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What Have the Politicians in Washington Given Us?
So far Occupy Wall Street and its imitators across the country have directed their rage at Wall Street and the rich in general. But they would be better served if they aimed their criticism at the true authors of this country’s problems: the politicians in Washington.
Obviously there are unscrupulous businessmen, and some on Wall Street behaved unethically, if not dishonestly taking advantage of lax oversight and bailouts to make fortunes while the rest of the economy suffered. But, if you look at the one percent that OWS is denouncing, most of them got rich by giving us things that makes us better off, or at least things that we want. Of the top one percent of earners, roughly a third are entrepreneurs or managers of nonfinancial businesses. Nearly 16 percent are doctors or other medical professionals. Lawyers, engineers, scientists, and computer professionals make up another 15 percent. In fact, fewer than 14 percent are involved in the financial industry at all. And even those much reviled bankers provide valuable services, including generating the capital that enables businesses to start, expand, and hire workers. At the same time, the rich are paying a disproportionate share of the taxes and contributing more than $150 billion annually to charity.
On the other hand, what have the politicians in Washington given us?
Many of the students taking part in the OWS protests are reportedly concerned about the cost of their student loans. Since the average student who graduates this year will do so with a debt of more than $25,000, that concern is understandable, though there is ample reason to believe that government is more responsible for that debt than the rich or even the banks. But, as bad as that debt is, worse is the $48,000 that each of those students owes because the politicians in Washington can’t stop spending. That’s each student’s share of our $15 trillion national debt.
And that doesn’t even take into account the unfunded liabilities of Social Security and Medicare. If one counted the full indebtedness of the U.S. government, each of those students owes more than $196,000.
And, if they are worried about jobs, well the blame for that can also be laid at the feet of big-spending politicians in Washington. The International Monetary Fund looked at the relationship between federal debt levels and economic growth and concluded that from 1890-2000, those countries with high debt levels consistently experienced slower economic growth than those with low debt levels. Similarly, Carmen Reinhardt of the University of Maryland and Kenneth Rogoff of Harvard concluded that countries with a debt totaling more than 90 percent of GDP have median growth rates 1 percent lower than countries with a lower debt, and average growth rates nearly 4 percent lower.
And, it’s not just debt; it is also the size of government. Numerous academic studies show that when government grows too large, costly, and intrusive, it acts as an economic anchor. For example, a pair of studies by Harvard’s Robert Barro found that “public consumption spending is systematically inversely related to economic growth” and that there is a “significantly negative relation between the growth of real GDP and the growth of the government share of GDP.” Similarly, an empirical analysis of 23 OECD countries by Florida State University economist James Gwartney and his colleagues found that a ten percentage point increase in government consumption as a share of GDP reduced the growth rate of real GDP by one percent. In other words, as government spending goes up, economic growth goes down.
In fact, even the current economic crisis has its roots in Washington. The housing bubble and the crash which followed were driven in large part by government policies that discouraged old-fashioned lending criteria such as down payments, as well as government-run institutions such as Fannie Mae and Freddie Mac, whose implicit government guarantee encouraged speculation on mortgage-backed securities. Meanwhile, other government policies deliberately targeted housing loans to low-income buyers who were far more likely to default.
There are certainly more than a few bad apples on Wall Street. But for all their faults, we are generally better off with the rich than without them. Can anyone say the same for big government?
This article originally appeared in a PolicyMic debate with Demos co-founder David Callahan.
A Deal, Not a Solution
The deal that President Obama and congressional leaders may well be the best deal that Republicans could get – and any deal that makes Paul Krugman this apoplectic can’t be all bad – but it should not be considered a solution to our fiscal problems.
In the face of a $1.1 trillion budget deficit, a $14.3 trillion official debt, and a real indebtedness of more than $120 trillion, the deal would reduce the baseline increase in planned spending initially by about $1 trillion, or an average of roughly $100 billion per year – less than the federal government will borrow this month. Moreover, the cuts are unspecific – apparently Congress still can’t find actual programs to eliminate – raising the specter that it will employ the same budgetary gimmicks as the Continuing Resolution last May, that promised $61 billion in cuts and delivered less than $8 billion. Any cuts that do occur are simply reductions in baseline increases, not actual year-over-year reductions. And most cuts are pushed far out into the future when they may or may not materialize.
