Is Health Care Spending Really Under Control?

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The New York Times has two recent articles about health care spending, “Good News inside the Health Spending Numbers” and “The Battle over Douglas Elmendorf – and the Inability to See Good News.”  These two articles focus on the fact, clearly evident in the chart just below, that the rate of increase in overall health care spending has slowed down since 2009.  In fact health care spending has been a constant 17.4% of GDP for the past four years, while it increased by 1.9% of GDP in the four years before that.  More precisely, health care spending rose by 3.6% in 2013, down from 4.1% in 2012.
CaptureIt is, of course, very good news that increases in health care spending have dropped dramatically since the recession in 2007-2009, but is it really surprising that this has happened in the midst of so much economic pain, with a very high rate of unemployment as well as stagnant incomes for most Americans?  In fact, even in these circumstances, health care spending is still growing at twice the rate of inflation, which has been under 2% during this same time period.
A more realistic view of health care spending has just been presented to the Health Subcommittee of the House Committee on Energy and Commerce by Marc Goldwein, from the non-partisan Committee for a Responsible Federal Budget, a Washington D.C. think tank focused on fiscal responsibility.  Mr. Goldwein makes the following points:

  • Despite the recent slowdown in health care spending, it remains incredibly important that policymakers pursue reforms to reduce future projected health care costs.
  • Policymakers should focus first and foremost on health care “benders” that would improve incentives in order to slow the overall growth of health care spending.
  • Policymakers should next look to health cost “savers” which reduce federal costs by better allocating resources within the federal health programs.
  • Given the aging of the population, health reforms will be necessary but not sufficient to put the debt on a sustainable long-term track.

Slowing down the rate of growth of health care is going to be a huge challenge for our national leaders.  I will elaborate on how to do this in forthcoming blog posts.

Let’s Keep the Economic Momentum Going

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There has been lots of good economic news lately:

  • The economy added 321,000 jobs in November, the most in one month since January 2012.
  • The unemployment rate of 5.8% remains steady and is down from 7% in November 2013.
  • The average hourly earnings for workers is up by 2.1% from a year earlier.
  • Economic growth for the third quarter is up 3.9% from the previous quarter.
  • The deficit for the 2014-2015 fiscal year was “only” 2.8% of GDP and is predicted by the Congressional Budget Office to drop to 2.6% for the current year.
  • The price of a gallon of gasoline has dropped to $2.71 on average, its lowest level since 2010 and is still dropping.

CaptureThe New York Times predicts that the “Brighter Economy Raises Odds of Action in Congress.”  Jason Furman, Chairman of the White House Council of Economic Advisors, is quoted as saying that “At least there will be less of a philosophical debate on infrastructure, tax reforms and expanding exports.  You can have that agenda because the economy is not in free fall.” These three items would make a great agenda for the 114th Congress in the following way:

  • Infrastructure. The continuing drop in the price of gasoline offers the opportunity to replenish the inadequately funded Highway Trust Fund in a fiscally responsible manner. Congress should raise the federal gasoline tax above its current 18 cents per gallon to a level which is sufficient to fund the entire federal share of highway construction and repair.
  • Tax reform. Individual and corporate tax reform will give the economy a huge boost. The idea here is to lower tax rates in a revenue neutral way by closing loopholes and deductions.
  • Expanding Exports. What’s needed here is to give the President fast track negotiating authority so that Congress has to vote any trade agreement up or down without modification. This is the only way to get other countries to make concessions.

 

Of course there are many other issues which need to be seriously addressed by the new Congress.  But relatively quick action on just these three less controversial items would be a great start!

Why Nebraska Needs a Learning Community III. High Black Unemployment

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Omaha’s Metropolitan Area Planning Agency has just released a comprehensive report, “Equitable Growth Profile of the Omaha-Council Bluffs Region,” describing the challenges facing the Omaha area economy in the next 25 years.
CaptureAs also reported in the Omaha World Herald  MAPA says that:

  • Racial minorities currently make up 21% of the area’s population, up from 9% in 1980. Under current trends minorities will comprise 39% of the population by 2040.
  • Minorities are less likely than whites to have high school degrees, associate degrees, or four-year college degrees.
  • The education gap contributes to a skills gap which in turn contributes to a jobs and income gap. As shown above, black unemployment at 12.2% (in March 2014) is much higher than the unemployment rate for any other racial group.

