Author Archives: jackheidel

Lowering the Cost of American Healthcare II. Entitlements

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My last post emphsizes that any solution to our nation’s long term debt problem must include reining in the cost of American healthcare.  There are two major drivers to this problem as is made clear by a new report from the American Enterprise Institute, “Improving Health and Health Care: An Agenda for Reform.”
Capture1First of all, out-of-pocket consumer spending on healthcare has been steadily declining for many years. The less we pay directly for our own healthcare, the less incentive we have to control costs.
Capture2Secondly, the cost of healthcare entitlement spending, for Medicare and Medicaid , is growing rapidly as a percentage of GDP.  Such a rapid increase is unsustainable and must be curtailed. Here is what the AEI report recommends for doing this.

  • Medicaid. It serves two groups of people: 1) able bodied adults and their children and 2) the disabled and elderly. The federal government should make fixed, per-capita payments to the states based on historical spending patterns for these two groups. The able-bodied adults and children would get the same (refundable) federal tax credits as everyone else supplemented by Medicaid payments. The states would be totally responsible for the second group.
  • Medicare. The current system would be gradually migrated to a premium support system which would provide enough to pay for a choice of competing insurance options. The eligibility age would gradually rise to 67, consistent with Social Security.
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  • Health Savings Accounts. HSAs are tax-preferred vehicles for saving for medical expenses until the (perhaps high) deductible amount is reached. Their use is growing rapidly. A one-time $1000 federal tax credit for establishing an HSA would increase their number even more. Their use should be expanded into Medicaid and Medicare as well.

Such reforms as these can significantly lower the cost of providing healthcare to the poor, the elderly and everyone else as well. If we don’t do something along these lines, we will eventually end up with a government run single payer system much to our detriment.

 

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Lowering the Cost of American Healthcare

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It is well understood that entitlement spending (Social Security, Medicare and Medicaid) is the biggest driver of our very serious long term debt problem.  Furthermore the high costs of Medicare and Medicaid can’t be separated from the high cost of American healthcare in general.  In other words, getting the cost of national health spending  under control is a fundamental fiscal and economic issue.
Capture1A major reason for this high cost is the tax exclusion of employer provided healthcare.  American out-of-pocket spending on healthcare is only 11% of the total as compared to 26% in Switzerland or 52% in Singapore, two examples of countries with efficient free-market systems.  Americans have little incentive to hold down the cost of their own care because it is mostly paid for by third party insurance companies.
The Affordable Care Act (aka Obamacare) expands access to healthcare but does nothing to control overall costs.  This means that any changes made to the ACA should be aimed at preserving access but making healthcare much more cost efficient.  This can be accomplished by

  • Keeping the Exchanges. The exchanges were set up to expand access for the uninsured and provide subsidies for those who couldn’t otherwise afford health insurance. This is the best feature of the ACA and should be retained.
  • Repealing the mandates for both individuals and employers. Mandates mean that benefits have to be strictly defined, uniform for all, and therefore more expensive. Employers are burdened by extra regulations which affect hiring and growth decisions.
  • Replacing the employer tax exclusion with a uniform tax credit for all. The credit would be about $2500 per person, the cost of high deductible catastrophic care. Employers could still provide insurance to employees but the tax deduction would be limited to the amount of the tax credit. The self-employed would get the same tax credit and it would also be refundable for those with low-incomes.

The American Enterprise Institute’s James Capretta describes how a transition could be made from the current ACA to such a new system.

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Tax Reform and Economic Growth

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In a recent post I pointed out that both Republican and Democratic presidential candidates are being unrealistic with their tax reform proposals:

  • The Republican plans would stimulate the economy but at the cost of huge increases in the national debt, even taking into account the growth effects of these plans.
  • Raising the top tax rate to 50%, a Democratic idea, would bring in an additional $100 billion per year in tax revenue, but this is neither enough to make a big dent on budget deficits or appreciably lower income inequality by redistribution.
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The nonpartisan Tax Foundation has just released a new report, “Options for Broadening the U.S. Tax Base,” describing three different ways to do this:

  • Ending the exclusion of employer-sponsored health insurance
  • Removing the cap on the social security payroll tax
  • Capping itemized deductions at a fixed dollar level

