Category Archives: economics

Why Health Care is So Expensive

Posted on June 29, 2009 | Leave a comment

Originally published at politicsunlocked.com on June 29, 2009

As the health care debate moves forward, the mess of issues surrounding why health care is so expensive is finally being fleshed out.

Private insurance and costs for health care make up great deal of our national economy. If we were all receiving excellent care and had few complaints about the system, the fact that it costs so much might not be a problem.

However, companies can ill-afford insurance costs when they offer insurance to employees and compete in a global economy. Some of our most successful corporations, those that have “adapted” to international competition such as Walmart, have dropped health care insurance for their employees. Others such as automobile manufacturers and airlines could not compete partly because of the growing costs of health care plans for current and retired workers. Bankruptcies have resulted and health care plans for retired workers have been trimmed or eliminated in the process.

About eighteen percent of the population is uninsured and are likely to avoid some care that would be important for good health and then pay for private care on their own or use expensive public resources without paying for care.

Even the insured have complaints about the system. The public often blames the insurance companies for skimping on coverage and profiting unfairly. While Americans who have employer-provided insurance are most often satisfied with their health care, those who have to obtain insurance privately have great concerns about exclusions of pre-existing illness and recession of contracts for insurance after they become ill.

A recent New Yorker article attempted to discover why the costs in different areas of the country differ dramatically. The article is a must-read for sorting out one aspect of health care: can costs be lowered while still providing excellent care? The writer, an M.D. himself, Atul Gawande, interviewed doctors in two Texas areas, where statistics show widely different costs per person for about the same health care outcomes for their patients. In one section of the article, Dr. Gawande recounts a conversation with doctors from the more expensive health care area:

Some were dubious when I told them that McAllen was the country’s most expensive place for health care. I gave them the spending data from Medicare. In 1992, in the McAllen market, the average cost per Medicare enrollee was $4,891, almost exactly the national average. But since then, year after year, McAllen’s health costs have grown faster than any other market in the country, ultimately soaring by more than ten thousand dollars per person.

“Maybe the service is better here,” the cardiologist suggested. People can be seen faster and get their tests more readily, he said.

Others were skeptical. “I don’t think that explains the costs he’s talking about,” the general surgeon said.

“It’s malpractice,” a family physician who had practiced here for thirty-three years said.

“McAllen is legal hell,” the cardiologist agreed. Doctors order unnecessary tests just to protect themselves, he said. Everyone thought the lawyers here were worse than elsewhere.

That explanation puzzled me. Several years ago, Texas passed a tough malpractice law that capped pain-and-suffering awards at two hundred and fifty thousand dollars. Didn’t lawsuits go down?

“Practically to zero,” the cardiologist admitted.

“Come on,” the general surgeon finally said. “We all know these arguments are bullshit. There is overutilization here, pure and simple.”  Doctors, he said, “were racking up charges with extra tests, services, and procedures.”

This does not demonstrate that the problems of health care costs are all related to decisions made by doctors. But research shows that the outcomes of care provided in lower-cost areas can be as good as that provided in high cost areas. If this is the case, insurers, the government and the public pay more than what is necessary through premiums, co-pays and taxes. A change in the care prescribed by doctors could save everyone a great deal of money without providing less care. In fact, patients would endure fewer tests, less and medical procedures than they are currently made to face.

Much of the current debate focuses on the politics of health care. People imagine a war between socialism and capitalism fought in the guise of health care reform. Good financial reform will be much more specifically tailored to deal with the problems in the current system and hopefully will give us more for less.

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What can Canada teach us about banking regulation?

Posted on June 19, 2009 | 3 comments
By Marc Seltzer and Leslie Schreiber; originally published as “Northern Light” on June 19, 2009, in Commonweal Magazine and at Commonwealmagazine.org.

US Regulatory Reform Follows Canadian Model

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Amid the greatest worldwide financial meltdown since the Great Depression, there have been few examples of sound financial management and regulation. Public authorities have had to provide billions of dollars to support ailing institutions and have acknowledged far-reaching gaps in public oversight. Responding to the disastrous bubble and bust, the Obama administration is calling for comprehensive reform. International leaders have even gone so far as to call for the creation of a world financial regulator.

