As I write, the House is debating a bill that would repeal the CLASS Act, one of two new entitlements created under ObamaCare. It’s hard express just how awful this program is. Here’s my attempt from back in October, when the Obama administration admitted CLASS is a bust:

The idea behind CLASS was that the government would run a voluntary and self-sustaining insurance plan to help the disabled pay for long-term care, including nursing home care…

Congress required CLASS to set each applicant’s premiums according to the average applicant’s risk of needing such long-term care, rather than her individual risk. But averaged premiums are only attractive to people with above-average risks. Since few people with below-average risks would enroll, the average premium would rise. That would encourage more people with below-average risks not to enroll, and the vicious cycle would continue until the program collapsed.

As it turns out, CLASS collapsed even before its 2012 start date. The same thing happened when Obamacare imposed the same sort of price controls on health insurance for children in September 2010: the markets for child-only coverage collapsed in a total of 17 states, and are slowly collapsing in even more.

Everyone with a rudimentary understanding of insurance saw this coming. The government’s non-partisan actuaries warned of “a very serious risk” that CLASS would be “unsustainable.” One wrote, “Thirty-six years of actuarial experience lead me to believe that this program would collapse in short order and require significant federal subsidies to continue.”

The Democratic chairman of the Senate Budget Committee called CLASS “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of.” An Obama administration official wrote, “Seems like a disaster to me.” One of President Obama’s own cabinet secretaries called the program “totally unsustainable” and echoed a presidential commission on fiscal responsibility by recommending it be “reformed or repealed.”

Sen. Tom Harkin (D-IA) has diagnosed the fatal flaw in this most ill-conceived government program. I swear, I am not making this up:

The problem with CLASS is that it’s voluntary.

Harkin isn’t the first person to wistfully lament that CLASS would be such a great program if only we could put non-participants in jail. He’s just the first person I know of who has said so explicitly. Others have said that the collapse of the CLASS Act should inspire confidence in the rest of ObamaCare, which imposes the same type of price controls on health insurance, and then threatens to put people in jail if they don’t buy it. Here’s how I described that strategy back in October:

Obamacare inspires confidence in its supporters, then, because one part of the law throws a Hail Mary pass to prevent another part of the law from stripping Americans of the insurance that currently protects them from illness and impoverishment. Feel safer?

Rather than make the CLASS Act compulsory, Congress should make the rest of ObamaCare voluntary:

[Ezra] Klein writes, “One way of looking at the administration’s [CLASS] decision is that it shows a commitment to fiscal responsibility.” If so, then let’s handle the rest of Obamacare exactly the same way. Congress should require Obamacare’s health insurance provisions to be voluntary and self-sustaining, just like CLASS: no individual mandate, no taxpayer subsidies. Or is fiscal irresponsibility part of the plan?

Harkin and other ObamaCare defenders have a profound lack of respect for other people’s freedom and dignity. The problem with that is that it’s voluntary. If it were a medical condition, it might be excusable.

‘The Problem with CLASS Is That It’s Voluntary.’ is a post from Cato @ Liberty - Cato Institute Blog

In the Daily Caller, I explain how the failure of ObamaCare‘s “CLASS Act” highlights the fatal flaws in the rest of the law:

As it turns out, CLASS collapsed even before its 2012 start date. The same thing happened when Obamacare imposed the same sort of price controls on health insurance for children in September 2010: the markets for child-only coverage collapsed in a total of 17 states, and are slowly collapsing in even more…

In the face of this setback, Obamacare supporters are naturally declaring victory. Jonathan Cohn of The New Republic sees “vindication.” Kevin Drum of Mother Jones proudly announces, “What happened here is that government worked exactly the way it ought to.” The Washington Post’s Ezra Klein instructs, “The CLASS experience should, if anything, make us more confident in the underlying law.” It’s hard to argue with such logic, but let’s try…

Obamacare inspires confidence in its supporters, then, because one part of the law throws a Hail Mary pass to prevent another part of the law from stripping Americans of the insurance that currently protects them from illness and impoverishment. Feel safer?

So if you’d like secure protection from illness and impoverishment, repeal ObamaCare. Or say your prayers.

The CLASS Act: This Is Confidence-Inspiring? is a post from Cato @ Liberty - Cato Institute Blog

I present you Robert Laszewski’s magnificent take on ObamaCare and Wisconsin, Democrats and Republicans.

‘So How Are Democrats and Republicans Different?’ is a post from Cato @ Liberty - Cato Institute Blog

It seems that Secretary of Agriculture Tom Vilsack took exception to Ezra Klein’s recent blog post on “Why we still need cities”. Someone at the USDA emailed Ezra, outlining the Secretary’s concerns and to set up a time for the two of them to talk. Ezra took notes during their discussion and, yesterday, posted a “lightly edited” transcript of their conversation.

The Secretary had plenty of the standard talking points on hand — and some new ones, like the fact that we should support farm subsidies because rural America has good values and farmers don’t feel appreciated – but Ezra expertly took him to task, deftly pushing back on the non-sequiturs, questionable assumptions and enduring myths about the need for farm subsidies.  He even gets in a worthy swipe at sugar tariffs and the “need” to produce all our food in America. Read the entire thing; it is worth your time.

(HT: Justin Logan)

Ezra Klein vs. the Secretary of Agriculture is a post from Cato @ Liberty - Cato Institute Blog

The Washington Post‘s Ezra Klein writes:

It’s put-up-or-shut-up time for Republicans. They managed to make it through the health-care debate without offering serious solutions of their own, and – perhaps more impressive – through the election by promising to tell us their solutions after they’d won. But the jig is up. They need a health-care plan – and quickly.

The GOP knew this day would come.

Say what?  Exactly what political factors are forcing the GOP to put up or shut up?  Their base is happy; it wants an all-out assault on ObamaCare, and congressional Republicans are giving it to them.  Republicans are even winning the ObamaCare debate among the broader public:

So why should Republicans all of a sudden stop attacking ObamaCare and start talking about their own refor–ohhhh…I see.  Klein is trying to talk the dog off the meat wagon.  Good luck with that.