Combined with marginal tax rate cuts, each of these options would lead to substantial economic growth.  However, the first option, ending the exclusion of employer-sponsored health insurance, is unlikely but rather this exclusion could be turned into tax credits as part of further healthcare reform.  Likewise, removing the cap on the social security payroll tax is more likely to be used to raise additional revenue to make social security financially sound for the long run.
However, the single measure of capping itemized deductions at $25,000 per individual could be combined with

  • Lowering the corporate tax rate to 27%
  • Cutting the top three ordinary income brackets by 5%
  • Implementing a top capital gains tax rate of 20%

Such changes would be revenue neutral and would lead to a long term GDP gain of 2.7%, a long term wage rate gain of 2.2% and a ten year dynamic revenue gain of $759 billion.
Conclusion:  it is possible to cut tax rates, broaden the tax base and grow the economy all at the same time and without increasing the deficit.  This is what we should be doing!

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The Close Connection between Fossil Fuels and Economic Growth

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One of my favorite economics journalists, Eduardo Porter, has a column which appears each Wednesday in The New York Times.  His column this week, “Imagining a World Without Growth,” shows that economic growth took off consistently around the world only about 200 years ago and that two things powered it: innovation and lots of carbon-based energy from fossil fuels.
Capture0The United Nations climate conference, meeting this week in Paris, is asking all countries to greatly cut back on their use of fossil fuels.  Mr. Porter, in an earlier column, described what severe cutbacks in fossil-fuel energy could look like:

  • In order to meet the consensus goal of keeping the earth’s atmospheric temperature from rising more than 2 degrees C from preindustrial times (and we’re half way there already), CO2 emissions will have to fall to at most 1.6 tons per year for every person on earth by 2050. This is less than 1/10 of the present U.S. average and less than 1/3 of the present world average.
  • Within about 15 years every car sold in the U.S. will have to be electric. By midcentury more than half of the U.S. economy will run on electricity. Up to 60% of power will have to come from nuclear sources.
  • To meet these ambitious goals the U.S. will have to decarbonize its energy supply at an average pace of 4% per year for the next 40 years. This is 10 times faster than the Energy Information Administration’s current plan.
  • This is not achievable by going after low-hanging fruit such as replacing coal with natural gas in power plants. Rather, for example, carbon capture and storage will have to become widely available starting within about 10 years.

Meeting the goal of limiting the average world-wide temperature increase to 2 degrees C will thus require a severe regimen of regulatory actions which will have negative economic consequences.  In fact it is difficult to image how such a strict regimen could ever be put in place or enforced without much public dissatisfaction.
We thus have two options for dealing with global warming.  We can ignore it at our peril or we can introduce a market mechanism to change people’s fundamental behavior and attitude about energy use.  What market mechanism?  A (revenue neutral) carbon tax, of course!  How else?

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A Path for Climate Change beyond Paris

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The United Nations climate conference has just opened in Paris.  The pledges that countries are making fall way short of what many say is needed to solve the problem of climate change.  The Deep Decarbonization Pathways Project based in Paris and New York describes what will be needed to get the job done:
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  • The 2 degree C temperature increase benchmark is used even though it is an arbitrary threshold. “Hell is not going to break loose at two degrees – it will take hundreds of years to unfold.” The world has so far warmed .9 degree C since 1880, halfway to the threshold.
  • The technologies available today, such as solar power and wind turbines, while good enough to get a running start on the transition, are not good enough to finish it.
  • Many countries will need to keep burning coal or natural gas to generate power while capturing the carbon dioxide emerging from smoke stacks, compressing it and injecting it deep underground. In fact most fossil fuel energy producers do not appear to be putting much effort into this approach.
  • Governments could easily flub the energy transition by failing to plan far enough ahead. Most countries are setting 10 and 15 year targets that can be met with incremental changes.
  • To achieve emissions goals, entire economies, including transportation, needs to be electrified as much as possible. Spending a lot of effort, as the U.S. is doing, trying to make gasoline cars more efficient, may be going down a blind alley.
  • Another potential dead end would be an overreliance on natural gas, which emits only half as much carbon as coal. This helps in the short run but gas has to go away within a few decades. Thus heavy investment in natural gas pipelines and power plants now could undermine long term goals.