U.S. Treasury Secretary Timothy Geithner, while not going that far, is asking Congress to grant the Treasury broad oversight authority for virtually all financial institutions, and a mandate to monitor systemic risk. Additional proposals seek to insure that financial instruments, such as credit-default swaps, are subject to federal regulation. While Congress will ultimately be responsible for crafting legislation, Geithner’s proposals provide a road map for a new financial order, in his words-“not modest repairs at the margin, but new rules of the game.”

The economic crisis has tested the stability of financial systems across the international community. The results differ widely, from Iceland’s near-bankruptcy to Canada’s remarkable financial health and insulation from risk. Beyond the private gains and losses, the crisis has revealed strengths and weaknesses of different regulatory environments. Remarkably, not a single major Canadian financial institution has needed a bailout. In March, the International Monetary Fund praised Canada’s banks for their “remarkable stability amid the global turbulence.” Howard Kaplow, an investment executive and director of financial services in Montreal, noted that Canadians “tend to be more conservative, but we also have a more restrictive financial authority with tougher rules to follow.” The IMF agrees, commending Canada’s “strong regulatory and supervisory framework.”

In this light one may ask how Secretary Geithner’s proposals for regulatory reform measure up against the Canadian model. Are the Obama administration’s efforts to monitor systemic risk and regulate all substantial financial entities and instruments in line with the Canadian approach?

In contrast to Canada’s conservatism, the U.S. system has gone through a period of “irrational exuberance.” Over the past twenty years, Congress deregulated financial industries in order to maximize business opportunity. New financial instruments, markets, and conglomerates were unleashed without oversight. In a recent debate over the causes of the crisis, New York University Professor Nouriel Roubini (nicknamed “Dr. Doom” for having predicted the current crisis) argued that, “deregulation occurred too fast and in ways that did not provide prudential regulation for provision of the financial system.”

The dominant political ethos was trust in free markets, competition, and modest regulation-even self-regulation. Where regulators did act, they followed a framework that called for distinct regulators in compartmentalized markets. The FDIC has been highly praised for its success at handling the closing of failed banks, but neither the FDIC nor the Federal Reserve had authority to intervene when an investment bank or insurer acted unwisely or teetered on the brink of bankruptcy.

In the end, the failures were systemic and pervasive. They could not be limited to one sector of the financial system, nor were they detected by any existing regulatory agency. In warning that the problems would not respond to a quick fix, President Barack Obama observed that the crisis “didn’t result from any one action or decision. It took many years and many failures to lead us here.”

New regulations were contemplated long before Secretary Geithner was confirmed. Former Treasury Secretary Henry Paulson and the General Accounting Office oversaw substantial groundwork in 2008, but it now falls to Geithner to finish the job. While Geithner is promoting a more comprehensive regulatory regime, the proposals have been developed by financial and market experts and insiders who believe in free-market capitalism. They do not wish to stifle financial innovation. Instead, the aim is to protect the overall system while allowing risk-taking activity to continue. This approach is in line with the Canadian system, where, despite strong regulatory authority, the financial sector has prospered. Today, five of the country’s banks are among the top fifty banks in the world. Ten years ago none of them was.

The lead financial regulatory authority in Canada is the Office of the Superintendent of Financial Institutions (OSFI), currently headed by Julie Dickson. She chairs the Financial Institutions Supervisory Committee, which has broad authority to monitor systemic risk and, for that purpose, brings together regulators who oversee market stability, risk-management, and business practices from across the financial economy. The OSFI mandate covers “all banks, along with federally regulated property, casualty, and life insurers, and trust and loan companies, plus about 10 percent of private pension plans” according to OSFI spokesman Jean Paul Duval. If any of the institutions “raise a red flag, the OSFI can implement a range of disciplinary measures, affecting everything from bank capitalization to controlling assets, and even getting directly involved in business planning.” Indirectly, this also includes securities firms, which are 70-percent bank-owned in Canada (for example, RBC Dominion Securities is part of the Royal Bank of Canada). The OSFI oversees 450 banks and insurers, and approximately 1,350 private pension plans. Its authority, while not reaching all financial institutions (hedge funds are not regulated by the OSFI), is fairly comprehensive and is foundational for the soundness of the Canadian system.

