Fiscal Fixes for the Jobless Recovery

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The economist Alan Blinder has a column in yesterday’s Wall Street Journal entitled “Fiscal Fixes for the Jobless Recovery” where he deplores the apparent complacency about our stubbornly high unemployment rate of 7.6% after four years now of recovery from the Great Recession.  His solutions: 1) boost government employment with greater deficit spending, 2) offer businesses a tax credit equal to 10% of the increase of their wage bills over the previous year, and 3) offset the high 35% corporate tax rate by taxing a company’s repatriated profits at a super low rate, based on the increase of its wage payroll.
What Mr. Blinder describes as complacency about the high unemployment rate is rather just huge frustration about the likelihood of a divided Congress being able to reach agreement on any fundamental reforms which would be able to boost economic growth.  His proposals illustrate why the philosophical chasm between the two political parties is so great.  In the first place, boosting government employment by increasing deficit spending is a total nonstarter.  Our enormous and rapidly increasing national debt is a major part of the problem.  We need to decrease government spending, not increase it.
We need to simplify the tax code, not make it more complicated with a new 10% tax credit.  Lowering tax rates overall, offset by eliminating special tax preferences for the well connected, is the type of fundamental reform which will truly boost the economy, by giving everyone the same greater opportunity to create wealth.
Since Republicans think that a 35% corporate tax rate is too high and Democrats think that too many companies are able to shelter their profits abroad, then why can’t we just lower the rate and change the rules to the point where multinational corporations will want to bring their profits home, pay taxes and reinvest in America.  A new tax credit just makes things more complicated!
What is needed to break the log-jam is leadership from our elected representatives, not more ideological name calling.  There are practical solutions to our economic and fiscal problems if we simply had more leaders who are focused on finding solutions rather than scoring points on the opposition!

Should Nebraska Adopt the Common Core Standards?

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Yesterday’s New York Times has an article by Andrew Hacker and Claudia Dreifus “Who’s Minding the Schools?”, which makes a strong case against the so called Common Core education standards already adopted by 45 states.  Their argument is that the standards are a “one-size-fits-all pathway governed by abstract academic content” which will primarily benefit the affluent middle class students who have strong parental support and who will go on to attend selective colleges.
About a year ago Mr. Hacker wrote another NYT article “Is Algebra Necessary?”, pointing out all the grief resulting from requiring high school students to learn algebra.  The Common Core standards have a strong algebra component and so they will tend to solidify the expectation that all high school students study algebra and learn it well.  This is an especially big challenge for low income and minority students who have the least academic success in high school and are the most likely to drop out before graduation.
Both the U.S. Senate and the House are currently considering legislation to renew No Child Left Behind by giving states more flexibility in figuring out how to increase educational success for their own students.  This makes a lot of sense and should make it possible to cut back substantially on the approximately $100 billion per year spent by the federal Department of Education on grants to the various states.  In other words, for various reasons there is currently taking place a shift in educational policy to give more control and responsibility back to the states.  The Common Core standards are attempting to move things towards more federal control and therefore are likely to face very strong headwinds.

After the Crisis: The Power Inversion and What It Means

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In today’s New York Times David Brooks has a column “The Power Inversion”  describing a shift of economic and political power from the federal government to municipal governments.  Of course, the rural to urban population migration has been taking place for many years.  But now the financial crisis and resulting political stalemate in Washington is causing civic leaders to take more initiative in addressing economic problems.  The Brooking Institution’s Bruce Katz gives many specific examples of such initiatives in a recent speech “After the Crisis: The Metropolitan Revolution”.
This shift of power away from Washington and back to local government could have big ramifications for the federal budget which, as almost everyone knows, is currently running huge deficits.  Here is a good example to start with.  The U.S. Senate is about to take up revision of the No Child Left Behind law which expired several years ago.  A bill, Strengthening America’s Schools, has been introduced by the Democratic majority for this purpose.  It allows states to create their own education reform plans and sets testing and performance standards for all states to follow.  It is much more flexible than NCLB.
Congress should take this opportunity to reorganize the federal Department of Education by greatly consolidating its huge number of individual programs (over 100 separate programs in K-12 education alone).  Support for state education programs could be given in much larger chunks thereby giving states and school districts more leeway in figuring out the best way to divide up and allocate their education dollars.  The total federal budget for education could be significantly reduced in this way and the states will, at the same time, be able to do a better job with fewer dollars because there will be fewer strings attached.
This is a smart way to shrink the federal deficit and we should take advantage of it!

Free Market Healthcare in America: How Do We Get There?