What on Earth Is Ezra Klein Talking about? is a post from Cato @ Liberty - Cato Institute Blog

Washington Post blogger Ezra Klein asks of Rep. Paul Ryan’s (R-Wisc.) Medicare voucher proposal (co-authored with former Congressional Budget Office director Alice Rivlin):

Why are the cost savings in his bill possible, while the cost savings in the Affordable Care Act aren’t?…when it comes to the ACA, Ryan firmly believes that seniors will quickly and successfully force Congress to reverse any reforms that degrade their Medicare experience. That’s a fair enough concern, of course. What’s confusing is why it isn’t doubly devastating when applied to Ryan-Rivlin.

Set aside that Klein violates Cannon’s First Rule of Economic Literacy: Never say costs when you mean spending.  And that he uses the word “affordable” to describe ObamaCare.

There are two reasons why the Medicare spending restraints in the Ryan-Rivlin proposal are more likely to hold than those in ObamaCare.

First, ObamaCare’s restraints amount to nothing more than ratcheting down the price controls that traditional Medicare uses to pay health care providers.  Structuring Medicare subsidies in this way — setting the prices that Medicare pays specific providers — makes it very difficult to lower those prices, because the system itself creates huge incentives for providers to organize and lobby to undo those restraints.  As I explain more fully in this op-ed from September 2010, Medicare vouchers would change that lobbying game by reducing the incentives for provider groups to expend resources in the pursuit of higher Medicare spending.  That gives the Ryan-Rivlin restraints a much better shot at surviving.  (Seriously, it’s a pretty cool feature.)

Second, Klein predicts a backlash against Medicare vouchers because he says it amounts to “giving seniors less money to purchase more expensive private insurance.”  The notion that Medicare is less costly than private insurance is pure, uninformed nonsense.  Medicare and a “public option” are attractive to the Left precisely because such programs hide the full cost of their operations from enrollees and taxpayers.  It is a virtue of vouchers that they would reveal to Medicare enrollees the actual prices of the coverage and services they demand, because that information will spur enrollees to be more cost-conscious when selecting a health plan and consuming medical services.  That, in turn, will force insurers and providers to compete on the basis of cost to a degree never before seen in this nation, competition that will generate the sort of cost-saving innovations that Jim Capretta discusses here.

Both of these reasons boil down to the truism that nobody spends other people’s money as carefully as they spend their own.  We’ll make a lot of progress in this country when the Left realizes how much damage they’ve done by ignoring that truism.

Why Ryan-Rivlin Beats ObamaCare on Costs — and Spending is a post from Cato @ Liberty - Cato Institute Blog

I’ve been noticing a game lately played in the bookish corners of the left side of American politics. We’ll call it “We Know Hayek Better Than You.” It’s a game not without some attendant dangers. But it’s nothing if not fun.

Writing at Ezra Klein’s spot in the Washington Post, Karl Smith quotes Friedrich Hayek as follows:

That the ideal of justice of most socialists would be satisfied if merely private income from property were abolished and the differences between the earned incomes of different people remained what they are now, is true. What these people forget is that in transferring all property in the means of production to the state they put the state in a position whereby its action must in effect decide all other incomes.

He glosses:

That is, as Hayek goes on to explain, there is nothing fundamentally wrong with communal ownership of the means of production. The mistake is to think that the government could facilitate such ownership because then the government is effectively a monopolist and that would give the government almost unlimited power.

The idea that in principle it would be okay to completely redistribute all capital wealth is far to the left of anything proposed in modern America.

I hate to say it, but this is quite the dog’s breakfast of confusion, misinterpretation, and strained reading. One ought to be suspicious when your author writes an entire book entitled The Mirage of Social Justice. Perhaps he’s not really too enthused about social justice, you know.

Although it’s probably true that most socialists‘ idea of justice would be satisfied if income from private property were abolished, it does not follow that this was Hayek’s idea of justice. Hayek didn’t think it was “okay” to collectivize the entire means of production, whether by the state or by private action.

The ability to accumulate capital and to believe that one held it justly was, for Hayek, a most important incentive for the formation of responsible individuals. If the means of production were collectivized, individual character would suffer, and society would suffer with it. He wrote:

A free society will not function or maintain itself unless its members regard it as right that each individual occupy the position that results from his action and accept it as due to his own action. Though it can offer to the individual only chances and though the outcome of his efforts will depend on innumerable accidents, it forcefully directs his attention to those circumstances that he can control as if they were the only ones that mattered (The Constitution of Liberty, Chicago: University of Chicago Press, 1978, p. 78).

The sense of responsibility has been weakened in modern times as much by overextending the range of an individual’s responsibilities as by exculpating him from the actual consequences of his actions… To be effective, responsibility must be both definite and limited, adapted both emotionally and intellectually to human capacities. It is quite as destructive of any sense of responsibility to be taught that one is responsible for everything as to be taught that one cannot be held responsible for anything…

Responsibility, to be effective, must be individual responsibility. In a free society there cannot be any collective responsibility of the members of a group as such, unless they have, by concerted action, all made themselves individually and severally responsible… If the same concerns are made the responsibility of many without at the same time imposing a duty of joint and agreed action, the result is usually that nobody really accepts responsibility. As everybody’s property in effect is nobody’s property, so everybody’s responsibility is nobody’s responsibility (ibid., p 83).

So no, Hayek wouldn’t have thought it was a good idea to collectivize the means of production. There are some interesting theoretical questions hereabouts regarding corporations, their appropriate size, responsibilities, and attendant knowledge problems, but I suspect that my friends on the left aren’t actually pining for one megacorporation to rule them all. (Are they? I know it can be tough to keep up, but really, this is too much. Even I don’t support that.)

Hayek tells us we have private property and private capital because it does good things to the individual character. While there will be accidents, and while life is sometimes truly unfair, the best course of action is nonetheless for everyone to work as though their efforts actually mattered. And the best way to ensure that they will do so is to allow their efforts, whenever possible, to matter.

And when individual initiative has failed, what did Hayek want then? He wanted a modest system of social insurance — with emphasis on the modesty. After that, he wanted very stern incentives for people to get back up on their feet and leave that system.

