EconomistMom.com

So all this week I’ve been planning to start a series of posts about the new “Cash for Clunkers” government rebate program which has just gotten underway.  The program is designed to help stimulate the economy (and the auto industry in particular) by encouraging people to turn in their fuel-hogging vehicles (18 mpg or less) and purchase new, more fuel-efficient vehicles.  It turns out I have a “clunker”–a 2004 Ford Freestar minivan (official EPA-estimated fuel efficiency of just 17 mpg) that I’ve really wanted to trade in anyway for several months now, for a new compact car (probably another Ford Focus, if I stay loyal to my sister’s employer).  It’s too big for my needs now (I never transport all four of my kids at once anymore, now that some of them are driving their own vehicles), and it’s felt just plain wasteful for me to drive (just) myself to work in it.  (And it doesn’t really fit in my parking space, either.)  Well, it turns out the trade-in value of my Freestar, given its mileage and condition, is right around $4500–coincidentally the value of the government rebate I would receive under the Clunkers program.

So it’s pretty much a toss-up for my own pocketbook:  I’d get a $4500 rebate credit under Clunkers for “trading” my Freestar for the Focus, or I’d likely get a $4500 trade-in credit from the dealer for literally trading in the Freestar for the Focus.  But the outcome for society would be quite different under the two options:  under the Clunkers program, the Freestar would have to be destroyed (insuring that it is “taken off the road” but also destroying any value still present in the decently-functioning vehicle), and the government (i.e., the taxpayer or rather the future taxpayer given the deficit financing of the program) would be giving me the $4500.  Under a normal trade-in, someone would eventually get more utility than I do from driving my used Freestar (instead of zero utility from a bunch of shredded metal), and the $4500 would be paid by the dealer, not the taxpayer.  So I’m thinking that ironically, a program designed to encourage us to be more socially conscious, might actually encourage me to be more wasteful with my Freestar.  Not only would the government (future taxpayers) be paying me $4500 for something I would have done anyway (buy a new, fuel-efficient car), but the program would be encouraging me to “waste” (destroy) any remaining value in the old vehicle instead of transferring the vehicle to someone (the highest bidder) who values it more than I do.

As these MSNBC and CNN-Money articles explain, the Clunker deal is an especially “sweet” one if your old vehicle has a trade-in value considerably less than $4500.  Then you (personally) are clearly better off participating in the Clunker program and having your vehicle destroyed.  You’re also more likely to have been more anxious to buy a new car anyway (given the low value of your old car), and hence more likely to be getting this big subsidy without it necessarily changing your behavior (unless you would not have otherwise chosen a more fuel-efficient vehicle for your new one).  And because it’s such a sweet deal for no doubt many people with gas-guzzling vehicles with trade-in values of less than $4500, it turns out many people seized the opportunity this week–so many that earlier this evening it looked like the government would have to suspend the Cash for Clunkers program (and perhaps spare me the social dilemma), less than a week after it got started.  From tonight’s CNN-Money report:

NEW YORK (CNNMoney.com) — This much seems certain about the Cash for Clunkers program: Consumers are happy to take government rebates to buy new cars.

The fate of the $1 billion trade-in program was up in the air late Thursday over concerns that it may have already burned through its funds less than a week after it was launched.

Congressional sources said earlier in the day that the program would be suspended…

As of Wednesday afternoon, nearly 30,000 Clunker transactions had already been submitted to the National Highway Traffic Safety Administration, the agency said, with requests totaling almost $96 million in disbursements.

But later this evening (around midnight), the story was revised to say (emphasis added):

A White House official and a source at the Department of Transportation later said the program would not be suspended. The DOT official said the administration would try to work with Congress to find more funds to keep it going.

Indeed, one of the program’s main champions in Congress, Sen. Debbie Stabenow, D-Mich., called on the administration and Congress to appropriate more money for it.

So we’ll see how this turns out and whether I’ll be able to keep writing about my Freestar becoming a possible “clunker” after all.  If the program isn’t suspended, the first thing I’ll need to do is see what the dealer would give me if I trade it in, the “normal” way.  Stay tuned.

Stan Collender of the Capital Gains and Games blog calls it “as close as you get to a knife fight among federal budgeteers”–and Stephen Spruiell of the National Review claimed Peter’s blog post was an “outburst” that “was the equivalent of a player upending the chess board and calling his opponent a cheater.”  Both are exaggerating.  Federal budget policy hasn’t really gotten that much more exciting lately, and OMB director Peter Orszag and CBO director Doug Elmendorf are long-time colleagues who like and respect each other.