Secretary Geithner told Congress in March that the oversight he was proposing “would include bank and thrift holding companies and holding companies that control broker-dealers, insurance companies, and futures commission merchants, or any other financial firm posing substantial risk” (emphasis added). Not every financial entity reaches the size and significance to affect systemic risk, but Geithner wants to avoid a system where the legal form of an entity can be used to shield it from regulation. A key component of meaningful oversight is the ability of the regulator to set standards for institutional risk management. Geithner is asking Congress for authority to increase capital requirements, to restrict leverage ratios, and to enact additional prudential rules.

In Canada, the OSFI has substantial experience with such oversight. According to Duval, since its creation in 1987, the OSFI “has always been vigilant in the development of its risk-management practices.” Capital requirements for Canadian banks have been held at 7 percent, while the global average is closer to 4 percent. Similarly, Canada’s bank-leverage ratio has been kept under twenty-to-one, while international bank leverage ratios were thirty-to-one and even forty-to-one. OSFI Superintendent Dickson remarked in November 2008, “We have seen how strong capital cushions in Canada have paid off to the benefit of our institutions and overall financial system.”

Canadian institutions were not free from risk-taking or even from exposure to subprime loans from the United States, but strong capital and leverage standards kept the damage from overwhelming Canada’s banks, let alone destabilizing the economy. In addition, Canadian banks generally still maintain the mortgage portfolios of loans they originate, retaining direct knowledge and responsibility for their management. These conservative practices reinforce sound regulation, and vice versa.

Canadian regulators give special attention to larger, “too big to fail” organizations. Duval explains that “OSFI utilizes a risk-based methodology, where institutions that we believe are operating in a riskier manner are subject to increased supervision. That said, the larger institutions will be operating in larger parts of the market, so [they] would naturally receive greater attention…and can be subject to different supervisory requirements.”

Similarly, the U.S. federal regulator proposed by Geithner will have the power to step in and manage problems when institutions fail to meet prudential standards or find themselves in financial difficulty. Special consideration would be given to entities deemed “too big to fail.” Geithner is asking Congress for the flexibility to intervene where there is risk to the wider economy. He has already intervened with a few of the big banks. Recent “stress tests” resulted in some banks being required to raise capital, although banks could choose whether to seek private or public funds.

Critics have called for regulations that would cap the size or restrict the legal structure of financial institutions. However, noting that other countries have allowed hybrid entities such as Canada’s banking and securities conglomerates, Geithner appears to trust that oversight will protect the system, and that private decision making should be allowed as much leeway as possible. The changes he proposes will require legislation. Under his lead, the Obama administration should be pushing hard for a substantial increase in federal regulatory authority. What might have been politically impossible before the crisis is now high on the legislative agenda. In addition, the chairman of the Federal Reserve, Ben Bernanke, has spoken in concert with the administration. While Congress will take a significant role in designing new regulation and is not likely to rubber-stamp the administration’s proposals, momentum is strong for the creation of comprehensive financial reform. The success of the regulatory system across the border should inspire both humility and hope.

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A Judicial Review: Justice Richard Posner

Posted on May 20, 2009 | Leave a comment
By Marc Seltzer; originally published on May 20, 2009 at politicsunlocked.com

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A potential candidate for the U.S. Supreme Court?

Justice Richard Posner of the U.S. Court of Appeals for the 7th Circuit is a giant in the field of legal theory. In association with others at the University of Chicago Law School, Posner is a chief architect of a movement called “law and economics”: efforts to bring free-market economic thinking into legal theory. Consequently Posner is known as a conservative for his economic principles. However, he does not take broad ideological positions. For example, he supported the government’s recent efforts to stimulate the economy using public funds, but he opposed the use of tax rebates because he concluded that the public would save this money rather than spend it. Instead, he endorsed spending on roads, bridges and other infrastructure, generally in line with Democratic Party positions.

Justice Posner is also a unique Supreme Court candidate because he has expressed so many opinions outside of the courtroom. He has written 40 books and hundreds of articles. He also maintains an active blog with colleague Gary Becker and is considered the most prolific justice in U.S. history. He has expressed support for environmental regulation, abortion rights and other principles that make him appear socially liberal. On the other hand he has supported a powerful government in the context of national security, defending the use of torture and limiting press freedoms in a way that is not popular with critics of the Bush administration.

Can such a person be nominated to the U.S. Supreme Court?

In the past, this would not have been a problem. However, since the 1980s, every Supreme Court nomination has become a power struggle and performance where the political parties attack the other side and try to score points while painting the opposition as extreme. The nomination of Posner would be difficult because it would appeal to centrists from both parties, but it would also be a sitting duck for attack by ideologues from both parties.