One incentive that he considered at least reasonable was to forbid welfare recipients (and government workers!) from voting — an idea far to the right of anything now being considered in America. But not a bad idea in the abstract. He wrote:

It is also possible for reasonable people to argue that the ideals of democracy would be better served if, say, all the servants of government or all recipients of public charity were excluded from the vote (ibid., 105).

I look forward to my friends on the left continuing to deepen their knowledge of Hayek, and maybe entertaining this modest proposal. Were it not for my overwhelming concerns about how our current welfare system entraps its recipients, I might even support it myself.

Saving Hayek from the People Who Think They’re Saving Hayek is a post from Cato @ Liberty - Cato Institute Blog

It’s fascinating to read Progressives as they think through a difficult policy problem. Kevin Drum writes (at Mother Jones!) that we can’t improve education or mitigate poverty:

“I continue to think that the biggest problem here is simply that no one has any really compelling answers. . . You can go down the list of every ed reform ever touted, and they either can’t scale up, turn out to have ambiguous results when proper studies are done, or simply wash out over time. . .

So is the answer to address concentrated poverty? Sure. Except that, if anything, attempts to address poverty have a worse track record than attempts to improve education.

I would really, really like someone to tell me I’m wrong. So far, though, no one has. At least, not to my satisfaction. But I’m willing to be schooled if anyone thinks I’m missing the big picture here.”

Wow, Progressives really are depressed this year. Ezra Klein, mostly agrees, Matt Yglesias and Kevin Carey seem more optimistic. But I doubt any of them have compelling answers for Drum’s concerns.

So Kevin, Ezra, I’m here to tell you . . . you’re wrong. Let me rephrase that. You are right that all your Progressive solutions to these problems are perpetual and necessary failures. But there is a solution.

We know what improves education, allows success to scale quickly, and saves money as well; a real market in education, aka private school choice, the freer and broader the better. The education problem is intractable only if the government continues to monopolize education services.

As I noted just the other day in response to Rhee’s resignation, the government school system is unreformable.

Meanwhile, the evidence is consistent and clear that private school choice, markets in education, work. And private school choice even helps the kids who remain in government schools. Ah, and it saves a lot of money.

I really can’t say it any better than Andrew Coulson, our director here at CEF, slightly edited; “Given that quality and productivity in every other sector of human activity have been maximized through the operation of minimally regulated markets, and that the same pattern can be seen in the field of education, it seems to me that we should emphasize the need to ensure the broadest possible access to the freest possible education marketplace.”

I can feel it . . . Drum and company are just this close to being mugged by reality.

Why Won’t This Pig Fly? I’ve Tried Everything . . . is a post from Cato @ Liberty - Cato Institute Blog

I must be losing my touch. I’ve let nearly two months pass without responding to Ezra Klein’s defense of RomneyCare, ObamaCare, and other centrally planned health care systems.  (For those who want to get up to speed: his original post, my reply, and his response.)  So here goes.

Klein notes that he and I had each used flawed measures of RomneyCare’s impact on health insurance premiums in Massachusetts.  Fair enough.  But Klein ignores the study I cited by John Cogan, Glenn Hubbard, and Dan Kessler, which estimates that RomneyCare increased premiums in Massachusetts by 6 percent.  The CHK study has limitations, but it is the best estimate available.  I hope Klein addresses it.

Klein’s fallback position is that even if RomneyCare increases premiums, that’s not an indictment of the law because cost-control was not one of its goals.  Never mind that Mitt Romney boasted, “the costs of health care will be reduced.”  Klein knows political rhetoric when he sees it.  Yet he oddly sees no parallels between the phony-baloney promises of cost-control used to sell RomneyCare and the phony-baloney promises of cost-control used to sell ObamaCare — despite ample assistance from people like Medicare’s chief actuary and Alain Enthoven (“the American people are being deceived“).

Then Klein throws down his trump card:

[E]ven a cursory read of the evidence would show that whatever the drawbacks of central planning, it covers people at an extremely low cost. Romney Care’s cost problem is a result of pasting a coverage-oriented quick fix atop our insane health-care system. Compare its costs to the British system, the French system, the German system, or any other system, and whatever your conclusions, you won’t walk away unimpressed by the ability of centralized systems to cover whole populations for much less money than we spend.

Oy, where to begin?  First, Klein violates Cannon’s First Rule of Economic Literacy: he writes that centrally planned systems cost less, when what he means is that they spend less.

Second, the phrase “whatever the drawbacks of central planning” is some serious hand-waving.  Those “drawbacks” include (among other things): the Medicare program’s suppression of comparative-effectiveness research, error-reduction efforts, care coordination, and other delivery innovations; Canada’s human-rights violating Medicare system; and the suppression of untold innovations in health insurance and medical treatment by government price controls.  Other than a few drawbacks, Mrs. Lincoln…

Third, our “insane health-care system,” as I blogged previously, “is the product of the old raft of government price & exchange controls, mandates, and subsidies.”  Prior to ObamaCare, government already controlled half of all U.S. health care spending directly, granted control over another quarter to employers, and regulated health care more heavily than perhaps any other sector of the economy.  Klein and his fellow central planners can’t deny paternity.  Our “insane health-care system” is the product of central planning.

Finally, only a cursory read of the evidence could lead to the conclusion that central planning contains health care spending.  Klein posts the following charts and concludes that since all those (other) centrally planned systems spend less on health care than the United States, central planning must result in lower health care spending.

Photo credit: By Robert Giroux/Getty Images

But if that were true, then one would expect per-capita spending on elderly Americans — who have universal coverage through the centrally planned Medicare program — would not be far out of line when compared to how much other nations spend per elderly resident.  Yet the United States is just as far out of here as overall.  According to the OECD, the United States spends about twice as much per elderly person as Canada, and more than twice as much as Australia spends.  (Alas, I’m not cherry-picking; these are the only four nations for which the OECD provides recent data.)