Here is what Peter’s blog post actually said, taking it in more proper (fuller) context (emphasis added):

This morning, the Congressional Budget Office (CBO) analyzed proposals to shift more decision-making out of politics and toward a body like the Independent Medicare Advisory Council (IMAC) put forward by the Administration.  CBO noted that this type of approach could lead to significant long-term savings in federal spending on health care…

In part because legislation under consideration already includes substantial savings in Medicare over the next decade, CBO found modest additional medium-term savings from this proposal — $2 billion over 10 years…

With regard to the long-term impact, CBO suggested that the proposal, with several specific tweaks that would strengthen its operations, could generate significant savings…

The bottom line is that it is very rare for CBO to conclude that a specific legislative proposal would generate significant long-term savings so it is noteworthy that, with some modifications, CBO reached such a conclusion with regard to the IMAC concept.

A final note is worth underscoring. As a former CBO director, I can attest that CBO is sometimes accused of a bias toward exaggerating costs and underestimating savings. Unfortunately, parts of today’s analysis from CBO could feed that perception. For example, and without specifying precisely how the various modifications would work, CBO somehow concluded that the council could “eventually achieve annual savings equal to several percent of Medicare spending…[which] would amount to tens of billions of dollars per year after 2019.” Such savings are welcome (and rare!), but it is also the case that (for good reason) CBO has restricted itself to qualitative, not quantitative, analyses of long-term effects from legislative proposals.  In providing a quantitative estimate of long-term effects without any analytical basis for doing so, CBO seems to have overstepped.

Note that for CBO to suggest that a proposal has the potential to (”could”) save “tens of billions of dollars” per year is not at all equivalent to CBO providing a quantitative “scoring” of the outyear (after-2019) effects of the proposal.  That evaluation (”tens of billions”) is pretty darn fuzzy (what analysts might call an “order of magnitude” prediction) and seems much more qualitative than quantitative.  CBO does longer-term “analysis” all the time to help guide the development of major fiscal policy initiatives; the organization does not do longer-term (beyond 10-year) cost estimates of specific legislation.  CBO has explained that in the health reform debate, an important goal of the Administration has been to “bend the health cost curve”…down.  Because most of this “bending” is expected to occur after the first ten years, part of what CBO is attempting to do in their analyses of health reform proposals is to determine, in a mainly qualitative manner, whether the curve is in fact likely to be bent down with these proposals.  (Determining whether the slopes of the trajectories are similar or not is an important part of even this mainly-qualitative analysis.)

I honestly think Peter was just disappointed in/felt “stung” by CBO’s quantitative 10-year estimate (for savings of just $2 billion) and felt like getting defensive about it, and in the process he forgot halfway through his blog post that he was actually happy that Doug said that the IMAC concept had the potential to save significantly on health costs beyond the first ten years (and that Doug had even explained specific ways to structure IMAC to make those savings much more certain).

I know people are getting bored because this health reform effort is stalling and it’s almost August recess, but sorry, these guys (Peter and Doug) aren’t the “drama kings” you might be hoping for.

The Congressional Budget Office once again validates some intuition many of us had about health care reform:  when you have health costs rising much faster than the economy is growing, a package that expands coverage but is unwilling to tax health benefits to pay for it is not likely to add up to a deficit-neutral plan over the longer term.  (Or, if this is the diet we’re going on, we’d better not buy the bikini just yet…)

Quoting from pages 12-13 of the report (a letter to Congressman Dave Camp (R-MI) on the House tri-committee proposal), emphasis added:

Looking ahead to the decade beyond 2019, CBO tries to evaluate the rate at which the budgetary impact of each of those broad categories would be likely to change over time. The net cost of the coverage provisions would be growing at a rate of more than 8 percent per year in nominal terms between 2017 and 2019; we would anticipate a similar trend in the subsequent decade. The reductions in direct spending would also be larger in the second decade than in the first, and they would represent an increasing share of spending on Medicare over that period; however, they would be much smaller at the end of the 10-year budget window than the cost of the coverage provisions, so they would not be likely to keep pace in dollar terms with the rising cost of the coverage expansion. Revenue from the surcharge on high-income individuals would be growing at about 5 percent per year in nominal terms between 2017 and 2019; that component would continue to grow at a slower rate than the cost of the coverage expansion in the following decade. In sum, relative to current law, the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window.

