Costing the health care bills

Lord Turner on the financial crisis

Adair Turner of the UK Financial Services Authority gave a very good speech on the causes and implications of the financial crisis yesterday in Washington. The event was hosted by National Journal and the Economic Club of America. Video here for National Journal subscribers. Transcript here.

Talking to Ken Feinberg

This morning I took part in an event organized by Georgetown Law and the Aspen Institute: a conversation with Ken Feinberg, special master for executive compensation at firms receiving assistance under the TARP, followed by a panel discussion on some of the issues he raised, featuring Mike Oxley, Chris Brummer, John Olson and Nell Minow. Following last week's announcements on pay, the session was very well-timed.

Perhaps it is stating the obvious, but Feinberg is an extremely impressive man, with a remarkable appetite for difficult assignments. This may be his hardest job yet. I thought his comments were interesting. If you have a couple of hours to spare, you can watch video of the entire event here.

Dithering on public borrowing

The public debt stands at nearly $8 trillion and within 10 years, according to Congressional Budget Office projections, it will be more than $14 trillion. Getting to that second figure in one piece depends on two things. Some optimistic economic assumptions need to hold, and investors need to be willing to lend the government another $6 trillion. Taking either of these things for granted would be foolish.

Almost everybody in Washington agrees that the fiscal outlook is scary. Almost everybody says that something must be done. But the options for confronting the problem come down to spending cuts or tax increases, and as soon as you mention either, an embarrassed silence descends.

The politicians are not as worried as they say they are. And the same is true of the public. If you believe the polls, voters are more anxious about public borrowing than their politicians are -- but not so worried as to welcome a rise in taxes (their own taxes, I mean) or cuts in Social Security or Medicare. They may be nervous about policies that would add to the fiscal problem -- hence their hesitation over health care reform -- but meaningful subtractions from the problem are a different matter.

Can anything be done? We have been here before. Washington has a time-honored procedure for such cases. Rather than thinking about entitlement reform or tax reform, it thinks about process reform. 

Dithering on Afghanistan

After eight years of government by gut instinct, most Americans welcomed the arrival of a deliberative president. Yes, get the experts in. Reflect, weigh their advice. What a good idea.

And so it is if you are attempting, say, to reform the healthcare system. (A shame it was not tried.) There is even more to be said for taking your time if you are contemplating going to war. But when you are already fighting one, it has drawbacks. The US has been at war in Afghanistan for eight years - and it is losing. On this issue, Barack Obama is giving deliberation a bad name. He needs to make his mind up.

You can read the rest of it here.

The public option lives

The idea of a public option in healthcare reform is not dead yet. A lot of Democrats believe you need it to hold down costs. A lot also see it as a first stride towards Medicare-for-all, which is where they want the system to end up. Obama has signalled he is ready to drop the idea, but has given no strong steer one way or the other. The party, especially in the House, is not willing to give up on it just yet.

One of the things keeping the notion afloat is the belief that voters, too, are pretty keen. I've blogged before about this (here and here), noting that the polling results are actually all over the place. The answer depends on the way the question is framed. The variation also suggests confusion--which is warranted, given the complexity of these proposals, with or without the option.

The excellent Jay Cost at Real Clear Politics has taken a much more careful look at the question. Framing is everything, he finds, and questions which draw attention to possible consequences of the option elicit less support.

Cost draws attention to some Rasmussen polling. When asked,

"Would you favor or oppose the creation of a government-sponsored non-profit health insurance option that people could choose instead of a private health insurance plan?"

the answer is strong approval. Then comes a follow-up question.

"Suppose that the creation of a government-sponsored non-profit health insurance option encouraged companies to drop private health insurance coverage for their workers. Workers would then be covered by the government option. Would you favor or oppose the creation of a government-sponsored non-profit health insurance option if it encouraged companies to drop private health insurance coverage for their workers?"

A clear majority is now opposed.

So, does this mean that the public is actually against the public option? I'd say no. Instead, I would suggest that the public lacks sufficient information about that specific item to deliver a firm opinion. Accordingly, its opinion varies depending upon question wording, priming effects, the ebbs and flows of the news cycle, and so on.

