people tend to come from different economic sectors and they tend to have different cultural sensibilities that shape their preferences regarding the kind of built environment they’d like to see, etc. Both also include middle-earners who again have very different interests even at the same level of cash income, due to where and how they live, the extent to which they emphasize psychic vs. market income, etc.
Rich people in the left-of-center coalition, for example, are clustered in high-cost metropolitan areas, where the highly regressive mortgage interest deduction and state and local tax deduction are particularly valuable. My guess is that this is a big part of why we hear much more about the vital (symbolic) importance of MTRs over ATRs.
And what does a “strong middle and working class” mean if we’re dealing with a great deal of real heterogeneity within this group? Indeed, it’s worth thinking through what constitutes a coherent definition of “middle and working class,” given the large number of Americans in the low end of the income distribution who are non-working and who rely heavily on transfers. I’d suggest that the public sector and private sector middle class have meaningfully different interests in many instances.
Eliding this distinction is part of what we might call the framing war. Champions of the public sector middle class will characterize those who want to weaken some of its expensive privileges as enemies of the middle class, despite the fact that they may well be seeking to craft policies that will benefit the larger private sector middle class, a group that is more stressed in a variety of ways thanks to lower expectations of job security, heavy total effective tax burdens, etc. Moreover, creating new labor protections increases the danger of creating a privileged labor caste that excludes young workers, migrants, and others who find themselves on the edges of a more heavily regulated labor market, as we’ve seen in market democracies ranging from France to Spain to Brazil.
(2) Mike goes on to talk about public universities:
Public universities are being defunded at exactly the moment when people are most focused on a “polarized” job market and a lack of supply of high-skills. Jeffrey Williams asks us to consider student debt as a modern equivalent of indentured servitude, and I think the comparison is correct.
What does it mean to suggest that public universities are being defunded when, as in the health sector, U.S. higher ed spending is far higher than “estimated spending according to wealth.” Is it working and middle class students who benefit from current spending levels, or is it incumbent educational providers that are effectively collecting rents by presenting themselves as the only legitimate instructional providers for working and middle class students?
I’ve been pleased to learn that James Kvaal in the Obama administration believes that a key issue in the higher education sector is improving funding formulas for all instructional providers, not-for-profit and for-profit, by including more value-added measures. Anyone who has spent time around a modern U.S. research university is aware of the extraordinary administrative waste that defines this institutions, thanks to a lack of transparency and comparatively easy money flowing from public sources. So yes, we can talk about defunding education. Or we can talk about fixing education by increasing transparency and fighting rent-seeking, without placing an ideological premium on quasi-public over quasi-private providers for the heck of it.
(1) The 2010 health care reform, even if fully implemented, likely will leave millions of Americans uninsured.
(2) Early education (preschool, child care), beginning at age one, is a very good idea. Not all states have full-day kindergarten; few have preschool for four-year-olds; none have much in the way of public funding of education for kids age one to three.
(3) Paid parental leave is available in only a few states and covers a relatively short period.
(4) Sickness insurance: ditto.
(5) Unemployment insurance covers too few of us.
(6) Unemployment insurance should be supplemented by or folded into a new wage insurance program.
(7) Social assistance benefits have been decreasing steadily over the past generation.
(8) If markets are now structured in such a way as to severely limit real earnings growth for those in the bottom half of the distribution, we may need to massively expand the EITC.
(9) We ought to do more for children, working-age adults, and elderly persons with assorted physical, cognitive, emotional, and social disabilities.
Regular readers are familiar with my views on (1). I think that protection against income shocks should be the focus of the safety net in all domains, including access to medical care. I don’t think that PPACA was the right way to get there. I see (2) and (5) as matters best handled by state governments, though I do think that states should be allowed to receive advances against future transfers from the federal government to manage the problem of countercyclical tax and spend during downturns. I’d much rather see something like a universal savings allowance supplemented by generous matching funds for poor and near-poor households than anything like (3) and (4), and I think such an approach is a much better, smarter way of meeting the social needs noted in (7). I’m sympathetic to (8), though I imagine Kenworthy and I disagree regarding what constitutes a massive expansion and I see a real danger in this approach. Massive increases in transfers in the UK under New Labour didn’t tackle many serious problems and may have exacerbated the implicit marginal tax problem at the low end. As for (9), I do wonder if existing public sector agencies are doing a good job on this front and I’d be open to experimenting with alternative providers.
Suffice it to say, I believe that my approach would be much, much cheaper. (Does anyone want me to write a Kindle single on all of this?)
We can talk about this stuff. But our conversations are structured by this “framing war” that makes it hard to build mutual trust. I see a real good vs. evil framework coming from lots of people who think of themselves as lefties and righties, and it’s not helpful.
Here’s a Rorschach test for you: in yesterday’s New York Times, Tyler Kepner has a story on how Gil Meche of the Kansas City Royals decided not to collect $12 million in salary because he felt he wasn’t earning his keep.
“When I signed my contract, my main goal was to earn it,” Meche said this week by phone from Lafayette, La. “Once I started to realize I wasn’t earning my money, I felt bad. I was making a crazy amount of money for not even pitching. Honestly, I didn’t feel like I deserved it. I didn’t want to have those feelings again.”
After his injury, Meche was expected to go through the motions of physical therapy, various surgeries, etc., and collected the $12 million to which he was entitled. Indeed, he could have done this and given the money to charity. But he couldn’t do it. Why? Perhaps it goes back to those “threshold earners.” The psychic cost of collecting the money actually outweighed the income, perhaps because the $43 million he’s received in salary from the Royals so far was enough to sate him. He could live comfortably off of the interest for the rest of his life, particularly if he chooses to lead a low-key life in small-town Louisiana.
I was disappointed by the four-man dissent released back in December by the right-of-center members of the Financial Crisis Inquiry Commission. I was impressed and pleased by the just-released dissenting statement signed by commissioners Keith Hennessey, Douglas Holtz-Eakin, and Vice Chairman Bill Thomas, which offers an impressively balanced picture of the various forces that contributed to the crisis that goes beyond political posturing and point-scoring. The following is drawn from a WSJ op-ed that summarizes their arguments:
We agree with our colleagues that individuals across the financial sector pursued their self-interest first, sometimes to the detriment of borrowers, investors, taxpayers and even their own firms. We also agree that the mountain of government programs supporting the housing market produced distorted investment incentives, and that the government’s implicit support of Fannie Mae and Freddie Mac was a ticking time bomb.
But it is dangerous to conclude that the crisis would have been avoided if only we had regulated everything a lot more, had fewer housing subsidies, and had more responsible bankers. Simple narratives like these ignore the global nature of this crisis, and promote a simplistic explanation of a complex problem. Though tempting politically, they will ultimately lead to mistaken policies.
As for the main report, it does seem to suggest that better regulation would have done the trick. As
The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, took as its premise the same regulatory deficiencies cited by the commission. As Sewell Chan reports in the New York Times,
The Dodd-Frank law overhauling the regulation of Wall Street, signed in July, took as its premise the same regulatory deficiencies cited by the commission.
Indeed. And as Charles Calomiris has argued, Dodd-Frank is extremely unlikely to prevent another financial crisis:
There is virtually no discussion in either the Dodd-Frank bill or the Basel Committee admitting the problem of risk measurement or proposing a solution for it. Slightly higher capital requirements are being imposed and more are being discussed, but nothing is being done to fix the regulatory system’s failure to measure risk and require capital accordingly. Nothing is being done to address the incentives of banks or rating agencies to hide risk; the two methods to measure risk (asking banks and rating agencies for opinions) have proven to be unreliable, but regulation still relies on them. So long as banks can vary risk as they please, small increases in required capital will be easily undone in their effects simply by goosing up risk invisibly.
With respect to TBTF, Dodd-Frank makes the problem much worse by institutionalizing a mechanism whereby the government, through the FDIC, can bail out any debt they choose. It is a profound irony that Chairman Ben Bernanke and Secretary Timothy Geithner argued for the new resolution authority as a means of imposing “haircuts” on uninsured creditors; they claimed that without a resolution authority haircuts would not be possible. But the new resolution authority permits the FDIC to impose zero haircuts, and that path of least political resistance will likely be chosen by government officials charged with implementing the new law.
Calomiris goes on to offer an alternative approach that, to my untrained eye, seems more likely to succeed. We’ll see where this conversation goes next.
Adam Doster has a piece in The American Prospect lamenting the undeniable fact that Rahm Emanuel’s legal troubles have distracted Chicago from pressing problems. Doster observes that the city’s fabled success has been limited in scope:
The second Daley administration gave new energy to Chicago’s business district and adjacent neighborhoods, but wide chunks of the city missed out on that wave of growth. With a budget deep in the red despite several controversial asset sales, the city’s recycling program in shambles, and major investments still needed in transit and other infrastructure, the time is ripe for a visionary leader to make his or her mark.
And he ends with the following:
Under Daley’s dictatorial watch, big businesses have sucked up expensive taxpayer subsidies, Chicago’s budget was blown to smithereens, and city officials largely failed to ignite sustainable growth or protect the most vulnerable in struggling neighborhoods. Progressives dying for a spirited debate about how to shape the future of their city, however, are left with a flawed field unwilling to grapple honestly with these pressing concerns. It’s a giant missed opportunity, and one that may not present itself again for a long while.
As a veteran of Progress Illinois, a highly informative labor-backed website that used to be run by the talented Josh Kalven, I know that Doster is aware of another pressing problem facing Chicago, which Steven Malanga, drawing on a study by by finance professors Joshua Rauh of Northwestern University’s Kellogg School and Robert Novy-Marx of the University of Rochester, described in vivid detail last fall:
The city with the highest per household unfunded liability in the nation is Chicago, $41,966 per household, or $45 billion in total obligations. Illinois, meanwhile, is the state with among the most troubled pension systems, with about $285 billion in unfunded liabilities. “Even if all other spending was shut down, the city of Chicago would need to allocate about eight years of dedicated tax revenues to cover pension promises it has already made,” the study by Rauh and Novy-Marx estimates. Meanwhile, Illinois’ pension obligations amount to seven times annual state tax collections.
I fear that no amount of visionary progressive leadership will make these pension obligations vanish. Big businesses did indeed collect lots of subsidies under Mayor Daley, but it’s not clear to me that big businesses are responsible for the fact that Chicago’s budget was blown to smithereens. As a non-expert, my guess is that Mayor Daley did what big-city mayors have done across the country: he focused excessively on the urban core rather than on improving intraregional mobility, school quality, and the cost-effectiveness of public services, and he secured political near-invulnerability by pacifying an expanding public workforce with generous fringe benefits, including large defined benefit pensions.
Fortunately, Chicago has an advantage that many other U.S. cities don’t: Mayor Daley did facilitate a building boom in the city, which has made it somewhat easier for property-owning middle and upper-middle-class families to remain within the city limits, though the public schools have remained a deterrent. The city has strong fundamentals.
[W]hat Tyler calls the Great Stagnation looks like a return to normalcy after the “Great Boom” of the post-WWII decades. Indeed, recent growth rates are better than those of all other earlier periods. So yes, growth has cooled down since the postwar “Golden Age,” and that fact poses real economic and political challenges. But the Golden Age was the outlier, not our present era; it just doesn’t make sense to talk about the present period as stagnant after centuries of easy growth.
I think that Tyler would embrace this characterization. As Tim Worstall has suggested, one could argue that the “Great Boom” was an artifact of pent-up growth during a long period of relative stagnation. For reasons I’ll return to in a moment, I nevertheless have a less sanguine interpretation of this return to normalcy than Brink.
[B]eginning in the mid-’’, fueled by the IT revolution, productivity growth came roaring back, nearly equaling the record of the Golden Age. It’s hard to look at these figures and conclude, with Tyler, that the trees in the orchard are becoming bare. Granted, the productivity comeback offers no ground for complacency. The productivity figures look better than the per-capita GDP figures, in large part because the labor force participation rate peaked in the late ’’, fell during the dot-com bust, and only recovered to early ’’ levels by 2007 (superior growth in output per worker was thus partially cancelled out by sluggish growth in the number of workers).
As regular readers know, I’m very interested in the labor force participation question. Brink focuses on the aging of the population, while I tend to focus on incarceration and the need for a more inclusive labor market, i.e., a freer labor market and lower marginal tax rates combined with a better system of work supports for workers at the low end of the income distribution.
(I’ll add that I find the idea that PPACA is cool because its increase in implicit marginal tax rates just means that some near-elderly will retire sooner profoundly misguided: we have good evidence to the effect that attachment to the labor force extends useful lifespan. I want more public investment not in high-speed rail — what an absurd, absurd idea — but rather in biogerontological research, to devise cures designed to delay the onset of various age-related diseases.)
So why am I less sanguine than Brink? The main reason is that he is older and wiser than I am, and he’s lived through more cycles of national hysteria and despair and boundless, irrational optimism, etc.
The other is that I think we’re dealing with a revolution of rising expectations problem. There is a fairly happy Patience scenario, in which we allow markets to do the work of making new leisure and consumption opportunities more accessible over time and help facilitate absolute upward mobility and risk-taking with a modest safety net. There is an unhappy Impatience scenario in which we devote ever-increasing sums to the public sector that flow more to public sector wages than straight redistribution, forcing tax increases and dampening our growth prospects, leading democratic publics to scrap over a stagnant pie. Higher growth makes the former scenario more likely, lower growth makes the latter scenario more likely.
Today, in a post over at The Corner, I wrote the following:
What’s ironic is that last year, the CBO projected a 2011 budget deficit of just $980 billion. What’s a $500 billion, 50 percent error among friends?
Indeed, I am the one who committed the error: that’s what I get for blogging immediately upon reading the CBO’s top-line summary, before I was able to read the entire report this afternoon. It turns out that $390 billion of the increase in the 2011 deficit was, according to CBO scoring, a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (see page 8 of the full CBO report). So, I owe an apology to the good people of the CBO.
However, Kevin Drum and others are also mistaken in arguing that “virtually all of [the $500 billion difference in projections] is due to the extension of the Bush tax cuts.” Page 9 of the full CBO report shows that only $103 billion of the $390 billion is attributable to renewing the Bush tax cuts: $98 billion for “tax rates, credits, and deductions initially enacted in 2001, 2003, and 2009,” and $5 billion for estate and gift taxes.
The rest of the provisions were unrelated to the Bush tax cuts: a patch in the Alternative Minimum Tax, a eternal budgeting device similar to the Medicare “doc fix”; a payroll tax holiday; a tax credit for purchases of equipment by businesses; and an extension of “emergency” unemployment benefits.
One of the most common complaints that conservatives have with CBO projections is that they do not take into account how changes in tax rates affect behavior and economic growth. Nick Gillespie makes an important point about the Bush tax cuts: the top decile paid more in taxes in 2008, as a share of total revenues, than they did in 2000. Conversely, the share of the bottom half of earners was lower in 2008 than it was in 2000. This, at least, confounds the widely accepted view that “tax cuts for the rich” under Bush worsened the deficit.
While we’re on the subject of the CBO’s new deficit projections, it’s worth highlighting some key passages from the new report (emphasis added):
CBO’s baseline projections…incorporate the assumption that current laws governing taxes and spending will remain unchanged. In particular, the baseline projections in this report are based on the following assumptions:
* Sharp reductions in Medicare’s payment rates for physicians’ services take effect as scheduled at the end of 2011;
* Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;
* Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and
* Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.
The projected deficits over the latter part of the coming decade are much smaller relative to GDP than is the current deficit, mostly because, under those assumptions and with a continuing economic expansion, revenues as a share of GDP are projected to rise steadily—from about 15 percent of GDP in 2011 to 21 percent by 2021.
As a result, the baseline projections understate the budget deficits that would arise if many policies currently in place were extended, rather than allowed to expire as scheduled under current law.
Tyler Durden also makes some important points that have significant consequences for the stability of the dollar and of U.S. sovereign debt:
So between 2010′s $1.3 trillion, 2011 $1.5 trillion, and 2012′s revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.
Finally, there is a kind of epistemological divide in thinking about deficits. Those who believe that tax cuts are to blame for our deficit are, by definition, of the view that federal spending at 25 percent of GDP is acceptable, despite its deviation from the historical average of 20 percent. There is at least a plausible argument to be made that 20 percent of GDP should be enough for the federal government to fulfill all functions that are appropriate for it to take on.