Under any proposal that provided new federal subsidies for the purchase of health insurance, the rate of growth in federal spending would depend importantly on how the subsidies were indexed over time. As long as overall spending for health care continued to expand as a share of the economy, people’s share of insurance costs would continue to rise faster than their income, or the government’s subsidy costs would continue to rise faster than the tax base, or both. The proposal limits the share of income that eligible people would have to pay when they purchased coverage in the insurance exchanges, and that share of income would not change over time. In addition, insurance plans offered through the exchanges would be required to pay a specified share of costs for covered services (on average), and that share also would not change over time. Combining those provisions, increases in health care spending in excess of the rate of growth in income would be borne entirely by the federal government in the form of higher subsidy payments—because those payments would have to cover the entire difference between the total premium for insurance coverage and the capped amount that enrollees would pay. Those factors help explain why the costs of the coverage provisions would continue to grow rapidly in the decade after 2019.

The President delivered these remarks today, at the Strategic and Economic Dialogue between the United States and China (here in DC).  I found his remarks to be remarkable, because Americans have been very wary of China’s economic rising as threatening our own nation’s economic strength and security–especially lately when we have become so dependent on China to lend us the money to deficit finance our economic recovery.  There’s no denying that dependence:  China now holds (as of end of May) more than $800 billion in U.S. Treasury securities–nearly one-fourth of the $3.3 trillion in total foreign holdings.  (Total foreign holdings currently represent about 47 percent of the total outstanding Treasury debt held by the public.)  At the beginning of the Bush Administration in January 2001, China held only $61.5 billion (just 6.1 percent) of the $1.0 trillion in total foreign holdings–and total foreign holdings were under 30 percent of total outstanding debt.  But the President understands that the “dependence” is mutual, and in his opening speech to begin the dialogue did a beautiful job of setting a cooperative tone:

My confidence is rooted in the fact that the United States and China share mutual interests.  If we advance those interests through cooperation, our people will benefit and the world will be better off — because our ability to partner with each other is a prerequisite for progress on many of the most pressing global challenges.

Let me name some of those challenges.  First, we can cooperate to advance our mutual interests in a lasting economic recovery…

[A]s Americans save more and Chinese are able to spend more, we can put growth on a more sustainable foundation — because just as China has benefited from substantial investment and profitable exports, China can also be an enormous market for American goods.

Second, we can cooperate to advance our mutual interest in a clean, secure, and prosperous energy future.  The United States and China are the two largest consumers of energy in the world.   We are also the two largest emitters of greenhouse gases in the world.  Let’s be frank:  Neither of us profits from a growing dependence on foreign oil, nor can we spare our people from the ravages of climate change unless we cooperate.  Common sense calls upon us to act in concert…

I believe in a future where China is a strong, prosperous and successful member of the community of nations; a future when our nations are partners out of necessity, but also out of opportunity…

And quoting a Chinese philosopher (awesome! ), the President concluded:

Thousands of years ago, the great philosopher Mencius said: “A trail through the mountains, if used, becomes a path in a short time, but, if unused, becomes blocked by grass in an equally short time.”  Our task is to forge a path to the future that we seek for our children — to prevent mistrust or the inevitable differences of the moment from allowing that trail to be blocked by grass; to always be mindful of the journey that we are undertaking together…

Together, I’m confident that we can move steadily in the direction of progress, and meet our responsibility to our people and to the future that we will all share.

This week’s Economist magazine reports that California is learning the hard way that their very progressive tax structure (especially for state-level taxes) is an “unreliable” source of revenue:

What is to blame for California’s recurring, humiliating budget crises? The state’s Byzantine tax system, says Gerald Parsky, a private-equity investor. Mr Parsky is also the chairman of the bipartisan Commission on the 21st Century Economy, which was set up by the governor, Arnold Schwarzenegger, last year with a mandate to think bold thoughts about taxation.

The commission has two goals. The first is to end California’s notorious revenue volatility. This is a result of the state’s heavy reliance on personal income taxes and in particular on capital-gains taxes paid by the rich (see chart). In good years, such as during the dotcom boom, revenues soar and politicians happily spend. In bad years revenues plummet and the budget cracks open. The second goal, as the commission’s name implies, is to modernise the tax system. The sales tax, for instance, applies only to goods, even though California has become a service economy…

So what kind of tax system would be less volatile, providing a revenue base with enough potential growth and resilience to handle the burden of rising health care costs (a reliable trend even if health care reform is passed)?  Not any surtax on the rich, that’s for sure.  The California tax reform commission has some ideas we’ve heard before in the federal context (emphasis added):

At first the Parsky commission leant towards a flat tax. That, however, raised hackles about shifting the burden to poorer people just as the state was cutting back on benefits in the teeth of a recession.