MAPA has several suggestions for improving job prospects for blacks such as more and better job training, better public transit, and helping minority owned businesses.  It also suggests building “cradle to career” pipelines for underprivileged youths.
This last suggestion is precisely what the Omaha area Learning Community is focused on.  As I reported  several months ago, the superintendents of the 11 school districts in the Learning Community have approved a comprehensive plan for Early Childhood Education whose purpose is to make sure that children from low-income families are well prepared to succeed in school.  It will be funded by a ½ cent levy approved by the Learning Community Coordinating Council.
These same 11 superintendents are highly supportive of the overall mission of the LC to close the academic achievement gap between low-income students and middle class students.  They have recently submitted a report to the Education Committee of the Nebraska Legislature suggesting ways to make the LC even more effective than it is already.
Achieving improved educational outcomes for minorities has been called America’s big new civil rights challenge of the 21st century.  Omaha is making significant strides in addressing this problem thanks to a huge communitywide effort by many different organizations including the Learning Community.

Why the U.S. Needs True Health Care Reform

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The Affordable Care Act has improved access to healthcare by already enrolling over 7 million Americans who were previously uninsured.  It is estimated that there will be a total of 20 million new enrollees by the end of this decade.
CaptureBut as the above chart from a recent Gallup survey indicates, the cost of healthcare is now a big barrier for an increasing number of people with health insurance.
The University of Chicago economist, Casey Mulligan, discusses the cost issue in a recent Wall Street Journal article “The Myth of ObamaCare’s Affordability” as well as in a new book.  He makes the following points:

  • Although the ACA helps specific populations by giving them a bigger piece of the economic pie, the law diminishes the pie itself by reducing the amount that American’s work and making their work less productive.
  • 35 million men and women currently work for employers who don’t offer health insurance. These tend to be small and midsize businesses with lower paid employees. The result of penalizing businesses for hiring and expanding will be less hiring and expanding.
  • The “29er” phenomenon is a good example of how the law harms productivity. If a business has 50 or more employees who work over 30 hours a week, it is required to offer health insurance. Many employers have thus adopted 29-hour work schedules which lessens overall productivity.
  • Mr. Mulligan estimates that the ACA’s long-term impact will include about 3% less weekly employment, 2% less GDP and 2% less labor income. He also claims that these effects will be visible and obvious in just a few years by 2017!
  • The ACA is thus weakening the economy. For the large number of people who continue to pay for their own healthcare, healthcare is now less affordable.

Conclusion: we need true healthcare reform which addresses cost as well as access and this can be achieved by fixing Obamacare.  It is not necessary to repeal it.  The Manhattan Institute’s Avik Roy has developed a plan to do this: ”Transcending Obamacare.”  Mr. Roy’s Plan would keep the exchanges, end both the individual and employer mandates, and migrate both the Medicare and Medicaid programs onto the exchanges over time.  These features will greatly reduce the cost of American healthcare.  Check it out and see for yourself!

Nebraska Will Benefit From Immigration Reform

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Several months ago the Omaha World Herald reported that Nebraska has approximately 45,000 illegal immigrants, or about 2.5% of the state’s population.  Nebraska’s unemployment rate has now dropped to 3.4%, the third lowest in the nation behind only North Dakota and South Dakota.  Such a low unemployment rate represents a labor shortage.  There simply aren’t enough Nebraskans to perform all of the physically demanding, low skill work needed in the agriculture, meatpacking and construction industries.  It is this labor shortage which is attracting such a large number of illegal immigrants to Nebraska.
CaptureAccording to the New York Times, the Tea Party has recently changed its focus from “curtailing the reach of the federal government, cutting the deficit and countering the Wall Street wing of the Republican Party to becoming largely an anti-immigration overhaul movement.”  This is a very unfortunate development.
Why would it be so difficult to solve our illegal immigration problem in the following manner:

  • Give all businesses a limited period of time, perhaps six months, to present a list of current employees who are illegal. Everyone on this list without a criminal record would receive a guest worker visa.
  • Going forward, businesses would be authorized to hire additional foreign workers as needed with guest worker visas issued in their home country. This would eliminate the need for illegal entry into the U.S.
  • As of a certain date in the near future, all businesses would be required to periodically demonstrate the legal status of all workers on their payroll.
  • Guest workers would be eligible to apply for citizenship after a lengthy period of time, perhaps ten years.

Once an adequate guest worker visa program has been set up and is operating efficiently, security on our southern border with Mexico would hardly be more of a problem than is security on our northern border with Canada. Illegal immigration should be considered as an economic problem, not a law-enforcement problem.
If it were handled correctly in this way, the problem would disappear in short order!

Let’s Do Something about Corporate Welfare and Crony Capitalism!