* Megan McArdle has written the most resonant take on last night’s SOTU.
* Ace CNET reporter Declan McCullagh takes congressional Republicans to task for backing a vast expansion of the government’s surveillance authority:
Jim Harper, director of information policy studies at the free-market Cato Institute, says the push for legislation is an example of pro-regulatory Republicans. “Republicans were put in power to limit the size and scope of the federal government,” Harper said. “And they’re working to grow the federal government, increase its intrusiveness, and I fail to see where the Fourth Amendment permits the government to require dragnet surveillance of Internet users.”
This seems to be at least as pressing a civil liberties issue as airport security junk-touching, but it hasn’t drawn nearly as much attention.
* Olivier Blanchard on the two-speed global recovery. (I have to say, I think the two-speed recovery is likely to be the two-speed reality for at least a decade. There’s lots of catch-up growth to be had in the developing world, but bloated public sectors in the advanced countries aren’t going embrace productivity-enhancing structural without an ugly and potentially unwinnable political fight.)
* I’m a believer in Jane McGonigal’s argument that gamification has enormous potential for solving seemingly intractable problems. I’ve been drawn to this idea for a long time, and I’m both delighted and slightly bitter about not having the good sense to devote more time to this theme as a young person.
* Diana Lind wrote an interesting op-ed on revitalizing declining urban neighborhoods through effective job-training programs. I’m a bit skeptical, but it’s worth a look.
* Is breaking up good to do? Parag Khanna makes the case for the establishment of new sovereign states out of the wreckage of dysfunctional multinational polities.
* Khanna also has a stimulating piece on the postmodern Medicis who are enhancing American influence in a post-Westphalian world (this deserves an entire post, but there’s almost too much to say):
At Davos, American leadership isn’t embodied in feeble cabinet members mouthing pre-fab remarks, but through its modern-day Medicis. The Medici family of medieval Florence led the West into the Renaissance by commissioning artists like Michaelangelo, inventors like Leonardo da Vinci, and backing secular rationalists like Machiavelli. Far from being ignorant, aloof, and depraved, America is home to most of the postmodern Medicis, from Bill Gates to Warren Buffett to George Soros. Mr. Gates tackles global scourges through science, Mr. Buffett backs public works through investment, and Mr. Soros attacks autocrats with technology. What the old and new Medicis have in common is a disregard for antiquated notions of public versus private power and a focus on a new hybrid model that unites the best of both spheres. America’s global footprint is far greater than its declining share of global GDP and its increasingly unpopular president. Davos is where it needs to go in greater numbers to regain global respectability.
Interesting.
* Yet another reason to be skeptical about the prospects for a Palestinian state.
* A Pascal Lamy op-ed in the FT found that of the 41,000 jobs the manufacture of Apple’s iPod created in 2006, 14,000 were located in the U.S. and 6,000 of those were professional jobs. U.S.-based workers earned $750M vs. $320M for all workers outside of the U.S.
One wonders about the comparable numbers for the iPhone circa 2011. I wonder if Apple’s suppliers have grown more productive, and if this has translated to higher compensation levels distributed across fewer workers. We’ll find out soon enough.
* Karan Mahajan, one of my favorite writers, has written an excellent, insightful profile of William Dalrymple for Bookforum.
* Karan pointed me to this essay by Ramachandra Guha, author of India After Gandhi (a book that can’t hold a candle to the work of Ayesha Jalal) and one of India’s leading public intellectuals. I agree with very little in the essay — I take a more benign view of the BJP, I see the rise in visible Indian inequality as a byproduct of an overwhelmingly beneficial growth explosion, I find Guha’s valorization of the midcentury Indian state risible, etc. But it’s actually a pretty useful reflection of how India’s center-left metropolitan intelligentsia sees the world, and he gets in some good shots at Naxalism and corruption.
* Josh Barro’s take on Chris Christie’s tenure as governor of New Jersey so far is one of the best policy missives I’ve read in a while: balanced, constructive, and interesting. I learned a lot. Barro offers Christie a roadmap to building on a strong but far from flawless record.
* Tim Fernholz seems to be making a smooth transition from opinion journalism to beat reporting: he’s written a solid, balanced take on reforming the corporate income tax.
Everyone likes upward economic mobility. But how much do we like downward economic mobility?
One obvious point is that while we all like absolute upward economic mobility, relative economic mobility is a bit dicier. I think we can all agree that it would be great to have more overall growth and bigger increases in absolute incomes across the spectrum. But this is fully compatible with a world in which there isn’t that much upward relative economic mobility for many people.
Greg Mankiw has an interesting post on one aspect of economic mobility:
According to this study (which I found thanks to a pointer by Paul Krugman), the elasticity of son’s income with respect to father’s income is about 0.5 in the United States. How do you interpret this fact?
Some see this as a sign of an entrenched economic aristocracy. The rich can buy various advantages for their children — access to high-quality schools and other enrichment experiences, membership in social networks that facilitate entry into high-status, high-wage occupations — and this dampens downward mobility. There is, as Mankiw notes, another dimension to this phenomenon:
As I understand it, that 0.5 estimate is roughly the correlation between father and son income. That means that the fraction of variance of son’s income explained by father’s income–that is, R-squared–is only 0.25. This last number is sometimes called the “heritability” of a characteristic.
By contrast, the heritability of IQ is usually estimated to be much larger than that. At least some of the heritability of income must come not from inequality of opportunity but from the genetic transmission of talent. Other aspects of talent, such as drive, energy, and spunk, might well have a genetic component as well, but they are harder to measure and thus we know less about them. But the one that has been studied extensively, IQ, seems more heritable than income.
And so, Mankiw concludes, it would be weird if we didn’t see significant heritability of income. Indeed, I wonder if the fact that the 0.5 estimate isn’t higher has something to do with the “threshold earners” phenomenon Tyler Cowen has described. Many children from affluent households are choosing psychic income over market income.
I’ll add another wrinkle. As Michael Fletcher reported in the Washington Post a few years back, drawing on a study sponsored by the Pew Charitable Trusts, downward mobility is more common among African Americans than among non-blacks:
Overall, family incomes have risen for both blacks and whites over the past three decades. But in a society where the privileges of class and income most often perpetuate themselves from generation to generation, black Americans have had more difficulty than whites in transmitting those benefits to their children.
Forty-five percent of black children whose parents were solidly middle class in 1968 — a stratum with a median income of $55,600 in inflation-adjusted dollars — grew up to be among the lowest fifth of the nation’s earners, with a median family income of $23,100. Only 16 percent of whites experienced similar downward mobility. At the same time, 48 percent of black children whose parents were in an economic bracket with a median family income of $41,700 sank into the lowest income group.
Do we want the downward mobility that defines life for many African American families to become the U.S. norm? Or do we want the “stickiness” of middle-class and more affluent black Americans to match that of non-blacks, while also improving absolute incomes at the bottom?
Rather than answer that question directly, I’ll just say that Somewhere, directed by Sofia Coppola, daughter of Francis Ford Coppola, was my favorite film of 2010.
P.S. Gabriel Rossman, a sociologist at UCLA and one of my favorite scholars, wrote in to add that the pattern of downward mobility for African Americans identified by the Pew study has been there for a long time — Blau and Duncan found the same pattern in The American Occupational Structure, a landmark study of social mobility in the U.S. first published in 1967.
And Gabriel kindly sent me a copy of “The Impact of the Cultural Revolution on Trends in Educational Attainment in the People’s Republic of China” by Zhong Deng and Donald J. Treiman. Basically, the Cultural Revolution succeeded in reducing the intergenerational transmission of educational attainment.
So if we really want to lower the father-son correlation of income and fight the natural tendency of parents to offer their children opportunities for economic security and advancement, we could send children of upper-middle-class parents to rural work camps (no, not an Outward Bound or NOLS course), making a careful effort to cut them off from their existing networks. Somehow I think that would be overkill.
Kevin Drum thinks I’m a crank. He is almost certainly right. But on this narrow point, let me riff a bit further. He writes:
The insane wealth of socially worthless Wall Street zillionaires helps provide a living for trapeze artists and experimental fiction writers? That doesn’t even strike me as “high-end consumption,” for starters. Do rich people really go to Cirque du Soleil and read Michael Ondaatje? I suspect that better examples would be gold-plated bathroom fixtures and Damien Hirst artworks. Both of which, frankly, the world could do without pretty easily. Especially the Damien Hirst monstrosities.
It depends on which rich people we’re talking about. But it’s pretty clear that the fiction industry in the modern US and UK relies on a constellation of MFA programs, fellowships, writers retreats, and reviews that are, in various ways, supporting by artistically-inclined rich people, or by the trusts they established at some point in the past.
Maybe this is just class envy talking, but America’s wealthy class doesn’t strike me as much like the Medicis of old, at least when it comes to support of great art. For the most part, it also doesn’t strike me that support of great art requires dense agglomerations of rich people anyway. Those agglomerations probably help support great museums and great opera houses, but that’s about it. And in any case, all that great art would still exist somewhere even if MOMA and the Met monopolized less of it.
I’m pretty sure there isn’t a fixed quantity of great art. Rather, I think artists respond to incentives. It’s pretty clear to me that Kevin and I disagree with what constitutes great art, but I feel as though decentralized, unequal, market-driven societies have done a pretty good job of producing a lot of it, particularly commercial art, decorative art, etc.
Many, many points to raise:
(1) I actually do think agglomerations of rich people matter. Kevin and I disagree on Damien Hirst. Perhaps we can agree that the arts are a pretty broad category. I would include fine dining in the relevant category. Having lots of affluent people who eat out frequently can help fuel creativity in this space. It might not be food that Kevin or I would enjoy eating in every instance, but I am, for aesthetic reasons mainly, very glad to have access to lots of culinary innovation.
(2) Kevin I disagree on the social worthlessness question. It’s not clear to me that “real economy” innovators who make vast sums selling what my friend Rory Sutherland calls “Veblen goods” — think jewel-encrusted refrigerators, or luxury sedans — are that much more noble than financiers. I find the idea of social worth incredibly subjective, and I prefer to steer clear of me. It is possible that we need stronger leverage and capital requirements and speed bankruptcy laws (I support all of these things), but my position on these issues has nothing to do with social worth.
(3) All that said, it is pretty clear that many members of the financial elite really are great patrons of the arts and civic groups, etc. Mark Gorton is a terrific example. He plowed money from HFT into advocacy for bicycle lanes and much else.
(4) Berlin is a great city for culture, and it’s not exactly an agglomeration of the ultra-rich. London has a much better theater scene and arguably a much better arts scene overall than New York, yet London and New York are roughly comparable on the agglomeration of the rich front. High rents can drive the creative out of town. All of this is true. It is one of many reasons I oppose building restrictions in our great cities. In Germany, the state is the great patron of the arts.
But I think we need a broader understanding of what we mean by cultural patronage. Berlin has become an artistic workshop, but it is not the sole site of consumption for Berlin-created art and Berlin-created ideas. Indeed, many things created in Berlin are sold in London, and without the London market those things would dry up. So why does the London agglomeration matter? Because wealthy Londoners will compete to outdo each other — how novel and thrilling is your consumption, etc. (On an unrelated note, I’m also comfortable with state and local governments supporting the arts provided they do so transparently.)
(5) Basically, I’m a believer in the importance of cultivating eccentricity. I see dense wealth concentrations as enablers of eccentricity.
(6) Let me underline that absolute incomes at the bottom are an important issue. I just don’t think it’s closely related to top incomes, per Lane Kenworthy:
Would the incomes of low-end households have grown more rapidly in the absence of the top-heavy rise in inequality? If we look across the rich nations, it turns out that there is no relationship between changes in income inequality and changes in the absolute incomes of low-end households. The reason is that income growth for poor households has come almost entirely via increases in net government transfers, and the degree to which governments have increased transfers seems to have been unaffected by changes in income inequality. (For more detail, see my piece in the November-December issue of Challenge.)
There is much more to say about the Kenworthy thesis, but we’ll live it there for now.
We all know that growth when you’re well behind the possible technological production frontier is easier than growth when you’re at it. This is why a poor place like China or India can grow at 8-10%, year after year, for decades even, while mature economies struggle to manage a consistent 2.5-3%.
There was somewhere between none and f[*cough*] all economic growth in the US (and many other economies) in the 1929-1945 period. But the production frontier continued to move outwards, indeed, the 30s are one of the all time great decades for both technology and productivity improvements. The 50s to the 80s were simply playing catch up, in the same way that China and India are now.
Part of Tyler and I think Tim’s point is that if we are indeed entering an era of slower growth than what we saw in the 1945 to 1973, it is possible that we’ve simply smoothed out growth over a longer, more sustainable period of time. This, of course, assumes that we’re not on verge of a series of nasty surprises of an ecological or geopolitical or otherwise unanticipated nature.
This leads me to something else: one of the reasons we, and by that I mean we free-trading, market-loving, globalization-friendly types, are relatively mellow about offshoring and related phenomena is that we don’t foresee rival states coercing through classical means. GDP was invented to assess how much revenue we could raise to arm and equip a million-man army to win large-scale coalitional warfare. It’s hardly surprising that the social scientists and bureaucrats who first used it weren’t particularly interested in consumer surplus.
Even if we do see a return of serious, non-nuclear inter-state — unlikely, in my view — one assumes that it will be technology-driven. Stuxnet is a preview.
But in the extremely likely event that this is all wrong, all the cheap fun in the world won’t save us.
Tyler posted an email by Ken Hirsch on school desegregation that raises interesting questions. Two things I’d like to add:
(1) As Gary Orfield acknowledges, there has been a marked decline in the share of non-Hispanic white children as a percentage of all children in U.S. K-12 schools. The number drifts from around 60 percent for the 15 to 19 cohort to a bit over half for 0 to 5.
(2) Among African Americans, the birthrate in middle-income and affluent families has sharply declined while the birthrate among poor families has remained stable. This means that a higher proportion of African American children are poor than would have been the case had birthrates remained stable across the board. This might sound a bit silly, but it’s a useful reminder that the segregation we’re seeing in K-12 is actually not mirrored among adults. As William Frey observes, black-white segregation has decreased in 61 of the 100 biggest metropolitan areas over the last ten years.
(3) And then there is the fact that many college-educated middle-class African Americans are choosing to settle in majority-black neighborhoods. This presumably exacerbates segregation, yet it’s not clear that it’s necessarily a bad thing. There is value in extending your social network to include people from other groups, but there are other considerations, including culturally-specific amenities, that factor into our decisions about where to live and where to learn.
I don’t want to sound glib. Concentrated poverty and cultural isolation are bad things. But they are bad things regardless of dissimilarity index values across a metropolitan area or across the country, which don’t necessarily tell us what we want to know.
Matt Yglesias has poked fun at me for quoting Rick Hess all the time.
You have basically a mirror-image situation on education policy, where something like 90 percent of non-budgetary conservative commentary on K-12 education is either by Rick Hess or consists of Reihan Salam quoting Rick Hess. Most conservatives just content themselves with the idea that school spending is wasteful, that teacher’s unions are at fault for this, and that Rick Hess has a book called Stretching the School Dollar. There’s very vigorous debate ongoing about how K-12 money should be spent, but the overwhelming majority of it occurs between warring left-of-center factions since thinking about poor kids and teachers and such is the kind of thing that mainly appeals to liberals.
I’m happy to discuss the book in greater detail — it’s very good — but I tend to think that Matt is viewing this through the wrong less. The education policy world is monolithically liberal, or rather people working in education policy tend to identify as left-of-center. So left-right isn’t the real axis of conflict. If it were, you’d have consensus, with a few marginal conservative cranks carping from the outside.
Moreover, I don’t think that “warring left-of-center factions” is the right mental model for educational policy debates, as we’re not dealing with a series of parallel Weltanschauung parties, e.g., a Zionist social democratic faction that loves small student-teacher ratios vs. black nationalist Maoists that prefer distance learning. There are many discrete issues that create different alignments, e.g., some Third Way school reformers favor vouchers and ESAs and for-profit providers as well as public charters, while some of the most enthusiastic charter advocates see private school vouchers as dangerous. Some people place a higher priority on desegregation, summer learning loss, etc. This is a specialized domain in which there is a great deal of disagreement among experts, partly because the social basis of expertise is fairly diverse, e.g., you have people from the for-profit world, people affiliated with ed schools attached to large private research universities as well as large public research universities, teachers and administrators, etc.