The latest plan would eliminate the state sales and corporate taxes entirely, and would make personal-income taxes so simple [i.e., broad based] that a return would fit one page. Courageously, it might nibble at Proposition 13, by letting commercial property be taxed more. But the main innovation is a “business net receipts tax” on the difference between gross sales and purchases from other firms. Mr Parsky says that this will be similar to a value-added tax, but “does not exist in exactly this form anywhere in the world.” California may be just the place to try it out.

The Wall Street Journal has two articles today that help explain how the Obama Administration and Congress can come up with a health care reform plan that I think would even satisfy the “can’t we do better” Blue Dog Democrats–who have just this afternoon pulled out of negotiations with their House colleagues, fed up with the lack of tough choices in the current version of the House proposal.

First, the WSJ’s Laura Meckler says that Obama Administration budget director Peter Orszag really does know what kinds of tough choices are necessary–it’s just not so easy convincing politicians to follow through with them:

President Barack Obama’s health-care plan is in jeopardy because of serious concerns that costs will spin out of control. As much as anyone, it’s White House budget director Peter Orszag’s job to save it.

Mr. Orszag is the administration’s point man for controlling health-care spending. So when the director of the Congressional Budget Office, which Mr. Orszag used to run, testified eight days ago that none of the health plans pending on Capitol Hill would control long-term spending, Mr. Orszag knew that meant trouble.

The wonkish economist likes to say he doesn’t have a “license to practice politics.” But with problems brewing, the technocrat sprang into the thick of the political haggling.

The next day, a Friday, he sent a letter to Capitol Hill detailing a proposal he had been more quietly pitching for weeks — creating a new agency with power to cut spending and implement changes in Medicare, the giant health program for the elderly. He also attached proposed legislative language. It was the most specific that the White House, which has tried to articulate principles and leave details to lawmakers, has been on any aspect of the legislation.

Mr. Orszag then visited rebellious conservative Democrats to try to persuade them the Medicare proposal would address their concerns over spiraling health-care spending…

Mr. Orszag believes that the idea he pitched in his letter to House Speaker Nancy Pelosi last Friday — a new agency with power to cut spending and implement changes in Medicare — is the single-most important thing Congress can do to control health-care spending.

The Medicare Payment Advisory Commission, created by Congress in 1997, has recommended more than $200 billion in cost cuts in the last year alone that lawmakers have ignored. Mr. Orszag wants to reconstitute the commission as an independent agency whose recommendations would automatically take effect — unless Congress expressly stops them…

Mr. Orszag’s ambitions extend beyond “scorable” spending cuts — reductions in federal spending that can offset the cost of expanding health-care coverage. The administration, he says, also is looking for ways to curb costs borne directly by individuals and businesses. To that end, Mr. Orszag wants to change the way medicine is delivered.

One idea is to change incentives so doctors focus more on delivering better care, not more treatments. The administration has proposed financial penalties for hospitals that frequently readmit patients, a sign they weren’t properly treated in the first place. Mr. Orszag calls such ideas game-changers.

“If all you did was the game-changing transformational stuff, you would be taking a risk that it wouldn’t pay off,” he says. “And if all you did was the blunter ’scorable’ savings, it won’t be sustainable, and you’re not getting at the inefficiencies. So it makes sense to do both.”

…and the WSJ’s “Capital Journal” columnist Gerald Seib explains that tax reform needs to be part of the “health reform” effort.  Without a more careful rethinking of the federal revenue system, we won’t be able to come up with a popular and economically sustainable way to pay for health care reform:

In an interview a few weeks ago, I asked President Barack Obama what he thought the top tax rate for the wealthiest Americans should be in the long run. He paused and gave a carefully calibrated answer: “I think instinctively that the tax rates that existed for the very wealthiest Americans under Bill Clinton struck the right balance.”

That’s a politically shrewd response. The top tax rate of 39.6% that prevailed in Mr. Clinton’s time was well below the suffocating 70% top tax rates that prevailed in the 1960s and 1970s, but just a notch above the 35% top rate created by George W. Bush’s tax cuts.

The problem is that, in just the few short weeks since, events may have begun shredding Mr. Obama’s position. And that, in turn, is a signal that the whole question of who pays what in taxes in America is going to have to be reconsidered.

