Do Not Repeal ObamaCare’s Cadillac Tax

My last post examines some of the reasons why American healthcare is so much more expensive than it should be.  We can’t possibly solve the U.S. debt problem without getting the excessive cost of healthcare under control.

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One of the drivers of these enormous costs is the tax exemption for employer provided healthcare.  This uncapped tax benefit for health insurance premiums is very costly.  It drags down wages and pushes up healthcare spending by contributing to the third-party payment problem.  That is, consumers tend not to care how much things cost when someone else is paying for them.

ObamaCare’s Cadillac Tax, a 40% excise tax on high cost employer sponsored health insurance, was supposed to take effect in 2018 but has already been delayed until 2022.  It would raise $197 in revenue from 2022 – 2029.  But the true purpose of the Cadillac Tax is to address the tax code’s preference for lavish plans since premiums aren’t subject to federal income or payroll taxes.

Unfortunately the House of Representatives has now voted, by a margin of 419 – 6, to repeal the Cadillac Tax entirely.  This bill now goes to the Senate.

Instead of repealing the Cadillac Tax, Congress could exempt both employer and employee HSA (Health Savings Accounts) contributions from the calculation of the value of the plan for the purpose of enforcing the Cadillac Tax.  Exempting these contributions would give employers an incentive to offer their employees HSA-qualified plans and fund their accounts.  This would erode the third party payment problem and nudge more Americans to consume healthcare the way they consume other services.

Summary.  Healthcare costs are increasing much too rapidly and must be slowed down.  Encouraging the formation of Health Savings Accounts is one way to accomplish this urgent task through private initiative.  If the free market is unable to control the cost of healthcare, then a single payer government-run healthcare system in the U.S. is almost inevitable.

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Examining the High Cost of American Healthcare

As I have stated many times on this blog, our country’s biggest problem is the rapidly growing and out of control national debt.  Furthermore our debt problem is driven primarily by the increasing cost of entitlements, and more specifically by healthcare spending.

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In other words, we need to understand why healthcare spending, both public and private, is growing so fast and figure out an effective way to control these costs.  A good source of information about healthcare costs is a new book by the economist, Uwe Reinhardt, “Priced Out: the economic and ethical costs of American healthcare”

Here is some of the pertinent information provided by Mr. Reinhardt:

  • U.S. health spending per capita in 2017 amounted to an estimated average of $10,209 – twice as much as is spent per capita in most of the rest of developed countries.
  • Although Americans actually consume fewer healthcare services than do Europeans, for example, prices for virtually any healthcare product or service in the U.S. tend to be at least twice as high as for comparable products or services in other countries. (As an example, see chart for a comparison of childbirth costs)

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  • Most nations have relatively simple health insurance systems. By comparison, the U.S. health insurance system is highly complex.  The typical American physician spends $80,000 per year interacting with health insurers, nearly four times as much as is spent by physicians in other developed countries.
  • From 1990 to 2012, the number of workers in the U.S. health system grew by nearly 75%. Nearly 95% of this growth was in non-doctor workers.  Today, for every doctor, only 6 of the 16 non-doctor workers have clinical roles such as nurses and care coordinators.  The other 10 are purely administrative staff.
  • Total spending on healthcare provided by employment-based health insurance is growing at an average annual rate of 8% (see chart for growth of healthcare costs for a family of four), four times faster than the rate of increase of inflation.

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Summary.  High prices for healthcare products and services (hospitals, doctors and drugs), the complexity of the U.S. health insurance system, the rapid growth of healthcare administrative staff: these are the major reasons for the high cost of healthcare in the U.S.  How are we going to get these costs under control?  Stay tuned!

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My Political Framework and Point of View

I am a non-ideological fiscal conservative and social moderate.  My two main sources of information on national policy are the New York Times and the Wall Street Journal.  If they agree on an issue, I will probably agree with them.  If they disagree, then I figure it out for myself.  Many of my other sources, such as new books, are often suggested to me by a review or reference in one of these two newspapers.