Those of us on the right with an interest in education reform will inevitably find ourselves rooting for people who would under most circumstances detest our politics. Shael Polakow-Suransky, the new deputy superintendent in New York city, is a brilliant guy, and I see him as an advocate of constructive structural reforms. He is also steeped in a lot of interesting left-of-center education thinking drawn from the developing world, and I find it unimaginable that we’d agree on much politically. There are still worlds in which a public policy conversation is more than a conservative conversation or a progressive conversation. One of Hess’s virtues is that he’s not generally that interested in conservative nostrums. He’s engaged in a lot of interesting, ground-level debates, and I like the way he thinks about a wide range of questions.
All that said, now that Rick has returned from vacation, I plan to shamelessly quote him at great length. Or rather I’m going to quote Rick describing a presentation by Karen Hawley Miles at a recent conference in Austin, Texas sponsored by the new Improving Productivity in Public Education:
Hawley Miles pointed out that “real” (e.g. inflation-adjusted) spending increased from $3,800 to $8,700 between 1970 to 2005, but that 80% of those dollars went into new staff positions and increased benefits. If teachers are frustrated that vast new spending in recent decades didn’t boost salaries, they need to recognize that this is because those dollars have gone into hiring new staff and into plumping benefits–and not because states and districts have failed to fund schools. Hawley Miles also pointed out that special education spending has risen from 4% to 21% of spending over that period, while general education spending has fallen from 80% to 55%.
Hawley Miles continued by highlighting the gap between top-line student-teacher ratios and the ratios seen across discplines:
Hawley Miles walked through district analyses pointing out one district where average class size for core 9th grade classes is 27, while it was 18 for 12th grade electives. She flagged a district where a student-teacher ratio of 16:1 is yielding an average class size of 29:1, because of how staff are utilized. In another district, she noted that self-contained special education costs $42,600 per pupil while special education in general classrooms costs $19,900 per pupil. Yet, we’ve bizarrely opted to put in place policies that discourage or even prohibit educators from taking into account the enormous cost of self-contained instruction when deciding how to assign children and allocate scarce dollars.
This is fascinating, and it’s a reminder of why the Hess-Meeks concept of educational spending accounts is so attractive: by making the cost of various instructional options more transparent, we encourage specialization that will yield more cost-effective approaches to educating young people. Some will object: “You right-wingers and your consumer-directed plans! I scoff at you!” I’ll take that.
Donald Marron has written a carefully argued post teasing out the different elements of in the 2010 health reform:
To say “the health care reform law reduces the deficit over the next ten years according to CBO” is absolutely true. But it often gets elided to “health care reform reduces the deficit over the next ten years” which isn’t true if, like Greg, you think the revenue raisers, student loan changes, and CLASS Act aren’t really health care reform.
I think Greg is right to worry about this distinction. Because of the information loss as the details of CBO scores get transmitted through various layers of speakers and media (including this blog), some people are indeed under the mistaken impression that health care reform, by itself, reduces the budget deficit over the next ten years. It doesn’t.
However, Greg’s analogy has a flaw: it presumes that none of the tax increases count as health reform. I disagree.
Marron is scrupulously fair-minded, and I recommend his reflections on the “Cadillac” tax. Let me just say that I really don’t think the Cadillac tax was the most effective version of tax reform as health reform, or even close. Jonathan Bernstein wrote a post that referred to a related observation of mine:
I don’t want to stretch what Salam said too far, but let’s just say it pointed me to a way through the confusion that I’ve had, and that I think others have had, about conservative budget thinking, and makes sense of Mankiw—and of GOP opposition to PAYGO, support for unfunded tax cuts, and the rest of the Republican fiscal stew.
To understand what they’re saying, just throw out the entire concept of a budget.
So: to characterize conservative talk about revenues and spending, I think what I’d say is that conservatives believe that each program, and every tax, should be judged on its own merits. If a spending program is necessary, like missile defense, then it should be fully funded. If not, it should not be funded. On revenues, the justification for any sort of taxation is that citizens should have “skin in the game,” and therefore everyone should pay the same, small amount. Any more taxes, and any more spending, are by this way of thinking fiscally irresponsible.
The first part of this last paragraph sounds reasonable enough. On taxes, I just want a system that raises the most revenue at the lowest level of excess burden, consonant with a desire to protect low to moderate earners from an onerous tax burden. This is consonant with a flattish income tax, but that has nothing to do with the justification for taxation. That is an entirely separate question over which I imagine there’s plenty of disagreement on the right. I’m content to assume that we should pay for justified government expenditures. In my perfect world, we’d pass a big, comprehensive overhaul of the tax code that would eliminate deductions, lower rates, and increase revenues. Then we’d tackle infrastructure in a bill that might have a tax component, e.g., it might reform the gas tax by replacing it with a VMT and use VMT revenue for mass transit as well as highways, etc., but it would steer clear of protecting wildlife and other issues that are best understood as separate. I wouldn’t fall on my sword on this idea — it’s hardly a matter of principle. It just makes intuitive sense to me, partly so we can get a clearer picture of what’s at stake.
Now, you may note at this point that there’s nothing in that formula to make government revenues equal government spending. As far as I can tell, that’s correct; conservatives aren’t interested in that question.
This is so foreign to how I think about these issues that I don’t know where to begin. It is possible that some conservative somewhere thinks about these issues in this way. I certainly don’t.
Moving along, Peter Suderman has a great interview with Douglas Holtz-Eakin (or, as some like to call him, the Notorious D.H.E.). He makes a simple and important point about CBO scoring:
The first and foremost thing to recognize is that “scoring” is just that. It’s not forecasting. It’s scoring. And the analogy I always use is, in football a touchdown is six, kicking an extra field goal is one, and running it over is two. Why? I have no idea. But by having that set of rules for scoring, you can compare games across time, across teams, and across all sorts of situations, because you have a common thread of scores. So the most important thing about scoring is to apply the same rules to every bill. Every time a new iteration of the health care bill it was either more or less expensive. And we knew something like the relevant ordering of it. So that’s its top priority.
That means that when CBO has to make a call, it should make that call in a similar fashion every time while you’re debating legislation. Sometimes you have to make calls that you don’t have much information about. In that sense they’re are arbitrary. But I don’t think that that’s a bad thing, as long as it’s done in a nice statistic fashion.
There’s a second goal: to be not only consistent across legislation, but to be accurate in its forecast. CBO certainly tries to do that. But it operates in an environment where there’s a ton of uncertainty. The most important pieces of legislation are the hardest, because they’re new and by definition harder to evaluate.
There’s been an active effort to characterize DHE’s criticisms of how the CBO score has been used in our political conversation as somehow attacking the ref. The idea is silly. He isn’t attacking the ref. Rather, he is drawing attention to how some politicians and activists are misunderstanding at best and misrepresenting at worst what the CBO scoring process actually means.
I haven’t seen much conversation around Jonathan Hefter’s Neverware, and that surprises me. Ben Popper has written a fascinating report in the New York Observer on Hefter’s effort to radically extend the useful life of old hardware by making virtual desktops cheaper and more accessible:
“The virtual desktop solutions that most of the big corporations offer are too expensive and complex for schools to deploy,” says Rhoten. Hefter’s technology, by comparison, was cheap, worked with whatever computer the school already had and reduced the amount of oversight needed on a daily basis.
Take this case study offered by HP about how they helped St. Peter’s Anglican Primary School. In it they replaced 160 traditional PCs with 80 blade PCs and 90 thin clients. That costs approximately $100,000 and generates 2 tons of e-waste. Hefter solves the same problem with two “juiceboxes” powering the original 160 PCs. Cost = $20,000. E-waste = 0.
It seemed too good to be true, so Rhoten spent the next few months trying to poke holes in Hefter’s project. “I brought in infrastructure guys to look at it, computing folks, people from school districts at both the local and federal level.” The response was always the same: this looks very promising, but there are a lot of people trying to do virtual computing with more experience and resources than this kid.
Rhoten eventually showed Neverware to an ex-Google engineer, who like everyone else, dismissed it at first. “I’ll never forget, about a week later this engineer emailed me up, it was on Thanksgiving day,” says Rhoten. “He said, I might have been wrong. I can’t stop thinking about Neverware. This might actually work.”
This is textbook disruptive innovation. Well, not quite. It’s not clear that Hefter is offering an inferior service to existing virtual desktops. Inferior perhaps in the sense that we don’t get the shmancier screens and keyboards when we save $80,000.
But consider how much we might save in IT budgets in the public sector if we relied on something like Hetfer’s juiceboxes.
Given that we live in an extremely loss-averse culture, it’s also worth noting that this will represent a real challenge to hardware manufacturers. If you fret about the offshoring of hardware manufacturing, well, you should be indifferent to this development, as it will presumably have a bigger job impact in low-cost manufacturing centers overseas. But if you believe that U.S. firms that design and brand new hardware will take a significant hit, you could see this as a serious source of dislocation and economic pain. And it should go without saying that IT professionals who skim off a lot of that $80,000 — private contractors who install new computer systems, etc. — will definitely take a hit. I nevertheless see Neverware as something that will allow us to do more stuff for less money, and that the short term dislocation isn’t something to worry about too much.
The really interesting thing is that there are Neverware-like innovators in many different domains, and one of the crucial political economy questions of our time is whether we will allow them to scale up and change the way we learn and work or not.
I had the great pleasure of reading The Great Stagnation late last week. I want all of you to buy it, or rather all of you with e-readers. The book prompted many thoughts:
(1) I like the business model behind the book. A few months ago, I tried to convince one of my close friends to self-publish a book of essays. He decided to go with a major publisher instead, as he felt needed the economic security a generous advance would provide. Tyler isn’t self-publishing this book, but he has priced it aggressively and he is ably promoting it through his blog. He is enacting Kevin Kelly’s 1,000 True Fans approach, though my sense is that he has a far wider impact.
(2) The business model behind the book reflects some of the deeper themes in the book itself, which is closely related to arguments Tyler has advanced in his stimulating essay on how to think about U.S. inequality and The Age of the Infovore, a book that was criminally underrated, mostly due, I suspect, to its confusing original title.
(3) I’m wary of summarizing the book — I really want you to read it for yourself — but the basic idea is very straightforward: Americans have grown accustomed to painless, automatic increases in prosperity. This is true of Americans on the right, who believe that painless tax cuts will deliver prosperity, and Americans on the left, who believe that above-market wages and more public investment funded by painless tax increases on the rich will deliver prosperity. Tyler convincingly argues that we’ve run out of this “low-hanging fruit.”
In 1920, the marginal college student was fully capable of profiting from a rigorous college education. In 2011, the marginal college student is perhaps less capable, due to a confluence of factors. Some believe that credit constraints are the driver of an increase in dropout rates. Others, myself included, believe that traditional college instruction isn’t necessarily right for, say, 80 percent of the population, and that the rigidity that defines an education sector that is tightly regulated and fueled by third-party public dollars doesn’t lend itself to the kind of specialization that would yield big productivity increases. This is a subject of particular interest to me.
(4) On the Infovore front, the great technological advances of our time are better at generating consumer surplus than the kind of revenue increases that can sustain the public sector. Moreover, the consumer surplus tends to flow to novelty-seeking, complexity-loving, information-hungry people. These people are unevenly distributed across social groups, e.g., they are disproportionately college-educated. As Tyler suggested in his inequality essay, our society is arguably becoming happier and more happiness-focused thanks to the proliferation of internet-enabled “cheap fun” while also experiencing stagnation in GDP and wage growth.
(5) One of the conclusions I drew from the book — a conclusion that, in fairness, reflects an existing prejudice of mine — is that we should educate young people in part to help them have a happier, more fulfilling life, in the hopeful expectation that a love of learning will prove economically useful at some point down the life. This flows together with Matt Crawford’s arguments in Shop Class as Soulcraft, though I don’t necessarily share all of Crawford’s views on political economy.
(6) It is easy to criticize the Cameron conservatives for their emphasis on “general well-being,” an admittedly fuzzy concept. Yet I do think that Tyler’s framework lends itself to a new way of approaching public policy dilemmas (though I should note that Tyler won’t necessarily endorse my leaps and extrapolations), e.g.,
(a) Commuting and congestion should be taken much more seriously then they are at present. Long commutes are a big source of misery for individuals and families. Encouraging telecommuting along the lines of Utah’s state government should be an urgent priority, on environmental, productivity-enhancing, and well-being grounds.
(b) Trickle-down is actually a pretty useful way of thinking about contemporary economic life. As one of the leading global economies, the U.S. is in a tough spot. While other countries have the low-hanging fruit of mimicking our most productive practices, e.g., the relative efficiency of our retail sector, we have to engage in a costly trial-and-error discovery process to become more productive. This trial-and-error process sometimes translates into labor market volatility. Relatively weak labor protections make it easier for firms to hire and fire, and it also makes it easier for them to find new ways to organize their labor force in new and potentially more productive ways.
But the wealth that we’re generating increasingly derives from the creation of knowledge capital. So a large and growing number of us cater to the small number of people who create the most valuable knowledge capital, and I don’t attach any normative significance to “most valuable” in this context. It is really useful to actually live in close proximity to these people.
This leads us back to commuting. The places we should worry about are the rural and urban places that are most disconnected from concentrations of great wealth. Many writers, including David Frum, have noted that “Red America” tends to be more egalitarian in the narrow sense that monolithically Republican places have narrower patterns of income dispersion than big, dense cities. This is true. But this isn’t necessarily a good thing As Ed Glaeser argues in Triumph of the City, big cities have high poverty concentrations because they attract poor people with the promise (and reality) of economic opportunity. This is also why poor people cluster near mass transit. More low-cost mobility means more access to economic opportunity. The disconnected poor are a huge problem. Why? Because they’re too far away for benefit from trickle-down.
(c) Chrystia Freeland’s Atlantic essay on the new global elite attracted a lot of attention for its thesis that we’re seeing a secession of the rich — a new global elite that feels increasingly independent of national loyalties, and that is perhaps more susceptible to horizontal, class-based solidarity. You won’t be surprised to learn that I don’t share all of her concerns. This was a telling passage:
I heard a similar sentiment from the Taiwanese-born, 30-something CFO of a U.S. Internet company. A gentle, unpretentious man who went from public school to Harvard, he’s nonetheless not terribly sympathetic to the complaints of the American middle class. “We demand a higher paycheck than the rest of the world,” he told me. “So if you’re going to demand 10 times the paycheck, you need to deliver 10 times the value. It sounds harsh, but maybe people in the middle class need to decide to take a pay cut.”
It’s worth unpacking this paragraph. Is he not sympathetic to the complaints of the American middle class, or is he somewhat more sympathetic than most Americans to the relative deprivation experienced by the poor elsewhere in the world? Is it obvious that nationalist solidarity is the right way to think about these issues? Are there alternative nationalist narratives we could embrace, e.g., we want America’s most successful people to be as successful as possible, and then live close to them so that we can share in some of their success through market mechanisms rather than by leveraging our power as voters to secure more redistribution that might jeopardize wealth creation? Many will call this a false choice — and it might be a false choice! — but I’m not so sure.
(d) I hope that Tyler is wrong about the likelihood of sluggish growth in the medium-term for the most advanced market democracies. If he’s not, we need to think seriously about how to create interesting, engaging, fulfilling work for large numbers of people for whom the market wage falls below the reservation wage. We can’t all be knowledge workers. But perhaps we can all find work that activates our senses.
Obviously we’re going to keep talking about all of these issues forever. Many thanks to Tyler for writing a really terrific provocation.
At some point I need to write about Max Chafkin’s slightly problematic take on Norway for Inc. magazine, but for now I’ll make a quick observation. As Matt Yglesias observes, Denmark has a very free economy:
I was struck to learn recently that a Heritage Foundation / WSJ op-ed page survey decided Denmark has more “economic freedom” than the United States of America. Well, it also has taxes as a much higher share of GDP, much less inequality, stronger labor unions, and it’s dramatically “greener” in terms of per capita (or per unit of GDP) carbon emissions. It seems to me that all things considered, progressives would gladly make the swap. And apparently conservatives would, too.