Today’s health-care debate is only the latest signal. Mr. Obama insists he won’t sign a health-system overhaul that adds to the deficit; it will have to pay for itself. Democrats on the House Ways and Means Committee, desperate to comply, decided two weeks ago to adopt the simplest possible solution: They voted to simply add a surtax on Americans with family incomes above $350,000.

That surtax, however, would push the top tax rate above the Clinton line for some, which led to sticker shock among some wealthier Americans who broke away from the Republican Party to back Mr. Obama in last year’s election. It also sent a shock wave through many in the small-business community, who pay taxes at the top personal rate.

Within a few days, House Speaker Nancy Pelosi began to edge away from the surtax plan, saying that she wanted it to apply only to families that make $1 million or more annually. In a news conference Wednesday night, Mr. Obama embraced the same position.

But even a narrower surtax on the wealthy comes with a significant downside: It makes it harder in the long run for Washington to escape the corner it has backed itself into.

…and an even narrower surtax on the (even) wealthier would make the required top marginal tax rate even higher.  Ugly.  Note that the Tax Policy Center’s estimates show that current law, where the Bush tax cuts expire as scheduled at the end of 2010, would automatically achieve that very “right balance” that President Obama talks about–those “tax rates that existed for the very wealthiest Americans under Bill Clinton”–with a top marginal rate of 40 percent.  In contrast, President Obama’s proposed tax policies (where most of the Bush tax cuts are extended) coupled with the House-proposed surtax, would cause the top marginal rate to rise to nearly 45 percent.

Then what can be done to raise the necessary amounts of revenue for health reform (and fiscal sustainability more generally) while sticking to the Clinton standard for tax policy?  President Obama himself seems to recognize that it’s time for a major change in tax policy, too:

The money to climb out of that [fiscal] hole is going to have to come from somewhere.

Ask administration officials how they plan to get out of that bind, and they often will say: The tax system will have to be reformed to come up with a better way to pay the bills. Mr. Obama noted in the Journal interview that an overhaul could “end up generating the revenues that we need to run the basics of our government” in a fairer way.

And that’s yet another reason why President Obama shouldn’t be so quick to offer up the Bush tax cuts as the major component of his proposed budget–certainly not if he wants to do Obama health policy, in a fiscally-responsible manner, right away.

At Wednesday night’s press conference, the President did his best to “sell” the American people on the effort to reform health care–by downplaying the “effort” part.  He made the “gain” seem so easy and happy, and the “pain” seem, well, not very painful to anyone in particular–except maybe millionaires.  From the transcript (emphasis added):

In the past eight years, we saw the enactment of two tax cuts, primarily for the wealthiest Americans, and a Medicare prescription program — none of which were paid for.  And that’s partly why I inherited a $1.3 trillion deficit.

That will not happen with health insurance reform.  It will be paid for.  Already we’ve estimated that two-thirds of the cost of reform can be paid for by reallocating money that is simply being wasted in federal health care programs.  This includes over $100 billion of unwarranted subsidies that go to insurance companies as part of Medicare — subsidies that do nothing to improve care for our seniors.  And I’m pleased that Congress has already embraced these proposals.  While they’re currently working through proposals to finance the remaining costs, I continue to insist that health reform not be paid for on the backs of middle-class families…

What I’ve said is that there may be a number of different ways to raise money.  I put forward what I thought was the best proposal, which was to limit the deductions, the itemized deductions, for the wealthiest Americans — people like myself could take the same percentage deduction that middle-class families do and that would raise sufficient funds for that final one-third.

Now, so far we haven’t seen any of the bills adopt that.  There are other ideas that are out there.  I continue to think my idea is the best one, but I’m not foreclosing some of these other ideas as the committees are working them through.  The one commitment that I’ve been clear about is I don’t want that final one-third of the cost of health care to be completely shouldered on the backs of middle-class families who are already struggling in a difficult economy.  And so if I see a proposal that is primarily funded through taxing middle-class families, I’m going to be opposed to that because I think there are better ideas to do it.

Now, there are — I have not yet seen what the Senate Finance Committee is producing.  They’ve got a number of ideas, but we haven’t seen a final draft.  The House suggested a surcharge on wealthy Americans, and my understanding, although I haven’t seen the final versions, is, is that there’s been talk about making that basically only apply to families whose joint income is a million dollars.

