Category Archives: Jack Heidel

Should the Employer Mandate Be Repealed?

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In last Sunday’s New York Times the columnist Ross Douthat makes an excellent case in “A Hidden Consensus on Health Care”,  that Obamacare’s employer mandate, recently postponed for one year until January 1, 2015, should be repealed altogether.  The reason for delaying its implementation is because of the complexity of the process for the government to gather all the necessary information about a company’s employees and coordinating with IRS tax returns to verify incomes.  This is, of course, a mammoth job.
Furthermore, small and medium sized companies, near the 50 employee cutoff for mandatory coverage, will not have to immediately slow down their growth, in order to avoid the health insurance requirement.  This could help boost the economy in the short turn.
In addition, as Mr. Douthat points out, it is the tax exemption for employer provided health insurance which is the biggest impediment for getting the cost of healthcare under control.  It means that employees are shielded from the true costs involved in receiving care and therefore have little, if any, incentive to hold down the cost of their own care.
If this tax exemption was eliminated, perhaps as part of a broad based tax reform initiative, then employers could still offer an optional health insurance benefit to their employees but it would be taxed as part of their total pay.  This would give employees an interest in holding down the cost of their own insurance.  And they would also have the option to shop around on the private market, perhaps on the new exchanges, for a better deal.
The Employer Mandate is thus altogether a dead weight on our struggling economy.  It’s certainly beneficial to have it postponed for a year.  Let’s go the rest of the way and repeal it altogether!   This would be a significant step towards true healthcare reform!

Does the Economy Need More Spending Now?

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In today’s Wall Street Journal the economist Alan Blinder writes, “The Economy Needs More Spending Now”, that the tax hikes and spending cuts agreed to in January and before are reducing GDP growth by 1.5% – 2% annually.  Mr. Blinder claims that it would be easy to design a new fiscal stimulus package that adds 2% to GDP per year as long as it lasts.  He also claims that a fundamental change like tax reform might only add a much smaller .2% to GDP per year although this much smaller annual effect would repeat indefinitely and therefore eventually amount to a large cumulative effect.  This is a sensible argument as far as it goes but is incomplete.
In the last five years there has been almost $6 trillion in (deficit) stimulus spending, coupled with a $3 trillion quantitative easing program by the Federal Reserve.  This represents an unprecedented fiscal and monetary stimulus to the economy by the federal government.  And the result has been a tepid although steady 2% annual growth in GDP, much slower than usually follows a recession.
After all of this enormous stimulus, which is having only a meager effect, what makes more sense:  to try even more stimulus or to try something different?  What else is there to try?  Immigration reform will boost the economy by drawing our 11,000,000 illegal immigrants into the main stream economy.  Note that citizenship (amnesty) is not required to accomplish this, only legal status.  Also, requiring many people receiving welfare (food stamps, disability benefits, etc.) to work would boost the economy by increasing the size of the labor force.
Broad based tax reform, greatly curtailing most, if not all, tax preferences, would be so attractive that it should not be put on a back burner, as Mr. Blinder suggests.  In fact, completely repealing the ACA’s Employer Mandate, now that it’s been postponed for a year, would give a big boost to many medium sized companies for which required health insurance is a big impediment to growth.
The point is that there are many ways to boost the economy besides even more artificial deficit stimulus, whose effect would be at most temporary anyway, as Mr. Blinder suggests.  It really is important to shrink our still very large annual deficits down to zero fairly quickly so that we stop adding to the huge burden which we have already placed on future generations.  In other words, we can likely have stronger economic growth and fiscal restraint at the same time, the best of all possible worlds!

The Four Fiscal Fantasies

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Jon Cowan and Jim Kessler from the Third Way think tank have just written a new article, “The Four Fiscal Fantasies”, in which they address our country’s current fiscal situation from a point of view which is sympathetic to, but critical of, the left.

  • Fantasy #1:  Taxing the rich solves our problems.
  • Fantasy #2:  We can have it all.
  • Fantasy #3:  Waiting is benign.
  • Fantasy #4:  The politics get better.