Speaking only for myself, I wouldn’t take the swap. There are many virtues to Danish political economy, and the country’s long-serving former prime minister was an eccentric extreme libertarian, a description I’d happily embrace. But in light of the pattern of brain circulation within the European Union, it’s worth considering whether Danish inequality looks different if we look at all individuals born in Denmark. Many of Denmark’s highest earners live in London and even in Sweden, where the tax burden is slightly lower, not to mention a wide variety of countries. This isn’t necessarily a bad thing for the Danes. Brain circulation redounds to the benefit of Denmark in many ways — by improving the flow of ideas in and out of the country, etc.
The United States also sees a fair amount of brain circulation, but my guess is that it is somewhat less common for income-maximizing U.S. born individuals to spend the bulk of their prime-age years working in countries with a lower tax burden. And my guess is that this is beneficial in its own way, e.g., agglomerations of rich people might improve the quality of high-end consumption, driving the creation of novel experiences, enabling artists and other creative professionals to make a living doing highly specialized work (e.g., trapeze artists, experimental fiction writers, etc.).
I often think of the U.S. as creating cultural public goods for the world. Our agglomerations of the rich are a big part of it. London deserves credit as well on this front. None of this is to suggest that we shouldn’t have more redistribution. My skepticism towards dramatically increasing the amount of redistribution we engage rests on other arguments. But it is something to think about, and, I’d suggest, something we should be proud of.
Ross Douthat has a useful piece out today on something I’ve been spending a lot of time on lately: what Republicans should do if and when their initial repeal effort fails. Here are some of his policy recommendations:
To address the first problem, Republicans should work to deregulate the new health care exchanges, so that high-deductible, catastrophic coverage can be purchased as easily as comprehensive plans. To address the second, they should propose capping the subsidies for the uninsured, so that they don’t dramatically exceed the value of the existing tax subsidy for employer-provided insurance.
Both of these are constructive ideas. House Republicans can ensure that high-deductible plans are not only eligible for the exchanges, but that the definition of HDHPs is broadened, such that individuals can put more money away in health savings accounts, and with more flexibility around out-of-pocket costs and deductible ceilings.
In addition, capping the dollar amount of subsidies in the exchanges could provide a backstop to the growth of subsidies, in case Republicans are ultimately unsuccessful in repealing PPACA.
Both of these efforts must be pursued with foremost consideration for how they would affect the CBO score of a repeal bill under reconciliation. As a reminder, Republicans will only be able to repeal PPACA via reconciliation if each provision of their repeal measure contributes to deficit reduction.
Ross goes on to endorse a limited enrollment period, something that we have advocated in this space:
The mandate is a harder puzzle, since it works in tandem with the requirement — popular enough to have many Republican supporters — that insurers cease denying coverage to customers with pre-existing conditions. If you repealed the mandate without repealing that requirement, people could simply wait until they were sick to buy insurance, driving everyone’s prices up.
But Republicans could propose dealing with the same problem in a less coercive way. One alternative would establish limited enrollment periods (every two years, for instance) when people with pre-existing conditions could buy into the new exchanges without being denied coverage. Anyone who failed to take advantage wouldn’t be able to get coverage for a pre-existing condition until the next enrollment period arrived. This would reduce the incentive to game the system, without directly penalizing Americans who decline to buy insurance.
Personally, I think two years is too short of an enrollment period: four-to-five years is better, as the German experience demonstrates. But the idea is sound.
UPDATE: Ramesh Ponnuru is less sanguine about the Douthat proposal.
The latest edition of Health Wonk Review was hosted by Joe Paduda of Managed Care Matters. Fittingly, it touched on Republican efforts to repeal PPACA. Count Joe among those who are irked by the “Obamacare” moniker: “the President signed a bill that was sent him by the Senate; BaucusCare would be much more accurate.” Does this mean we get to refer to the “Bush tax cuts” as the Lott/Daschle tax cuts, and the “Clinton balanced budget” as the Gingrich balanced budget?
Paduda also weighed in on the debate regarding the CBO’s assessment of PPACA’s fiscal impact, arguing we should trust the CBO because “they’ve no axe to grind, unlike the pols.” (My take on the matter is somewhat less sanguine.)
Austin Frakt of the Incidental Economist is the left-of-center health wonk who is most engaged with right-of-center analysts. So I was surprised to see him approvingly cite this quotation from health economist Henry Aaron:
[T]he bill contains, at least in embryonic form, virtually every idea for cost control that any analyst has come up with…The most practical cost-control strategy that is now available to Congress is to accelerate the implementation of these provisions, not to stymie them.
This argument that “every idea for cost control that any analyst has come up with” was incorporated into PPACA is only true of you entirely exclude the right side of the spectrum. I can tick off a laundry list of cost-control strategies that weren’t included in the law: means-testing Medicare benefits; defined contribution reforms; indexing Medicare eligibility to life expectancy; serious tort reform; FEHBP-modeled reforms, etc. etc.
Furthermore, I and most other free-market-oriented health policy analysts argue that PPACA will increase costs by further subsidizing the overconsumption of health care. If you increase demand, while keeping supply constant, prices go up.
The opportunity for cost control that most excites center-to-left health wonks is PPACA-sanctioned accountable care organizations, or ACOs. Indeed, the January 2011 issue of Health Affairs is devoted to the topic. ACOs work by assembling a group of hospitals, doctors, and clinics who agree to be paid based on quality-driven measures, instead of simply on a fee-for-service basis. With this in mind, Jason Shafrin of Healthcare Economist has identified some legal barriers to ACO implementation that ACOs will need to seek waivers from.
Jeff Goldsmith of the Health Affairs Blog has an unconventional approach to Medicare’s “doc fix”; i.e., Sustainable Growth Rate, problem: “writing off the SGR ‘debt’ to the federal budget as ‘uncollectable’ and demanding both sacrifice and reform from the physician community in exchange.” The end result of the proposal put forth by the President’s deficit commission was somewhat similar: various Medicare and health spending cuts used to offset a long-term doc fix.
David Harlow of HealthBlawg has an interesting piece on an ongoing lawsuit to overturn one aspect of the Massachusetts individual mandate. The issues are quite different from those surrounding the PPACA mandate, as you can imagine.
The rest of this fortnight’s Health Wonk Review can be found here.
Gene Steuerle of the Urban Institute has written a wonderful op-ed for the Fiscal Times outlining a way forward on health reform. He begins with the simple observation that the health system is always evolving, and that the new health law has many discrete pieces, some better than others. All or nothing is a false choice. As congressional Republicans have made clear, there are aspects of the new health law that they intend to retain or recreate. The trouble is that some legislators and activists on the other side have been offering a somewhat misleading narrative:
Democrats said it would be difficult for Republicans to pick and choose among provisions of the law because the popular and unpopular parts were locked together.
Consumers like the assurance that they can obtain coverage regardless of any pre-existing condition, but dislike the requirement to carry insurance. Without such a requirement, insurers say, people could go without coverage until they needed care, driving up costs for everyone else.
As Paul Starr has argued, however, there are other ways to manage the free-rider problem. We’ve been discussing other alternatives to the mandate in this space. Moreover, James Capretta and Thomas Miller, the leading health reform advocates on the right, have offered their own promising framework for covering pre-existing conditions that would involve far smaller subsidies than PPACA. Picking and choosing does appear to be an option, provided there are structures in place to help keep people in continuous coverage.
Steuerle offers a number of cautionary notes about the new health law:
Recent health reform did introduce some interesting experiments and new models. But, here again, these initiatives — like weight-control experiments on the value of exercise without limiting dietary intake — are unlikely to reduce cost growth if budget constraints aren’t in effect. Resisting normal budget constraints while insisting on conflicting standards of perfection puts Republicans and Democrats in a mutual bind. Relative to today’s mostly open-ended system, any cost-saving reform will necessarily generate some losers — somebody who has to get less or pay more, or some provider who has to accept less. Each political party always wants the other to pick the losers.
If simple budget principles guided policy, politics would adhere to a rule that each health program had to operate within a budget — one that would not grow automatically simply because private actors decided they wanted more services or private providers decided they wanted more money. That means that each health program must empower somebody — individuals, intermediaries or government itself — to say “No” to some prices and procedures to stay within budget. The legitimate debates — that really will never end in an evolving system — would then turn to the size of the budget and who should say “No,” to what and when.
This is the logic behind the Rivlin-Ryan shift towards a defined contribution approach to Medicare: create a hard constraint, and give providers the flexibility to offer lower-cost approaches to offering high-quality medical care.
And Steuerle also offers a challenge to critics of PPACA:
* Do we really want to go back to having more than 50 million nonelderly people uninsured (old law)? On the other hand, shouldn’t we address the inconsistencies and sometimes perverse incentives in our four-tranche, almost-universal subsidy system of Medicare, Medicaid, insurance exchange subsidies and subsidies for employer-provided insurance (new law)?
* Do we really want to return to providing higher subsidies through the tax code for only the richest employees with the most expensive employer plans (old law)? Or give far higher subsidies to many employees simply because they join employer-employee groups that don’t provide insurance (new law)?
* Do we really want to continue encouraging employers to drop health insurance because it has become so expensive (old law)? Or encourage employers to segregate lower-income employees into firms without employer insurance so they can get higher subsidies from the exchanges (new law)?
Realistically, it is hard to see PPACA vanishing from the face of the earth. This means that Republicans and Democrats will have to work to fix the subsidy regime, to replace community rating with a cheaper form of risk adjustment, and return to the drawing board on Medicaid. The one silver lining is that PPACA did secure a notional commitment to reducing Medicare expenditures, though it didn’t provide a reliable mechanism for doing so. An optimist could say that while the last Congress did a great deal of damage, it did take a serious political hit that might make it easier for future legislators to put Medicare on a sustainable footing. That is where something like Rivlin-Ryan comes in.
My Economics 21 colleagues have highlighted an often overlooked fact about the growth of public spending as a share of U.S. GDP in a brief primer on state and local public sector compensation:
Measured from the end of the Korean War (1953) to the year before the financial crisis (2007), federal spending had actually declined as a share of GDP, from 20.4% to 19.6%. Since the 1960s, federal spending has exhibited no persistent upward or downward trend. Periods of rising federal expenditure have been followed by periods of declining outlays, measured relative to GDP. The federal government has grown substantially over the entire period, of course, but this growth has been roughly in line with that of the overall U.S. economy. By contrast, over the past 60 years, state and local government expenditures have doubled as a share of the economy, from 7.7% of GDP in 1950 to 15.5% in 2009. Since 1950, state and local spending has grown at an 8.1% annual rate, fast enough to double the size of state and local government every 8 or 9 years.
Perhaps this growth might not be so bad, depending on where those incremental expenditures are allocated. If the much higher spending were directed towards improved infrastructure, perhaps it could be considered money well spent. But that’s not the case. Data from the BEA shows that Gross state and local investment – spending on things like roads, hospitals, prisons, highways, ports, and transit systems – has virtually flat-lined as a share of GDP since 1950 while the rest of the state and local spending has increased by 130% since then.
While this won’t come as a shock to many of you, the increasing importance of state and local spending raises interesting questions:
(1) As the article goes on to observe, spending on the state and local workforce is an important component of the spending increase. Yet it’s not clear that steady decreases in the student-teacher ratio in U.S. public schools has been the most effective use of public resources, or that state governments have achieved an ideal, flawlessly efficiency-enhancing mix of compensation schemes. (This is part of what I find so interesting and peculiar about critics of compensation reform: do they really believe that there is no room for improvement? Critics of PPACA almost never claim that there is no room for improvement in the U.S. health system, which is why increasing energy is being devoted to ideas about how to “replace” the new health law.)
(2) Why isn’t Tiebout choice restraining state and local spending growth more effectively?
(a) Decreases in marginal tax rates at the federal level have made state income taxes somewhat more salient, as the state and local tax deduction is worth considerably less to high earners than it was in the 1960s and 1970s. This has helped encourage at least some restraint in terms of tax levels.
(b) But Medicaid’s federal-state nature has created misaligned incentives that have encouraged spending growth across all states, and the same is true of other smaller and lesser-known federal-state programs. When competitive federalism is replaced by cooperative federalism, it is almost inevitable that we’d see more convergence across state governments in terms of how spending programs are structured. That is, if states seek matching grants from the federal government according to federal funding formula, they will have to harmonize their approaches on at least some dimensions.
My sense is that (b) is a stronger force than (a). Moreover, tax restraint will not automatically deliver spending restraint if state officials are convinced that they can extract more money from the federal government or engage in shadow borrowing.
(3) As the country has grown more affluent and unequal, and as the demographic composition of the population has changed — more single-parent families, more single-occupancy households, etc. — demand for public services has increased. It’s not clear to me that this demand had to be met by public providers. Yet there’s no denying the increased demand. As we turned away from the forced institutionalization of the mentally ill (and those deemed mentally ill), a need emerged for more expensive and humane outpatient facilities, a homelessness problem emerged that had to be managed through the deployment of public resources, etc.
The advent of new narcotics like crack cocaine helped fuel a crime explosion, prompted a concomitant increase in incarceration levels. And even as the crack epidemic waned, one could argue that rising affluence influenced the demand for what we might call a higher level of public order. When murder rates decline, you don’t hear anyone say, “Well, in that case let’s shrink the size of the police force.” Some, myself included, argue that we should continue increasing the per capita number of police to drive down other violent crimes and further improve the quality of life. This is public spending.
(4) A big part of the story, I suspect, is that the relative attractiveness of state-level public sector employment has created a large and very loss-averse population of engaged voters. Moreover, the expansion of social scientific disciplines has been tightly linked to the expansion of the state, a subject to which I’ll return.
That is the reminder Howard Gleckman offers Congress in a recent post, with an able assist from Marty Sullivan:
U.S. tax law is very, very good to some of these companies and much less generous to others. Courtesy of Marty Sullivan over at Tax Notes, here are the average effective rates that some of the firms represented at Geithner’s meeting reported paying over the past three years. Keep in mind the statutory tax rate in the U.S. is 35 percent, but companies can often lower their bill thanks to dozens of deductions and credits. At one end were the winners: Cisco reported an effective income tax rate of 19.8 percent, Johnson & Johnson 22 percent, and GE just 3.6 percent. At the other end: Wal-Mart paid 33.6 percent, and Disney paid 36.5 percent–more than the statutory rate. This all happens mostly because some companies can shift nearly all of their profits to low-tax countries while others, due to the nature of their business, can’t. But whatever the cause, the effect is that the winners are very likely to fight like Tiger Moms to preserve their tax preferences even as they argue for lower rates. Those who get the short end of the tax stick today will use all of their influence to drive down rates and, if they can get away with it, convince Congress to add a beneficial tax break or two.
A more radical option: eliminate the corporate income tax and raise average (not marginal!) income tax rates for the rich by eliminating various deductions. My guess is that this approach won’t win many friends in Congress, on either side of the aisle. And besides, we need the revenue from eliminating and curbing deductions for deficit reduction.
I have a plan to reduce the budget deficit. The essence of the plan is the federal government writing me a check for $1 billion. The plan will be financed by $3 billion of tax increases. According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.
Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit. Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit. But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.
Healthcare reform, its advocates tell us, is fiscal reform. The healthcare reform bill passed last year increased government spending to cover the uninsured, but it also reduced the budget deficit by increasing various taxes as well. Because of this bill, the advocates say, the federal government is on a sounder fiscal footing. Repealing it, they say, would make the budget deficit worse.
Douglas Holtz-Eakin, one of the most prominent critics of PPACA, has explicitly embraced the idea of making deep cuts to Medicare and Medicaid expenditures, as have most of the new health law’s critics on the right. And there are many policy thinkers on the right who favor reforming the tax treatment of medical insurance as well as well-designed subsidies for the purchase of medical insurance, with an eye towards protecting U.S. households against income shocks.
But what many of these same critics object to are steep tax increases, including increases in implicit marginal tax rates. I believe that we will most likely need to increase average tax rates — not marginal tax rates — as well as implement deep spending cuts to address long-run deficits. The trouble with PPACA is that it deployed virtually all of the “low-hanging tax fruit,” i.e., it attached many opaque tax increases that were just confusing or stealthy enough to dull political resistance to significant spending increases rather than employing them to the existing budget shortfall.