The question for President Obama is whether he believes Posner would make a great justice. Obama knows Posner from their time together on the faculty at the University of Chicago Law School. They share a pragmatic view of politics and policy. Is the President willing to apply his political capital in support of a candidate who will draw fire from his own party? Is Obama comfortable appointing a justice with such an independent mind that his judicial decisionmaking is difficult to predict?

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A Judicial Review: Professor Cass Sunstein

Posted on May 15, 2009 | Leave a comment
By Marc Seltzer; originally published on May 13, 2009 at politicsunlocked.com

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Harvard Professor Cass Sunstein is 54, the same age as Justices Kim Wardlaw and Sonia Sotomayor, profiled here in recent weeks. A longtime Professor at the University of Chicago Law School, where he was a colleague of President Barack Obama, Sunstein is one of the country’s leading legal scholars. He has published widely with particular interest and expertise in environmental issues, information technology, and behavioral economics.

Sunstein is referred to as a liberal, but his political philosophy is not easy to categorize. He would appeal to some conservatives because of his belief that judges should carefully limit their focus to the case at hand, leaving the larger legal rulemaking to legislators. Mr. Sunstein supported the nomination of Bush appointee John Roberts Jr. to the Supreme Court. Roberts had articulated this philosophy of judicial minimalism in his Senate confirmation hearing.

However, when Justice Samuel Alito was nominated by President George W. Bush, Mr. Sunstein wrote a detailed analysis of Alito’s conservative rulings arguing that Alito was a “conservative’s conservative.” The op-ed did not overtly oppose Mr. Alito’s nomination, but it sought to make plain theesssential conservatism of Alito’s positions.

This type of record is something that would not be available for those considering Professor Cass as a nominee to the high court. He has not served as a judge and has no record of judicial decision-making to dissect.

Professor Sunstein left the University of Chicago to join the Harvard Law faculty this academic term, and in January was nominated by the Obama administration to be head of the Office of Information Technology and Regulatory Affairs.

He is extremely creative and forward-thinking. His most recent book Nudge: Improving Decisions about Health, Wealth, and Happiness, which he co-authored with Richard H. Thaler, discusses a framework for moving society’s decisions in the right direction.

Responding to the question, “How does anyone determine what’s “good”? How do we determine what’s good for the environment?” in a recent interview, Sunstein explained,

“For most nudges, we’re thinking of people’s good by reference to their own judgments and evaluations. We’re not thinking that the government should make up its own decision about what’s good for people. The environment can fit within that framework to a substantial extent, but it has a wrinkle, which is that often when we buy certain goods or use certain energy or drive certain cars.…we inflict harm on others, so our own judgments about our own welfare aren’t complete. We want nudges that do help people who are being nudged but also help people who are harmed by those who are not taking adequate account of the risks they are imposing on other people.”

Sunstein’s pragmatism also seems a good fit for President Obama, demonstrated in the following quote:

“I think on a lot of problems, including environmental problems, we can make progress without getting stuck on issues that divide people. The price system can be used in a way that fits with people’s moral obligations. If you’re inflicting harms on other people but the costs of your actions (become) higher, then you’re probably going to inflict lower harms on other people. One of the great tasks of the next decade is to ensure that when people are creating risks though their daily activities, that they bear the cost.

I believe also that one big motivator of behavior is economic and another big motivator is moral, and for certain environmental activities we should appeal to people’s conscience. A lot of people are buying hybrids not because they save money, which they might, but because it’s the right thing to do. I just bought a hybrid myself. The reason I bought it was moral.”

Fundamental to Sunstein’s public policy theory is the idea that more information makes people more able to get the right outcome. If Sunstein is nominated to the Court, or if he is confirmed in the position at the Office of Information Technology and Regulatory Affairs, we should expect to receive an education.

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Immigration Solutions

Posted on May 12, 2009 | Leave a comment
By Marc Seltzer; originally published May 12, 2009, at care2.com

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Last month, after President Obama announced the beginning of a discussion on immigration reform, I wrote a blog discussing the fundamental political conflict at the heart of the matter:  Legalization for twelve million or so immigrants, whose status is currently illegal.

