Photo above: The Hertford Bridge in Oxford, England. Used by Permission. © Tom Ley 01302 782837

Monday, November 23, 2009

Congress and the Haste for Health Care Reform by Douglas O. Walker

The Reid health care bill has now passed the Senate and proceeds to a formal debate on the Senate floor. It brings to mind not only the importance of this health care legislation in how it will affect all Americans but the importance in the way it is being enacted.

Needless to say, many controversies surround the question of health care and the vote to proceed merely sets the stage for an epic battle between those that regard the bill as essential to improving access to health care by many millions of uninsured Americans and those that regard the bill as not only an objectionable takeover by the government of the nation's health care sector but an unacceptable intrusion into their personal life and health care decisions.

Beyond this great debate is the very manner by which legislation of this importance and sweeping ramifications has been put together and foisted upon the American people. In a matter of a few months a few dozen people in Congress meeting in secret with representatives of a few special interests cobbled together several bills to restructure one-sixth of the U.S. economy. During these discussions, the details of the bills under discussion, to the degree they were known, changed from day to day as special interests had their influence on the evolving text and the compromises necessary to induce key legislators to support a bill were introduced. It is generally agreed that both the House and Senate bills are almost incomprehensible and many of their details, most notably key elements of their financing, remain to be defined by later legislation.

The very manner by which these bills were put together precluded any substantive discussion by the House and the Senate (not to mention the country at large) of the important questions entailed in such a major change in public policy and how it might impact the country. Here are some of the questions that should have had a through airing by the Congress and public before this legislation is approved:

• Does improving access and the delivery of health care require a big, new government-dominated system or can the existing set of more informal arrangements be improved to deal with problems all agree need to be addressed?

• Is it financially and technically possible to cover all those not now covered by some form of health care insurance? Should non-Americans such as legal and illegal residents be included in any program to widen access to health care? Does the government have the Constitutional power to mandate its citizens to purchases health insurance?

• Exactly what should be covered in any government-supported health care program? Will it cover preventive care, mental health, abortion, chiropractors, elective services such as plastic surgery, and a host of other kinds of non-essential health care needs?

• Can a nation already deeply in debt and facing the prospect of huge increases in existing entitlement expenditures afford an expansion of expensive government-supported health care services? How, exactly, will any needed revenues be obtained? Who, exactly, will be the source of these revenues? What, honestly and with credibility, will be the costs of this legislation and its impact on the deficit? Given the huge deficits involved, Why should future generations pay for the health care of this generation?

• Given the large increase in taxes now being discussed, Why, as a matter of political responsibility, should the people to be taxed be forced to pay for the health care of people they do not know and have not way of comparing the needs of these people against the needs of their own families? Why will they be placed in criminal jeopardy if they fail to meet the demands being imposed upon them?

• How can the rapid rise in health care costs be restrained in a way that does not destroy the incentives of the health care industry in general and providers in particular to deliver quality health care services? How can we expand our existing health care capacity to meet the nation's growing demand for health care at least cost?

Proponents of the legislation now before the Congress claim these questions have been answered. But of course they have not and could not have been adequately answered in the short time Congress has been discussing health care reform.

In its haste, Congress is on its way to introducing an expensive disaster that will set this country back decades in the quality and availability of the health care now enjoyed by most Americans. Restructuring a large part of any economy, after all, is a process that should be undertaken in small steps over many years as it involves great complexities and hidden interrelationships that no one understands.

I for one am amazed that Congress does not see that even the most committed central planners of the old Soviet Union would not try and restructure their economy in this irresponsible way.

Thursday, November 19, 2009

Global Imbalances and the President's Trip to China by Dr. Douglas O. Walker

It has now been more than two months since Dr. Pingfan Hong, Chief of Global Economic Monitoring of the United Nations Secretariat, visited Regent and spoke to faculty and students on the ongoing problem of huge global imbalances that threaten the stability of the world economy. He pointed out that the outsized and unsustainable trade deficits and surpluses that describe trade between the United States and China are central to this problem, and must be eliminated if there is to be a sustained recovery from the Global Financial Crisis and the past pace of world growth is to be restored. He also suggested some ways that China could contribute to reducing the imbalances by increasing its import demand and promoting higher domestic consumption within its economy. In the case of the United States, he noted that the U.S. must reduce its import demand significantly, most notably by reducing its extraordinarily large fiscal deficits.

Dr. Hong emphasized difficult adjustments on the part of both countries would be required to restructure patterns of production, consumption, employment, and trade in such as way as to establish a stable foundation for long-term growth. Because of the precarious state of the world economy these adjustments should begin immediately. A video of Dr. Hong's presentation and comments of other participants can be seen here.