In my view, it is conceptually useful to think of the spending component and the revenue-raising component of PPACA separately. Why? Because there are much better ways to raise the same amount of revenue, e.g., by eliminating or paring back the mortgage interest deduction and the state and local tax deduction, among other thing. My sense is that thinking of revenue-raising mechanisms separately leads us to better public policy conclusions.
James Capretta argues that Republicans need to talk about entitlement reform now. Ramesh Ponnuru argues that this would be premature. I’m sympathetic to Ramesh’s conclusion:
There is no point to Republicans’ endangering their seats for legislation, however worthy, unless they have a good shot at getting a presidential signature on it. They will get their answer in the next State of the Union address.
But, as Ramesh makes clear, this makes it all the more important that conservative presidential candidates make the political case for entitlement reform.
Greg Marx has an article at Remapping Debate on how various center-right thinkers approach the problem of middle-class squeeze. It’s well worth a look. My view is that supply-side constraints in housing and education markets in dense, high-cost regions are the biggest problems for families with children. More broadly, the deleveraging cycle will prove challenging for the rest of the decade. I’m skeptical of more narrowly-tailored interventions.
I’ve harped on this before, but Howard Gleckman reminds us, perhaps unintentionally, that there are many relatively attractive alternatives to the individual mandate in PPACA:
Health consultant Bob Laszewski, for instance, suggests dumping the mandate and replacing it with a system that allows consumers to buy insurance with no limits on preexisting conditions–but only when they start a job or are first eligible to buy coverage through an exchange. They can wait to purchase if they choose. But if they do delay, they would not be covered for any pre-existing condition for two years.
Gail Wilensky, a top health advisor to President George H.W. Bush, would charge higher premiums to those who wait to enroll, much as Medicare does today. Of course, both Gail’s and Bob’s plans are taxes too, but they somehow sound more palatable than a mandate.
When Gleckman says that Gail’s and Bob’s plans are taxes, I’m not quite sure what he means. Does he consider the penalty under the mandate a tax? Gail’s and Bob’s plans don’t impose a cash penalty. So perhaps Gleckman considers the insurance premium itself to be a tax, in which case the CBO score for PPACA would look very different. Another possibility is that Gleckman sees the incremental difference in the insurance premium between when’s charge when you sign up during the open enrollment period and when you don’t as the tax. But that seems fairly fine-grained.
Lewin Group vice president John Sheils has a somewhat different idea. He’d create a very limited “open season” each year during which people could enroll. If they failed to sign up in that narrow window, they would have no coverage until the next enrollment period.
This strikes me as another reasonable approach, though of course it raises the question of whether we should set a default, and what that default or rather what the default-setting mechanism ought to look like.
I’ve long been attracted to the idea of postal banking as an alternative to tighter regulation of private banks. (I should warn you: I’m about to conflate many different ideas in a potentially confusing way.) Last April, I wrote:
In many countries, including the United States in decades past, the demand for consumer-friendly financial products has been met directly by the state, e.g., through postal savings accounts invested in ultra-safe state assets. We’ve moved away from this model and towards explicit guarantees for for-profit firms. It’s hardly surprising that these guarantees come with strings attached — more and more strings all the time.
As I suggested last week, Steve Randy Waldman’s call for a reform of deposit insurance is one way forward: provide large depositors with a powerful incentive to monitor the financial health of the banks. But another way to go, one that’s not incompatible with that approach, is simply to offer postal savings accounts with “vanilla” features, and allow the private financial firms do what they’d like. Rather than have the public subsidize for-profit firms, we’d create a “public option.” Many will object to this as statist. But is it actually less statist than pervasive state guarantees for virtually all firms? The idea is to make the subsidy narrow and explicit. The public “vanilla” products would presumably be less attractive than private products in many respects — they’d just be less risky.
I imagine that there are many problems with this approach, but I wonder if it’s preferable to demanding that all new consumer financial products meet a state-mandated standard of safety. I found Steve Randy Waldman’s notion of a Treasury Express card intriguing:
While transactional credit provision is a perfectly good business, it might be reasonable for the state to offer basic transactional credit as a public good. This would be very simple to do. Every adult would be offered a Treasury Express card, which would have, say, a $1000 limit. Balances would be payable in full monthly. The only penalty for nonpayment would be denial of access of further credit, both by the government and by private creditors. (Private creditors would be expected to inquire whether a person is in arrears on their public card when making credit decisions, but would not be permitted to obtain or retain historical information. Nonpayment of public advances would not constitute default, but the exercise of an explicit forbearance option in exchange for denial of further credit.) Unpaid balances would be forgiven automatically after a period of five years. No interest would ever be charged.
Let’s think about how this would work. For most people, access to various forms credit — transactional credit, auto and home loans, unsecured revolving credit, whatever — is worth more than $200 per year. Although people might occasionally fall behind, for the most part borrowers would pay off their government cards, simply because convenient participation in the economy is worth more than a once-in-five-years $1K windfall. However, people with no savings and irregular income (for whom transactional credit is a misnomer, since they haven’t the capacity to pay) might well take the money and run. The terms of the deal amount to a very small transfer program to the marginal and disorganized, and a ubiquitous form of currency for everyone else. People with higher incomes would want more transactional credit, or revolving credit, which they would acquire from the private sector.
This all comes to mind in light of a new IRS program to grant tax refunds in the form of government-issued debit cards, as Sudeep Reddy reports in the Wall Street Journal:
The U.S. Treasury Department plans to launch a pilot program Thursday to deliver tax refunds through prepaid debit cards, an effort to cut the expense of paper checks and aid lower-income taxpayers who don’t have bank accounts.
About 600,000 low- and moderate-income taxpayers nationwide, a slice of those earning about $35,000 or less annually, will receive letters inviting them to activate a debit card that can receive direct deposits.
It is easy to imagine this becoming an effective vehicle for delivering government services. Martin Feldstein’s brilliant 2009 call for universal catastrophic coverage including the following proposal:
Two related problems remain. First, how would families find the cash to pay for large medical and hospital bills that fall under the 15 percent limit? While it would be reasonable for a family that earns $50,000 a year to save to be prepared to pay a health bill of, say, $5,000, what if a family without savings is suddenly hit with such a large hospital bill? Second, how would doctors and hospitals be confident that patients with the new high deductibles will pay their bills?
The simplest solution would be for the government to issue a health-care credit card to every family along with the insurance voucher. The credit card would allow the family to charge any medical expenses below the deductible limit, or 15 percent of adjusted gross income. (With its information on card holders, the government is in a good position to be repaid or garnish wages if necessary.) No one would be required to use such a credit card. Individuals could pay cash at the time of care, could use a personal credit card or could arrange credit directly from the provider. But the government-issued credit card would be a back-up to reassure patients and providers that they would always be able to pay. [Emphasis added.]
I can see many people objecting on the grounds that a Treasury Express card that could be used for health expenditures among other things represents an increase in the the scope of government. I would argue that the expansion of regulatory authority is more troublesome than this far more transparent and contained concept, which would actually allow the federal government to pare back the regulation of private firms. We could just say no to either approach. But like it or not, that doesn’t seem to be an option.
The conversation surrounding “Zero Marginal Product” workers has been interesting. Alex Tabarrok offers an able summary and a few first-cut thoughts that I find congenial.
As for Paul Krugman’s thoughts on the same issue, I found his last point particularly interesting:
Instability of the business hierarchy: One last point may be that firms don’t seem to retain their position at the top as long as they used to; there seems to be much more thrashing in the business hierarchy. GM ruled the roost for many decades; these days one decade’s Goliath is another’s pitiful helpless giant (see Microsoft). And if firms know that their position is temporary, they may be less inclined to keep workers during a slump in an attempt to retain long-term loyalty.
This reminded me of Ashwin Parameswaran’s very different explanation, as elaborated in his critique of what he sees as our brittle “cronyist economy”:
Due to insufficient exploratory innovation, a crony capitalist economy is not diverse enough. But this does not imply that the system is fragile either at firm/micro level or at the level of the macroeconomy. In the absence of any risk of being displaced by new entrants, incumbent firms can simply maintain significant financial slack. If incumbents do maintain significant financial slack, sustainable full employment is impossible almost by definition. However, full employment can be achieved temporarily in two ways: Either incumbent corporates can gradually give up their financial slack and lever up as the period of stability extends as Minsky’s Financial Instability Hypothesis (FIH) would predict, or the household or government sector can lever up to compensate for the slack held by the corporate sector. …
Most developed economies went down the route of increased household and corporate leverage with the process aided and abetted by monetary and regulatory policy. But it is instructive that developing economies such as India faced exactly the same problem in their “crony socialist” days. In keeping with its ideological leanings pre-1990, India tackled the unemployment problem via increased government spending. Whatever the chosen solution, full employment is unsustainable in the long run unless the core problem of cronyism is tackled.
For Parameswaran, this post-cronyist economy would involve “much more thrashing in the business hierarchy”:
Most exploratory investments are destined to fail as are most firms, sooner or later. Yetdue to the diversity of firm-level strategies, the macroeconomy of vulnerable firms is incredibly resilient. At the same time, the transfer of wealth from incumbent corporates to the household sector via reduced corporate slack and increased investment means that sustainable full employment can be achieved without undue leverage. The only question is whether we can break out of the Olsonian special interest trap without having to suffer a systemic collapse in the process.
I wonder if Krugman and Parameswaran see things differently because Krugman is focusing on the “real economy,” where something like a macroeconomy of vulnerable firms seems to prevail, at least in some sectors, while Parameswaran’s mental model is dominated by the major financial institutions.
Last week Lori Montgomery of the Washington Postreported that the White House won’t pursue serious tax reform that takes on the mortgage interest deduction and other problematic provisions in light of the president’s 2008 pledge not to raise the taxes of households earning less than $250,000 a year.
Administration officials said no one should be surprised to learn that Obama is unwilling to backtrack on one of the central tenets of his administration – protecting middle-class Americans from higher taxes – particularly after last month’s tax battle with Congress.
What I found odd is that the article made no mention of PPACA, which contains a number of tax provisions that will presumably impact middle-income households, including the planned excise tax on high-cost health insurance coverage. Assuming the Administration actually intends to implement the excise tax as planned, or rather intends for its successor to implement the excise tax in 2018 as planned, and one would hope so as it is one of the more effective cost containment measures in the new health law, the pledge has already been undermined. So why not jettison it in the name of a fairer, more growth-friendly tax code?
Perhaps the president could propose an “alternative maximum tax” for under-$250,000 households. This is a terrible idea for all kinds of reasons, but it’s certainly in keeping with the 2008 pledge. In keeping with the excise tax, he could call for an alternative maximum tax that would expire in 2018, long after he has left office.
High marginal tax rates tend to reduce labor supply. This isn’t necessarily a bad thing. Some workers — Tyler Cowen has described them as “threshold earners” — target a certain level of disposable income and will work less in response to a lower tax burden. But if everyone works less, we could find ourselves in a bind.
I’d suggest that we need more labor supply rather than less, particularly at the low end of the income distribution. The male labor force participation rate has declined over the last thirty years, and one of the culprits, according to scholars from the left and the right, is high effective marginal tax rates for non-custodial fathers and ex-offenders.
One of the quirks of the subsidies offered under PPACA is that they increase implicit marginal tax rates for a wide range of low to moderate income households. Given that the effective marginal tax rates for many of these workers are already quite high, this seems like a mistake.
It’s great when people have more leisure time. The last five decades have seen a dramatic increase in leisure time in the U.S., thanks in large part to the improved efficiency with which we complete household tasks. But it’s particularly great when people choose more leisure time. And it’s not obvious to me that disadvantaged young men on the margins of the formal labor market are in the driver’s seat.
I support government involvement in the insurance marketplace. In particular, I like the idea of channeling dollars from the employer tax exclusion towards refundable tax credits that could be used for the purchase of catastrophic coverage. Federal and state governments could provide additional targeted assistance to low to moderate income households, e.g., a reformed Medicaid program built around block grants might help poor households purchase first-dollar coverage, or we could use a system of public debit cards for routine medical expenditures. This approach would, in my view, increase economic opportunities for vulnerable Americans and address some of the pathologies that exacerbate cost growth in U.S. medical care. This approach would be relatively inexpensive and would probably not reduce labor supply, not because it makes Americans poorer but because it would reduce the need for future tax increases and might even allow for a small tax burden. I see that as a virtue. But tastes vary.
For reasons I still don’t fully understand, Winnie Hu of the New York Times cited James Lytle of the University of Pennsylvania as her only scholarly authority on the question of the efficacy of school choice:
Vouchers have been tried in Cleveland, Milwaukee and Washington, among other places, with mixed success, said James Lytle, an education professor at the University of Pennsylvania and the superintendent of the Trenton public schools from 1998 to 2006.
“There isn’t much evidence that these approaches improve student performance,” said Dr. Lytle, who is concerned that such plans could divert resources from the public schools.
Nevertheless, he said, these kinds of proposals, meant to introduce competition, choice and incentives to improve education performance — something he calls “market models of school reform” — are becoming more popular, attracting the support of the Obama administration and influential groups like the Bill and Melinda Gates Foundation.
Note that the proposal floated by Governor Christie is not a Milwaukee-like voucher system. Rather, according to Hu’s own reporting, it is something quite different:
Mr. Christie has also called for more charter schools and adoption of a voucherlike system that would provide scholarships so students in low-performing schools could attend other schools. (The New Jersey scholarships would be financed by private corporations in exchange for tax credits.)
Where has something like this been tried? Florida. And do we have any evidence regarding the Florida Tax Credit Scholarship Program? We do. Cassandra M.D. Hart and David Figlio of Northwestern published an evaluation of the program in EducationNext.
Our results indicate that the increased competitive pressure public schools faced following the introduction of Florida’s Tax Credit Scholarship Program led to general improvements in their performance. Both expanded access to private school options and greater variety of options that students have in terms of the religious (or secular) affiliations of private schools are positively associated with public-school students’ test scores following the introduction of the FTC program. The gains occur immediately, before any students leave the public schools with a scholarship, implying that competitive threats are responsible for at least some of the estimated effects. And the gains appear to be much more pronounced in the schools most at risk to lose students (elementary and middle schools, where the cost of private school attendance with a scholarship is much lower) and in the schools that are on the margin of Title I funding.
As Figlio and Hart acknowledge, there are limitations to their approach. Yet this does seem like a salient finding.
One thing I found frustrating was the way in which Hu characterized Christie’s education agenda as “tough-on-schools.” The notion that zealously defending above-market wages for underperforming teachers is the same as zealously protecting public schools strikes me as very weird. While this isn’t of earth-shattering importance, it is fair to say that many New Jersey residents will only read Hu’s take on the issue, and that’s a shame. At the very least, it would’ve been useful to find someone knowledgeable about the Florida Tax Credit Scholarship Program.
Hal Salzman, a professor at Rutgers’ John J. Heidrich Center for Workforce Development, debunked myths about these in a May 2008 article in Nature magazine. Salzman noted that international tests use different sampling criteria from country to country, so we’re not always comparing apples to apples. As well, the tests compare select populations of small countries such as Singapore and Finland, which each have about 5 million people, with the U.S., which has 310 million. These countries achieve the top rankings on the PISA list. Compare these countries to similar-sized U.S. states, however, and you find that some of those states, including Massachusetts (population 6.5 million), produce the top students. Additionally, we’re comparing America’s diverse population—which includes disadvantaged minorities and unskilled immigrants with little education—with the homogeneous populations of countries like Finland, Japan, and New Zealand. [Emphasis added.]
That is the Tino point.
Much is made of the PISA test scores and rankings, but the international differences are actually quite small. Most of the U.S. ranking lags are not even statistically significant. The U.S. falls in the second rank on some measures and into the first on others. It produces more highest-performing students in science and reading than any other country does; in mathematics, it is second only to Japan. Moreover, one has to ask what the test results actually mean in the real world. Do high PISA rankings make students more likely to invent the next iPad? Google (GOOG)? I don’t think so.
There is the germ of an important point here. In a provocative paper on labor market balances, Richard Freeman floated the following idea:
How can low income countries with few scientists and engineers relative to their work forces compete in high tech?