The plan also creates a “”supercommittee – there’s an original idea – to propose an additional $1.2-1.7 trillion in spending cuts or tax increases, but few Washington observers expect it to be able to reach an agreement that could actually pass Congress. Of course, in theory, if that happens, there would be automatic cuts of about $1.2 trillion, split equally between domestic programs and defense. However, those cuts would not go into effect until 2013, after the next election. Since the current Congress cannot bind future Congresses, it’s entirely possible – even likely – that those cuts will be rewritten, reduced, or done away with altogether. Certainly there is no reason why we should count on them occurring.
The net result of this deal is that – if every penny of the proposed cuts actually occurs – our official national debt will rise to about $20 trillion by 2020. That it otherwise would have reached $23 trillion is scant comfort. With our country careening toward a fiscal cliff, Congress has chosen to tap on the breaks, not change direction.
More troubling, the deal fails to deal with entitlement reform. It is Medicare, Medicaid and Social Security that are driving this country towards insolvency, but this plan does not include any structural reform of these programs. They are exempt from the first round of cuts, and the level of cuts that can be proposed by the supercommittee are far too small to encompass anything like the Medicare reforms that Paul Ryan proposed early this year. And both Social Security and Medicaid are exempt from the across-the-board cuts that kick in if the committee’s cuts do not occur. In that case Medicare would be trimmed, but only in terms of further reductions in reimbursements to providers.
Certainly, this deal could have been worse. There are no tax increases (yet). There are at least theoretical cuts in spending. We’ve moved a long way from when President Obama proposed an increase in spending as part of his 2012 budget. But no one should pretend that we’ve put our fiscal house in order.
Romney Can Run, but He Can’t Hide from Romneycare
Massachusetts Governor Mitt Romney announces today that he will be a candidate for president. His announcement is expected to tout his business experience and to portray him as the candidate best able to deal with the country’s economic problems. But one thing you are not likely to hear him talk about is his Massachusetts health plan, Romneycare.
Of course, Romney has already tried to put this issue away with a speech in Detroit last month, and he would probably be happy to never talk about it again. But if Romney really believes he can hide from the Romneycare fallout, he is badly mistaken.
Cato scholars have issued several reports detailing the many failings of Romneycare. Those studies can be found here , here , here and here for instance.
In his Detroit speech, Romney trotted out three defenses. First, he says that his plan, unlike Obamacare, did not increase taxes. That is technically true — if you consider only the legislation as Romney signed it. However, it is also true that the legislation relied heavily on federal subsidies — more than $300 million — and was still underfunded. Romney’s successor was forced both to cut back on some benefits that the plan originally offered and to raise the state’s cigarette tax by $1 per pack ($154 million annually) to help pay for the program. The state also imposed approximately $89 million in fees and assessments on health-care providers and insurers.
Similarly, Romney claims that his plan only costs about one percent of the Massachusetts budget and is, therefore, not a budget-busting, big government program. In making this claim, however, Romney fails to note that that accounting does not take into account more than $300 million annually in federal funds. Nor does it count the costs that were pushed off onto Massachusetts businesses and taxpayers through the individual and employer mandates, or the costs of increased insurance premiums.
And, finally, Romney criticizes Obamacare as a “one size fits all” federal plan, whereas his plan was implemented in only one state. That’s true. Governor Romney only messed up the health-care system in Massachusetts, while President Obama has messed up health care for the entire country. Of course, as governor, Romney didn’t have the power to impose his model outside of his state. He now says that he opposes any national plan, calling for states to experiment with different approaches as the “laboratories of democracy.” That would certainly be an improvement over Obamacare. On the other hand, he has repeatedly said that he sees the Massachusetts plan as a model for the nation and has urged other states to copy his approach.
Governor Romney faces many challenges in convincing voters that he really does want to reduce the size, cost, and intrusiveness of government. For example, Romney has recently been pandering to Iowa voters by renewing his support for ethanol subsidies. On other issues, he has been a big supporter of federal involvement in education. He backed No Child Left Behind and once called for the federal government to buy a laptop computer for every child born in America. His record as Massachusetts governor was decidedly mixed. In the Cato Institute’s biannual ranking of governors on fiscal issues, Romney received a grade of only “C.” His philosophy of governing can be seen from his comment, “I’d be embarrassed if I didn’t always ask for federal money whenever I got the chance.”