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Almost everyone agrees that healthcare in the U.S. is way too expensive but how do we change to a better system?  Douglas Holtz-Eakin and Avik Roy have laid out a roadmap to do this: “The future of free-market healthcare”.  Here is the essence of their plan: 1) start with what we will soon have under Obamacare: subsidized health-insurance exchanges; 2) limit subsidies in the exchanges to incomes up to 300% of the federal poverty level as in Massachusetts and also limit the growth of subsidies to the overall growth rate of the economy; 3) use the exchanges for Medicare reform by raising the eligibility age for Medicare by 3 months each year.  Retirees would then gradually migrate into the defined contribution system of the exchanges; 4) gradually shift Medicaid enrollees into the exchanges.  The exchanges would allow them to move up the income ladder while maintaining their health insurance.
Eventually all low income and retired  Americans would become part of a unified health-insurance system based on the exchanges which would provide subsidies as needed.  I would add one additional feature to this system:  remove the tax exemption from employer provided insurance.  This would, of course, create healthcare cost consciousness amongst employees.  Employers could still offer a health insurance package to their employees but it would become part of their taxable compensation.  They might decide to join an exchange instead for a better deal.
Such a system as outlined above is based on the Swiss free market model.  The Swiss choose their own doctors and have short waiting times for appointments.  The cost of healthcare in Switzerland is about half as much per person as in the U.S. so we would achieve a huge savings.  We have got to make big changes in the way we deliver and pay for healthcare in the U.S. and here is one way to do it!

Colonoscopies Show Why American Health Care is So Expensive

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Yesterday’s New York Times has an excellent article, “The $2.7 Trillion Medical Bill”, which uses a detailed analysis of the cost of colonoscopies to show why American healthcare is so expensive.  In the U.S. an insurance company pays about $3500 – $4000 for a colonoscopy compared with the cost for the procedure in Europe of between $400 – $800.  Also the price can vary enormously, from as little as $665 (in Utah) to as much as $8577 (in New York City).  There are all sorts of reasons for this huge variation in cost, for example, whether or not an anesthesiologist is used as well as a gastroenterologist, and whether the procedure is performed in a surgical center rather than in a doctor’s office.
The basic problem, of course, is that in the U.S. nobody is sufficiently responsible for the bottom line.  The patient isn’t responsible because the bill is paid by the insurance company.  The insurance company negotiates with healthcare providers but the insurance premium is paid by the patient’s employer.  If the insurance company has to pay too much in claims one year, then it just raises insurance premiums for the following year.
The problem is getting so serious that it will soon have to be dealt with in a comprehensive way.  There are essentially two different ways to proceed.  One is to have a single payer system like most of Europe and Canada.  Healthcare would be tightly controlled by the federal government which would set prices and ration care.  The cost of healthcare would be controlled but we’d be giving up a great deal of personal freedom in return.  Basically it would amount to expanding Medicare into a rigidly prescribed national healthcare system.
The alternative is to adopt a new payment system which makes each of us directly responsible for the cost of our own healthcare.  The best way to accomplish this is to remove the tax exemption from employer provided health insurance.  Health insurance could still be provided by an employer but it would be considered a part of total salary and be taxed as such.  Then the employee, as well as any self-employed person, would have a direct personal stake in setting up an efficient health insurance plan to keep the cost of healthcare under control.
Americans put great emphasis on personal freedom and responsibility and I believe that most of us would prefer this latter free market approach to healthcare rather than a single payer system like what most of the rest of the world has!

Is Medicare Out of the Woods?

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The Medicare Trustees have just released their annual report and, according to today’s Wall Street Journal, “Medicare Trustees’ Report Eases Concerns on Funding”.  In 2012 Medicare expenses, most of which are paid out of general government tax revenue, amounted to $574 billion, up 4.6% from 2011.  Although this is a smaller annual increase than usual, it still represents a rate of growth which is much too fast to be sustainable over the long run.  After all, the economy (i.e. GDP) is only growing at a rate of 2% per year and so a rate of 4.6% for Medicare is more than twice as fast as the economy is growing.  Such a rapid rate of growth for Medicare has been going on for many years and simply cannot be continued much longer.
The problem is that Medicare is an open ended entitlement program which pays whatever is needed by its currently 50.7 million retired enrollees, whose number is also increasing rapidly.  The only way that Medicare can possibly survive indefinitely is to be turned into a defined contribution program whereby each enrollee’s annual support is limited to a fixed amount.  Of course, this places responsibility on each enrollee to pay attention to the cost of her/his own medical care.  This is a big change from the present system of government responsibility and so it will take a major change of thinking to make such a big switchover.  But a new system can be phased in over time so that everyone can get used to it.
We really only have two choices.  We can postpone any action along these lines until the cost of the current system is so outlandish that the government is given the authority to severely ration healthcare for senior citizens.  The alternative is to set up, and phase in, a new system so that every enrollee bears responsibility for the cost of her/his own care.  Right now we have the luxury of deciding which of these two systems we want to adopt.  But if we put off the choice much longer, it will be forced upon us by financial necessity.

Is Voucher Really a Dirty Word?