These countries have moved to the technological frontier because success in high tech depends on the absolute number of scientists and engineers rather than on the relative number of S&E workers to the workforce. It isn’t how many engineers perperson that produces a technological breakthrough as much as the total number ofengineers working on the problem. Put differently, there is an economy of scale in R&D and innovation that enables large populous countries to reach the scientific and technological frontier. China and India can have a large footprint in high tech because they will have many highly educated scientists and engineers, not because they approach the advanced countries in S&E workers per capita. I have called the process of moving up the technological ladder by educating large numbers as “human resourceleapfrogging” since it uses human resources to leapfrog comparative advantage from low tech to high tech sectors, contrary to the assumption of the North-South model.
Freeman’s point is that this will prove advantageous to China and India, but it also applies to the United States relative to small homogeneous countries with high average levels of educational performance: even if the Shanghainese or Singaporeans or Finns perform well on average, the absolute number of educational U.S. high-fliers is always going to be very high, for a variety of reasons. And these super-skilled workers concentrate in a handful of metropolitan areas, which become hotbeds of S&E-driven entrepreneurship.
Now let’s revisit Tino, who offers an important insight: when we (crudely) correct for demographic factors, weak U.S. performance becomes very strong U.S. performance.
It turns out that the U.S educational advantage is approximately what the U.S economic advantage would predict.
I can’t fault Mr. Salam for wanting more output for the input American tax payers are spending. However my analysis suggests that unlike conventional wisdom on the political right, public education spending is not just wasted. It appears successful in buying America better test scores, for each given demographic group, albeit of course with diminishing marginal returns.
I still think we’re talking past each other. When I express disappointment or dismay over our relative performance, it’s not because I think rigid, unionized public education systems in western Europe are outperforming U.S. schools. Rather, it is because the U.S. has experience in overcoming Baumol’s cost disease in a number of domains — the retail sector comes to mind — and yet we’ve failed to replicate this feat in education.
It is widely understood that the U.S. retail sector is more productive than the retail sector in most of western Europe, though the gap has been closing in recent years. Part of our retail advantage lies in the fact that U.S. labor markets are less rigid than labor markets in most of western Europe, and because U.S. firms tend to have higher levels of capital productivity. (These phenomena are related, obviously.)
The U.S. public sector, in contrast, is far less productive than the public sector in most of northern Europe, as we discussed in November:
According to the World Economic Forum’s GCR, the U.S. is ranked 68th in the world in terms of wastefulness of public spending. That is, 67 of the 139 countries in the index are doing a better job of channeling public dollars into productive activities, including Singapore, Rwanda, and Qatar at the top of the list and Australia, New Zealand, and Canada among our large English-speaking peers. Not surprisingly, to those of us who follow work on the quality and cost-effectiveness of public spending across countries, the northern European market democracies perform well, with Sweden at 12, Finland at 14, Denmark at 16, and Norway at 20. Switzerland is at 9, Holland is at 17, Germany is at 33. There are no real shockers on the list.
If the U.S. public sector were as productive as the Canadian public sector at 32 — not an unreasonable goal, I should think — we’d presumably have more resources to direct towards public education for non-native children and children from minority backgrounds. And if our education sector were organized around more responsive, market-like lines, it is at least possible that productivity gains would see the pattern we’ve seen in retail and other service industries.
So again, I think we’re underperforming in light of our core economic strengths. But I do think Tino is telling us something important: the U.S. has nothing to learn from Finland.
There’s been much discussion on the blogosphere of whether or not repealing PPACA is fiscally responsible. I actually agree with a lot of what Ezra Klein says in this piece, in which he responds to conservative criticisms that Democrats manipulated the CBO to provide favorable projections for the new law.
However, I also agree with Kevin Williamson’s basic point: the government has a history of underestimating future spending, and overestimating future tax revenue. Hence, just because the CBO says PPACA will reduce the deficit doesn’t mean it will actually happen.
Indeed, as I write today for National Review Online, there are features of PPACA that are highly likely to result in far greater spending than PPACA anticipates:
David Brooks, in a recent New York Times column, highlighted Obamacare’s most serious flaw: PPACA incentivizes companies to drop health coverage for their employees. Employers who drop coverage have to pay a fine, but the fine is cheaper than offering health insurance, and even the employees can be better off — they buy their insurance on state-based “exchanges,” where they can take advantage of the law’s new subsidies. (Americans making less than 400 percent of the federal poverty level are eligible for subsidized coverage on the exchanges.) AT&T has calculated that it would save $1.8 billion a year by dumping its workers into the government’s lap.
Companies are keeping quiet about their plans for now, but make no mistake: If Obamacare remains the law of the land, nearly every corporation in America will do what AT&T has contemplated. So will cash-strapped state governments.
Last March, the CBO projected that 26 million people will take advantage of Obamacare’s exchange subsidies in 2019, at a cost of $109 billion that year. But that number is based on the assumption that of the 162 million people who have employer-sponsored insurance today, only 4 million — 2.5 percent — will switch.
In other words, the projection of $109 billion is absurdly low; it underestimates Obamacare’s cost by trillions of dollars.
In a recent Politico column, former budget officials Douglas Holtz-Eakin and James Capretta calculated what would happen if the CBO’s estimates were somewhat off. By their math, if the households below 250 percent of the federal poverty line ($55,125 for a family of four) that now have employer-sponsored health insurance were to migrate to Obamacare’s exchanges, spending on those exchanges would more than triple, resulting in trillions of dollars in additional liabilities.
Let me talk about employer dumping, which I’ve left out until now. The basic concern here is that employers will stop being such nice guys and giving people health care and instead dump them into the exchanges so they can buy it at subsidized rates. I don’t think this will happen: If we were going to see it, we’d have seen it in Massachusetts, which, like the ACA, makes it much cheaper for employers to dump workers into the exchanges. But there’s no evidence (pdf) that it’s been happening. Employer coverage has been shockingly resilient given the recession.
That said, I can see the argument that it’d be good if it did happen. Basically, it would mean that employers stop paying employees with health-care insurance and begin paying them with cash. That’s basically how the Wyden-Bennett bill worked, and both Brooks and I liked that bill. If it happens in an unstructured way in the ACA, it could cause more disruption, but it could also be a positive step that makes the bill look more like Wyden-Bennett.
One thing I believe is not included [in Holtz-Eakin’s estimate] are the income and payroll taxes levied on the higher wages those additional exchange-enrolled people will receive…I don’t know how much in income taxes would be collected, but it is something Holtz-Eakin and Smith could compute. It would somewhat offset the $1.4 trillion gross price. (The CBO likely calculated the offset, so one could just triple it. I haven’t yet found the CBO’s figure on this. Have you?)
Another question is whether all employers who theoretically might benefit from “dumping” will actually drop offers of coverage firm-wide. Holtz-Eakin and Smith don’t assume they all will cut coverage in this way (firm-wide). That’s because if coverage is not offered to lower-wage workers (for whom dumping is economically beneficial to employers), it can’t be offered to higher wage workers either. But there’s another proposed route: “[T]here may be incentives for firms to ‘out-source’ their low-wage workers to specialist firms (that do not offer coverage) and contract for their skills.”
Of course, this is something firms can (and do) do today. Moreover, it’s not costless to outsource. There are transaction costs that would partially offset the benefit. Thus, it is not likely that all firms for which outsourcing would appear beneficial (and which don’t already out-source) would do so. Finally, if this were something all firms that could theoretically benefit would do, we should see a considerable crowd-out effect in Massachusetts. So far, there is no evidence of it.
I’m not saying that the ACA won’t contribute to erosion of employer-sponsored coverage. It will. But it isn’t likely to be as an extreme reaction as some predict, nor will it cost as much as Brooks thinks. The $1.4 trillion price tag he suggested ignores some offsetting factors. It’s just not plausible.
Let’s summarize the counter-arguments raised by Ezra and Austin and go through them one-by-one:
1. Employers in Massachusetts didn’t dump their employees, so it’s unlikely to happen nationwide.
It’s not as straightforward as Ezra may believe to extrapolate the Massachusetts experience nation-wide. There are several reasons for this. Most importantly, most large employers have offices in multiple states; they are unlikely to dump coverage in one state while maintaining coverage in another. Also, the cost of insurance continues to increase, to a point that is increasingly unsustainable for companies; that, combined with PPACA’s “Cadillac tax,” increases the incentive for more employer dumping in the future.
2. Even if dumping did happen, it would be a good thing, because it would help foster more of an individual market for health insurance.
As to fomenting an individual market: yes, it would be better if we had a market for health insurance in which individuals purchased insurance for themselves, rather than receiving it willy-nilly from their employers. However, the individual market under PPACA will be heavily subsidized by the government, dramatically increasing federal spending—which is the whole point of the Brooks/DHE critique. If the exchanges weren’t subsidized, or at least subsidized less heavily, Ezra and Austin would have a stronger argument.
3. The fiscal impact of employer dumping is less than DHE and others estimate, because DHE’s estimates leave out the regained payroll taxes that would accrue to the government.
Austin is right to point out that there is at least some revenue that would flow back to the government from payroll taxes. But it’s not clear that this offset would be significant; indeed, whatever its size, it is guaranteed to get smaller over time, because health care costs rise far faster than wage growth. The PPACA subsidies are designed to guarantee that individuals pay no more than 10 percent of their income for health insurance; hence if wages stay flat and health care grows, the government’s liability grows over time.
4. Maybe employer dumping wouldn’t happen firm-wide: firms will outsource their low-wage work, and continue to offer coverage to their higher-wage employees.
It’s possible that some employers might try the strategy that Austin suggests of using outsourcing to maintain health coverage for their employees. As Austin himself points out, this is something that firms can do today. Furthermore, increasing unemployment, by incentivizing firms to outsource peripheral capabilities to lower-wage countries, leads to higher welfare spending and lower tax revenues: i.e., increased deficits.
To me, this is the real debate we should be having about the fiscal prudence of Obamacare. And then, we need to ask: how would the CBO score Obamacare if it were required to make more realistic assumptions about employer dumping? Here’s hoping that someone in Congress asks the CBO to do just that.
While surveying the newly-elected right-of-center governors, Rick Scott didn’t immediately leap to mind as the most promising. Josh Barro recently profiled a number of the Midwestern governors taking office in 2011, and Rick Snyder of Michigan and Scott Walker of Wisconsin stuck out as the most impressive-sounding. Walker has a particularly good opportunity to change the way government works in his state:
The biggest fight is likely to come in Wisconsin, where Governor-Elect Scott Walker (R) campaigned on cuts to public employee compensation. Walker’s proposals include requiring state workers to pay 5 percent of salary toward their pensions — currently, most pay nothing — and requiring them to pay 12 percent of the cost of their health premiums, a bit more than double the current level. Essentially, this would constitute a significant cut in total compensation for public employees.
Of course, he will have a hard time getting unions to agree to those terms. That’s why he has also broached the subject of ending collective bargaining for public employees in Wisconsin altogether. This move may sound radical, but at least 15 states already prohibit collective bargaining for some public employees. Virginia and North Carolina do not allow it for any.
But it is Rick Scott, the controversial healthcare executive who now serves as the governor of Florida, who has offered what I consider to be the most significant, transformative ideas I’ve ever seen advanced by an actual elected official with any real power. Sean Cavanaugh, who covers the states for Education Week, describes the proposal as follows:
The newly elected Republican’s education transition team recently released itsrecommendations for school policy, which are chocked full of far-reaching proposals.
One of them is the creation of “education savings accounts,” a voucher-type system that Scott had spoken about somewhat vaguely in recent weeks. His transition team filled in a few key details. Under their proposal, parents would be allowed to receive funding equal to 85 percent of the “amount the student would have generated in the public school system,” presumably in per-pupil funding, to pay for private school costs, private tutoring, private virtual education, prepaid college plans, and other options.
And the remaining 15 percent? Scott’s team says it would flow back in the public coffers.
“The state will save 15 percent for every public school parent who chooses this option,” his team predicts.
As Cavanaugh goes on to explain, there is reason to believe that the state courts might find this proposal in violation of the Florida constitution, so we’re not out of the woods. But this is an idea that could make a dramatic difference to our moribund educational landscape. There are more details here, but let’s think through this for a bit. Homeschooling parents would suddenly have resources for a variety of instructional materials and to hire educational providers like Kumon to provide supplementary instruction. Kids attending relatively low-cost parochial or independent schools will have additional dollars to college savings, music lessons, and other enrichment programs. And best of all, the state saves money.
Some might fear that affluent parents who would have chosen parochial or independent schools even without the subsidy will now seek public dollars, but I’m not sure this is a particularly pressing concern. The idea is that children would receive 85 percent of the funds they would receive in the public school system. One obvious solution is to embrace something like Robert Reich’s proposal for “progressive vouchers,” which would assign higher amounts of public resources to poor children as opposed to affluent children. Imagine a statewide ESA program in which educational dollars are provided through a statewide formula, not through local funds raised via property taxes, thus enhancing property values in working class neighborhoods with weak schools and dampening them in the state’s richest areas. There would, of course, be resistance to this approach, but it would give even affluent parents much more flexibility than they have under the current system. Or we could place limits on eligibility for ESAs, e.g., parents above income threshold X aren’t eligible. Or we could prevent children from switching in and out of the “public” system by imposing a penalty, not unlike Paul Starr’s alternative to the individual insurance mandate, thus giving parents a big incentive not to send their children to parochial or independent schools without a subsidy. That strikes me as problematic, but it is one potential way to mitigate the moral hazard problem.
Even without this kind of structural transformation, it’s easy to imagine ESAs doing a great deal of good for the large minority of parents looking for alternatives to conventional public schools. And it’s important to note that the ESAs Scott has in mind are vastly superior to vouchers, which can only be redeemed with one educational providers at a time, namely a school. But as almost all middle class parents know, many of the best educational opportunities are found in various after-school programs, including music lessons, after-school language classes, etc.
The only downside of Scott’s proposal, in my view, is that it doesn’t do enough for parents who send their children to conventional public schools. We need to offer public school parents more choices for supplementary educational services, and that’s where Rick Hess and Olivia Meeks come in. In “Sounding the Alarm,” they offer a more comprehensive vision for ESAs, which they call “education spending accounts”:
Wisconsin would do well to start exploring a new model at the high school level. It ought to continue insisting that schools provide the 11 core credits, amounting to about 55% of the high school curriculum, but then rewrite the funding formula so that the per pupil allocation currently delivered to school districts is broken into two pieces: 55% to fund “core” mandated instruction and 45% deposited in a virtual Educational Spending Account (ESA) created for each child. Parents would have a choice. They could direct those ESA dollars to their child’s school and simply enroll their child in the usual manner, or they could use them to procure instruction from other state-approved providers.
The beauty of this approach is that it is interestingly severable. Whereas Scott’s ESAs are all-or-nothing — you’re either enrolled in a public school or not — this approach allows children to be half-enrolled in a public school, and otherwise engaged with various virtual schools, brick-and-mortar tutoring programs, and much else. This approach also dramatically increases the size of the potential political constituency for ESAs, which is not a bad thing.
If Rick Scott follows through on half of his education proposals, he’ll build on Jeb Bush’s impressive education reforms and he’ll maintain Florida’s role as one of the nation’s leading laboratories for innovation in public education. That was a mouthful. But you get my drift.
Many decades ago, a young Seattle band called Fastbacks released a song called “In America.” The lyrics sound a little petulant and characteristically punkish, the premise being that America is a hard country to live in and that one ought to consider leaving. But there’s a bit more to it than that: “Lately been thinking about what/what it means to be in a country that’s not/all that it could be.” It reminded me of Richard Rorty’s notion of “achieving our country.” It goes without saying that no country is “all that it could be,” yet there’s something about America that attracts and cultivates a quality of restless dissatisfaction that is arguably the source of both our best and our worst qualities. For whatever reason I find this song very affecting, and I recommend it, for draft resisters or tax exiles or other wanderlusty utopians.
Please compare Ross Douthat’s thoughtful, intelligent column on the Tucson massacre with the characterization of said column in this blog post, written by a well-regarded writer of narrative non-fiction. And read the rest of the blog post too. Note that most people who read the post will not have read the column, and thus won’t have read the entire paragraph of which the excerpted sentence was a small part. Note also who merits moral condemnation in the post and who does not. Very instructive.
All I’ll say is that I’m generally of the view that humanity is on a gentle upward slope. But when I read this kind of material, I do find myself a bit discouraged. Then I remember that most people are busy getting on with their lives.