Passing a health reform bill is just a start

One thing this bill or any other would not do, though, is end the controversy over US healthcare. The battle would move to new ground. The argument over access to health insurance would subside - this would be Mr Obama's lasting success - but the argument over paying for it would become even more intense. The committee's bill conforms to Mr Obama's demand that it be "deficit-neutral", but for the most part only pretends to deal with the costs...

[T]he bill, if it passes, is unfinished business with a vengeance. The implication is clear: here is one more reason why US taxes will have to rise. If Medicare recipients resist cuts in their services, as they will, higher taxes will be needed to pay for the subsidies. Reducing the subsidies is not the answer, because this will worsen the insurers' risk pool, raise health-cost inflation, and roll back gains in coverage.

In the end it should come as no surprise that providing wider access to health insurance is going to cost taxpayers money, but the advocates of this change - to repeat, a desirable and long overdue reform - are doing nothing to prepare the country for this unavoidable result.

This column by Ross Douthat is on the same page so far as financial consequences are concerned. He advocates a more limited form of universal access--to coverage with a very high, income-related deductible, or so-called catastrophic insurance. As he says, this has been proposed by Martin Feldstein and Brad DeLong, conservative and liberal respectively, so the idea has cross-party appeal.

There's certainly a lot to be said for this approach. Feldstein and DeLong differ in important ways (DeLong wants to shut down private health insurance altogether) but they agree that the taxpayer should pay for healthcare expenses above a high threshold, and that the tax deduction for employer-provided insurance (which costs more than $200 billion a year) should be abolished to pay for it. Either of their plans would strengthen the individual incentives to economise up to the threshold. I only wonder if a deductible as high as they envisage (15% of gross income; DeLong favors an income-tax increase of 5 percentage points on top of that) could be made to stick.

More on the Nobel

Charles Krauthammer and Bill Schneider offer contrasting takes. Krauthammer as always makes some powerful points. His catalogue of Obama's failures to date is correct, isn't it? In particular, Russia's lack of response to the administration's multi-track overtures has received too little attention.

And what's come from Obama's single most dramatic foreign policy stroke -- the sudden abrogation of missile defense arrangements with Poland and the Czech Republic that Russia had virulently opposed? For the East Europeans it was a crushing blow, a gratuitous restoration of Russian influence over a region that thought it had regained independence under American protection.

But maybe not gratuitous. Surely we got something in return for selling out our friends. Some brilliant secret trade-off to get strong Russian support for stopping Iran from going nuclear before it's too late? Just wait and see, said administration officials, who then gleefully played up an oblique statement by President Dmitry Medvedev a week later as vindication of the missile defense betrayal.

The Russian statement was so equivocal that such a claim seemed a ridiculous stretch at the time. Well, Clinton went to Moscow this week to nail down the deal. What did she get?

"Russia Not Budging On Iran Sanctions: Clinton Unable to Sway Counterpart." Such was The Washington Post headline's succinct summary of the debacle.

You can make a better case than Krauthammer allows for changing the missile-shield policy, but the fact that Russia hasn't budged on Iran is indeed a notable failure.

Krauthammer goes much further, of course, and says that calling Obama's Nobel merely "premature" is absurd. He thinks we can already write off the administration's whole approach. There he loses me. Such certainty, less than a year in, seems as daft as saying it's all going great.

Continue reading "More on the Nobel" »

Bankers' pay

I think this FT leader is very good. First it says that public money underwrites the bonuses banks are getting ready to hand out. That is a familiar point but one that deserves to be emphasised. Then it puts its finger on something mentioned less often. These huge bonus pools are diverting funds that could be used to build capital, which the industry as a whole urgently needs to do.

The problem is not limited to the bonuses on which political debate has unhelpfully focused. It is widely agreed that variable pay must be designed to discourage risks to the economy. But current plans for regulating pay will not limit the total amount bankers extract from profits, which could instead be added to capital.

In principle, other planned regulation - strong insolvency regimes and risk-sensitive capital requirements - can limit banks' profits from risks underwritten by others. But it will take years before these are credibly enforced.