Source: OECD, author's calculations

(One could argue that the reason for this is that Medicare exists alongside the world’s largest (ostensibly) private health care sector, whose evils spill over into Medicare.  If that were the case, then moving all Americans into Medicare should reduce U.S. health care spending, bringing it back into line with other nations.  But consider that Klein and The New Republic‘s Jonathan Chait both acknowledge that Congress had to throw $2 at the health care industry for every $1 that ObamaCare cut from future Medicare spending. How exactly could Congress move 250 million Americans into Medicare (which presumably would reduce overall spending), or reduce Medicare spending later, given those constraints?  How, exactly, would an independent rationing board survive the political dynamics that produce such outcomes? Prediction: it won’t.  The narrative that central planning contains health care spending just doesn’t hold water.)

Klein, The New Republic‘s Jonathan Cohn, and others have taken a big step by acknowledging that RomneyCare is struggling.  When they shift the blame to “the American health care system,” however, they obscure what’s really happening.  As I closed my previous post: “RomneyCare and its progeny ObamaCare are attempts by the Left’s central planners to clean up their own mess.  If Klein and Cohn want to defend those laws, pointing to the damage already caused by their economic policies won’t do the trick.  They need to explain why government price & exchange controls, mandates, and subsidies will produce something other than what they have always produced.”

Shifting the Blame for America’s Health Care Woes is a post from Cato @ Liberty - Cato Institute Blog

There’s been a bit of chatter in the blogosphere about a recent post on Ezra Klein’s blog, featuring estimates from various economists about the revenue-maximizing tax rate. It won’t come as a surprise that people on the right tended to give lower estimates and folks on the left had higher guesses. Donald Luskin of National Review estimated 19 percent, for instance, while Emmanuel Saez, Dean Baker, Bruce Bartlett, and Brad DeLong all gave answers around 70 percent.

There are two things that are worth noting.

First, every single answer is to the right of the Joint Committee on Taxation. The revenue-estimators on Capitol Hill assume that taxes have no impact on overall economic performance. As such, even confiscatory tax rates have very little impact on taxable income. The JCT operates in a totally non-transparent fashion, so it is difficult to know whether they would say the revenue-maximizing tax rate is 90 percent, 95 percent, or 100 percent, but it is remarkable that a mini-bureaucracy with so much power is so far out of the mainstream (it’s even more remarkable that Republicans controlled Congress for 12 years, yet never fixed this problem, but that’s a separate story).

Second, very few of the respondents made the critically important observation that it should not be the goal of tax policy to maximize revenue. After all, the revenue-maximizing point is where the damage to the overall economy is so great that taxable income falls enough to offset the impact of the higher tax rates. Greg Mankiw of Harvard and Steve Moore of the Wall Street Journal indicated they understood this point since they both explained that the long-run revenue-maximizing rate was lower than the short-run revenue-maximizing rate. But Martin Feldstein of Harvard explicitly addressed this issue and hit the nail on the head.

Why look for the rate that maximizes revenue? As the tax rate rises, the “deadweight loss” (real loss to the economy) rises. So as the rate gets close to maximizing revenue the loss to the economy exceeds the gain in revenue…. I dislike budget deficits as much as anyone else. But would I really want to give up say $1 billion of GDP in order to reduce the deficit by $100 million? No. National income is a goal in itself. That is what drives consumption and our standard of living.

For more information, I think my three-part video series on the Laffer Curve is a good summary of the key issues. I posted them in May 2009, but Cato-at-Liberty has been growing rapidly and many people have not seen them. Part I addresses the theory, and explicitly notes that policy makers should target the growth-maximizing tax rate rather than the revenue-maximizing tax rate. Part II reviews some of the evidence, including analysis of the huge increase in taxable income and tax revenue from upper-income taxpayers following the Reagan tax-rate reductions. Part III looks at the Joint Committee on Taxation’s dismal performance.

What’s the Ideal Point on the Laffer Curve? is a post from Cato @ Liberty - Cato Institute Blog

I’m still dealing with the statist echo chamber, having been hit with two additional attacks for the supposed sin of endorsing Reaganomics over Obamanomics (my responses to the other attacks can be found here and here). Some guy at the Atlantic Monthly named Steve Benen issued a critique focusing on the timing of the recession and recovery in Reagan’s first term. He reproduces a Krugman chart (see below) and also adds his own commentary.

Reagan’s first big tax cut was signed in August 1981. Over the next year or so, unemployment went from just over 7% to just under 11%. In September 1982, Reagan raised taxes, and unemployment fell soon after. We’re all aware, of course, of the correlation/causation dynamic, but as Krugman noted in January, “[U]nemployment, which had been stable until Reagan cut taxes, soared during the 15 months that followed the tax cut; it didn’t start falling until Reagan backtracked and raised taxes.”

This argument is absurd since the recession in the early 1980s was largely the inevitable result of the Federal Reserve’s misguided monetary policy. And I would be stunned if this view wasn’t shared by 90 percent-plus of economists. So it is rather silly to say the recession was caused by tax cuts and the recovery was triggered by tax increases.

But even if we magically assume monetary policy was perfect, Benen’s argument is wrong. I don’t want to repeat myself, so I’ll just call attention to my previous blog post which explained that it is critically important to look at when tax cuts (and increases) are implemented, not when they are enacted. The data is hardly exact, because I haven’t seen good research on the annual impact of bracket creep, but there was not much net tax relief during Reagan’s first couple of years because the tax cuts were phased in over several years and other taxes were going up. So the recession actually began when taxes were flat (or perhaps even rising) and the recovery began when the economy was receiving a net tax cut. That being said, I’m not arguing that the Reagan tax cuts ended the recession. They probably helped, to be sure, but we should do good tax policy to improve long-run growth, not because of some misguided effort to fine-tune short-run growth.

The second attack comes from some blog called Econospeak, where my newest fan wrote:

I’m scratching my head here as I thought the standard pseudo-supply-side line was that the deficit exploded in the 1980’s because government spending exploded. OK, the truth is that the ratio of Federal spending to GDP neither increased nor decreased during this period. Real tax revenues per capita fell which is why the deficit rose but this notion that the burden of government fell is not factually based.