The point is that the DDPP, designed to hold a global temperature increase to just 2 degrees C from preindustrial times, is extremely demanding.  It will require massive governmental interference in the energy economies of both developed and developing countries all over the world.    A far, far better approach is for leading world economies such as the U.S., Western Europe, China and Japan to provide leadership by implementing a tax on carbon emissions and thereby create an economic incentive for the fossil fuel industry to decarbonize itself.

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Creating a Carbon-Free World

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Tomorrow the United Nations climate conference opens in Paris.  According to Peter Thiel, the venture capitalist, “We can talk about a carbon-free world, or we can create one.” Continues Mr. Thiel, “The single most important action we can take is thawing a nuclear energy policy that keeps our technology frozen in time.”
CaptureConsider:

  • Wind and solar together provide less than 2% of the world’s energy and they aren’t growing anywhere near fast enough to replace fossil fuels.
  • China’s coal consumption is growing at 2.6% per year and India’s at 5%. In India there are 300 million people without access to electricity. The Paris plan wants India to be satisfied with a .6 metric ton of oil equivalent per person, when a minimum of at least four tons per person is needed for the development of an advanced nation.
  • Safety fears about nuclear power are overblown. The 1979 accident at Three Mile Island caused no significant amount of radiation to be released. The 1986 Chernobyl disaster was caused by a faulty design and operator incompetence. Fewer than 50 people were killed by released radiation compared with 13,000 killed every year by smoke from coal-fired power plants. The 2011 Fukushima disaster resulted in no deaths from radiation.
  • A new generation of American nuclear scientists has produced designs for better reactors which have the potential to overcome the biggest obstacle to the success of nuclear power: high cost.

I hear many people say that the U.S. needs to provide leadership in getting the world to stop using fossil fuels.  A carbon tax would provide an economic incentive to either move away from fossil fuels or clean them up.  But even a revenue neutral carbon tax would face strong political resistance. Climate change activists should consider supporting nuclear energy development as perhaps the most viable alternative to fossil fuels.

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The Many Things I Am Thankful For

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My website, “It Does Not Add Up,” is primarily concerned with the very serious fiscal and economic problems faced by the U.S.  Occasionally I write about other critical issues such as how the U.S. should respond to the recent terrorist attacks in Paris.  Or what can be done to address the K-12 academic achievement gap between kids from low income families and those from middle class families (an issue I am personally involved in).
CaptureToday I will try to express what I think is right about our country and why I am so thankful to be an American:

  • America is the strongest, wealthiest and one of the freest countries on earth.
  • We owe a huge debt of gratitude to those who came before us and have built such a wonderful country for us to live in.
  • We can vigorously debate our differences of opinion about how to move forward.
  • There is enormous energy, enthusiasm and participation in constantly striving to make the U.S. a freer, more just and more prosperous nation.
  • We resolve our differences peacefully through a democratic political process – one person, one vote.
  • We try to give everyone an equal opportunity to get ahead.
  • We have a vast safety net to take care of the less fortunate members of society and those who fall through the cracks.
  • We try especially hard to lift up a whole class of people who have historically been discriminated against. Slowly but surely progress is being made on this difficult task.
  • On the whole we accept our responsibility, as a strong and prosperous nation, to provide leadership in maintaining peace and stability around the world.

As you can see, I am an optimist. We do have big problems but we’re also doing many things right.  America will continue to flourish in the future because we will successfully meet our many challenges.  This won’t happen automatically or necessarily easily but rather because so many capable and dedicated people are working so hard to achieve it.  The political process will ultimately respond to the true will of the people.

Does the U.S. Care About Europe?

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“After Paris, Islamic State’s rise and Syria’s agony are shaking a weakened Europe – and the broader international system,” writes the Brookings Institution’s Robert Kagan in yesterday’s Wall Street Journal. “Can the U.S. summon the will to respond?”
Capture“What the U.S. now does or doesn’t do in Syria will affect the future stability of Europe, the strength of trans-Atlantic relations and therefore the well-being of the liberal world order. … Just as in the 1990s, when Europeans could address the crisis in the Balkans only with the U.S. playing the dominant military role, so again America will have to take the lead, provide the troops, supply the bulk of the air power and pull together those willing and able to join the effort.”
Such an effort would require:

  • Establishing a safe zone in Syria to avoid having more refugees flood Europe and provide a place to return for those who have already fled. This would require not only U.S. airpower but also ground forces numbering up to 30,000.
  • An additional 10,000 – 20,000 troops to uproot Islamic state from its havens in Syria and Iraq.
  • An internationally negotiated transition in Syria ushering Mr. Assad from power and establishing a new provisional government to hold nationwide elections.