While reading about the newly-inaugurated California governor’s budget proposal for his cash-strapped state in the Wall Street Journal, I kept shaking my head. Look at this nonsense:
Mr. Brown, a Democrat sworn in as governor last week, proposed an $84.6 billion general-fund budget that would rely on $12.5 billion of cuts—with higher education and health programs hit especially hard—and $12 billion of revenue from extending the higher taxes.
Consider what is being spared:
Mr. Brown said more cuts would be needed if voters were to reject the tax measures. “If we don’t have the taxes, it’s going to be extremely difficult, even draconian,” he said. Funding to kindergarten-to-12th grade education was maintained in the governor’s budget proposal, but he suggested that state leaders would have to cut that funding if the tax-increase measure failed.
Then consider what is being cut:
The governor’s budget plan also called for cuts to services that Mr. Schwarzenegger often targeted: $1.5 billion from the state’s welfare-to-work program and $1.7 billion from Medi-Cal, the state’s Medicaid program.
That’s right: to protect salaries in K-12, Governor Brown, elected with heavy assistance from K-12 teachers’ unions, is actually cutting welfare-to-work programs.
Please keep in mind the wise words of Arne Duncan, President Obama’s secretary of education, at AEI in November:
I am here to talk today about what has been called the New Normal. For the next several years, preschool, K-12, and postsecondary educators are likely to face the challenge of doing more with less.
My message is that this challenge can, and should be, embraced as an opportunity to make dramatic improvements. I believe enormous opportunities for improving the productivity of our education system lie ahead if we are smart, innovative, and courageous in rethinking the status quo.
It’s time to stop treating the problem of educational productivity as a grinding, eat-your-broccoli exercise. It’s time to start treating it as an opportunity for innovation and accelerating progress.
Duncan then went on to describe the broad outlines of this approach:
So, what do I mean when I talk about transformational productivity reforms that can also boost student outcomes? Our K-12 system largely still adheres to the century-old, industrial-age factory model of education. A century ago, maybe it made sense to adopt seat-time requirements for graduation and pay teachers based on their educational credentials and seniority. Educators were right to fear the large class sizes that prevailed in many schools.
But the factory model of education is the wrong model for the 21st century. Today, our schools must prepare all students for college and careers — and do far more to personalize instruction and employ the smart use of technology. Teachers cannot be interchangeable widgets. Yet the legacy of the factory model of schooling is that tens of billions of dollars are tied up in unproductive use of time and technology, in underused school buildings, in antiquated compensation systems, and in inefficient school finance systems.
Rethinking policies around seat-time requirements, class size, compensating teachers based on their educational credentials, the use of technology in the classroom, inequitable school financing, the over placement of students in special education—almost all of these potentially transformative productivity gains are primarily state and local issues that have to be grappled with.
Suffice it to say, reforming lockstep compensation is a direct threat to the interests of weak performers. But is that a reason to cut funding for people who are trying to transition from welfare to work rather than let go of the least productive teachers and use technology to extent the reach of the most effective teachers?
There’s still time for the governor to make up for this. Right now, however, I am seriously disappointed in Brown, who, for all his faults, is a man I’ve long considered a serious thinker and devoted public servant.
… is entertaining and informative. I can’t say I’m as optimistic as Hassett about the prospects of reducing travel costs for federal employees, and I’m more sympathetic, at least in the short term, to federal support for local law enforcement. But I did appreciate the opening section on how to rethink support for farmers:
Canada has experimented with a program that provides government matching funds for farmers’ deposits into savings accounts that help them buffer their incomes against the ups and downs of farm prices. Such a program in the U.S. could achieve the objective of helping family farmers survive while enabling policy makers to withdraw billions of subsidies to big agriculture.
These changes, plus closing the U.S. Agriculture Department’s Foreign Agricultural Service, would save about $19.5 billion. Not a bad start.
Hassett then goes on to call for cuts to energy subsidies:
Next, target energy subsidies, which might make us feel good but make little economic sense. As I’ve written before, if Congress wants to encourage innovation in energy, it should tax carbon, not subsidize politically favored approaches such as ethanol. Riedl says cutting energy subsidies would save about $6.5 billion. (We could go after the tax-credit subsidies too, which technically aren’t spending.)
Jeffrey Leonard, CEO of the Global Environment Fund, has a lengthier treatment of a related idea in the latest issue of the center-left Washington Monthly:
If President Obama wants to set us on a path to a sustainable energy future—and a green one, too—he should propose a very simple solution to the current mess: eliminate all energy subsidies. Yes, eliminate them all—for oil, coal, gas, nuclear, ethanol, even for wind and solar. It will be better for national security, the balance of payments, the budget deficit, and even, believe it or not, the environment. Indeed, because wind, solar, and other green energy sources get only the tiniest sliver of the overall subsidy pie, they’ll have a competitive advantage in the long term if all subsidies, including the huge ones for fossil fuels, are eliminated. And with anti-pork Tea Partiers loose in Washington and deficit cutting in the air, it’s not as politically inconceivable as you might think.
I don’t agree with all of Leonard’s prescriptions. For example, I’m not sure about the appropriate status of the foreign tax credit against royalty payments made to foreign governments in the extractive sectors, and I think that certain subsidies for nuclear power might make sense. But his essay is worth reading regardless.
In the December issue of The Economist’s View, a collection of short-form essays by leading economists published by the Berkeley Electronic Press, Mark Pauly of Wharton has an excellent piece that clarifies many of the challenges facing the health reform architecture created by PPACA. He walks through a number of issues.
(1) On the impact of PPACA on Medicare and the overall tax burden, Pauly writes:
It is well known that the Medicare program has substantial financial difficulties as the population ages and costly but beneficial new technology continues to be applied to care for seniors. The real problem is of course not the fictitious balance in the Medicare Part A trust fund, but rather the increased future tax rates borne largely by the working population as growing Medicare spending needs to be financed. The changes in Medicare—reducing Medicare Advantage payment and some other reimbursement reductions to hospitals and doctors (the latter already in great jeopardy)—had been considered possible modifications to Medicare that might have mitigated the worrisome and probably unsustainable tax burden for transfers to the elderly through Medicare and Social Security. Now that these provisions have instead been used to finance transfers to the uninsured, the high burden of future Medicare financing will remain without modification. Who bears this cost depends on what happens next. If the high tax burden induces reductions in social insurance programs for the elderly, they will pay yet further for coverage of the rest of the population. If, despite the dramatically higher tax rates these programs, they are sustained in something like their current form, middle class taxpayers and workers in the future will in effect bear the cost of covering the uninsured. They do this not because they were asked to pay higher explicit taxes for health reform, but rather because they will have to pay higher taxes for Medicare to replace the savings that were transferred to funding health reform.
Pauly then posits that the prospect of sharp increases to average and marginal tax rates will put pressure on advocates of the new insurance subsidies. Because the voting public wasn’t given a clear picture of the implications of PPACA for the tax burden going forward, new questions will likely be raised about the structure of the subsidies:
But if instead they come to realize for the first time how much this generous program is costing them, they may ask for better evidence on the benefits from it, and, if the evidence is lacking, cut back on the program in order to hold their overall federal taxes down.
Pauly’s basic take is that while there is fairly clear evidence that the minority of uninsured people who are poor and near-poor derive significant benefits from received insurance coverage, the evidence is weaker for extending coverage to the non-poor uninsured. If we’re all going to collectively pay for extending coverage to the non-poor uninsured, we need to have a better sense of what’s at stake.
(2) Pauly sees a potential free-lunch in imposing taxes on fringe benefits, including health benefits:
Note that the tax would cause increased cost sharing and strengthen managed care among the middle class and above who are already insured; results of the RAND health insurance experiment strongly suggest that there will be little adverse impact on health but considerable reduction in spending. Moving up the current high cost insurance tax to more recent implementation and redefining it as a tax on higher wageworkers who take more generous policies would help both transparency and implementation.
This is a tax with a negative excess burden, one that both raises revenue and corrects already existing distortions, so in that sense it is ideal public policy from the point of view of economic welfare.
In light of the political resistance to this approach, Pauly notes that the government could, “offset at least part of the capping of the exclusion by lower marginal tax rates.”
(3) Pauly ends with a brief discussion of the inequitable nature of the subsidies:
Subsidies are much greater for lower income workers in small firms or firms which do not offer insurance coverage (often the same) which is both inequitable to lower income workers in large firms and likely to cause distortions in firm size as large firms spin off low wage activities to smaller firms that can qualify for subsidies (Herring and Pauly 2010). Government’s ability to keep different sets of low wage workers apart in order to offer much larger subsidies to some than to others is likely to erode over time. But subsidizing everyone raises the cost of subsidies.
All in all, Pauly offers a very useful guide to thinking about how we might reform reform. Many argue that we should take about nothing but repeal between now and the presidential election. My concern is that there needs to be a Plan B if PPACA does survive between now and, say, 2014. Because the legislation is unsustainable, it will have to be fixed if it is not repealed. And even if PPACA’s Republican and Democratic critics manage to successfully repeal the legislation, we’re in urgent need of an alternative that addresses the underlying problem of access to affordable insurance coverage, like the approach outlined by Thomas Miller and James Capretta.
Is it ever right to just wind up and let someone have it with all you’ve got? That’s a question that I think has to be asked. It’s certainly possible that we’ve all become too used to unrestrained rhetoric as a form of entertainment, and people like me live right in the middle of the guilt parabola there. Most all of us are grownups and can handle extreme argument, but clearly some people are not, and obviously I’m not just talking about Jared Loughner.
To see that, all you have to do is attend almost any family gathering, where once-loving relationships have been completely lost because of the overheated right-left culture war. If real family relationships are being lost to this kind of political debate, if someone on TV can reach into your living room and break up your family without knowing anything about you or even knowing that you exist, that tells us that this mechanized mass-media rhetoric has been almost unimaginably successful at dehumanizing whole classes of people.
I applaud the general sentiment.
On an unrelated note, I’ve already seen the tone of the conversation over Jared Loughner’s despicable crime shift. The more we learn about his mental universe — see Peter Suderman’s coverage at Reason — the more implausible are some of the casual claims that had been advanced immediately after the massacre about his political proclivities, and how the broader climate might have shaped his views. My underinformed gut instinct tells me that Loughner was an erratic young man with a heightened sense of his importance. When Giffords was appropriately dismissive towards one of his nonsensical questions at a public gathering, bursting his bubble of self-regard, he grew obsessed with doing her harm.
And so I’m now hearing that Loughner’s motivations were immaterial, and that, for whatever reason, the “real issue” is the fact that many residents of Arizona want to use mostly symbolic, poorly-crafted legislation to discourage unauthorized migrants from settling in their state, and/or that Michelle Bachmann often employs needlessly salty language. I can’t say that this strikes me as a sensible view.
Matt Yglesias makes a point I’ve been hoping to make myself:
I can tell you a story about how a tiny number of financiers have been able to hoover up money from the executives of rival financial institutions as deregulation has led to consolidation of the industry. I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people in the 80th-99th percentile who own the bulk of the financial assets in the country by swindling them. I can tell you a story about how a tiny number of financiers have been able to hoover up money from the broad class of rich people via the income tax and “bailouts.”
But the median wage earner seems harder to me. Especially because they somehow got to the median German wage earner, but not to the median Chinese wage earner.
Here’s another story. A lot of the median wage earner’s money has been hoovered up by the health care system. If we had single payer health insurance in the United States then increases in per capita health care spending would exhibit themselves as higher taxes. Instead, most people get health care through employers who subsidize their premiums, so increases in per capita health care spending exhibit themselves largely as lower wages. Optimistically, in exchange for all this extra money we’re now getting way better health care. Pessimistically (and, I think, more plausibly) an awful lot of it is getting “hoovered up” to little good end.
As I imagine Matt would agree, health care dollars do flow into the coffers of medical providers, pharmaceutical companies, the manufacturers of medical devices, and other who participate in a perversely regulated medical marketplace, so the money doesn’t quite vanish. Indeed, job growth in the health sector has represented a large share of total employment growth over the last decade, and an even larger share of private employment growth, though perhaps we should say “private” given the role of public subsidies.
With Iran, you never really know what’s what (remember the National Intelligence Estimate a few years ago telling us that Tehran had stopped developing nuclear weapons?) but I think it is fair to say that the combination of sanctions and subterfuge has definitively set back Iran’s nuclear program by at least one and perhaps as many as four years.
Then comes the interesting part:
Much credit in delaying Iran goes to the unknown inventor of Stuxnet, the miracle computer virus, which has bollixed-up Iran’s centrifuges; much credit goes to the Mossad and the CIA and the Brits and God knows who else, who are working separately and in tandem to subvert the Iranian program, and a great deal of credit must go to, yes, President Barack Obama, who has made stopping Iran one of his two or three main foreign policy priorities over the past two years.
While I’m quite happy to give President Obama credit, I’m particularly intrigued by the role of Stuxnet. When we think of rogue non-state actors intervening in international affairs, we tend to think of al Qaeda and its affiliates, and other terrorist organization. But here we have a rogue non-state actor intervening on behalf of the good guys. One wonders if we’ll see more of this: self-appointed high-tech vigilantes taking action that governments can’t or won’t.
My friend Graeme Wood has speculated about whether or when a rogue billionaire might take it upon herself to launch a one-person geoengineering effort by using, say, stratospheric sulfate aerosols to cause global dimming. Strangers thing have happened, and will happen.
P.S. No, I’m not a CIA mole, I promise! We don’t know much about the origins of Stuxnet, but it does appear to have been government-sponsored in some sense. As Bruce Schneier has written:
We don’t know who wrote Stuxnet. We don’t know why. We don’t know what the target is, or if Stuxnet reached it. But you can see why there is so much speculation that it was created by a government.
Stuxnet doesn’t act like a criminal worm. It doesn’t spread indiscriminately. It doesn’t steal credit card information or account login credentials. It doesn’t herd infected computers into a botnet. It uses multiple zero-day vulnerabilities. A criminal group would be smarter to create different worm variants and use one in each. Stuxnet performs sabotage. It doesn’t threaten sabotage, like a criminal organization intent on extortion might.
Stuxnet was expensive to create. Estimates are that it took 8 to 10 people six months to write. There’s also the lab setup–surely any organization that goes to all this trouble would test the thing before releasing it–and the intelligence gathering to know exactly how to target it. Additionally, zero-day exploits are valuable. They’re hard to find, and they can only be used once. Whoever wrote Stuxnet was willing to spend a lot of money to ensure that whatever job it was intended to do would be done.
So it does seem very likely that a government was involved, though, as Schneier later suggests, it could also have been a research project spun out of control.
But what if Stuxnet was created by a gentleman hacker? Now there’s a Hollywood thriller I’d love to write.
I can’t imagine I have anything to say that hasn’t already been said. When I first heard the news, on a packed flight landing at JFK, I was reminded of David Foster Wallace’s very short essay on “the American idea,” published in The Atlantic in 2007:
Are some things still worth dying for? Is the American idea* one such thing? Are you up for a thought experiment? What if we chose to regard the 2,973 innocents killed in the atrocities of 9/11 not as victims but as democratic martyrs, “sacrifices on the altar of freedom”?* In other words, what if we decided that a certain baseline vulnerability to terrorism is part of the price of the American idea? And, thus, that ours is a generation of Americans called to make great sacrifices in order to preserve our democratic way of life—sacrifices not just of our soldiers and money but of our personal safety and comfort?
In still other words, what if we chose to accept the fact that every few years, despite all reasonable precautions, some hundreds or thousands of us may die in the sort of ghastly terrorist attack that a democratic republic cannot 100-percent protect itself from without subverting the very principles that make it worth protecting?
Our elected representatives are not always held in high esteem. But they put themselves in harm’s way on our behalf, and for that they deserve considerable credit. During the darkest days of the sectarian strife in Iraq, elected officials — down to the equivalent of town selectmen — faced assassination as a matter of course. Consider that there were Iraqis who kept standing up to take the place of those who had fallen even so. In Mexico, mayors and police officers who dare to take on the drug cartels are being gunned down in heartbreakingly large numbers. We’re lucky to live in a country where we take basic security for granted. But though we’re powerful and prosperous, we’re not immune to random violence and terrorist violence, and I’m sorry to say that we never will be.