The two solutions offered by opposing sides are:  (1) strict enforcement of current law, leading to deportation of the illegal work force and those family members without legal residence; or (2) legal status and a path to citizenship with a fine for breaking the law.

The first option is not realistic because of the human costs, economic disruption and political beliefs of the majority of Americans and their representatives.  Those who see this as a black and white issue, where illegal means “no rights” are missing the historic context of a nation built on immigrants and hard work, not entitlement and status.  It’s not that illegal immigration is right, it’s that this solution is not right.  The nation may or may not be capable of policing its borders, but it is not capable of ten million deportations.

The second option is essentially the same “Amnesty” program that was implemented under President Ronald Reagan, with the addition of a potentially significant fine to punish and discourage the immigration law violations.

There has not been much discussion of the fine or potential restrictions of this type of legalization.  This may be where there is some room for compromise.  There is no reason that the fine could not be substantial, that the path toward citizenship could not be long, or that some immigrants could not be put in legal worker programs, where they would not be entitled to a path to citizenship without further application along with other non-resident applicants.

A stricter, more “punishing,” legalization program would serve to discourage illegal immigration in the future, especially if legal quotas for immigration kept up with the labor needs of U.S. employers and employers who broke the law were sanctioned.

If the second option (legalization) can be achieved politically, then the 12 million people who can take advantage of the program will come out from the shadows of the law and establish legal identities in the American system.  If this option cannot be achieved politically, the status quo may continue for another period.  This option has many negative consequences.   For the illegal residents, they suffer exploitation and lack of legal participation in the society in which they live.  Society loses their number in the census, in some tax collection and public allocation of resources.  Unfair competition with the legal workforce is also a problem.

So far, anti-legalization forces have not shown an interest in creative compromise.  It’s time they did so.  The failure to enact legal reform does not create a better real-world solution.  Helping to create an immigration program for the future that is realistic and firm is the best way to get the legal framework in line with an enforceable legal reality.

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Mayor Geithner, Sheriff Krugman and the Only Game in Town

Posted on March 24, 2009 | Leave a comment

Originally published March 24, 2009, at care2.com

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Imagine a terrible snow-storm brings a community to a standstill.  There is a grocery store, with plenty of supplies to keep the town going for a few weeks, but the power is out and the owner and staff can’t reach the store.  The townspeople are enlightened enough to realize that if everyone takes what they please, the supplies wont last and the owners will be bankrupt when they return.

Sheriff Krugman advises Mayor Geithner to open the store and charge a dollar for each item. The town will have provisions, the owner will have money, and the town council can pay the owner at a later date for losses where the sale prices were too low.  “What’s important is that we are making it happen now.”

Mayor Geithner agrees to open the store.  But he’s afraid of the effect of the $1 dollar price tag on the town’s liability for the store’s losses.  He decides to try to revive the store by getting the town involved in a public/private partnership.  “First, I want some of you to invest in the store goods,” he tells onlookers.  “Then you can sell them for a profit to the public.  You set the prices to get what you can for the goods,” he explains.  “Some of the profit will go to the store owner, some to the town and some to you.  Suppliers that can reach us will make an effort to do so and will get paid for their supplies, while we are waiting for normal conditions to return.”

Sheriff Krugman warned, “This is complicated and depends on strong participation.  Meanwhile the food is perishing and may not be sold and resupplied in time,” he said.  “My plan gets the goods moving now so the supplies aren’t wasted. If your plan takes time and fails we will still have to get the food to people and we wont be able to charge much for it then. Too risky, when what we need is certainty.”

The Mayor then made his best case, “Here’s what I will do.  The town will lend you all the money to invest, since you don’t have access to the bank.  If you lose money the town will insure most of your losses, using the town’s share of profits when you succeed.”  “If you take an interest in the supply and demand of these goods, we should have prices that are as close to real prices as the conditions allow,” he said.  “Thus, no awful surprises when the owner comes back.”

Many people had stopped listening or fallen asleep.  Others were clueless. But a few were guessing the price of soap, thinking of the deals they would have to make in order to move the produce before it went bad andimagining that a run on canned sardines and the like could give them a chance to save for a new car.

No one wanted to lose money, but the terms weren’t bad.  

The people turned to the wise elder, Gergen, for his opinion on whether to follow Krugman or Geithner.  “It depends on you,” Gergen said.  “If you buy into the Mayor’s plan it may work.  If it fails, we will end up with the Sheriff’s plan whether we like it or not.”