President Obama is now in China and high on the agenda is the question of China-U.S. trade and progress toward reducing the large trade imbalance between the two countries. It is useful to quickly review where we are in addressing the problem outlined by Dr. Hong to see if any progress has been made.

Since the fourth quarter of 2008, both China's surpluses and U.S. deficits have been smaller than in recent years, reduced by the collapse of world trade and the improvement in the household and business saving rate in the U.S. This is consistent with reducing global imbalances and the improvement is of course welcome, if not the way it was attained. However, the Wall Street Journal reported the other day renewed strength in America's import demand and a higher trade deficit in August and September as the recession starts to wind down. This quick response by import demand to an upturn in economic activity would seem to imply the improvement is related to transitory factors such as the steep decline in U.S. economic activity due to the recession. Given its rapid reversal when conditions in the U.S. improved slightly there is little reason to believe any long-term adjustment in the pattern of U.S. trade is taking place. Similarly, the Chinese insistence on a weak-currency policy would seem to indicate that China is not taking steps needed to restructure its trade.

News reports on the President's trip to China indicate that little or no progress between the two countries has been made on the contentious issues surrounding their mutual trade. Clearly, neither side is prepared at this time to deal with the deep-rooted problems that at once define and threaten their prosperity.

The failure of both China and the U.S. to do anything significant about their trade imbalance is not surprising. For both countries very large changes are needed to create patterns of production and consumption and exports and imports that are compatible with a rapidly changing world economy. This does not mean that Dr. Hong was wrong to warn us of the consequences of global imbalances of the magnitude we have seen in recent years.

It simply means we should not be surprised if soaring U.S. trade deficits and huge Chinese trade surpluses continue to weigh on the world economy and place it in great risk of another crisis such as we are now enduring.

RSG World Economic Brief for November 2009 by Dr. Douglas O. Walker

Please see the actual brief in the gray box to the right. This month’s brief reviews economic conditions in a number of countries and points out three key developments of recent months:
  • Significant changes are taking place in the pattern of foreign purchases of U.S. government and corporate assets, with the previous rapid pace of foreign accumulation of U.S. assets declining dramatically at the summer’s end. This is in response to an increase in private saving in the U.S. as households and business rebuild their balance sheets. 
  • There are signs that the world economy is starting to recover from the deepest contraction of the post-World War II period. An increasing number of countries are reporting positive growth since the second quarter of 2009. International trade and commodity prices have also strengthened in recent months. The global recovery, however, is seen as fragile, and financial conditions across the world remain in a state of distress. Forecasts for countries and regions are given in the Brief.
  • Prices on world oil markets have stopped their recent rise and may have begun to fall again. Some of the recent rise was attributable to financial transactions unrelated to oil fundamentals rather than supply and demand considerations in this key market, which may be unfavorable at this time to high oil prices.
Thanks to Erick Poorbaugh for the excellent Brief.

Wednesday, November 11, 2009

Our Prosperity and Posterity by James A. Davids

Life in post-Revolution America was rough and bears some semblance to today. The new nation was deeply in debt because of governmental spending, and foreign lenders refused to accept our paper money, insisting instead on gold. When debtors could not pay their loans, the banks started a wave of foreclosures in Massachusetts, took possession of farms and homes, and jailed debtors. Hundreds of people coalesced around Daniel Shays, a Revolutionary War veteran, who led his “army” in shutting down courts to stop foreclosures and then freeing imprisoned debtors. Neither the national or state government was willing or able to respond, so a group of Bostonians paid for an armed militia to go to western Massachusetts, reopen the courts, and defeat and arrest Shays and his army. Within a few months of this incident, the Constitutional Convention began in Philadelphia.

Shays’ Rebellion must have been on the mind of those gathered in Philadelphia during the summer of 1787, since the Preamble states that the Constitution’s purposes include “to insure domestic Tranquility,” and to “secure the Blessings of Liberty to ourselves and our Posterity . . .” These “Blessings of Liberty” included personal and economic freedom so Americans and their posterity could pursue “happiness” (the acquisition of property), which was identified as an “unalienable” right in the Declaration of Independence eleven years previously.