But the biggest single obstacle to his candidacy remains Romneycare. Unless and until he finds a way to deal with this albatross, he will be a weak and wounded frontrunner.
Not a Good Week for Obamacare
It has not been a good week for Obamacare. Another court ruled that the bill was unconstitutional, while it took a party-line vote in the U.S. Senate to avoid a legislative repeal. Meanwhile, chipping away at the legislation began, with the Senate voting to repeal one of the bill’s most unpopular provisions, a requirement that businesses file 1099 tax forms on even small purchases. Supporters of the bill are bailing as fast as they can, but the ship is sinking rapidly.
Still Not Serious About Cutting Spending
The howls of outrage that have greeted the report of the bipartisan National Commission on Fiscal Responsibility and Reform shows two things: 1) most Democrats have no interest in reducing the size and cost of government; and 2) few Republicans are actually serious about it.
From the initial reaction, one would think that the Commission has slashed government to the bone, throwing the elderly, poor and sick into the street. In reality, the Commission report is far from a radical document. It proposes a reduction in government spending from 24.3 percent of GDP today to 21.8 percent over the next 15 years. That’s a start. But as recently as 2000 total federal spending was just 18.4 percent of GDP — and people were hardly dying in the streets during the Clinton years.
In fact, the Commission doesn’t actually “cut” federal spending. Under the Commission’s proposal, it would rise from roughly $3.5 trillion today to more than $5 trillion by 2020. So, under the terrible “cuts” that the Commission is recommending, federal spending would still increase faster than inflation. This is the old Washington game of calling a slower increase than previously projected a “cut.”
But Democrats appear unwilling to support even this modest slowing in the growth of government. Instead they call for simply raising taxes to support a virtually unlimited amount of federal spending. Republicans, meanwhile, talk about reducing government, but fall back on bromides about reducing waste, fraud, and abuse when faced with the need to make specific cuts.
If we were serious about reducing the size, cost and intrusiveness of government, we should roll back spending to Clinton-era levels. (My colleague Chris Edwards has shown how that can be done.) That would eliminate the need for the tax increases that the commission proposes.
Alas, we still await political leadership with that amount of courage.
The Deficit Commission: A Good Try That Falls Short
My colleagues, Dan Mitchell, Jagadeesh Gokhale, Michael Cannon and Chris Edwards have already provided their thoughts on the chairman’s mark released yesterday by the bipartisan deficit reduction commission. A few additional thoughts:
The commission provides a good-faith look at the magnitude of the problem we face, and the magnitude of cuts necessary to bring spending down to even 21 percent of GDP (and it really should be far lower). In doing so they show just how unserious Republicans are in proposing a paltry $100 billion in spending cuts. And the commission makes it clear, unlike Republicans, that both entitlements and defense spending must be on the table.
The commission also starts the debate in a useful direction by implicitly acknowledging that their need to be some limits to government spending—that government cannot consume an ever-increasing proportion of GDP. (Without a change in policy, the federal government will consume 43 percent of GDP by 2050.)
But ultimately the report falls short because it fails to address the proper role of government. In fact, it tacitly accepts the idea that government should be doing everything it is doing now. It even acquiesces to the new health care law. As a result, it fails to reduce the size of government sufficiently to avoid tax hikes, let alone permit tax cuts in the future.
Moreover, because the commission leaves the basic structure and role of government intact, it raises questions about the future viability of its proposed mix of spending cuts and tax increases. History demonstrates that it is far too likely that tax hikes will be permanent, while spending cuts will last as long as the next year-end emergency appropriations bill.
As the commission moves toward a final report on December 1, members would be advised not to focus just on the details of these proposals, but to have a serious and deliberative discussion of what the federal government should and should not be doing.
On Election Eve…
With Tuesday’s election widely predicted to bring a near-historic shake-up of the political establishment, here are some things we can say for certain even before the first results are tallied:
- This election will be a win for economic conservatives, not social conservatives. Not surprisingly given the economic climate, economic issues dominated the campaign, with social issues barely registering. This was particularly helpful for Republicans, since economically conservative, socially moderate suburban voters, who backed Democrats in 2006 and 2008, switched to Republicans this year. There is a lesson here for Republicans in the future.