Those are some interesting points, and I might respond to them if I wanted to open a new conversation, but they’re not germane to what I said. In my original post (the one he was attacking), I commented on the “burden of government” rather than the “burden of government spending.” I’m a fiscal policy economist, so I’m tempted to claim that the sun rises and sets based on what’s happening to taxes and spending, but such factors are just two of the many policies that influence economic performance. And with regard to my assertion that Reagan reduced the “burden of government,” I’ll defer to the rankings put together for the Economic Freedom of the World Index. The score for the United States improved from 8.03 to 8.38 between 1980 and 1990 (my guess is that it peaked in 1988, but they only have data for every five years). The folks on the left may be unhappy about it, but it is completely accurate to say Reagan reduced the burden of government. And while we don’t yet have data for the Obama years, there’s a 99 percent likelihood that America’s score will decline.

This is not a partisan argument, by the way. The Economic Freedom of the World chart shows that America’s score improved during the Clinton years, particularly his second term. And the data also shows that the U.S. score dropped during the Bush years. This is why I wrote a column back in 2007 advocating Clintonomics over Bushonomics. Partisan affiliation is not what matters. If we want more prosperity, the key is shrinking the burden of government.

Last but not least, I try to make these arguments to the folks watching MSNBC.

When Keynesians Attack, Part II is a post from Cato @ Liberty - Cato Institute Blog

If I was organized enough to send Christmas cards, I would take Richard Rahn off my list. I do one blog post to call attention to his Washington Times column and it seems like everybody in the world wants to jump down my throat. I already dismissed Paul Krugman’s rant and responded to Ezra Klein’s reasonable criticism. Now it’s time to address Derek Thompson’s critique on the Atlantic‘s site.

At the risk of re-stating someone else’s argument, Thompson’s central theme seems to be that there are many factors that determine economic performance and that it is unwise to make bold pronouncements about Policy A causing Result B. If that’s what Thompson is saying, I very much agree (and if it’s not what he’s trying to say, then I apologize, though I still agree with the sentiment). That’s why I referred to Reagan decreasing the burden of government and Obama increasing the burden of government — I wanted to capture all the policy changes that were taking place, including taxation, spending, monetary policy, regulation, etc. Yes, the flagship policies (tax reduction for Reagan and so-called stimulus for Obama) were important, but other factors obviously are part of the equation.

The biggest caveat, however, is that one should always be reluctant to make sweeping claims about what caused the economy to do X or Y in a given year. Economists are terrible forecasters, and we’re not even very proficient when it comes to hindsight analysis about short-run economic fluctuations. Indeed, the one part of my original post that causes me a bit of regret is that I took the lazy route and inserted an image of the chart from Richard’s column. Excerpting some of his analysis would have been a better approach, particularly since I much prefer to focus on the impact of policies on long-run growth and competitiveness (which is what I did in my New York Post column from earlier this week  and also why I’m reluctant to embrace Art Laffer’s warning of major economic problems in 2011).

But a blog post is no fun if you just indicate where you and a critic have common ground, so let me identify four disagreements that I have with Thompson’s post:

(1) To reinforce his warning about making excessive claims about different recessions/recoveries, Thompson pointed out that someone could claim that Reagan’s recovery was associated with the 1982 TEFRA tax hike. I’ve actually run across people who think this is a legitimate argument, so it’s worth taking a moment to explain why it isn’t true.

When analyzing the impact of tax policy changes, it’s important to look at when tax changes were implemented, not when they were enacted (data on annual tax rates available here). Reagan’s Economic Recovery Tax Act was enacted in 1981, but the lower tax rates weren’t fully implemented until 1984. This makes it a bit of a challenge to pinpoint when the economy actually received a net tax cut. The tax burden may have actually increased in 1981, since the parts of the Reagan tax cuts that took effect that year were offset by the impact of bracket creep (the tax code was not indexed to protect against inflation until the mid-1980s). There was a bigger tax rate reduction in 1982, but there was still bracket creep, as well as previously-legislated payroll tax increases (enacted during the Carter years). TEFRA also was enacted in 1982, which largely focused on undoing some of the business tax relief in Reagan’s 1981 plan. People have argued whether the repeal of promised tax relief is the same as a tax increase, but that’s not terribly important for this analysis. What does matter is that the tax burden did not fall much (if at all) in Reagan’s first year and might not have changed too much in 1982.

In 1983, by contrast, it’s fairly safe to say the next stage of tax rate reductions was substantially larger than any concomitant tax increases. That doesn’t mean, of course, that one should attribute all changes in growth to what’s happening to the tax code. But it does suggest that it is a bit misleading to talk about tax cuts in 1981 and tax increases in 1983.

One final point: The main insight of supply-side economics is that changes in the overall tax burden are not as important as changes in the tax structure. As such, it’s also important to look at which taxes were going up and which ones were decreasing. This is why Reagan’s 1981 tax plan compares so favorably with Bush’s 2001 tax plan (which was filled with tax credits and other policies that had little or no impact on incentives for productive behavior).

(2) In addition to wondering whether one could argue that higher taxes triggered the Reagan boom, Thompson also speculates whether it might be possible to blame the tax cuts in Obama’s stimulus for the economy’s subsequent sub-par performance. There are two problems with that hypothesis. First, a substantial share of the tax cuts in the so-called stimulus were actually new spending being laundered through the tax code (see footnote 3 of this Joint Committee on Taxation publication). To the extent that the provisions represented real tax relief, they were much more akin to Bush’s non–supply side 2001 tax cuts and a far cry from the marginal tax-rate reductions enacted in 1981 and 2003. And since even big tax cuts have little or no impact on the economy if incentives to engage in productive behavior are unaffected, there is no reason to blame (or credit) Obama’s tax provisions for anything.

(3) Why doesn’t anyone care that the Federal Reserve almost always is responsible for serious recessions? This isn’t a critique of Thompson’s post since he doesn’t address monetary policy from this angle, but if we go down the list of serious economic hiccups in recent history (1974-75, 1980-82, and 2008-09), bad monetary policy inevitably is a major cause. In short, the Fed periodically engages in easy-money policy. This causes malinvestment and/or inflation, and a recession seems to be an unavoidable consequence. Yet the Fed seems to dodge any serious blame. At some point, one hopes that policy makers (especially Fed governors) will learn that easy-money policies such as artificially low interest rates are not a smart approach.