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The American Enterprise Institute is one of my favorite Washington think tanks.  It defines its mission as “research and education on issues of government, politics, economics and social welfare.”  I especially like its interest in social welfare which translates for me as being fiscally conservative with a heart.
CaptureThe AEI’s Timothy Carney has just proposed “An anti-corporate welfare, anti-cronyism agenda for the 114th Congress.” Most candidates for Congress condemn crony capitalism and corporate welfare.  This generally means any policies which tilt the playing field, picking winners and losers and rewarding well-connected insiders.  Such actions contribute to the public perception that the “game” is rigged and harm economic growth and innovation.  Here are some prime examples discussed by Mr. Carney:

  • Health Care: repeal Obamacare’s insurer bailout (the “risk corridors”) so that health insurers compete totally on price.
  • Health Care: end the individual mandate which forces people to buy a product from a private industry. An alternative incentive for individuals to remain covered would be limiting enrollment periods, for example, to a brief six-week sign-up period every two years.
  • Energy: end tax breaks and subsidies for both renewable energy (including ethanol) and oil and gas. Make all forms of energy compete in the market.
  • Taxes: make corporate taxes simpler, lower and more neutral. Besides being fairer, such changes will boost the economy.
  • Finance: Rein in Fannie Mae and Freddie Mac by treating them the same as all big banks. This means the same capital requirements, the same tax treatment and the same consumer protection regulation.
  • Finance: Kill Dodd-Frank’s too-big-to-fail designation. It acts as a moat, protecting the big guys from competition.
  • Trade: Kill the Export-Import Bank.
  • Trade: Repeal the Jones Act. It requires all shipping between U.S. ports be done on U.S. flagged vessels.
  • Agriculture: End the Sugar Program which costs consumers $3 billion per year.
  • Agriculture: Reform the Federal Crop Insurance Program by making it self-supporting.

These mostly well-known examples of corporate welfare represent just the tip-of-the-iceberg.  Nevertheless they provide a good place to start in cleaning things up!

Inequality Does Not Reduce Prosperity

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In the national elections this year four states: Alaska, Arkansas, Nebraska and South Dakota raised their state minimum wage rates above the national rate of $7.25 per hour and, at the same time, elected Republicans to the U.S. Senate, in three cases replacing Democratic incumbents.  Does this represent contradictory behavior by the voters?
CaptureThe American Enterprise Institute’s James Pethokoukis recently reported (see above) that the U.S. has the third highest rate of billionaire entrepreneurs behind only Hong Kong and Israel, as well as by far the most billionaires over all.  These are the high-impact innovators like Bill Gates, Steve Jobs and Mark Zuckerberg and the Google Guys.
These observations are put in context by the Manhattan Institute’s Scott Winship who recently reported that “Inequality Does Not Reduce Prosperity.” Here is a summary of his findings:

  • Across the developed world, countries with more inequality tend to have higher living standards.
  • Larger increases in inequality correspond with sharper rises in living standards for the middle class and poor alike.
  • In developed nations, greater inequality tends to accompany stronger economic growth.
  • American income inequality below the top 1 percent is of the same magnitude as that of our rich-country peers in continental Europe and the Anglosphere.
  • In the English-speaking world, income concentration at the top is higher than in most of continental Europe; in the U.S., income concentration is higher than in the rest of the Anglosphere.
  • With the exception of a few small countries with special situations, America’s middle class enjoys living standards as high as, or higher than, any other nation.
  • America’s poor have higher living standards than their counterparts across much of Europe and the Anglosphere.

Conclusion: Americans are fair-minded and would like to help the working poor do better.   But Americans also appreciate the value of innovation and entrepreneurship.  When there is a tradeoff between increasing prosperity and reducing inequality, greater prosperity comes first.

Reforming Remedial Education

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Many observers agree that one of the best ways to boost the economy and reduce income inequality is to improve educational outcomes at both the K-12 and postsecondary levels.  One of the main barriers to accomplishing this goal is the huge K-12 achievement gap between students from low-income families and those from middle class families.  This creates a huge need for remedial education in college as shown in the chart below.
CaptureA recent article in the Wall Street Journal, “Remedial Courses in College Stir Questions Over Cost, Effectiveness,”  shows the dramatic increase in the number of undergraduate students taking remedial courses in recent years and also the extent to which these remedial students are receiving financial aid in the form of Pell grants.  The article points out that some states such as Connecticut, Florida and Tennessee are no longer requiring remedial education for students who test poorly.
But the educators Jane Wellman and Bruce Vandal say not so fast in an article “5 Myths of Remedial Education”

  • Myth #1. Remedial Education is K-12’s problem. Colleges could do a much better job of specifying clear benchmarks for college success.
  • Myth #2. Remedial Education is a Short-Term Problem. Even if the Common Core curriculum raises high school standards, there will still be a large number of poor performers, as well as older adults returning to school, who will need remediation.
  • Myth #3. Colleges Effectively Determine College Readiness. College placement tests do not provide a precise diagnosis of student skill deficiencies.
  • Myth #4. Remedial Education is Bankrupting the System. Remediation using non-tenured faculty and making heavy use of technology is not expensive and can be very effective. (The UNO Math Department, where I work, is a good example of this.)
  • Myth #5.   Maybe Some Students are Just Not College Material. This is an elitist point of view which minimizes the importance of postsecondary education in today’s economy.