- In the months leading up to the election, we have heard a great deal about the so-called “civil war” in the Republican Party. As it turns out, there wasn’t one. Despite some spirited, even bitter, primary fights, Republicans of all stripes were able to unify around a common opposition to the Obama agenda. But having achieved electoral success, Republicans will now be forced to confront the serious divisions in their party: tea partiers vs. the GOP establishment; economic conservatives vs. social conservatives; budget hawks vs. neoconservatives. The “civil war” will be back with a vengeance.
- Voters will choose Republicans in this election because they aren’t Democrats. It doesn’t mean that voters have fallen in love with the Republican party. In fact, polls show that Republicans remain only slightly more popular than used car salesmen—or Democrats. At best, voters are willing to give Republicans one last chance. If they don’t deliver, it will be a long, long time before they get another one.
- No issue hurt Democrats as much as the health care bill. It wasn’t just that voters hate the bill—they do—but that it crystallized the average American’s antipathy to a government that was too big, too costly and too out of touch. Voters will declare that they don’t want government running health care…and come to think of it, they don’t want government running much else either.
Personal Accounts for Social Security an Election Killer — Not Quite
You can tell its election season because Democrats are once again attacking Republican’s for daring to propose reforms to Social Security. These attacks come despite the fact that Social Security is already running a temporary deficit, and that deficit will turn permanent in just five years. Overall, the amount the system has promised beyond what it can actually pay now totals $18.7 trillion.
But the latest Pew Poll suggests that attacking Republicans for wanting to “privatize” Social Security might not be such an effective tactic after all. According to the poll, Americans support proposals to “allow workers younger than age 55 to invest a portion of their Social Security taxes in personal retirement accounts that would rise and fall with the markets” by 58 – 28 percent. Younger voters supported personal accounts my an astounding 70-14 percent margin, but every age group except seniors was supportive. Seniors split evenly. Independents, widely believed to be the key to the upcoming election, supported personal accounts by 61-27, and even Democrats favored the idea by 50-36.
Maybe this will finally give the Republicans some courage on the issue.
One Signature Closer to a Vote on Obamacare Repeal
This morning, in a column for National Review Online, I criticized a number of Democrats and Republicans who voted against Obamacare but had not signed a discharge petition that would force a floor vote on repealing the new health care law. One of the Republicans I singled out was Rep. Castle of Delaware, who is now seeking the GOP nomination for US Senate. This afternoon, Rep. Castle’s staff informed me that he intends to sign that petition as soon as he returns to Washington after the recess. That leaves five Republicans who have not signed. For the record, they are: Mark Kirk of Illinois, Joseph Cao and Charles Boustany of Louisiana, David Reichert of Washington, and Shelley Moore Capito of West Virginia.
A Rough Week for ObamaCare
Half way through the work week, and the White House has had an unusually difficult week concerning the progress of their signature piece of legislation. Let’s recap:
On Monday, a federal judge cleared a lawsuit brought forth by Virginia Attorney General Ken Cuccinelli regarding the Constitutionality of the recent health care legislation—specifically the individual mandate. This case will almost certainly be decided by the Supreme Court, but this was an important first step in that process.
Later that day, reports came out that Secretary of HHS Kathleen Sebelius had caught heat regarding misleading statements that claimed ObamaCare would simultaneously pay for the coverage of an additional 30 million Americans and extend the life of the Medicare Trust Fund. The $575 billion that CMS claims the Medicare program will save as a result of the legislation can be used for one purpose or the other, but not both.
Yesterday, a Congressional Research Service Study announced that it is impossible to estimate the number of new agencies created as a result of ObamaCare. Most estimates have the number at around 100, but CRS claims that the final tally is “unknowable” because of the uncertainty surrounding some of the language.
Meanwhile, throughout the course of the day yesterday, voters in Missouri were busy voting in favor of Proposition C, a law that would exempt the citizens of Missouri from the requirement to purchase health insurance, the centerpiece of ObamaCare. The referendum passed by a 3-to-1 margin, but the breakdown of votes is even more telling.