Yes. At the present rate of progress, in fact, one wonders if they will ever be credibly enforced. In any event, regulation of the overall level of bankers' pay, not just its design with respect to risk-taking, is evidently going to be needed--something I never expected to say.

Frontline on Afghanistan

I thought last night's PBS Frontline documentary on Afghanistan was excellent, if depressing. If you didn't see it you can watch it here. The scene where the US marine starts to lose his temper with the people he is trying to protect makes you wince. Talking through a translator who spoke neither the local dialect nor English all that well--"I'm asking you for the fifth time"--the marine's posture is impatient throughout and increasingly exasperated. He eventually resorts to an outright threat. The villagers' not unreasonable response: What do want us to do? You have tanks and planes. If you can't beat the Taliban, how do you expect us to?

This is counter-insurgency? Impossible to say, of course, how representative an encounter it was, but the situation looked all too plausible. You could not help but think that what we are asking of our forces--with little training and no aptitude for this kind of work--is just impossible.

If that isn't enough to make you gloomy, this WashPo piece today might do the trick.

The case for a VAT

An excellent column by Henry Aaron and Isabel Sawhill.

So here is what we propose: Congress should enact a value-added tax, the equivalent of a broad-based sales tax on all goods and services. It should take effect only after unemployment has fallen to a predetermined level or in, say, five years, whichever comes first. Congress should link revenue from the new tax and other sources directly to public health-care spending through a newly created health-care trust fund. The trust fund would pay for all federal health-care spending. This framework would mean that Americans would get the health care they are willing to pay for. If spending outpaces projections, Congress will have to choose between raising taxes and finding ways to slow the growth of spending.

By balancing revenue and health-care spending, such a reform would help solve America's long-term fiscal problems. In the near term, it would also support and sustain the economic recovery. Consumers would be encouraged to buy now, before the tax takes effect. And by showing financial markets that Congress is determined to put our fiscal household in order, it would help keep interest rates low and encourage investment. The trust fund mechanism would strengthen incentives to institute reforms that will actually bend the health-care cost curve, because measures to slow the growth of health-care spending would avoid unpopular future tax increases that would otherwise be necessary.

This is a good idea.

Last year, by the way, I praised a book by Zeke Emanuel which makes the same points while laying out a basic blueprint for healthcare reform. Healthcare, Guaranteed is still the best thing I've read on the conjoined issues of tax reform and healthcare reform. The policy in the works is not going to be like this, needless to say, but the country might get there in the end. For the reasons Aaron and Sawhill say, it had better. Unfortunately Emanuel has been silent on the subject since going on to the White House payroll (where he has faced a lot of brainless criticism on the "death panels" issue). I think he would be more valuable educating the public than advising the president.

Obama's Nobel prize

Mr Obama was always going to struggle to gratify the hopes that got him elected. He knows this better than anybody. In office, a key task was to temper expectations, face uncomfortable facts and bring the country to a more sober understanding of its choices. This is not going well and the Nobel committee's declaration of love has made it all a little harder.

In fact, the president's wisest course, as the commentator Mickey Kaus observed, was to have turned the prize down, saying he had not had time to accomplish the things he wanted to. Accepting the world's praise for having done nothing looks vain and is not without risk. The president could have turned the embarrassment to his advantage but has let the opportunity pass. He said he would accept the award as "a call to action" and was deeply humbled by the panel's choice. Yes, thinks much of America, he still has plenty to be humble about.

Getting the price of carbon into cap and trade

My new column for National Journal looks at the Senate's climate-change bill [the link to the article expires in two weeks].

Carol Browner, the top White House adviser on energy and the environment, recently told a conference hosted by our sister magazine The Atlantic that the president was unlikely to sign a climate-change law before the next big international meeting on the subject, in Copenhagen in December. "That's not going to happen," she said. The American negotiators should have a bill to work from -- quite likely more than one -- but no new law. This will be an embarrassment. It will hamper the Obama administration's efforts to claim global leadership on the issue.

But for those who seek effective curbs on carbon emissions, the news is not all bad. It matters more to get the right kind of agreement -- one around which global cooperation on carbon abatement can work -- than it does to meet the December deadline. And it may be that the United States is inching, after all, toward the kind of measure that could serve this purpose.