As Mr. Kagan reminds us the U.S. has taken lots of police actions in the last 70 years since the end of WWII:  Korea, Vietnam, Panama, Kuwait, the Balkans, Afghanistan and Iraq being the big ones.  “Not today.  Americans remain paralyzed by Iraq, Republicans almost as much as Democrats, and Mr. Obama is both the political beneficiary and the living symbol of this paralysis.  He may be the first president since the end of WWII who simply doesn’t care what happens to Europe.”
Mr. Kagan concludes, “Perhaps there are Europeans today wishing that the U.S. will not compound its error of commission in Iraq by making an equally unfortunate error of omission in Syria.  They can certainly hope.”

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How to Defeat ISIS

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The lead story in yesterday’s New York Times, “Experts Explain How Global Powers Can Smash ISIS,” starts out “Much of the world agrees that the Islamic State needs to be crushed.  But how can that be accomplished?”
CaptureHere is the strategy espoused in the NYT article and also by Garry Kasparov, writing in the Wall Street Journal:

  • Assad must go. “For the U.S. and the West to ally with Iran, Russia and the Assad regime in Syria would be morally repugnant, strategically disastrous and entirely unnecessary.”
  • The importance of the Sunnis. “To beat ISIS you need the enlistment of the Sunnis and this won’t happen as long as Assad remains in power.” Removing Assad “would immediately have the support of Turkey and Saudi Arabia.” “The 2007 U.S. military surge in Iraq was so successful because it included the protection and recruitment of Sunni tribes to fight Sunni extremists.” “The hasty exit from Iraq left the Sunnis at the mercy of a hostile Shiite government.”
  • Troops on the ground. “Anything less than a major U.S. and NATO-led ground offensive against ISIS will be a guarantee of continued failure and more terror attacks in the West.”
  • Long term governance. “For the long term, eradicating the Islamic State and other violent Jihadi groups will require drastic reforms in the nature of Middle East governments. ISIS thrives on their failures.”

After the Paris attacks, the West now realizes that ISIS represents a huge threat to world peace and stability.  Hopefully the U.S. is also beginning to realize that only it can provide the leadership to organize an effective response.
I will soon return to talking about the fiscal and economic issues which I usually dwell on.  Every once in a while another major issue intervenes and takes precedence.

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Avoiding World War III

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What happened in Paris could also easily happen in London, New York City or Washington D.C. and soon will if our President does not adequately respond to the threat of terrorism.  As the Wall Street Journal declared yesterday, “For seven years Mr. Obama has used the unpopularity of the Iraq war as a shield for his retreat from anti-terror leadership and the Middle East.”
CaptureThe American Enterprise Institute’s Danielle Pletka informs us that:

  • NATO aircraft scrambled more than 500 times in 2014, with only a few exceptions, in reaction to Russian incursions into NATO member airspace.
  • In 2014, Japan scrambled aircraft almost 1000 times, with all but a few of these incidents attributed to either Russian or Chinese warplanes.
  • Russian bombers entered US airspace 10 times in 2014, double the previous average.

Ms. Pletka also suggests how we should respond to four years of carnage in the Middle East:

  • The first step is to actually have a strategy, rather than a series of reactive tactics and incremental escalations.
  • The second step is to build a coalition with sub-state and national partners that we trust and that trust us to stick with the job.
  • The good news is that there is still time to lead a decisive war against ISIS.
  • There is no need to launch broadsides against all Muslims, the Syrian people and refugees in general. It is Islam extremists who are attacking us, not mainstream Islamists.

The world is a dangerous place and we have many enemies.  On this website I am mostly focused on our own fiscal and economic problems which are very serious and need to be dealt with in a timely manner.  However the immediate safety and security of our country is the highest priority of all and, on occasion, takes precedence over everything else.  Now is a time for such heightened vigilance.