These four fantasies are fairly self-explanatory.  The solution they propose for the long term insolvency of Social Security is an at least partial lifting of the FICA cap as well as chain-weighting of the CPI.  These are both good ideas.
Their solution to looming Medicare insolvency is to trim costs in the current program with, for example: bundled payments, medical homes for end-of-life, a permanent fix for the Sustainable Growth Rate (doc fix), reducing duplicative care, increasing provider coordination, etc.  This however is a band aid approach to getting Medicare costs under control.  We need far greater and more fundamental changes in our entire healthcare system, public and private.  Douglas Holtz-Eakin and Avik Roy have a plan to do this which I have discussed in my June 5, 2013 blog post, “Free Market Healthcare in America”.
With respect to discretionary spending in the federal budget, Mr. Cowan and Mr. Kessler propose several specific budget cuts in order to boost spending for other programs for kids, science, research, curing disease, infrastructure, etc.  Savings in one area would be spent on investments in other areas rather than being used for reducing the deficit.
To me this whole program represents a step in the right direction even though it does not come close to all of the changes that will be needed to shrink the deficit down to zero.  If national Democratic leaders would propose this sort of a program, it would force Republican leaders to take it seriously and would therefore break the current logjam in Congress.

Immigration Reform is Pro-Growth

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The lead editorial in today’s Wall Street Journal, “A Pro-Growth Reform”, is right on the money.  It challenges the GOP House to improve the Senate immigration bill, not kill it.  The emphasis in the Senate bill is to provide an eventual path to citizenship for the approximately 11,000,000 illegal immigrants currently in the US.  To offset the charge that this is amnesty, the Senate bill greatly increases enforcement by doubling the size of the border patrol, at a cost of $4 billion per year, and increasing the criminal penalties for employers who mistakenly hire an illegal.  The Senate bill also increases the quota for skilled workers from the current 65,000 per year limit to 120,000 per year but it only barely increases the annual quotas for construction and agricultural guest workers, which doesn’t nearly meet current needs.
What is needed is less emphasis on eventual citizenship (coupled with stronger enforcement) but rather more emphasis on simply having an adequate supply of both skilled and unskilled legal guest workers.  This presents an opportunity for the House of Representatives to produce a better bill.
First of all, raising the quotas for both skilled and unskilled guest workers should be the first priority for the House.  An adequate supply of legal guest workers means there will be much less demand for illegals, which, in turn, means less need for the increased enforcement measures of the Senate bill.
Secondly, what immigrant workers need most is legal status rather than a guaranteed path to citizenship.  It is the constant risk of deportation and separation from their families which adversely affects their quality of life, rather than the lack of US citizenship.
More immigrants, both skilled and unskilled, will help our economy grow faster and recover more quickly from the Great Recession.  We should provide immigrants with the legal status they need to come to our country and succeed and prosper!

Who is Conducting War on the Unemployed?

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In his ever provocative fashion, columnist Paul Krugman claims in today’s New York Times that fiscal conservatives, i.e. Republicans, are conducting “War On the Unemployed” because extended unemployment benefits are being allowed to expire both nationally and in various states around the country.  According to Mr. Krugman it is “meanspiritedness converging with bad economic analysis” because more government spending will boost the economy and, moreover, the federal deficit is nothing to be concerned about.
The problem is that we have now had enormous fiscal stimulus, i.e. huge federal deficits, for five years, as well as a highly expansive monetary policy, and the economy is still barely limping along at a 2% growth rate.  It is unfortunate that so many liberals are ideologically opposed to broad-based tax reform whereby tax rates would be lowered in a revenue neutral way by either eliminating entirely, or else cutting back substantially, the many tax preferences, deductions and loopholes which pervade the tax code.  By emphasizing profit potential over tax avoidance strategies, this would give a big boost to business risk takers and thereby lead to economic growth and lower unemployment.
At the same time that our economy is suffering from low growth and high unemployment, our national debt is exploding to a large extent because the federal government is spending too much money.  Efforts to rein in government spending across the board are highly desirable and should be supported as simple common sense.
By advocating tax reform to boost the private economy and, at the same time, restraining federal spending wherever possible, fiscal conservatives are helping the long-term unemployed far more than their supposed champions who are doing just the opposite!