Later I refer to a paper for Brookings by Adele Morris, Warwick McKibbin and Peter Wilcoxen. This advocates a "carbon price collar"--a very good idea that Kerry-Boxer has now taken up. If you follow this issue, the paper by Morris et al is essential reading. You can find it here.

Good advice on the Nobel prize

History, legitimacy and reason

For those who read my column on rage in US politics, and for others as well, no doubt, here is an interesting article by Lou Cannon (noted biographer of Ronald Reagan, among other distinctions) on "the once and constant opposition".

My foray in the archives casts doubt on two assertions that have been made so often they seem as if they have the force of fact. The first is that Obama faces slurs and slanders of unprecedented magnitude. This is sometimes been attributed to racism but more often to the coarsening of the public dialogue arising from the decline of newspapers and the rise of talk radio, 24-7 cable news, and an Internet that puts legions of amateur bloggers on equal footing with professional journalists and historians.

The second assertion is that conservatives and/or Republicans are out of ideas and time, a contention made provocatively by Sam Tanenhaus in his new book, "The Death of Conservatism." "Today's conservatives resemble the exhumed figures of Pompeii, trapped in postures of frozen flight, clenched in the rigor mortis of a defunct ideology," Tanenhaus writes.

[Y]ou do a disservice to your readers when you equate right-wing birthers questioning whether Mr Obama was born in the US and leftwing counterparts who argue that George W. Bush stole the 2000 election.  There is absolutely no evidence that Mr. Obama was born anywhere outside Hawaii, whereas there are serious grounds to question the legitimacy of the outcome of the 2000 election.  At least four Supreme Court judges would agree.  Furthermore comparing conservative claims that Congress' (not Mr. Obama's) healthcare plan is a plot to turn the US socialist to former president Jimmy Carter's (impolitic) suggestion that much of the opposition to Mr. Obama is mere racism is also misguided.  Carter clarified his (arguably misinterpreted) remarks saying that some attacks on President Obama were tinged with racism.  Few Republicans have backpedalled on claims of a socialist plot.

A polity blinded by rage

Historically, the US has both accommodated and benefited from a remarkable degree of cultural pluralism - with sufficient civic tolerance, mutual (if sometimes grudging) respect and unashamed patriotism to bind the whole together. Now, more than ever, the instinct of politicians and their energised supporters is to divide. Mr Obama seemed to promise a corrective, but that hope is fading. Old and new media, obsessed with gladiatorial politics, offer no remedy. They either take sides or act as fight promoters; in any event they worsen the polarisation and leave the centre unserved. The internet's echo chambers stir brainless anger and push the poles still further apart.

The Atlantic/Aspen Institute/Newseum event

This was the second day of a conference organised by The Atlantic, the Aspen Institute and the Newseum.

David Leonhardt's interview with Alan Greenspan was interesting. (Megan McArdle's write-up is here, along with a video.) Greenspan emphasised the need for higher capital requirements in banking and finance. He was also asked to name the issue that we would one day come to see as today's biggest neglected economic-policy problem. Public debt, he said. Asked how we solve that problem, he said with higher taxes--they will be needed even if control of spending can be tightened--and a VAT would be the best way to raise them. He is right on all those counts, in my view. What's striking, though, is that as a matter of practical politics the conversation about restoring fiscal balance has not even started. In the end, of course, the country will have to confront this question. But when and how will the inevitable present itself? What kind of further crisis will it take to get this subject on the table?

In another session, political strategists Steve Schmidt and Bob Shrum discussed, among other things, the prospects for next year's elections. (See Marc Ambinder's write-up.) Whether and how far the Republicans make progress will depend on the strength of the recovery, they noted. If the economy surges back, the administration and the Democrats might do quite well, said Shrum. At the moment, most economists seem to be expecting a fairly tepid expansion, with unemployment still higher than 10 percent on election day--but not all. The column I mentioned in my previous post mentions a paper by Michael Mussa of the Peterson Institute. This argues, and quite persuasively, I think, that the recovery will be a lot stronger than that, with unemployment falling to less than 9 percent by the end of 2010. Democrats seeking uplift should read it.