(4) Thompson writes, “Is Mitchell really saying that $140 billion on Medicaid, firefighters, teachers, and infrastructure projects are costing the economy five percentage points of economic growth?” No, I’m not saying that and didn’t say that, but I have been saying for quite some time that taking money out of the economy’s left pocket and putting it in the economy’s right pockets doesn’t magically increase prosperity. And to the extent money is borrowed from private capital markets and diverted to inefficient and counter-productive programs, the net impact on the economy is negative. Thompson also writes that, “Our unemployment picture is a little more complicated than ‘Oh my god, Obama is killing jobs by taking over the states’ Medicaid burden!’” Since I’m not aware of anybody who’s made that argument, I’m not sure how to respond. That being said, jobs will be killed by having Washington take over state Medicaid budgets. Such a move would lead to a net increase in the burden of government spending, and that additional spending would divert resources from the productive sector of the economy.

The moral of the story, though, is to let Richard Rahn publicize his own work.

When Keynesians Attack is a post from Cato @ Liberty - Cato Institute Blog

I seem to have touched a raw nerve with my post earlier today on my International Liberty blog,  comparing Reagan and Obama on how well the economy performed coming out of recession. Both Ezra Klein and Paul Krugman have denounced my analysis (actually, they denounced me approving of Richard Rahn’s analysis, but that’s a trivial detail). Krugman responded by asserting that Reaganomics was irrelevant (I’m not kidding) to what happened in the 1980s. Klein’s response was more substantive, so let’s focus on his argument. He begins by stating that the recent recession and the downturn of the early 1980s were different creatures. My argument was about how strongly the economy rebounded, however, not the length, severity, causes, and characteristics of each recession. But Klein then cites Rogoff and Reinhardt to argue that recoveries from financial crises tend to be less impressive than recoveries from normal recessions.

That’s certainly a fair argument. I haven’t read the Rogoff-Reinhardt book, but their hypothesis seems reasonable, so let’s accept it for purposes of this discussion. Should we therefore grade Obama on a curve? Perhaps, but it’s also true that deep recessions usually are followed by more robust recoveries. And since the recent downturn was more severe than the the one in the early 1980s, shouldn’t we be experiencing some additional growth to offset the tepidness associated with a financial crisis?

I doubt we’ll ever know how to appropriately measure all of these factors, but I don’t think that matters. I suspect Krugman and Klein are not particularly upset about Richard Rahn’s comparisons of recessions and recoveries. The real argument is whether Reagan did the right thing by reducing the burden of government and whether Obama is doing the wrong thing by heading in the opposite direction and making America more like France or Greece. In other words, the fundamental issue is whether we should have big government or small government. I think the Obama Administration, by making government bigger, is repeating many of the mistakes of the Bush Administration. Krugman and Klein almost certainly disagree.

Responding to Paul Krugman and Ezra Klein is a post from Cato @ Liberty - Cato Institute Blog

Maggie Mahar responds to my response to her critique of Michael Tanner’s claim that ObamaCare is deeply unpopular.  Mahar’s alternative narrative, espoused by many on the Left, is that “the more voters learn more about the reform legislation, the more they seem to like it.”

Mahar shows that her narrative works if you begin looking for a trend at the high-water mark of opposition, if you look at a few select polls, if you look at not-so-straightforward poll questions, if you interpret simultaneous declines in both support and opposition as growing support, and if you devise a rationale for ignoring the views of those who most oppose ObamaCare.  Which is to say, her narrative doesn’t work.  ObamaCare remains deeply unpopular.

Mahar claims that support for repealing ObamaCare has been trending downward since reaching its high water mark of 63 percent on May 22, as measured by the polling firm Rasmussen Reports. This was shrewd; if you’re going to look for a downward trend, the high water mark is an excellent place to start. But it doesn’t paint an accurate picture of what’s been happening with public support for repeal. Starting on the enactment date, as I wrote before, “Rasmussen finds opposition to repeal hovering between 32-42 percent, and support for repeal hovering between 52-63 percent, with no clear trend on either side.” No clear trend, and a majority consistently supports repeal.  Check out Rasmussen’s data and see for yourself.

Next, Mahar selects a few polls that do support her narrative (e.g., Gallup, NBC/Wall Street Journal, Kaiser Family Foundation).  For example, in her first post, Mahar cites an NBC/Wall Street Journal poll from June that suggests voters would prefer a Democratic congressional candidate who didn’t want to repeal ObamaCare over a Republican who did. Aside from the results being barely statistically significant, the question she cites introduces confounding factors such as party affiliation. When that same poll asked a more straightforward question, it found that 47 percent of respondents would be enthusiastic about or comfortable with a candidate’s desire to repeal ObamaCare, compared to 40 percent who would have reservations or be uncomfortable.

Moreover, selecting just a few polls probably paints a less accurate picture than looking at something like Pollster.com, which aggregates all polls and therefore (presumably) cancels out the quirkiness of individual polls.

The above graph shows that opposition to ObamaCare surged after Obama’s inauguration and surpassed support just as the debate began in earnest in July 2009. (That rising opposition fueled the angry town halls of August 2009.) In other words, from the moment the public began to focus on ObamaCare, they didn’t like what they saw, and opponents have out-numbered its supporters for 12 months now.  (Note: the above graph only includes polls that ask the straightforward support/oppose question. It does not include Rasmussen’s polls showing broad and deep support for repeal, nor the NBC/Wall Street Journal and Kaiser Family Foundation polls Mahar cites, which show weaker support for repeal. It would be interesting to see Pollster.com aggregate the “repeal” polls.)

When Mahar turns her attention to all available polls, she argues, “if you’re looking for a trend, it’s only sensible to begin the day the bill was signed, March 23.” Why?

It was only after the final bill was passed, that people could begin to offer an opinion.

How true that is.  Also: mere voters can hardly be expected to offer an opinion about would-be presidents until after Inauguration Day.