You can stop imagining now.

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Immigration 2009

Posted on March 19, 2009 | Leave a comment
By Marc Seltzer; originally published on March 19, 2009 at care2.com

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No Easy Answers

The announcement that President Barack Obama will begin a public discussion of immigration reform in May will reawaken debate on a highly contentious issue.  At core, the issue pits those fiercely opposed to allowing illegal residents in the United States to convert their status to legal residency against those who, albeit with conditions, seek to legalize most of the U.S.’s estimated 12 million illegal residents.

Political Risks

If the President follows his campaign position in seeking a legislative solution that includes offering legal status to those in the country illegally, he will be investing his political capital in an extremely divisive issue at great political risk.

Prior to the 2008 election in which Democrats gained in both houses of congress, anti-illegal immigrant forces had the upper hand.  While Democratic gains make the congressional votes for reform more plausible, the economic crisis and growing unemployment will intensify concern that giving illegal residents the opportunity to obtain legal status will make already-difficult competition for jobs that much worse.

The President will have his hands full with this one and risks a political fight of an uglier, nastier and more divisive nature than even the financial turmoil has wrought.

Increasing Attention and Concern

The economic crisis and growing unemployment is likely to increase opposition to immigration generally and make compromise more difficult.  However, some commentators such as Thomas Friedman, in his NY Times column, have noted that allowing more legal immigration could bring wealthy immigrants eager to buy homes, shoring up the contracting real estate market.

Illegality is troubling, but what are the alternatives?

Illegal immigration presents the difficult combination of illegal entry into the United States, perceived competition for jobs, and use of public resources that is a too-bitter pill for many Americans.  Yet with nearly 12 million illegal immigrants residing in the United States, it is difficult to realistically imagine a solution that does not involve granting some form of legal status.

One approach would be to grant permission to work for a period of years, without giving traditional legal permanent residency, which begins a path towards citizenship.  However, advocates of a path to citizenship for illegal immigrants, recognize that people who have effectively moved to the U.S., will likely be in financial and family jeopardy if they are forced to leave after having lived for five, ten or more years in the United States.  This type of compromise has not received significant support from immigration opponents, either, who chafe at the idea of rewarding those here illegally with any form of legitimate legal status.

Reagan’s Leadership, or a matter of time?

One thing is certain, poor management of the immigration issue in the past has set up a nearly impossible predicament in the present.  Congress could have largely managed the issue by raising legal immigration quotas sufficiently to keep up with the needs of employers during the 1990s and first decade of the new century.   Instead, the demand for labor far outstripped the legal supply and the debate shifted to unrealistic proposals of effective border enforcement on the one hand and mass deportation on the other.

In the end, Obama’s political skill and the Democratic congressional majorities may forge a “legalization” solution, much as Ronald Reagan did in 1986.  However, the opposition will be charged, and losing control of the issue could not only lead to defeat of immigration reform, but chip away at the President’s momentum and, so far, commanding authority.  While both sides in the debate should compromise and seek to offer creative solutions to the real problems that exist, within their principles, there will be those primarily looking to use the issue against Presidential authority and to position candidates for the 2010 congressional elections.

What to expect, at least initially

President Obama will likely push for a legalization process that aims to implement legal status after the recession eases and the unemployment rate declines.  Mr. Obama is opening the debate in May, and it would not be a surprise for legislation enacted in 2009 or 2010 to provide opportunities for legal status in 2010, 2011 or 2012, when employment is predicted to increase, if the recession ends.

Any proposal is likely to impose penalties and conditions as an attempt to deal with and discourage “unlawful” entry and residence.  More today than in the past, surveillance technology at the border and electronic identification procedures in the workplace make future enforcement of immigration laws possible, although by no means guaranteed.

UPDATE: In Immigration Solutions I push towards a compromise and ask both sides if they are willing to meet half way.  Whether it was because his hands were full with health care of because the prospect for immigration reform legislation was not good, President Obama has put off immigration legislation for at least a year.  In a later post I will review what is going on in enforcement and changes that result from the economic downturn with respect to illegal immigration.

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Health Care on the Horizon

Posted on March 14, 2009 | 3 comments

Originally published November 17, 2008

President-elect Barack Obama made health care reform a central tenant of his campaign. The fact that so many Americans are not covered and that coverage is so costly for those who are, brought the public together behind Obama’s call for change.