The G20's unfinished business

My new column for National Journal argues that the success of the G20's efforts to stabilise the world economy will turn on whether governments can mend the capital-adequacy regime for banks and other financial firms. [The link to the article expires in a week.]

The most important unfinished business is reform of financial regulation -- and the most crucial piece of that fix is capital requirements. To prepare the way for the Pittsburgh summit, the G-20 finance ministers met in London, and Treasury Secretary Timothy Geithner presented some good proposals. The details are complex and troublesome, of course, but the basic principles of what needs to be done are actually quite simple and not in dispute...

Regulators have let banks hold less and less capital over the years, reasoning that bankers were competent managers of financial risk. How quaint that now seems. In effect, banks were allowed to decide for themselves how much capital was needed, and even what counted as capital for regulatory purposes. Capital has a low yield -- which is why a higher capital requirement is like a tax on banks' lending -- and governments were standing by to rescue them if necessary. So they cut corners. You know the rest.

Geithner said that banks need to set aside much more capital. Big banks should reserve proportionally more than small banks. The new requirement also needs to be "counter-cyclical": Banks should have to set aside proportionally more capital when their lending is increasing quickly. There should be an overall leverage ratio, too, as a global check on capital adequacy, even if proper amounts of capital have been reserved against specific types of "risk-adjusted" lending. And there should be a liquidity requirement so that banks have a line of retreat if their ability to borrow short-term is compromised...

The Pittsburgh meeting affirmed the need for this new regime, but the timetable for reform is vague and the G-20 partners have different ideas about what happens next. Right now, U.S. banks are better capitalized than many of their European counterparts, so Europe is complaining that it will be harder for its banks to execute Geithner's proposal. This disagreement is liable to slow the introduction of new rules and might lead to their being watered down...

This is the G-20's real challenge. Forget the rest -- rebalancing global growth, rebuilding the International Monetary Fund, coordinating fiscal and monetary "exit strategies," and all the other stuff name-checked in the communique. Helpful though some of that may be, none of it is indispensable (and some of it is impossible). Stricter bank capital requirements are in a category of their own. Judge the G-20 -- and place your bets on the next financial crisis -- according to what, if anything, it achieves on this.

Centrists and the public option

EJ Dionne asks a good question: why don't centrists approve of the public option?

It doesn't involve a government takeover of the health-care system. The idea is that only consumers who want to enroll in a government-run health plan would do so. Anyone who preferred private insurance could get it.

The public option also uses government exactly as advocates of market economics say it should be deployed: not as a controlling entity but as a nudge toward greater competition. Fans of the market rightly oppose monopolies. But in many places, a small number of insurance companies -- sometimes only one -- dominates the market. The public option is a monopoly-buster.

Centrists tell us they want to hold down spending and fight deficits. Strong versions of the public option, as the Congressional Budget Office showed in its scoring of Sen. Jay Rockefeller's proposal, cut the costs of insuring everyone.

My view on the public option has always been that I'll know whether I like the idea when I see it explained. The problem is that the idea has been pitched as all things to all men. Centrist voters are told it won't make much difference. Progressive voters are told it will make so much difference that the entire project is a waste of time without it.

Dionne does that very thing in recounting the public option's virtues. The public option cannot be both an ordinary competitor, leaving your circumstances unchanged if you choose not to take it up, and a force that can balance the budget by squeezing hundreds of billions out of public health-care costs. It can be one of these or the other but not both.

Democrats have been debating whether a "strong" public option should pay Medicare reimbursement rates, something an ordinary competitor could not do. If it did, this would drive down costs and have many other (not necessarily intended) consequences. It would be a big step towards Medicare for all.  As I have argued before, there are worse things than Medicare for all, including in my view the present system. But this outcome is one of the things that the administration is saying it does not want. If you want Medicare for all, do what some Democrats do and make the case. If you don't, stop proposing a public option that would push the system towards it.

Politically, the problem with the public option is that it has added to the uncertainty, and hence the anxiety, that surrounds this reform. People want to know where all this is heading. The public option might be nothing, or it might be everything, depending on how it is done. But when advocates like Dionne say that it can be both everything and nothing at the same time, according to your preferences, then centrist voters are right to say, "No thanks."