In my opinion here are the fundamental problems facing the U.S:

  • The national debt.  Our enormous debt problem can only be fixed by reforming and curtailing entitlement spending, especially for public healthcare programs such as Medicare and Medicaid.  This will be very hard to accomplish through our democratic political system, absent a major fiscal crisis, which is why I consider it to be our biggest problem.
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  • Economic growth. GDP growth has increased in the past two years and is likely to remain brisk for the foreseeable future.  This keeps the unemployment rate low (now at 3.7%) which gives low-income workers and the unemployed a big boost.  This is the best way to address income inequality and reduce poverty.
  • U.S. economic and military strength. It is the overwhelming U.S. economic and military strength since the end of WWII which is responsible for the relative world peace and stability of the past 75 years.  The growing economic and military power of China will challenge U.S. superiority in the coming years but we have many advantages in this struggle.
  • Global warming.  The evidence for global warming is overwhelming (decrease in arctic sea ice, warmer and more acidic oceans, rising sea levels, more extreme weather events, etc.) but I am optimistic that humanity will rise to the challenge of controlling it, led by the U.S.  Already 70% of Americans agree that global warming is real and man-made and this percentage is steadily increasing.  Two major states, California and New York, have begun initiatives to become carbon neutral by 2050 and other states and regions will soon follow.  For example, OPPD in eastern Nebraska has committed to 50% wind power by 2025.
  • Social welfare. I strongly support many social welfare programs.  This includes Social Security and Medicare for retirees.  It also includes such programs as Medicaid, TANF (temporary assistance for needy families), food stamps, and EITC (earned income tax credits) for low-income people
  • Other social issues. I support immigration reform (with a strong guest worker visa program), justice reform (less incarceration for nonviolent criminals), and gun control (universal background checks for all gun purchases).  But I am not a social liberal.  I favor restrictions on abortion.  I am opposed to the legalization of marijuana (I support the Nebraska policy of decriminalization for possession of small amounts).  I also support capital punishment for the most heinous crimes.

Summary.   To me being a fiscal and economic conservative and social moderate is just common sense.  We need to pay our bills with tax revenue, provide economic opportunity for all Americans, defend our democratic way of life, respond to natural threats, and help the less fortunate among us.

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How Much Should We Be Concerned about Income Inequality?

American income inequality is much deplored by many news media and politicians on the left.  And there is little doubt that it has been getting worse in recent years.  The question is what we should, as a society, be doing about it.

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Let’s refer to an excellent book which I highly recommend, Steven Pinker’s “Enlightenment Now.”  In it Mr. Pinker shows that human progress has been slowly but surely increasing ever since the beginning of the industrial revolution started in the late 18th century.

In a chapter on inequality, he points out that “income inequality is not a fundamental component of well-being.  It is not like health, prosperity, knowledge, safety and peace. . . .  Economic inequality should not be confused with unfairness or with poverty.”

How do we reconcile the obvious improvements in living standards in recent decades with the conventional wisdom of economic stagnation?

  • The first point is the difference between relative and absolute prosperity. It is not a sign of stagnation if the proportion of income earned by the bottom fifth does not increase over time.
  • The second confusion is the one between anonymous and longitudinal data. Joe the Plumber has probably moved into a higher pay class by gaining experience or moving to a higher paying job while someone else has taken his place in the bottom fifth.
  • A third point is that low incomes have been mitigated by social transfers. Counting these social transfers, disposable incomes for the bottom four quintiles grew dramatically, and in roughly equal measure, between 1979 and 2010.
  • The fourth reason for the confusion is the difference between income and consumption. “When poverty is defined in terms of what people consume rather than what they earn, we find that the American poverty rate has declined by 90% from 1960, from 30% to just 3%.” The two forces, globalization and technology, which have caused income inequality to increase, have at the same time decreased inequality in what matters most.

Summary.  Inequality as not the same as poverty, and it is not a fundamental dimension of human flourishing.  As societies escape from universal poverty, they are bound to become more unequal.  In short, the world has become less equal but the people have become much better off.

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Why Debt Is Our Most Serious National Problem

Lately on this blog I have been discussing a variety of serious problems faced by our country such as slow economic growth, income inequality, global warming and external threats from major foreign rivals.  These are all big problems which need to be addressed by our political leaders.

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But the biggest problem of all is national debt.  The reason is that it is caused primarily by the growth of entitlement spending, especially healthcare costs such as Medicare and Medicaid.  These rapidly increasing costs (see chart) must be slowed down which will require involvement and some sacrifice from many ordinary, non-wealthy people.  This will be very hard to accomplish by elected politicians.  It may take an extreme fiscal emergency to make the necessary spending adjustments.