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The current issue (May 25, 2013) of the Economist has an excellent article “Entitlements in America”, which tackles the broad issues of entitlement spending and health care inflation in America.  There are many aspects of this whole problem but let’s focus here on “Medicare, the hardest part of the budget”, as the Economist says and with which I totally agree.  We cannot get government spending under control, i.e. deficits on a steep downward path, until we figure out how to control the cost of Medicare.
The Economist makes some standard recommendations, such as increasing the eligibility age from 65 to 67 (as for Social Security) and raising premiums on the well-to-do (means testing).  These are good ideas but not large enough in scope to make a significant dent on the problem.  Somehow or other we need to convert Medicare from a defined benefit program (with no cap on expenses) to the same kind of limited defined contribution program which everyone else has through private insurance.  But how can we accomplish this within our political process?  Republican House Budget Chair Paul Ryan has taken an enormous amount of heat for proposing to make this switch with a premium support or “voucher” plan.  It is much too easy for Democrats to accuse him of trying to destroy Medicare when he’s really just trying to save it by making it financially sound.
The Economist proposes converting the Federal Employee Health Benefits program into a voucher system as an experiment to see if it saves money.  Right now FEHB offers unlimited benefits with federal employees paying 35% of the cost.  This makes FEHB open ended with no constraint on overall spending, which is exactly the problem with Medicare.  Each federal employee would have an annual health benefit amount and would have to decide on what kind of health insurance benefit to purchase with the fixed amount, supplementing with personal funds if desired.  If a voucher program for federal employees saves money for the federal government, as it undoubtedly would, then we could confidently convert Medicare to a similarly system.
We have to make big changes in our current Medicare program and here is an excellent suggestion for one possible way to do it!

What is America’s Biggest Problem?

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I’d like to do things differently on Memorial Day and ask you to say what you think our biggest national problem is at the present time.  If you have been following this blog for a while, you can probably guess what my own answer is.  But I will not answer directly, at least not yet.   However I will respond to your comments and give you my take on your answer.  Later on I’ll give you my own answer to the question. I hope to hear back from you!

A Frightening New Look at the U.S. Debt Problem

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Let’s take another look at the Congressional Budget Office’s “An Analysis of the President’s 2014 Budget”.  On May 18, I pointed out that his budget projects a deficit of “only” 2% ten years from now in 2023, which amounts to a $542 billion deficit in that year, quite a large amount.
There is actually a clearer and rather frightening way to look at the continuing buildup of debt over the next ten years according to the President’s budget.  On page 4 of the CBO report, year by year projections are given for each of the following: Debt Held by the Public (on which interest is paid), Gross Domestic Product, Net Interest on the Public Debt, and Net Interest as a Percentage of GDP.  The actual amounts for 2012 are: $11.3 trillion in Public Debt, $15.5 trillion GDP, $220 billion Net Interest and 1.4% Net Interest/GDP.  These figures all steadily increase during the next 10 years with projected values for 2023 being: $18.1 trillion in Public Debt, $25.9 trillion GDP, $782 billion Net Interest and 3.0% Net Interest/GDP.
Here’s what is so frightening.  Right now we’re paying 1.4% of GDP as debt interest but GDP is itself growing at about 2%.  So we at least have a small net growth of .6%.  But the 1.4% interest for 2012 and 2013 is projected to keep growing steadily and reach 3% in 2023 and then to continue on growing indefinitely after that.  This means that either our growth rate continues to steadily increase and hits at least 3% by 2023, and then still goes even higher after that or else our economy will begin to stagnate and go backwards.
We are currently on a perilous course, caused by the enormous accumulation of debt over the past few years, on which we will have to pay interest in perpetuity.  It is an urgent matter to rapidly shrink deficit spending way down close to zero in the next few years.  We need to find more effective ways to boost the economy than the excessive public stimulus which has put us into this dreadful current situation.

Income Inequality and What to Do About It

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In yesterday’s New York Times Timothy Noah has a column in The Great Divide series “The 1 Percent Are Only Half the Problem” in which he makes the case that there are two different types of inequality which society needs to address.  First, the income gap between the top 1% and the bottom 99% is getting wider and wider.  But there is also a skills gap between the (college) educated class and those whose education ended in high school.
What can and should be done about these two different aspects of inequality in America?  Controlling the excesses on Wall Street in order to avoid future bailouts will help control the wages of the top 1%.  This is already being done with the Dodd-Frank financial reforms and current efforts to require the biggest banks to hold more capital reserves.
But much more could be done.  Unfortunately, the main effect of the Federal Reserve’s low interest rate policy is to drive up the stock market which favors the more affluent.  Broad based tax reform which would lower tax rates by eliminating unjustified tax breaks for the rich would do much more to stimulate faster economic growth and give a big boost to middle class incomes.
The huge and rapidly growing cost of employer provided health care (now averaging about $5000 annually for individual coverage and about $14,000 for family coverage) is having a huge negative impact on middle class wage growth.  The U.S. spends twice as much of GDP, about 18%, on healthcare as any other developed nation.  Reforming employer provided health insurance by removing the tax exemption (and replacing it with lower tax rates) would get each of us personally involved with controlling healthcare costs.
The skills gap is driven by globalization and the advance of technology and is not going to disappear.  The only way to address it is by improving educational outcomes.  Putting more emphasis on early childhood education (ages 0-5) will help as well as making college more accessible and affordable.  Online education and especially Massive, Open, Online Courses (MOOCs) will help in both respects.  Hopefully more and more students and families will come to realize that there are many attractive alternatives to very expensive and elite residential colleges and universities.  It is not necessary to be wealthy or to borrow lots of money to attend college!
Conclusion:  inequality in American society is a large and growing problem.  But there are effective ways for both policy makers and individuals to respond.