In 1989, the liberal foreign policy thinkers James Chace and Caleb Carr wrote a fascinating book calledAmerica Invulnerable: The Quest for Absolute Security from 1812 to Star Wars. The book was in part a critique of Reagan-era U.S. foreign policy, but it also contained useful lessons for all of us about the extent to which we can legislate ourselves, or rather wish ourselves, out of danger. I recommend it.
Well, 2010 is in the books, and what a year it was: inarguably the most momentous in health policy since 1965. Now, whether or not that is a good thing remains a matter of spirited debate among your favorite health wonks.
Over at The Apothecary, I’m hosting the latest edition of Health Wonk Review. I personally want to thank the contributors to Health Wonk Review for their tireless work. I’ve certainly learned a lot from all of them, especially John Goodman, my nominee for Outstanding Health Wonk of 2010.
The Individual Mandate
This fortnight, Goodman focused on December’s big news: that Judge Henry Hudson of Virginia overturned PPACA’s individual mandate. In a piece entitled, “Do we need a mandate?” he argues that, if we applied the logic of the individual mandate to other aspects of the economy—like life insurance—it would seem ridiculous. Moreover, the reduction in the rate of the uninsured in Massachusetts, he argues, is due to the reform law’s tax and spending subsidies: “only 7.1% of the newly insured in Massachusetts are individuals buying unsubsidized insurance on their own.” Instead of the mandate, Goodman proposes giving a “refundable tax credit of $3,000 to every individual and $7,500 to every family to purchase health insurance.”
Joe Paduda of Managed Care Matters asks, “what happens without a mandate?” His conclusion won’t shock many health wonks: “It would be tough to design a better recipe for disaster for insurers.” Would the Obama White House overturn the various insurance regulations if the mandate was overturned, and avoid this disaster? “To be determined…[health insurers] have few friends left among Democrats, and those friends would be hard pressed to convince the Administration to be nice to an industry that has been anything but to the Democrats.”
I myself have discussed the implications of Hudson’s ruling, both from the standpoint of constitutional law and health policy. My conclusions? On the law, it will all depend on Supreme Court Justice Anthony Kennedy. On the policy, we could have avoided this whole fight by using a limited-enrollment-period approach.
The Role of the States
A number of health care bloggers discussed state-level health policy issues, both directly and indirectly related to PPACA. Peter Suderman of Reason discusses Vermont’s pursuit of a single-payer health care system under newly-elected governer Peter Shumlin. Vermont’s plan is something that both liberals and (non-Vermont-residing) conservatives can get behind, as it will help us understand if “Medicare-for-all” is the solution to spiraling health costs. Suderman, for his part, isn’t convinced.
Louise Norris of Colorado Health Insurance Insider assesses the prospects for the new Colorado health insurance exchange, which is due to come online in 2014. The state legislature will need to pass a bill with “basic guidelines for an exchange,” after which a legislature-specified governing body will “hash out the details.” The bottom line: “It remains to be seen whether Colorado’s exchange will be bare-bones or robust.”
Michael Cannon, on the Cato Institute’s blog, has some advice for incoming New York governor Andrew Cuomo, who is facing a serious, Medicaid-driven budget crisis. Cannon argues that Cuomo “can start [by closing] the loopholes that allow well-to-do New Yorkers to feign poverty on paper so that Medicaid underwrites their care.”
Jason Shafrin of Healthcare Economist gives us an update on employer health benefits in California, via a report from the California Health Care Foundation. Like New York, the state is in fiscal freefall, facing a $28.1 billion deficit over the next 18 months. Health insurance premiums increased by 8.1% last year. The CHCF survey finds that California reflects national trends: the proportion of employers offering coverage is similar to the previous year, but that doesn’t take into account the companies that went out of business. Premiums have risen 134 percent since 2002. Cost sharing is increasing, and the percentage of firms indicating that they are “very likely” to drop coverage went from 1% in 2008 to 4% last year.
John Graham of the Pacific Research Institute, writing for the NCPA blog, touches upon a creative proposal from the Texas Public Policy Foundation that individual states engage in interstate compacts with one another, as a way of circumventing various PPACA insurance mandates.
Austin Frakt and Aaron Carroll of The Incidental Economist consider “how the health reform game has changed.” They argue that key interest groups supported PPACA last year, and oppose repeal now. The Republican House won’t be able to do much to change the law, but the aforementioned state governments will play a big role in how the law is implemented.
The Dismal Science
As I mentioned above, the merits and demerits of the Patient Protection and Affordable Care Act remain a matter of energetic debate. Megan McArdle, in her blog at The Atlantic Monthly, continues her examination of the various positive consequences that PPACA advocates believe will flow from the law. This fortnight, she responds to a recent David Leonhardt piece in the New York Times, in which Leonhardt argues that PPACA “gives people the freedom to take risks,” thereby strengthening Americans’ entrepreneurial drive and improving the economy. McArdle cites data to suggest that the number of new businesses started on this basis is far outnumbered by those lost because existing businesses can’t afford to hire new workers.
Costs, Costs, Costs, Costs, Costs, Costs, Costs
Health wonks never tire of talking about the never-ending problem of rising health costs. However, this fortnight, Brad Wright of Wright on Health has hit the nail on the head, with a beautiful personal essay on one of the key challenges with consumer-driven health care: his struggle to actually find out how much various tests and services cost. “The experience, while costly, taught me…how little patients or providers know about the real cost of health care, and how hard it is for patients to make price-based decisions when the system isn’t designed with that in mind.” Let’s hope the country can make progress on that front.
Mike Feehan, with classic InsureBlog humor, laments HHS’ “intention to ignore the rising cost of medical care.” HHS will require insurers to “disclose and justify any rate increases of 10 perecent or more,” something that had been the province of the states. Feehan argues that this will increase the cost of insurance, by increasing the amount of money insurers spend “responding to regulation.” On the bright side, HHS’ intervention will lead to more public discussion of the fact that the real driver of rising insurance costs is…the rising cost of health care. “So I say, let the rate reviews and debates begin. And I say, the sooner, the better.”
The Health Affairs blog highlights a study by John Kastor of the University of Maryland and Mark Kelley of the Henry Ford Health System in Detroit, entitled “Productivity Still Drives Compensation in High Performing Group Practices.” They ask: why are institutions like the Cleveland Clinic able to provide hospital care less expensively than other prominent institutions? The hypothesis is that Cleveland Clinic’s staff are paid on a fixed salary rather than on a fee-for-service basis. They looked at 12 multispecialty group practices, of which two paid via salary (Mayo and Kaiser) and ten more traditionally. They conclude that the reality is complex: rewarding physician productivity, in the traditional model, can lead to lower costs and higher quality. Quoting one of their surveyed participants, “Simply paying all physicians in the US on a salary basis will not be a panacea for our current ills.”
Robert Book, of the Center for Data Analysis at the Heritage Foundation, revisits the most famous town in health care wonkery—McAllen, Tex.—and asks, “is something wrong with McAllen, Texas, or is something wrong with Medicare?” Book raises an all-too-infrequently raised concern about the Dartmouth data: that most policy analysts assume that “there were no systematic differences between how physicians treat Medicare patients and how they treat other patients.” Book cites a number of other studies that show that variations in private insurance spending do not correlate with those of Medicare spending. Book points out that private insurers are less able to keep payments down, relative to Medicare’s market power, yet have far greater incentives than Medicare to root out fraud.
2010 in Review
Jaan Sidorov of Disease Management Care Blog dissects “the spin in HHS Secretary Sebelius’ Year in Review video.” Sebelius highlights tax credits to help small businesses in buying insurance; national standards for health IT; community health centers; and new Medicare anti-fraud provisions. In each case, Sidorov argues the reality is less cheery: the tax credits are too small to make a difference; health IT has not been shown to achieve a positive return on investment; community health centers cost more than typical Medicaid clinics; and the new Medicare anti-fraud provisions haven’t led to more fraud convictions.
Julie Ferguson of Workers’ Comp Insider highlights the top news stories of 2010 related to worker’s compensation, insurance, risk and general business, along with some predictions for 2011.
Miscellaneous
Roy Poses of Health Care Renewal points out a disturbing trend that only worsens as the government sticks its nose into everything we do: federal officials leveraging their high-profile offices into lucrative, multimillion-dollar gigs at large corporations. Poses’ case study is of former NIH director Elias Zerhouni, now at French pharmaceutical giant Sanofi-Aventis. Timothy Carney of the Washington Examiner has been tracking a long list of government aides and officials who have taken industry jobs, in what he calls “The Great Health-Care Cashout.”
Rich Elmore of Healthcare Technology News asks a useful question: “will [electronic health records], unequally deployed, heighten the appalling differences in care quality and outcomes that exist today among races and regions in the U.S.?” He mines data from the Dartmouth Atlas to examine the problem, and expresses optimism that EHR may actually “overcome some of the intractable problems of care coordination.”
David Williams of Health Business Blog is a fan of the Wall Street Journal’s peerless business reportage. However, in the case of a recent article regarding mental health parity, the newspaper “blows it.” The article in question claims that employers are dropping “mental health and substance abuse coverage in reaction to a new law that requires larger plans to treat such coverage the same way they treat coverage for physical ailments.” Williams looks at the data, and finds that the WSJ has the story “roughly backwards.” He hopes this isn’t a sign that the Journal’s reporting is becoming more aligned with its “reactionary editorial page.”
Glenn Laffel of Pizaazz discusses a recent study in the Journal of General Internal Medicine that explores the impact of Facebook on diabetes care. Much to their relief, the authors of the study found “very little evidence of dangerous, misleading, or risky self-medication behavior being supported by Facebook pages for patients with diabetes.” However, inability to verify the identity of the poster…poses a significant problem to the trustworthiness of any single piece of information on [Facebook].” Do we trust individuals to filter this information for themselves, or should physicians and experts be the gatekeepers of information? It looks like technology is pulling us in the former direction.
Julie Rosen of Bedside Manner argues that “open, empathic communication” is the key to improving the influence of evidence-based medicine in physician practice.
Jonathan Cohn and Ezra Klein make a valid and important point about the new House majority’s push to repeal Obamacare. Here’s Cohn:
The media is playing [the repeal resolution] as a pointless stunt, because the Senate would never pass it and President Obama would never sign it. This seems unfair to me. Repeal of health care is among the very top priorities for these Republicans. Passing such a bill has important symbolic value.
But precisely because I do take this seriously, I’m curious: Will the Republicans ask the Congressional Budget Office to score the bill? Say what you will about the process that produced the Affordable Care Act, but it was not rushed and it did not try to game the budget accounting process. On the contrary, Democrats went to great pains–and, arguably, suffered tremendous political damage–because they were determined to produce a bill that the CBO would pronounce as deficit-reducing.
They succeeded, too. CBO projections suggest that the Affordable Care Act will reduce the deficit by more than $100 billion over ten years, which is not bad–indeed, not bad at all–for an initiative that will allow 30 million more people to get insurance and push the entire health care system in the direction of more efficiency. It stands to reason that if the Republicans repeal the bill, they will be increasing the deficit by an equivalent amount.
Ezra, in a detailed post, points out some of the apparent inconsistency in GOP’s position:
House Republicans are in a pickle: One of their new rules says that new legislation must be paid for. But the health-care bill reduces the federal deficit by more than $100 billion over the next 10 years. Luckily, they’ve figured out an answer to their problem: They’ve decided to simply exempt the repeal bill from the rules. That means they’re beginning the 112th Congress by lifting their own rules in order to take a vote that will increase the deficit. Change we can believe in, and all that.
Republicans are aware that this looks, well, horrible. So they’re trying to explain why their decision to lift the rule requiring fiscal responsibility is actually fiscally responsible. Majority Leader Eric Cantor got asked about this, and he returned the reporter’s serve with a volley of nonsense. “About the budget implications, I think most people understand that the CBO did the job it was asked to do by the then-Democrat majority, and it was really comparing apples to oranges,” Cantor said. “It talked about 10 years’ worth of tax hikes and six years’ worth of benefits. Everyone knows beyond the 10-year window, this bill has the potential to bankrupt this federal government as well as the states.”
That’s all well and good — but it’s not true. Take Cantor’s core point: The health-care reform bill includes “10 years’ worth of tax hikes and six years’ worth of benefits.” There’s nothing philosophical about this statement. It can be checked with a simple look at the spending tables the Congressional Budget Office published in their analysis of the bill. And when you look at those tables, Cantor’s statement falls apart.
I have a piece out today, on National Review’s main page, that discusses this problem in depth. The basic point is that, while conservatives are rightly cynical of CBO projections about Obamacare’s deficit-reducing features, as a matter of parliamentary procedure, the CBO’s opinion is extremely important.
If Republicans manage to take back the White House and gain majority control of the Senate in 2012, they are almost certainly going to have to use the reconciliation process to repeal Obamacare. I note in the article:
As we learned last year, the reconciliation process is different from the normal legislative process. The Senate parliamentarian, using Congressional Budget Office estimates, certifies measures that, either by raising taxes or by cutting spending, will reduce the budget deficit. Only deficit-reducing measures can be passed using reconciliation.
The problem for Republicans is that the CBO estimated that the PPACA would reduce the deficit by $132 billion over the 2010–2019 period. Because of amendments passed in late 2010, it’s likely that the CBO’s estimate of the cost of repeal will be even higher in 2013. Hence, a simple, two-paragraph repeal measure won’t get through reconciliation.
This is where the agenda of the next Congress comes in. In place of comprehensive health-care reform, House Republicans are promising to reverse some of Obamacare’s most unpopular elements: for example, the new 1099 provision, which requires that all businesses issue an IRS form 1099 for any payments to vendors of more than $600 per year. The CBO scores this measure as raising $18 billion for the government over ten years: indeed, that’s why it was included in the PPACA in the first place. If Congress reduces Obamacare spending elsewhere to “pay for” this tax cut, ultimate repeal could become more difficult.
The individual mandate is a more worrisome example. Last June, the CBO projected that repealing the individual mandate would reduce the deficit by $252 billion in the 2011–2020 timeframe. Under current law, the CBO is counting on some people under PPACA paying the fine for not purchasing health insurance, thus increasing revenues to the government; however, repeal of the mandate would generate savings by reducing the number of people who rely on Medicaid and exchange subsidies. If the mandate is eliminated, repealing the rest of Obamacare will become $252 billion harder.
Hence, if Republicans in the 112th Congress succeed in eliminating some of these provisions, they may increase the fiscal cost, as scored by the CBO, of repealing the rest of Obamacare in the next Congress. In addition, every unpopular tax increase that is eliminated now will need to be offset by additional tax increases or spending cuts, which complicates things when the real repeal effort starts in 2013. Republicans, therefore, may be setting a trap for themselves.
It’s a long article, but it explores a lot of the implications of this problem. Let me know what you think.
I’ll be in northern Europe, or, as I like to call it, VATland, for the next week, and I intend to write while I’m there, though posting will be sporadic as I wrangle wifi. My original plan had been to visit India, but, well, you know how it goes. With luck, I’ll make it to India before the year is out.
Though I spend a fair bit of time criticizing aspects of various European social models, I’m always very happy to visit “the Continent” (which continent? Pangea, of course), not least because (a) I like dense, bustling places, (b) I like contrasts, and (c) I like to be reminded of the distinctiveness and, for lack of a better word, awesomeness of the American way of life, and I say that in the most respectful, least jingoistic way possible.
I’ve been meaning to write a post about the Australian social model. I haven’t made it out there yet, but there’s still time.
The Corner More Debt Ceiling Scare Tactics
Since the 112th Congress was sworn in, Democrats have consistently argued that failing to raise the federal debt ceiling would . . .Go
Critical Condition Now It's Serious
In October of 2009, a reporter from CNS asked then-Speaker Nancy Pelosi which provision of the Constitution allowed Congress to . . .Go
Planet Gore Doug Holtz-Eakin on Cap-and-Trade
ICYMI, Doug Holtz-Eakin writes in The Corner:
Beware Liberals Bearing Miracle Cures: Blinder’s Case for a Carbon Tax
My graduate-school professor Alan . . .Go
Phi Beta Cons Re: Interdisciplinary Studies
Dr. Camplin's essay was well done, but there is another angle to interdisciplinary studies: Isn't higher education itself interdisciplinary? Ideally, . . .Go
Media Blog Q: What's a Pier For?
A: To nose-dive off of, when it comes to ratings.
CNN's replacement for Larry King, Piers Morgan, was barely in third . . .Go