To me, that meets my principle that it’s not being shouldered by families who are already having a tough time, but what I want to do is to see what emerges from these committees, continuing to work to find more savings — because I actually think that it’s possible for us to fund even more of this process through identifying waste in the system, try to narrow as much as possible the new revenue that’s needed on the front end, and then see how we can piece this thing together in a way that’s acceptable to both Democrats and I hope some Republicans.

The President was pretty vague about how the health cost savings would be achieved and where the “waste” in the current health care system would be found and eliminated.  For that reason I think it’s unrealistic to stick to this pledge of deficit neutrality and count on the required amount of revenue being “narrowed.”  The President recognizes that raising that much revenue from a tax limited to the very richest households makes the new tax an “ugly” one (in the ways I described a couple days ago).  But I note that nothing the President said above rules out turning to two better-looking revenue options:  (i) capping the tax exclusion for employer-provided health benefits (as well explained in this Tax Policy Center brief); and/or (ii) letting all of the Bush tax cuts expire so that we stick with what’s written into current tax law.  Both are broader but still progressive ways of raising revenue, where most of the higher taxes will be paid by the highest-income households.

In today’s Washington Post, Harold Meyerson complains that the centrist “Blue Dog” Democrats have a “can’t do” attitude when it comes to health care reform:

[O]ur government used to actually pave roads, build bridges and allow for secure retirements by levying taxes on those who could afford to pay them. To today’s centrist Democrats, this has become a distant memory, a history lesson they cannot grasp. The notion that actual individuals might have to pay to secure the national interest appalls them. In the House, the Blue Dogs doggedly oppose proposals to fund universal coverage by taxing the wealthiest 1 percent of the nation’s households…

Centrist Democrats’ opposition to health reform verges on the incoherent. A caucus (the Blue Dogs) formed ostensibly to promote balanced budgets now disapproves of the proposed taxes that would cover the expenses of the new programs. The congressional centrists say, commendably, that they want to squeeze more economies out of the system, but they oppose giving more power to an agency that would set the payment scales for physicians…

[A]ct on behalf of the nation as a whole, even if it means goring Wall Street’s or Wal-Mart’s oxen? Perish the thought. Pass a health-reform bill that will cover 45 million uninsured Americans and slow the ruinous growth of health-care spending? Not if somebody, somewhere, actually has to pay higher taxes. Hey, we’re America — the can’t-do nation.

But Harold misunderstands.  It’s not that the Blue Dogs don’t want to do a major health reform that could both expand coverage and reduce health care costs (save money) at the same time.  It’s that they do want to do all that, in a fiscally-responsible and economically-wise way–yet so far, they haven’t really seen a specific plan that would achieve all that. The Blue Dogs are asking: “can’t we do better?”

How could we do better?  Harold’s colleague, Steven Pearlstein seems to have some ideas, even with his column that argues that “imperfect health reform” is better than no reform.  Steven hints that the President doesn’t seem to be pushing the “tough choices” that would make a real difference in containing health costs–and that we can’t really estimate (with any precision or faith, just yet) how large this difference would be:

[I]n trying to build public support for reform, President Obama has made promises that will make it even more difficult to bring all the pieces together into an effective and viable reform plan.

Let’s start with the promise, repeated often by the president and written explicitly into both House and Senate proposals, that if you like the insurance you have, you can keep it. But if we’re aiming to fundamentally restructure the system, is it really credible to say that we can have all the good parts of the old one with none of the bad parts?

We know, for example, that people like to decide for themselves what medical care they will consume and send the bill off to their insurer. And doctors and hospitals like being paid for whatever they do, no matter whether it is needed or is the most cost-effective treatment. We also know, however, that moving away from “fee-for-service medicine,” as it is called, is the key to taming runaway health spending and improving health outcomes. That will be a better system, but it will be a different one, and it won’t come unless it is pushed and prodded into being by the government…

[L]ong-term cost savings…might come from restructuring the way doctors and hospitals are paid or moving patients from solo practitioners to clinics that make better use of nurses and coordinate care among a variety of specialists. There is a general consensus among health-care experts that these are the reforms that will finally “bend the curve” of ever-increasing health-care spending, and CBO Director Douglas Elmendorf made headlines the other day by telling Congress that lawmakers had not been aggressive enough in embracing these reforms…[but at the same time t]here isn’t enough knowledge to say with any precision how much would be saved and when the savings would materialize.