Regarding securing economic freedom for their posterity, the Founding Generation and their immediate successors unlike today paid off their national debt. Primarily because of the Revolutionary War, the national debt in 1791 stood at $75 million. This debt grew but by 1835, America was debt free. The Civil War caused the national debt to climb for the first time into the billions ($2.7 billion after the war), but this debt stayed rather stable until World War I pushed the national debt to $22 billion. The debt was paid down in the 1920s to $16 billion, until the social spending of the New Deal and World War II exploded the debt 1600% to an amount equal to the value of all goods and services produced in the U.S. in one year. With the rapid expansion of the economy after World War II, the percentage of debt to GDP fell while the debt increased primarily due to inflation. The debt passed $1 trillion in 1982, doubled to $2 trillion in 1986, and then added another trillion dollars in debt in 1990, 1992, 1996, 2002, 2004, 2006, 2007, and 2008. This raging appetite for debt continues. The Congressional Budget Office in March estimated that the current $10 trillion debt would double in ten years based on President Obama’s budget.

Although the Cold War, Vietnam and Iraq Wars, and other overseas ventures have consumed considerable resources, we have not had a world war for 60 years. Rather, our continuing huge budget deficits and resulting mountains of debt are attributable to expensive social programs passed largely by Democrats (who failed to raise taxes to cover the new expenses) and tax cuts passed largely by Republicans (who failed to cut spending). In other words, for the past 25 years our leaders have borrowed money so we could spend it on ourselves either for retirement benefits, prescription drugs, health care for the elderly, or simply more consumer spending – a continuing legacy of the “Me Generation.” The debt, and the burgeoning interest on the debt, we leave to our children and grandchildren.

By adding “…and our posterity” to the Constitution’s Preamble, the Founders placed upon themselves and all subsequent generations (certainly including us) a profound moral duty which we have sorely neglected. Such neglect is reason enough for the rise of future Daniel Shays. Whereas the Founders in gaining independence sacrificed their prosperity for their posterity, we have sacrificed our posterity for our prosperity.

Some Advice from our European Colleagues: Stay Home if You’re Sick by Dr. Mary Manjikian

Europeans like Obama a lot. And that worries some Americans. Throughout the Obama campaign, one theme his opponents raised was the idea that deep down, Obama wanted American to be more like Europe. For many conservatives, that invoked the specter of socialized medicine, trade unions run amok, shorter work days, longer vacations and the end of America’s competitiveness in the global economy. It meant that Obama envisioned a softer, more feminized America which no longer carried the same weight in foreign affairs. Instead of owning its position of leadership in the world, many feared, America would likely give up its values, ideals and history, in an attempt to be popular in the international system. And popularity might be achievable, but it could come at the cost of self-respect and dignity.

As the current debate over health care shows, this theme of what and how much to borrow from Europe still dominates politics and both sides have valid points. But I’d like to suggest that Americans have already begun adopting one positive European innovation. The radical European idea sweeping America? It’s called “staying home when you’re sick” -- and it just might catch on in your neighborhood.

Some brief comparisons: Last year the average American federal employee took less than three days of sick leave while the average European took eleven. And most European nations offer paid sick leave for all workers, while somewhere between 34 - 50 fifty percent of Americans get no paid sick leave. Are these Americans who report to work no matter what simply healthier than Europeans? No. Rather, employer organizations point to a pattern of ‘presenteeism’ in America. Presenteeism refers to the hours of lost productivity generated when sick workers come to work anyway where they do little, make expensive mistakes for the company when they are under the weather and spread contagion, leading to even more lost work time.

I first learned about “staying home when you’re sick” when I reported to work at the American Embassy in The Hague, Netherlands as a young foreign service officer. Despite a nasty flu I’d picked up while travelling, I came in to the office -- mostly to demonstrate my commitment to the organization, no matter what. My Dutch colleagues politely explained that one was granted sick leave for a reason and that infecting your colleagues was considered rude rather than admirable. I went home to rest until I felt better.

As we cope with swine flu this winter, many American businesses have begun issuing guidance to their workers that sounds suspiciously European. Businesses are even acknowledging that many working parents save sick leave to use with sick children and simply soldier on when they themselves are ill. The federal government recently reminded workers not to endanger themselves or colleagues by reporting for work when ill, and even called for flexibility in situations where employees may have sick children or a flu-related school closing to cope with.

It will be interesting to look at the statistics next spring when the flu has passed. Will businesses report lost income due to increased use of sick leave, or will they report that they now have healthier, more productive workers as a result? Will we indeed find out that this is an idea borrowed from Europe which makes sense in the United States as well? It just may be that ‘staying home when you’re sick’ is a European idea whose time has come in America as well.

Friday, November 6, 2009

The Healthcare Bill and the Poor by Dr. Douglas O. Walker

It is not easy to help the poor and the lower middle-class through public policy.