Why it’s So Hard to Get the Long-term Unemployed Back to Work

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Earlier this month the economist Edward Lazear had an op-ed column in the Wall Street Journal “The Hidden Jobless Disaster”, pointing out that, even though the unemployment rate has been dropping for the past four years, the employment-to-population ratio has stayed stuck at 58.5%.  This low labor participation rate means that many workers have dropped out of the labor force and stopped looking for work.  In fact the disability rolls have grown by 13% since 2009 and the number of people receiving food stamps has grown by 39%.  These disincentives help to explain why the proportion of long-term unemployed is still so very high at 37%.
The WSJ reported in April, “Workers Stuck in Disability Stunt Economic Recovery”, that the federal disability rolls have jumped from 7.1 million in December 2007, when the recession started, to 8.9 million today, which is 5.4% of the civilian workforce.  This exodus to disability costs 0.6% of GDP, a sizable chunk when GDP is only growing at an annual rate of about 2%.  Furthermore only 0.5% of federal disability recipients return to work in a given year compared to 20% for private, employer sponsored, disability recipients.
Two conclusions can be drawn from this data.  First of all, the federal government should be much stricter in establishing and enforcing work requirements for all public welfare recipients, including those on disability.  This should be noncontroversial but it won’t happen unless Congress and the President take the initiative and make it happen.
But even more important, our national leaders need to get far more serious about boosting the economy to get many more millions of the unemployed and underemployed back to work.  Fundamental tax reform would help the most but targeted deregulation and expanded foreign trade would also help a lot.  The Republicans have the strongest, free market, argument on this basic and high priority issue and they should hammer away at any Democrats, including the President, who are dragging their heels on it!

Should Welfare Recipients Be Required to Work?

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On June 18, 2013, Lawrence Mead, Department of Politics and Public Policy, New York University, testified before Congress, “Making Welfare Work”, that even as the number of Americans receiving welfare has dramatically increased in recent years, welfare programs are failing to provide sufficiently strong incentives for the recipients to find work.  This has contributed to the fact that “the share of our population that is employed has recently fallen sharply compared to several European countries” such as Germany, the Netherlands and the United Kingdom.
Mr. Mead shows that there are three main reasons for this: “(1) work tests in the major income programs are still limited, (2) we have neglected the problem of poor men, and (3) the disability programs are diverting too many Americans from the work force entirely”.  He points out that the Welfare Reform Act of 1996 required that the Temporary Assistance for Needy Families (TANF) program put 50% of their cases in rigorous “work activities” by 2002.  This led to a dramatic reduction of the AFDC/TANF rolls by more than two-thirds. But since then exemptions and waivers have sharply limited the specific work activity demands which mobilized welfare recipients to hold jobs.
Even with the currently high unemployment rate, there are plenty of low-paid, low-skilled jobs available, which are suitable for welfare recipients.  After all, even a low-paid job may well provide the opportunity to learn skills as well as to develop better work habits. Congress clearly needs to strengthen work requirements for welfare.  And the incentives need to be right so that these workers keep more pay than they give up in benefits.
Putting more welfare recipients back to work will not only help control the federal budget but also give our economy a boost by increasing the size of the workforce!

Who is Responsible for the Sour Economy?