Nearly 670,000 people voted in favor of the proposition, approximately 85,000 votes more than the number of Republican and third-party primary votes. Even if the 40,000 or so voters who apparently cast a vote for Proposition C but not for a primary candidate all voted in favor of proposition, as well as every single Republican and third-party voter, that still leaves nearly 45,000 Democrats who must have also voted with their Republican constituents in upholding their right to obtain health insurance on a voluntary basis.
Keep in mind that these are not just ordinary, uninterested voters. These are the base of the Democratic Party, the most politically active citizens, and yet somewhere between 12-25% of them decided to oppose the individual mandate, notably in a state that is often the bellwether of national election campaigns.
If things continue this way, repeal should be on its way by next week.
Media Coverage of the Health Care Overhaul
Over the course of the health care debate, the media often reported and editorialized — and sometimes it was impossible to tell the difference — quite favorably on the Democratic proposals running through Congress. While some upheld their journalistic responsibility to scrutinize and offer objective analysis of the legislation, many did not.
It was not surprising to read stories almost daily about how Obamacare would lift millions of poor, elderly, sick, and generally down-trodden Americans out of financial and medical crisis, and even go so far as to singlehandedly save the lives of hundreds of thousands of Americans over the course of the next decade. (It would even provide one free turkey for Thanksgiving to every family living 400 percent below the poverty level.)
This morning, however, the headlines read something like this:
- “Rasmussen: Public Favors Repeal 58%-38%” (Rasmussen Polls)
- “Lawmakers, Staff May Lose Coverage” (New York Times): Adds the Times, “The confusion raises the inevitable question: If they did not know exactly what they were doing to themselves, did lawmakers who wrote and passed the bill fully grasp the details of how it would influence the lives of other Americans?”
- “Healthcare Law Could Boost Costs For Less Healthy Americans” (New York Times)
- “Healthcare Law Unlikely To Curb Premium Increases” (Los Angeles Times)
My question is this: where were these reporters before the passage of the health care bill?
Obama’s Health Tax Conundrum
As President Obama is finding out, spending a trillion dollars on health care reform is easy; paying for it is a bit harder.
Both the House and Senate versions contain huge tax increases. But they take completely different approaches toward which taxes are hiked and who would pay them. And, as President Obama discovered in yesterday’s contentious meeting with labor bosses, those differences will not be easy to resolve.
The Senate wants to slap a 40 percent excise tax on so-called “Cadillac” insurance plans, that is plans with an actuarial value of more than $8,500 for an individual and $23,000 for a family. The tax technically falls on the insurance company that offers the plan, but there’s widespread recognition that insurers will merely pass that tax on to their customers in the form of still-higher premiums. The Congressional Budget Office estimates that initially about 19 percent of insurance plans would be subject to the tax, and union surveys suggest that it could hit as many as 25 percent of union workers. Moreover, as inflation drives costs higher, more and more plans will be subject to the tax. That is because the threshold for the tax is indexed to general inflation not medical inflation which runs higher.
As today’s Washington Post editorial points out, economists and deficit hawks see this measure as one of the few cost-control provisions left in the bill. Its goal is not just to raise some $150 billion in revenue over 10 years, but to discourage the type of “gold plated” insurance plans that encourage over utilization and drive up costs. That is why the Obama administration has endorsed this approach.
However, as labor leaders made clear in yesterday’s meeting with the president, this middle-class tax hike is unacceptable. AFL-CIO president Richard Trumka has even threatened to retaliate at the polls against Democrats who vote for it. In addition, 124 House Democrats have signed a letter opposing the “Cadillac tax.” With just a three vote margin, House Speaker Nancy Pelosi cannot afford to have any defections from tax opponents.
The House, on the other hand, has gone with a “soak the rich” strategy, calling for a surtax on incomes of $500,000 or more a year. But Democrats already plan to allow the Bush tax cuts to expire next year, raising income taxes for millions of Americans. An income tax surtax on top of that would mean marginal tax rates of more than 50 percent in many states with devastating consequences for economic growth. Moderate Democratic Senators like Ben Nelson (Neb.) and even liberals from states with high cost of living like Chuck Schumer (NY) are unlikely to go along with this tax. And, in the Senate, Democrats can’t afford even a single “no” vote.
The conventional wisdom in Washington is that a health care bill is inevitable. But if the growing fight over taxes is any indication, inevitability is overrated.
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