One would think that Mahar would only insult the public’s intelligence, and dismiss the views that a plurality/majority of adults consistently expressed for 9 months, if it would help to bolster her argument.  But it doesn’t.  When we look at the trend in public opinion on ObamaCare since the signing ceremony, we see that opposition and support are declining:

If the trendline showing declining opposition to ObamaCare supports Mahar’s narrative (“the more voters learn…the more they seem to like it”), the trendline showing declining support for ObamaCare supports the opposite narrative (“the more voters learn, the less they like it”).

But recall that Mahar claims that voters are warming to ObamaCare.  When we look only at polls of adults who are registered to vote, there doesn’t appear to be any change since ObamaCare became law:

Looking just at voters also reveals that the opposition leads support by an even wider margin (9.5 percentage points).

(NB: These Pollster.com graphs will update automatically as new polling information becomes available, which may affect the trendlines.  My description of the trends and the numbers I cite are current as of July 26, 2010.  Also, readers using Internet Explorer have reported difficulty seeing the trendlines in user-generated graphs from Pollster.com.)

Finally, Mahar channels Marion Barry, who (in)famously claimed that if you don’t count murders, the crime rate in Washington, D.C., is really quite low.  She cites a poll that “suggests that opposition is largely confined to the one group that already has universal coverage–seniors,” and then invokes Ezra Klein‘s rationale for dismissing their opinions:

[S]eniors, of course, aren’t opposed to government-run health care. They love their Medicare, and insofar as they have a policy concern here, it’s that the Affordable Care Act will interfere with the single-payer system they rely on.

It is nonsense to say that ObamaCare is popular if we just ignore the views of people who will suffer.  If ObamaCare weren’t taking the money for its insurance-company bailouts new government spending out of Medicare, it would have to take that money from somewhere else and those people would be angry.  (Actually, since those Medicare cuts probably won’t happen, we’ll get to see that scenario play out.)  Even if ObamaCare were popular among non-seniors, all Mahar and Klein would have established is that massive new government entitlement programs would be popular if we didn’t have to pay for them.

ObamaCare Remains Unpopular, or Round Two of My Exchange with Maggie Mahar is a post from Cato @ Liberty - Cato Institute Blog

Ezra Klein writes:

So long as the political system is working reasonably well, we can get out from even quite a lot of debt. But the more it breaks down — the more the market sees things like the deficit commission rejected by its Republican sponsors in Congress, the more it hears threats to repeal the deficit reduction in health-care reform, the more it seems likely that Democrats will become just as unreasonably obstructionist when they become the minority — the more it has reason to worry.

I doubt that investors worry more when they hear threats to repeal ObamaCare or its Medicare cuts, which few took seriously in the first place. Given that the non-partisan Congressional Budget Office, the non-partisan chief actuary of the Medicare program, and even the International Monetary Fund have all expressed skepticism that those cuts will take effect, I expect investors have already discounted claims that ObamaCare will reduce the deficit.

More generally, the problem is not that the political system is breaking down.  That system is working pretty much the same way it always has and always will: it promotes irresponsibility.  Republicans and Democrats are merely responding to the incentives created by the system in which they operate.  (If they didn’t respond to those incentives, the political system would throw them out and replace them with people who do.)  If investors don’t already understand that, the sooner the better.

This is why responsible people want to take responsibility for our health care, etc., out of the hands of politicians.

Investors: Fear the Process That Gave Us ObamaCare, Not Efforts to Repeal It is a post from Cato @ Liberty - Cato Institute Blog

Ezra Klein and Jonathan Chait argue the only way government could reduce inefficient Medicare spending was to create a new health care entitlement program.  Think about that.

The worst part is, they’re not entirely wrong.  And that same system will now be controlling your health care and an ever-growing share of your income.

Why Politics Is Stupid is a post from Cato @ Liberty - Cato Institute Blog

You know things aren’t going well in Massachusetts when supporters of RomneyCare write “there’s some evidence that the reforms signed into law by Mitt Romney in 2006 are struggling.”  That’s how The Washington Post‘s Ezra Klein puts it in a post defending RomneyCare.  The New Republic‘s Jonathan Cohn offers a similar defense.

Klein mentions only a few of the difficulties confronting Massachusetts.  Here are a few more:

• The Commonwealth Fund reports that even though Massachusetts already had the highest health insurance premiums in the nation, premiums rose faster post-RomneyCare than anywhere else; 21-46 percent faster than the national average.
• A recent study estimates that RomneyCare has so far increased employer-sponsored health-insurance premiums by an average of 6 percent.
• The success that Klein sees in Massachusetts’ individual market — which accounts for just 4 percent of the private market — is merely the product of shifting costs to workers with job-based coverage.
• Contrary to Klein’s post hoc spin that RomneyCare “was never an attempt to control costs,” Romney himself promised that “the costs of health care will be reduced.”
• Aaron Yelowitz and I find evidence suggesting that uninsured Massachusetts residents are responding to the individual mandate not by obtaining coverage but by concealing their insurance status.  Coverage gains may therefore be less than official estimates suggest.
• Evidence is mounting that, despite stiffer penalties than ObamaCare will impose, increasing numbers of people are gaming the individual mandate by only purchasing health insurance when they need medical care. Such behavior could ultimately cause the “private” insurance market to collapse.

Nevertheless, the Klein/Cohn thesis is basically that costs have been climbing and employers have been dropping/curtailing health benefits for decades.  So you can’t blame that stuff on RomneyCare.  We should instead be thankful that Massachusetts enacted a new raft of government price controls, mandates, and subsidies to protect residents from those features of “the American health-care system.”

The only problem is that “the American health-care system” is the product of the old raft of government price & exchange controls, mandates, and subsidies.  The largest purchaser of medical care in the country (and the world) is Medicare.  Medicaid is second.  The Left complains so much about fee-for-service medicine fueling rising health care costs and reducing quality, you’d never know that their beloved Medicare program is the primary reason for its dominance.  Likewise, the reason why employers are dropping and curtailing coverage is that the government turned the private health insurance market into an unsustainable employment-based system that is doomed to unravel.  Cohn’s book documents the inhumanity of that system so well, you’d think it would sour him on the sort of centralized planning that created it.  I could go on…

RomneyCare and its progeny ObamaCare are attempts by the Left’s central planners to clean up their own mess.  If Klein and Cohn want to defend those laws, pointing to the damage already caused by their economic policies won’t do the trick.  They need to explain why government price & exchange controls, mandates, and subsidies will produce something other than what they have always produced.