…and Steven points out that there are much smarter ways to raise revenue to pay for health care reform than the darned surtax idea–if it weren’t for the President’s darned campaign promises:

One way to pay for universal coverage, of course, would be to tax those who are likely to benefit most from slowing the growth of health insurance premiums, such as workers who already get their health insurance tax-free. But Obama has also boxed himself in on that issue by reiterating his promise never to raise taxes on anyone who makes less than $250,000 a year. Having a little flexibility on that issue would go a long way to putting together a final package.

A CNN story explains that centrist Democrats are frustrated with the House health bill:

WASHINGTON (CNN) – New questions about the fate of the health care bill were raised Wednesday as some fiscally conservative Democratic House members said Congress is not close to reaching an agreement…

“We are making progress; however, we have a long way to go,” Rep. Mike Ross, D-Arkansas, a leader of the fiscally conservative “Blue Dog Coalition,” said in a written statement.

One of the Blue Dogs’ concerns is ensuring that any change to the health care system does not add to the federal deficit…

“Some of the issues that the Blue Dogs have put forth are issues that we all are concerned about,” [House Speaker Nancy Pelosi] told reporters. “We want to squeeze as much savings out of the system as we can before we seek any [new tax] revenue. [But] you can only go so far.”

So it’s not that the Blue Dogs are saying “no can do”… It’s really that they believe that we can do (and should do) better.

The front page of today’s Washington Post reports on President Obama’s determination to forge ahead on his plans for health care reform, despite Republican attacks and a lack of consensus among even Democratic proponents as to how to pay for it:

Several House Democrats in the conservative Blue Dog Coalition have already said they will not vote for the current House bill, citing the risk of raising taxes in this economic climate. The House bill would expand insurance to 97 percent of Americans but would add a surtax of 1 to 5.4 percent for families earning more than $350,000 a year. Democrats are considering raising the surtax so that it applies only to individuals making at least $500,000 and families making $1 million a year or more, aides to Speaker Nancy Pelosi (D-Calif.) said Monday night.

In my mind the surtax–essentially an increase in income tax rates on the very rich (mostly millionaires)– is such a bad idea as a means of financing health care reform, for the following reasons:

• Too tiny a base and thus tax rates that are too high. According to the Tax Policy Center (TPC), this is a tax increase limited to just 1.3 percent of households.  Limiting ourselves to such a narrow tax base while needing to raise a large amount of revenue (on the order of $600 billion over just the first ten years) means that tax rates have to be set quite high.  The TPC calculates that the effective marginal tax rate on millionaires would rise from 33.6 percent under current policy extended (Bush Administration tax rates) to 44.6 percent under the Administration’s budget proposals along with the health surtax.  The more-than-10-percentage-point increase in the marginal tax rate (an increase of about one-third) is significant and can be expected to have a disincentive effect on work and saving, even if not so large as to on net reduce revenues (I’m not talking Laffer Curve here…).
• A very narrow distribution of taxpayers funding a program with broadly-distributed benefits. I see two problems in taxing only the very rich to pay for broader health care coverage:  (i) so few people “paying for” the new health benefits means so few people will feel they have a “stake” in it, and there will be so little pressure on the government to “get our money’s worth” out of the new health spending; and (ii) when it’s only the very rich that pay for benefits that are distributed progressively (disproportionately to lower-income households), it can create a perception that the funded program is a “welfare program”–which can undermine support for the program.  Or at least that’s the argument that many liberals make against raising the Social Security taxable maximum as a way of closing Social Security’s (relatively small) fiscal gap.  (What is the distinction here, anyway?)
• A revenue base that can’t possibly keep up with the rapid growth in health care spending. As I (and Donald Marron) explained in an earlier post, health care spending is likely to keep rising considerably faster than the economy grows, even with considerable success in achieving cost containment via health care reform.  It’s really hard to imagine a revenue source that could rise as rapidly, unless what you tax happens to be well correlated with health care spending–such as is the case with taxing employer-provided health benefits (that idea that the Administration is reluctant to endorse).  Taxing the richest households only, at tax rates designed to offset the cost of health reform over the first ten years only (and when the expanded coverage only slowly phases in), means that revenues will fall increasingly short of the cost of expanded coverage over time.

The CBO’s most recent cost estimate of the House “tri-committee” bill is a tale of three trajectories.  It shows that the cost of expanded coverage doubles from 2014 to 2019.  It shows scorable savings from changes in Medicare and Medicaid payment policies growing at a much slower rate from 2014 to 2019 (by about a third).  And it shows the revenue from the surtax rising at a similar slower rate.  Put these together and you have a recipe for an unsustainable government program–just based on the sheer mathematics.  Add in the political challenges of the surtax looking like a “soak the rich,” anti-growth tax that will make health care reform seem like a new “welfare program,” and I just don’t see the current House proposal as a reliable route to achieving the reform.

