How Not to Stop Healthcare Inflation

The NY Times reports:

President Obama will propose on Monday giving the federal government new power to block excessive rate increases by health insurance companies, as he rolls out comprehensive legislation to revamp the nation’s health care system, White House officials said Sunday.

Very, very strange.  You would think that all those future Nobel-prize-winning economists working for the President would explain to him the history and economics of government price controls.  Imposing price controls certainly wasn't President Nixon's finest hour.

Maybe President Obama should instead follow in President Ford's footsteps and start wearing a WHINE button on his lapel, for Whip Healthcare Inflation Now, Egads!  

Feckless would be one step better than counterproductive.

What unions are getting...

....from the Obama Administration, according to The Economist:

Union leaders such as Mr Trumka and Andy Stern, the leader of the more moderate Service Employees International Union, are regular guests at the White House. Mr Obama has revoked some Bush-era executive orders that unions hate and issued a few they adore. He has appointed union insiders to top jobs, allowed Congress to add “buy American” provisions to the stimulus bill, risked a trade war with China to please tyre-workers, let other trade deals wither and brazenly favoured unions when bailing out car firms.

But his biggest favour has been green, foldable and borrowed. For example, he encourages the use of “Project Labour Agreements” on big federal construction projects, whereby contractors must recruit through a union hiring hall. Such agreements inflate costs by 12-18%, according to David Tuerck of Suffolk University, and were banned under Mr Bush. Even where PLAs are not in force, federal contractors are obliged to pay “prevailing” wages. That actually means something close to the union rates, which is nice for the workers in question but means that taxpayers get fewer roads and schools for their money.

What I've Been Reading

I enjoy good memoirs. At their best, they can give you a sense of what it would be like to lead a different life, to walk in another's shoes. Political memoirs are usually a disappointment, as the writers typically have an agenda, such as establishing a place in history or angling for the next job.  They seem more like spin than truthful self-assessment.  Memoirs by nerdy academics, rare as they are, are among my favorite, in part because I can easily see myself in them and in part because the authors are often brutally honest.

All this is a prelude to a book recommendation: My Life as a Quant: Reflections on Physics and Finance, by Emanuel Derman. I have never been a physicist or worked on Wall Street, but this book gives a good sense of what both career paths are like.

The book was written, by the way, before the recent financial crisis. As a result, one does not get a sense of how the author would put recent events into perspective. But by the end of the book, the author is skeptical enough about the use and abuse of financial models that I suspect he would not be terribly surprised when they went awry.

Fiscal Stimulus, One Year Later

Pro and Con.

Thoughts about the Fiscal Commission

Here is a question I have been pondering.  If you were a member of the fiscal commission, what would you try to achieve?

The answer for liberals is easy: They want to raise taxes to fund the existing, and even an expanded, social safety net, while politically insulating the Democrats as much as possible from the charge of being the "tax and spend" party.  President Obama can then campaign in 2012 that he did not break his no-taxes-on-the-middle-class pledge, but rather a bipartisan group broke it.  That is, the President wants to take credit for fixing the fiscal situation but duck responsibility for having imposed higher taxes.

But what if you are conservative?  This is harder.  You can try to stick to your no-tax-increase position.  The problem is that doing so would require spending cuts larger than are politically realistic.  If I were king, I bet I could find sufficient spending cuts.  But I am not expecting to be anointed any time soon.  If the fiscal commission is going to succeed, tax increases will have to be part of the deal.

A reasonable position is, perhaps, that the commission should not succeed.  After all, it is the president's responsibility to put out a budget.  The one he just released is, as I explained in my recent Times column, not sustainable.  He just passed the buck to the fiscal commission.  Perhaps conservatives should not allow him to do that but, instead, should try to force him to put out a sustainable budget on his own.  After all, isn't that Peter Orszag's job?

But let's suppose that you are a conservative and you want the fiscal commission to succeed.  You will have to agree to higher taxes as part of the bargain.  But what should you aim to get in return?  Here is my list.

1. Substantial cuts in spending.  Ensure that the commission is as much about shrinking government as raising revenue.  My personal favorite would be to raise the age of eligibility for Social Security and Medicare.  Do it gradually but substantially.  Then index it to life expectancy, as it should have been from the beginning.
2. Increased use of Pigovian taxes.  Candidate Obama pledged 100 percent auctions under any cap-and-trade bill, but President Obama caved on this issue.  He should renew his pledge as part of the fiscal fix. A simpler carbon tax is even better.
3. Use of consumption taxes rather than income taxes.  A VAT is, as I have said, the best of a bunch of bad alternatives.  Conservatives hate the VAT, more for political than economic reasons.  They should be willing to swallow a VAT as long as they get enough other things from the deal.
4. Cuts in the top personal income and corporate tax rates.  Make sure the VAT is big enough to fund reductions in the most distortionary taxes around.  Put the top individual and corporate tax rate at, say, 25 percent.
5. Permanent elimination of the estate tax.  It is gone right now, but most people I know are not quite ready to die.  Conservatives hate the estate tax even more than they hate the idea of the VAT.  If the elimination of the estate tax was coupled with the addition of the VAT, the entire deal might be more palatable to them.

One thing is clear: The Democrats in Congress would hate the five demands above.  But that is precisely the point.  The fiscal commission is giving the Democrats something of very high value: political cover for a major tax hike.  If Republicans are going to give them that, they should get something very big in return.  If the conservatives on the commission could achieve my five goals above, it might be a deal worth talking about.

An Illogical Attack on the GOP

The Democratic Party is attacking some Republican congressmen for both opposing the stimulus bill and also helping direct some stimulus spending into their districts.

I don't know the facts of the case, but the logic of the Democratic position baffles me.  It seems perfectly reasonable to believe (1) that increasing government spending is not the best way to promote economic growth in a depressed economy, and (2) that if the government is going to spend gobs of money, those on whom it is spent will benefit.  In this case, the right thing for a congressman to do is to oppose the spending plans, but once the spending is inevitable, to try to ensure that the constituents he represents get their share.  So what exactly is the problem?

Let me offer an analogy.  Many Democratic congressmen opposed the Bush tax cuts.  That was based, I presume, on their honest assessment of the policy.  But once these tax cuts were passed, I bet these congressmen paid lower taxes.  I bet they did not offer to hand the Treasury the extra taxes they would have owed at the previous tax rates.  Would it make sense for the GOP to suggest that these Democrats were disingenuous or hypocritical?  I don't think so.  Many times, we as individuals benefit from policies we opposed.  There is nothing wrong about that.

The Buck Stops Where

Click here to read my latest column in the NY Times.