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In yesterday’s New York Times the columnist Ross Douthat with “The Great Disconnect” makes a good case that the Washington to Boston corridor, i.e. the national elite, is disconnected from America’s most pressing problems.  Instead of concerning themselves with jobs and the economy, healthcare costs and entitlement reform, fighting poverty and reforming the tax code, which are the real priorities of the American people, the issues getting the most attention by our national leaders are rather gun control, immigration reform and climate change mitigation which represent much lower public priorities.
Of course there is a political logjam between the two parties.  The Republicans want to use free market incentives to improve the economy such as tax reform and the elimination of onerous regulations.  The Democrats want more government stimulus which is controversial because it will increase the deficit.  As far as Mr. Douthat is concerned both parties are pretty much equally to blame for the stalemate because of their unwillingness to compromise in order to make progress on our biggest problems.
In a situation like this there is really only one person who has the clout to make a difference.  It is the President.  Presumably he is motivated to improve the economy more quickly because lack of progress will be a blot on his record and a drag on the chances of his party in the next presidential election.
The problem is that his liberal ideology, which got him elected and then re-elected, is at odds with the one single measure which would most improve the economy.  I am referring to pro-growth, broad-based tax reform where rate reduction and simplification would be offset revenue-wise by eliminating deductions and closing loopholes.  If such tax reform includes the elimination of the tax deduction for employer provided health insurance (again, offset with lower tax rates!), the cost of healthcare would drop dramatically as consumers started paying attention to their own costs.  Then Medicare and Medicaid could be brought into the same framework and presto, we have entitlement reform as well.
Republicans are strong advocates of tax reform.  It’s too bad that Democratic leaders can’t see how everyone, including themselves, would benefit from doing this!

Is America in Decline?

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A new book by the two economists Glenn Hubbard and Tim Kane “Balance: The Economics of Great Powers from Ancient Rome to Modern America” analyzes the decline of many of the great empires and civilizations in human history.  According to the authors, they all declined (or are now declining!) primarily for internal economic reasons rather than from external military threat.  The authors conclude that America’s own existential threat is fiscal.  Our lowest debt level in recent years was 23.9% of GDP in 1974 ($344 billion) which has climbed to 75% of GDP today ($12 trillion) and is predicted to keep growing worse in the years to come.
Our political system is too polarized to solve our huge debt problem.  Republicans want lower taxes; Democrats want higher spending.  If Republicans succeed in cutting spending, it upsets the voters and gives the Democrats an advantage.  If Democrats succeed in raising taxes, it upsets the voters and gives the Republicans an advantage.  So we end up with low taxes, high spending, fiscal imbalance and political stalemate.  This is the dilemma we are in.
But the authors propose a solution: a flexible balanced budget constitutional amendment where total outlays for a year do not exceed the median annual revenue collected in the seven prior years.  A three-fifths supermajority of each house of Congress can declare a one-year emergency exemption.  Additional one-year exemptions may be approved only by escalating votes in each house of Congress.  The amendment would take effect in the seventh year following ratification by the states.  During the seven year transition period the deficit would be reduced gradually each year until it reached zero.
Messrs Hubbard and Kane provide an excellent, nonpartisan analysis of the deep predicament in which our country now finds itself as well as an attractive means of extricating ourselves from this precarious situation.

The Folly of Paul Krugman

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In yesterday’s New York Times Paul Krugman has a column “Fight the Future” in which he says that “fiscal contraction” is “undermining what might otherwise have been a fairly vigorous recovery” and that  focusing on long run fiscal sustainability “isn’t a way of being responsible”.  He compares our fiscal problems with global warming and says that the “uncertainty about the impact of greenhouse gases on global temperatures actually strengthens the case for action, to head off the risk of catastrophe”.  But “delaying action on entitlement reform has no comparable cost”.  He even says that seeking a “grand bargain” that links reduced austerity now to longer-run fiscal changes is harmful because it would involve negotiating with untrustworthy Republicans!
First of all, there has been no real fiscal austerity in the past five years.  Federal expenditures took a huge jump from 2008 to 2009 and have increased each year since, in spite of huge deficits.  The sequester will not cut spending in 2013 compared with 2012 but only slow down the rate of increase.  There is little, if any, uncertainty about how fast the costs of healthcare in general, and Medicare in particular, will increase in the years ahead.  The current slowdown in healthcare costs in the last few years still leaves it growing at twice the rate of increase of GDP.  Demographics alone clearly show that the cost of Medicare will start increasing even more rapidly in just a few years from now.
Mr. Krugman concludes by saying that “influential people should stop using the future as an excuse for inaction.  The clear and present danger is mass unemployment, and we should deal with it, now.”  I basically agree with him!  The question is how!  Should we deal with it by artificial stimulation (bigger deficits and more debt) or rather by boosting the private sector with tax reform and strategic deregulation?  It takes two to tango and Mr. Krugman doesn’t help by constantly ridiculing the Republicans!