Almost always, efforts by government to do so end up adding to the burdens on the poor and putting obstacles in their way to a better life. For this reason, measures intended to lift their incomes and provide them with services must be carefully crafted to ensure that they do not do more harm than good.

An example is the health care reform bill now being discussed in Congress. At the present time, there are several versions of the bill making their way through Congress and contention over the drafting of the bill is high, so it is not clear exactly what the final bill will look like. One idea being discussed is providing subsidies for health insurance to low-income individuals and families. In a recent blog entry, Professor Gregory Mankiw of Harvard focused on one aspect of the Baucus bill recently passed by the Senate Finance Committee and pointed to one of many problems hidden in the approach to subsidized health care in the bill.
Here the problem before the policymakers trying to help the poor afford health insurance with means-tested subsidies: Because the cost of comprehensive health care is expensive and beyond the ability of low-income families to afford full coverage, the bill proposes subsidizing its cost to low-income families, and the poorer the family, the greater the subsidy.

There is no problem with a subsidy if the family remains poor and its income does not change. In this case, the subsidy continues unchanged. However, means-tested subsidies do affect incentives to work and earn more income. If the family earns more income, for example, its subsidy is reduced, and the cut in the subsidy falls faster than the rise in the family’s income until the family’s income has risen to the point where it no longer qualifies for a subsidy.
On first appearance, this seem fair since low-income families should be subsidized more than high-income families, and at some point the subsidy should end.
Now we ask the question, "How does the reduction in the subsidy affect the family's income if the family works harder and earns more income? In other words, if the family’s income rises, what happens to the taxes and fees it must pay to the government.

In the case illustrated by Mankiw, he points out on the basis of the provisions of the Baucus bill if a family earning $54,000 receives a $12,000 increase in pay its health care insurance premium increases by $2,800, or about 23 per cent of his pay raise. This also sets in motion other changes to the family's tax obligations:

A higher pay check means higher Federal income taxes. A family earning $54,000 a year is in a 25 per cent marginal tax bracket. 25 per cent of the addition $12,000 means $3,000 in extra Federal income tax.

It also means higher Social Security and Medicare contributions of 7.65 per cent (actually, double this figure, since the employee pays the employers share in the form of lower wages, not considered here). This amounts to a deduction of another $918 from the $12,000 pay raise. So far, the government has taxed $6,718 out of the $12,000 raise.

But there are yet more taxes. Here in Virginia we have a state income tax. The additional tax attributable to a pay raise that lifts a family’s income by $12,000 from $54,000 a year to $66,000 a year generates another $788 in tax owed to the state of Virginia.

Even this is not the end of it. Virginia has a general sales tax rate of 5 per cent (4 to the state, 1 to the city). If the family decides to spend the approximately $4,500 left after paying the mandatory health care insurance premium, the Federal income tax, the mandatory Social Security and Medicare contributions, and the state income taxes, another $225 will have to be paid in sales taxes.

And there is yet more. Embedded in the price of all products purchased are taxes and fees paid by producers, from the corporate income tax to property taxes on commercial property to the import tariffs and duties on goods and services imported into the country. These taxes are either shifted forward to the consumer or backward to the factors employed. A good estimate of these added costs to the consumer is another 5 per cent of their additional consumption expenditures, or another $225.

Given all these deductions for taxes and fees, the actual amount of additional purchasing power to the example family from a $12,000 raise in pay is only about $4,000, or one-third of the supposed increase their increase in income.

In other words, provisions of the Baucus bill cause the government to take two-thirds of any additional income of a family with a modest income of $54,000. Similar results in terms of percentages would occur at lower levels of family income.

It is of course important to extend access to health care to all segments of the population. But how this is done is the critical question. It is not enough to simply put out a program without considering its unintended consequences. Often attempts to help people through public policy end up setting them back.

As now written, the Baucus health care reform bill is an example. It leads to confiscatory rates of taxation on families of modest incomes. Marginal rates can be even higher, it should be noted, on families with higher incomes in some versions of the health care bill now under discussion.

The problems go beyond a poorly designed health care bill. The simple fact is the high general level of taxation in this country has reached the point of oppression, especially on the poor, because implicit tax rates on the poor are much higher than those on the wealthy.

Means-tested provisions of income and services to the poor often create 'poverty traps' that make it difficult for the poor to raise their after-tax income. In doing so they discourage work and lead to efforts to hide income and earn income off-the-books, often through illegal activities. Health care legislation now being considered by Congress is a perfect example of the unintended consequences of poorly thought out public policy.