Recent polls confirm a substantial consensus for government action on health care.

Ninety-two percent of Obama supporters, 88 percent of undecided voters, and 57 percent of McCain supporters in an August 2008 WorldPublicOpinion.org poll, recognized that the government bears some responsibility for the health care of its citizens. This may not be a call for nationalized health care as was toyed with during the Clinton administration, but it does signal government involvement in a health care solution will be welcomed. 69 percent of respondents also said the government was “doing a poor job” ensuring basic health care needs are met.

Obama’s proposals, voiced prominently during the campaign, call for federal regulation of insurers and public spending to help uninsured Americans obtain coverage. Keys to any new legislation are likely to be mandatory coverage for pre-existing conditions, tax credits for small businesses that insure their employees, fees for large corporations who don’t, coverage of all children and subsidies for those that need help with premiums.

Obama estimated the costs of reform to be $50-65 billion and suggested that a repeal of Bush tax cuts for upper income Americans would offset increased spending in the federal budget.

The real question now is what shape health care reform will take in light of the financial crisis. President-elect Obama has put economic recovery at the top of his agenda and hinted that other issues will be considered in this light.

The concern on health care reform is that tax increases for the wealthy and for some businesses could negatively impact economic growth. With economic indicators bleak, and all eyes on fiscal stimulus, the country can ill-afford to burden any segment of the economy.

Health care policy experts are speculating on a limited phase-in of reforms, with insurance for children touted as a first step. Longtime advocates for reform, such as Senator Ted Kennedy, are preparing draft legislation in time for inauguration day on January 20th, 2009.

The new president is all about pragmatism, so he will undoubtedly consider any potential harm to the economy before taking action. However, there is reason to expect progress on health care.

Obama has spoken passionately about health care from the very beginning of his campaign and has stated how crucial it is to improving the lives of middle class Americans. His own mother faced “preexisting illness” denial-of-coverage issues for treatment of her terminal ovarian cancer.

This President will begin his term with a substantial electoral victory, strong majorities in the Senate and House of Representatives, and public opinion in support of government action.

This is a mandate for change and the power to see it through.

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Nationalization: Cutting Losses and Creating Solutions

Posted on March 13, 2009 | Leave a comment

A debate rages on different plains about rescue of the banking industry and real estate market.  That is a clean way of putting it.  Not the debate–the debate is pretty clean.  But the notion that it is just the banks and homeowners who are at risk is pretty sanitary. 

Without banks there is no substantial financing of business activity.  We could reinvent financing, especially since the Internet was not around when the current banking system was begun, but it would take years to reach anything like national capacity.  In the meantime, now, falling business activity continues a downward spiral of unemployment, business failures, investment losses, and postponed planning and recovery.

With no finance and no confidence, there can be no real estate market.  There is only deterioration in values and losses in investment.  Forward business activity and healthy market forces require confidence in the future. 

Hence, the nationalization debate.

If the government takes over weak segments of the banking system, it can, at a cost, make them stable institutions of the recovery economy.  They can loan money without fear of failing for lack of sufficient loan reserves.  Similarly, the government could buy up and hold real property at discounted prices throughout the United States.  This would eliminate the concern that numerous properties sit in default with no payments made on the mortgages and with no interested buyers.  The government is used to owning land in America–it owns much of what is not developed or used.  Add to that a fraction of the housing stock, to be resold later, and you have a more stable marketplace for the remaining property.  (You would have to create a formula such as automatic purchase of all homes in foreclosure at a set percentage discount for a six month period).

Why not nationalize one or both fractions of the marketplace?  Certainly this is not an efficient method of setting prices and running financial and real estate markets.  It would be a really bad idea if you had a functioning marketplace because like the communist economies, it would lead to poor allocation of resources, lack of private incentive and declining productivity.  But, should we be holding out for efficiency, when the very functioning of the system is so broken down?

It must be particularly hard for the Obama administration to look towards nationalization as an option.  The first African American president is hardly a financial liberal or political radical.  He taught at the University of Chicago, a free-market powerhouse.  He was not, so far as I know, part of the “Chicago School” of conservative economics, but neither was he ever noted as a liberal economic standout.  His centrist, free market, choices for Treasury department and economic advisors confirm this.  