As the article concludes, “Remedial education is the 800-pound gorilla that stands squarely in the path of our national objective to increase the number of adults with a college degree. … Our nation can no longer afford these myths.”

Fix the Debt

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Recently I have had several posts about our national debt, for example, “Why the National Debt Is Such a Threat to the U.S.,” showing graphically that our current public debt at 74% of GDP is very high by historical standards and rising rapidly under current fiscal policies.
CaptureYesterday I attended a workshop in Washington D.C. put on by Fix the Debt.  All expenses were paid and, in return, the attendees agree to make at least three presentations to local community groups during the following year.  This means that I will soon be sending out a letter to such groups as Kiwanis and Rotary Clubs around the Omaha area where I live, offering my services as a speaker at one of their meetings.  The purpose is to build more public awareness of the threat of a huge and growing national debt to the long-term welfare of our country. Here is a summary of talking points from the workshop:

  • The deficit for the 2013-2014 fiscal year is almost $500 billion.
  • Under current fiscal policies the debt will increase to 270% of GDP by 2080.
  • Reasons for our debt problem:
  1. An aging population which means expanded Social Security spending
  2. Healthcare costs are growing for both Medicare and Medicaid
  3. Interest costs will grow rapidly as the economy recovers and interest rates rise
  • All bipartisan reform plans call for both spending cuts and revenue increases.
  • The benefits of taking action are:
  1. Increased budget flexibility
  2. Lower exposure to changes in interest rates
  3. Reduced risk of another financial crisis
  • The longer we wait:
  1. The older our population gets
  2. The higher the debt will rise
  3. The less time we have to phase in changes
  4. The slower our economy will grow
  5. The fewer tools we will have to fix it
  • How do we bring debt under control?
  1. Enact policies that grow the economy
  2. Health care cost containment
  3. Spending cuts
  4. Tax reform and tax expenditure cuts

Let me know if you’d like a speaker on this topic at your club!

Is It Feasible to Cut Tax Preferences to Pay for Lower Tax Rates?

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I have been focusing lately on America’s two biggest fiscal and economic problems:

  • How to boost the economy in order to put more people back to work
  • How to either cut spending or raise revenue in order to shrink the deficit.

A few days ago in “The Great Wage Slowdown and How to Fix It,” I laid out a fairly specific proposal to make a substantial reduction in tax preferences in order to cut tax rates across the board and especially for the 64% of taxpayers who do not itemize deductions.  These are the middle- and lower-income workers with stagnant incomes who would likely spend any tax savings they received thereby giving the economy a big boost. Let’s examine whether or not this is a realistic course of action.
CaptureThe above chart from the Congressional Budget Office document, “The Distribution of Major Tax Expenditures in the Individual Income Tax System,” shows that, for example, the upper 10% of households by income receive about 40% of the total $1 trillion in individual tax expenditures per year.  Furthermore, this same top 10% of tax payers have an income of about $140,000 or more (Congressional Research Service). My basic idea is to shrink tax preferences by $250 billion per year and to lower tax rates for middle- and lower-income non-itemizers by this same amount.  If we assume that they would spend 2/3 of this new income, it would boost the economy by $170 billion per year which is 1% of GDP.
A reasonable way to achieve this savings is to expect higher income earners to contribute a greater percentage of their tax preference savings.  For example:

  • top 1% contribute $110 billion (2/3 of their total deductions).
  • top 96th % to 99th % contribute $50 billion (1/2 of their total deductions).
  • top 91st % to 95th % contribute $30 billion (1/3 of their total deductions).
  • top 81st % to 90th % contribute $30 billion (1/4 of their total deductions).
  • top 61st % to 80th % contribute $30 billion (1/5 of their total deductions).
  • this gives a total of $250 billion in tax preference savings.

This back-of-the-envelope calculation is not intended to be definitive but rather to suggest what can be done along these lines.  Those who are more well-off need to make bigger sacrifices in getting our economy back on track.