The other problems listed above can be solved by less drastic measures and are therefore more readily accomplished.  For example:

  • Global warming.  The evidence for global warming is very strong.  The solution will have to involve more than ad hoc regulatory measures on fossil fuels.  The best approach is to enact a (revenue neutral, i.e. refundable) carbon tax which would apply to all carbon emissions.  Already 70% of the American populace agrees that global warming is man-made and needs to be addressed.  As this percentage continues to increase, I am confidant that our political system will respond in a satisfactory manner.
  • Slow economic growth and income inequality.  Recently the economy has started growing faster and the unemployment rate has dropped to a fifty year low of 3.6%.  Already wages are rising faster at the lower income levels as employers struggle to find enough workers.  This is the best way to address income inequality.
  • Threats from autocratic powers such as China and Russia.  America cannot afford to be complacent about our dominant superpower status but we have many strengths in our favor including demographics, entrepreneurial spirit, and a strong willingness to make sacrifices for freedom.

Summary.  I am an optimist by nature and I am optimistic about the future of our country.  But I don’t see how our democratic political system can solve our debt problem through the usual political give and take.  I’m afraid that it will take a severe fiscal crisis, much worse than the financial crisis of 2008, to somehow get our rapidly increasing debt under control.

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U.S. Strengths in the Coming Struggle for Freedom and Democracy

In my last post I discussed the challenges facing the U.S. from the two strongest autocratic powers in the world: China and Russia.  We simply cannot afford to be complacent about our current status as the world’s strongest superpower.

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But there is also good news on this front.  The American Enterprise Institute’s Nicholas Eberstadt has a report in the current issue of Foreign Affairs about the demographic advantages enjoyed by the U.S.  Consider:

  • With 1.4 billion people and rapid economic growth, China appears headed to surpass the U.S. as the world’s leading power.  But China will likely see its population peak by 2027.  Its total fertility rate of 1.6 and dropping is far below the replacement level of 2.1 children per woman.  By 2040 China will have 325 million people over the age of 65, twice as many as under the age of 15.
  • Despite its high levels of schooling, Russia has low levels of human capital.  With a population of 145 million, it earns fewer U.S. patents each year than the state of Alabama.  It earns less from service exports than Denmark and has less privately held wealth than Sweden.
  • United States. By maintaining our current net (legal) immigration rate of one million per year, our population will increase to 380 million by 2040.  It will be a younger population than almost any other rich democracy and our working age population will still be expanding.
  • Indonesia, Philippines and India. These emerging democracies are growing rapidly.  All three countries have increasingly young and well educated populations.  The U.S. should court these rising powers.

Summary.  “It would be a geopolitical tragedy if the postwar economic and security order that the United States built really were to fade from the scene: no alternative arrangement is likely to promise as much freedom and prosperity to so many people.”   We can win this struggle if we do not succumb to complacency.  Demographics are in our favor.

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The Biggest Threat to the American Way of Life: Complacency

This blog “It Does Not Add Up” focuses primarily on U.S. fiscal and economic issues such as massive debt and slow economic growth.  But lately I have also been discussing other serious threats to our comfortable and prosperous way of life such as global warming  and challenges from rival powers such as China and Russia.

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The Hoover Institution’s Larry Diamond well describes these growing foreign policy threats in his new book, “Ill Winds.  According to Mr. Diamond it is imperative that we:

  • Stand up to Putin. “Putin is like a burglar walking down a corridor of apartments, testing to see which doors are unlocked.  When he gets the chance he breaks in; when he cannot, he moves on.”  We need to continue pressuring regime elites where it hurts: their assets and their ability to enjoy them.  Targeted sanctions are effective because they punish corrupt and abusive individuals, not the Russian people at large.
  • Stand up to Xi. The most important thing to do here is to continue to insist that China stop stealing our intellectual property and that it provide fair access to Chinese markets for American products. We need to keep the trade pressure (i.e. tariffs) on China as long as necessary while reducing it on our longtime allies around the world as well as well as neutral countries with whom we do business.
  • Continue to support freedom and democracy around the world.  Remember that no two democracies have ever gone to war with each other.  We need to support not only established democracies but struggling and developing democracies as well.  We should try to pressure authoritarian regimes to stop abusing the rights and stealing the resources of their citizens.  We should continually update and reboot our public diplomacy – our global networks of information and ideas – for today’s fast-paced age of information and disinformation.

Summary.  We are still the leading superpower in the world, both economically and militarily, but we cannot afford to rest on our laurels.  Our continued success is not automatically assured.  We must never forget that “freedom is not free.”

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