What’s the solution?  How about giving a group of responsible Republicans the challenge of crafting and selling the temporary-nationalization plan?  Cherry-pick them in advance so they are willing, at least, to do what is needed.  Despite all our anti-politician rhetoric, there are many among them who are in an of themselves, profiles in courage. 

Rather than indulging in battle over whose party it is, and what it stands for, why not take on the problems of the day and solve some?  

We are clearly at a point of great uncertainty.  The recovery may come as the bottom of the market is reached according to market forces or it may not.  The stimulus spending and tax cuts may aid the recovery or they may not.  But the hole in the plan needs to be repaired, one way or another.

There is a significant, whether that’s one percent or more, risk of more devastation to business activity and investment value.  At some point, rather than aiming for a refined solution, you need to aim to protect yourself from the risk of catastrophe.  Protection from disaster is different than planning for optimal results.  We should, at least someone should, be advancing ideas on that level.

When the countries of the former Soviet Union endured its collapse and economic crisis in the 1990s, industrial production, standards of living, and life expectancy declined deeply.  Painful as it was, within a few years, conditions improved.  We might learn from these experiences as well as from other nations that have had to nationalize collapsing industries, and our own savings and loan crisis in the 1980s.  In each of these cases privatization was eventually successful, so we should not worry about a slippery slope towards socialism or the communist domino effect.  The real risk in those directions comes only if the United States is unable to pull itself up by its bootstraps and demonstrate a viable system.

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Big Spender or Economic Reformer?

Posted on March 12, 2009 | Leave a comment

Originally published on March 5, 2009 at care2.com

 

In the midst of this economic downturn, the president has proposed a budget that gives further definition to his vision for American progress.  In some ways it may not be the best time to propose something new, as many people, shocked by financial insecurity and instability, investment and pension losses, and business and job distress feel the need to hunker down and survive, rather than experiment and take risks.

On the other hand, the government is stirred to take significant steps to repair a major crisis, and while thinking big, there is opportunity to take bold action.  That, I think, can be said of President Obama’s political vision.  The question is, what kind of action is it?

Probably the most sensitive issue at the present time, is the issue of government spending.  Americans are mistrustful of congress’ ability to spend responsibly and are deeply concerned with the deficit.  How should Obama’s grand, if evolving, plan be looked at from this perspective? 

Is he the big-spending liberal, willing to meet any “progressive” goal with tax-payer dollars, giving only secondary consideration to the harm to the economy of tax increases, redistribution of wealth, and deficit spending? 

If we turn to conservatives for an answer, we hear the harsh critique of a socialist redistribution of wealth.

Even moderates, such as David Brooks, find the size and target of the fiscal stimulus legislation and budget proposal too big and too progressive, while expressly embracing parts of the program such as education.

If we ask liberals, they may very well see an increase in public spending on education, health care, and alternative energy that bespeaks progressive values, liberal causes and Democratic agenda.

I disagree.  Mr. Obama is a financial reformer, using public funds as necessary to do what government truly needs to do, but intent on cutting waste, corruption, and mismanagement out of the workings of government?

The main thrust of the vision is still investment in parts of the economy that need repair:  a struggling education system that is needed to produce a work force on which our prosperity will be based; an inefficient health care system that uses too much of our national budget, is a drag on our businesses large and small (unless like Walmart did they force these costs on private individuals and on state tax-payers when private citizens use public resources) and is too expensive for too many to afford; and energy that is imported at great cost to our economy and national security.  These are issues of fundamental importance to our economic prosperity, our business climate, our capitalist system.

Couldn’t we call what Obama is doing long-range economic reform? 

It might even make a good Republican agenda, as they are rooting around for one. 

Let us not quarrel with the targets of public spending as they are, in fact, economically productive and necessary.  Let us not quarrel with the amount of funds because they are realistic and necessary.  Let us organize and fight for the right use of these funds so that every dollar engenders in our children the philanthropic, creative, entrepreneurial and leadership qualities of business and civic leaders like Bill Gates, Steve Jobs, Warren Buffet and Colin Powell. Let’s make sure our businesses and citizens can afford economical health care benefits, and our citizens receive worthy care, and let us, using the scientific and entrepreneurial genius among us, develop alternative energy or at least efficient energy that is home grown, as clean as is reasonably possible, and marketable to the world.

Is that liberal?  Really?

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