RomneyCare Advocates: We Swear, This Time Centralized Planning Will Work is a post from Cato @ Liberty - Cato Institute Blog

There’s an interesting back-and-forth between Dan Foster at National Review and Ezra Klein at the Washington Post over whether there’s a symmetry between libertarian (or conservative) preference for smaller government and progressive advocacy for a larger or more active one.  Ezra wants to maintain that the former is “philosophical”—one might use the more loaded “ideological”—in a way that the latter is not.  And his argument has some intuitive appeal, but I think ultimately misfires:

But like a lot of people, I actually don’t have an abstract preference for either bigger government or smaller government. If we made the Defense Department a lot smaller, or reformed the health-care system so that we were getting a deal more akin to European countries, or got the federal government out of farm subsidies, that would be fine with me, even as the government would shrink. A lot of conservatives believe, I think, that their philosophical preference for small government is counterbalanced by other people’s philosophical preference for big government. But that’s not true: Their philosophical preference for small government is counterbalanced by other people’s practical preference for larger government in certain areas where it seems to make sense.

Now, this much I take to be true: Ezra and other progressives, talk show rhetoric notwithstanding, don’t have some abstract desire to increase the size and power of government independently of particular functions they want government to serve.  But that doesn’t mean his contrast between his “practical preference” for larger government “where it seems to make sense” and the “philosophical preference for small goverment” will fly.  As long as we’re invoking philosophy, it may be useful to deploy the hoary distinction ethicists often make between teleological and deontological principles—very crudely, the distinction between principles that specify ends or goals, and principles that specify rules that constrain our pursuit of ends or goals.

In a teleological frame, the asymmetry Ezra is positing makes a certain amount of sense. Progressives’ desire for larger government is mostly instrumental, while libertarians and conservatives seem to treat smaller government as an end in itself. But I think this is somewhat misleading. You could also say that Ezra and I both favor a government exactly large enough to accomplish its legitimate functions, albeit with very different views of what those functions are. In part this difference is “practical”—or at any rate, empirical—on both sides: Neither of us, presumably, think the government should squander taxpayer money on ineffective programs, but we have different background views about the relative effectiveness of government and civil society at achieving worthy aims.

But flipping explicitly into a deontological frame, we can see another difference—and here I think there is a real symmetry. You could say that where we differ is in how much weight we give the citizen’s prima facie claim against coercive interference. I think that claim ought to have quite a lot of weight, such that there are a relatively small number of public goods sufficiently vital to justify overriding the presumption against interference. Even assuming we agreed on the probable utilitarian benefit of some particular government program, I think it is fair to say Ezra gives a lot less presumptive weight to such claims. If you do not see anything seriously morally problematic about compelling people to contribute to projects and goals that (granting assumptions about efficacy, for the sake of argument) seem broadly worthy, you’ll be inclined to see government as an all-purpose mechanism for remedying a whole array of social problems. Which particular problems justify larger government will then be determined by “practical” considerations, but the background premise about the weight of the claim against compulsion is going to be exactly as “philosophical” for the progressive as for the libertarian or the conservative.

You Can Laugh All You Want To, But I’ve Got My Philosophy is a post from Cato @ Liberty - Cato Institute Blog

The Washington Post‘s Ezra Klein looks at the May/June polling data from Pollster.com (below) and concludes ObamaCare is “getting more, not less, popular.”

At The Weekly Standard, Jeffrey H. Anderson explains how that changing trendline reflects not a shift in public sentiment, but the fact that the polls conducted in May and June are fewer and less reliable.

Anderson: “Opposition to ObamaCare Is Rock-Solid” is a post from Cato @ Liberty - Cato Institute Blog

Ezra Klein quotes the Congressional Budget Office’s latest cost estimate of the Senate health care bill when he writes:

“CBO expects that the legislation would generate a reduction in the federal budgetary commitment to health care during the decade following 2019,” which is to say that this bill will cover 30 million people but the cost controls will, within a decade or so, leave us spending less on health care than if we’d done nothing.  That’s a pretty good deal. But it’s not a very well-understood deal.

Indeed, because that’s not what the CBO said.

First, the CBO said the “federal budgetary commitment to health care” would rise by $210 billion between 2010 and 2019 under the Senate bill.  Then, after 2019, it would fall from that higher level.  And it could fall quite a bit before returning to its current level.

Second, the “federal budgetary commitment to health care” is a concept that includes federal spending on health care and the tax revenue that the federal government forgoes due to health-care-related tax breaks, the largest being the exclusion for employer-sponsored insurance premiums.  If Congress creates a new $1 trillion health care entitlement and finances it with deficit spending or an income-tax hike, the “federal budgetary commitment to health care” rises by $1 trillion.  But if Congress funds it by eliminating $1 trillion of health-care-related tax breaks, the “federal budgetary commitment to health care” would be unchanged, even though Congress just increased government spending by $1 trillion.  That’s what the Senate bill’s tax on high-cost health plans does: by revoking part of the tax break for employer-sponsored insurance, it makes the projected growth in the “federal budgetary commitment to health care” appear smaller than the actual growth of government.

Third, the usual caveats about the Senate bill’s Medicare cuts, which the CBO says are questionable and Medicare’s chief actuary calls “doubtful” and “unrealistic,” apply.  If those spending cuts don’t materialize, the “federal budgetary commitment to health care” will be higher than the CBO projects.

Fourth, Medicare’s chief actuary also contradicts Klein’s claim that the Senate bill would “leave us spending less on health care than if we’d done nothing.”  The actuary estimated that national health expenditures would rise by $234 billion under the Senate bill.

And really, Klein’s claim is a little silly.  Even President Obama admits, “You can’t structure a bill where suddenly 30 million people have coverage and it costs nothing.”

The Senate Bill Would Increase Health Spending is a post from Cato @ Liberty - Cato Institute Blog