Bruce Bartlett has the idea that this “Robin Hood” tax policy in the surtax will eventually get us to higher taxes on everybody:

I remain convinced that just down the road major tax increases will be needed to avoid national bankruptcy. When that day comes, it will be harder for Democrats to go back to the same well and demand that all the burden fall upon the wealthy, especially if it is clear by then that the surtax didn’t raise nearly as much revenue as expected. Congress will have no choice except to look for ways to tax people who have much more limited opportunities for tax avoidance: those who have only wage income, which means the middle class.

Historically, increases in the top rate have tended to pave the way for higher rates on the middle class…

But if we’re going to have to get to a broader-based but still-progressive tax base eventually, there’s a much easier way than leading off with that ugly and inefficient surtax.  Just let the Bush/Obama tax cuts expire.

I’ve been out of town the past few days, having gone back to my home city of Detroit to attend my 30th high school reunion.  It was certainly a tough year to organize a big, happy event in a city that’s certainly down on its luck–or just down for a variety of reasons.  Over the past year it’s been awkward at times for me to talk about my fiscal policy work here in DC with those family and friends who work for the auto industry back home.  While they were fearful of losing their jobs and agonizing over buyout offers, I would opine at two very impractical levels–alternating between purely theoretical and purely emotional–about what the federal government ought to do to help, and I would do this without really understanding the practical challenges faced by an industry that was too late to adapt to a changing market (which the government did so little to clarify).

Many of my friends back home in Detroit have had a hard time in the past year, having either lost their jobs outright or at least lost a tremendous amount of job security.  In contrast, there’s pretty high demand for economists working in DC on fiscal policy issues.  So when I first broached the subject of our 30-year reunion about a half year ago, I wasn’t sure I’d get a very enthusiastic response.  But I did, and together with a few classmates, we managed to plan a “budget” version of a class reunion.  Ten years ago our 20th reunion was held at a fancy hotel with a formal dinner and open bar very much like a wedding reception.  It required about 18 months of planning and a significant up-front financial commitment.  This year’s reunion was planned largely using (free) Facebook and other online social network services, was held at a sophisticated martini bar owned by a friend of a classmate who offered us the upper-level space for free, and was financed on a strictly individual, “pay as you go/drink” basis.  We also secured some reduced rates for rooms at walking-distance hotels, so that out-of-towners and in-towners alike could party responsibly.  The “right price” and no-commitment policy helped us get good participation and created a relaxed atmosphere where everyone was able to have a lot of fun.  Without time to plan a reunion “agenda”–and with a bar not exactly being the kind of place for speeches and “games”–we were able to spend more quality time catching up with our classmates one on one.

One of the “extracurricular” pleasures I have is yoga, and I teach a “restorative yoga” class every Saturday in northern Virginia–but of course, not this past Saturday when I was in Detroit for the reunion.  Google “restorative” and you will find some of these definitions:

• tonic: a medicine that strengthens and invigorates
• renewing: tending to impart new life and vigor to; “the renewing warmth of the sunshine”
• corrective: a device for treating injury or disease
• recuperative: promoting recuperation; “recuperative powers”; “strongly recuperative remedies”;
• Something believed to have restoring properties; Of or pertaining to restoring…

…which is why I think of the reunion we just had as a “restorative reunion”–especially given the hard times many of my classmates have been through this year.  It had a “restorative” effect on me, too, despite the fact that I haven’t been worried about losing my job.  Because no matter how far one goes in life and how successful one’s career, sometimes all the superficial, checked-off “to do” lists fail to resonate.  Sometimes one needs to take a step back and remind oneself of the friendships developed a long, long time ago before our lives became busy and complicated and before our outer layers were caked on–by spending some time with those people who knew us when we were in many ways our pure, genuine, uncensored selves.

I graduated from high school in 1979.  In that year, Chrysler received a federal bailout to help turn itself around, and it did.  Now 30 years later, Chrysler and the rest of the Detroit auto industry are trying to turn themselves around again.  I may not have the industry expertise to be able to objectively and impartially predict how it will turn out, but I sincerely hope it works out just as well this time around, for the sake of my precious friends and a city that I realize I still consider “home.”