James Pethokoukis

Politics and policy from inside Washington

Did the GOP capitulate on healthcare?

May 27, 2009 12:44 UTC

ambulance– James Pethokoukis is a Reuters columnist. The opinions expressed are his own –

You can’t beat something with nothing” often passes for political wisdom in Washington. In 1994, Republicans defeated Bill and Hillary Clinton’s healthcare reform plan with pretty much nothing — well, at least with nothing positive.

Republican congressional solidarity, along with help from business group attack ads and the Clintons’ own political miscues, were enough to doom the landmark legislative effort. Back then, “No” was sufficient.

But 2009 is not 1994. A “Just say no” strategy seem laughably insufficient this time around. Economic anxieties are much higher, the Democrat president more popular, the Democrat-controlled Congress more committed and aggressive.

Want even more evidence of the changed economic and political landscape?

Just take a look at the 248-page Patients Choice Act, a comprehensive GOP healthcare reform plan drafted by Senators Tom Coburn and Richard Burr, and Representatives Paul Ryan and Devin Nunes.

A big feature of the plan calls for redirecting the $300 billion-a-year tax exclusion for employer-based health benefits into refundable tax credits to purchase private plans.

Low-income families would be subsidized so they could also buy private health insurance. The theory here is that people act more like cost-conscious consumers when they have to select and purchase their own health insurance rather than pay premiums indirectly through their employers via lower wages.

While the bill doesn’t stand a chance of passage with the Obamacrats in charge, it does reflect a recognition by congressional Republicans that if they are to derail or significantly modify Democratic healthcare efforts, they need a positive and serious policy rejoinder of their own.

“I think it is a good, bold, free-market alternative,” says James Capretta, an economist at the Office of Management and Budget under President George W. Bush and now a fellow at the Ethics and Public Policy Center.

“Broadly defined, this is where the conservative coalition can plant a flag and begin engaging in the debate.”

But is the bill really a choice rather than an echo? The indisputable conservative credentials of Coburn, Burr, Ryan and Nunes have not prevented some free marketeers from scowling and some liberal policy wonks from cackling after taking a look at the legislation.

Michael Tanner, a healthcare expert at the libertarian Cato Institute immediately tagged the plan “Obamacare Lite” and claimed it would “increase regulation, mandates and government control over the healthcare system.”

At the same time, liberal healthcare blogger Ezra Klein was almost rapturous: “The core elements of this plan…make it the same type of plan Democrats are offering….And it’s further evidence that the argument over health reform is narrowing, rather than widening. And it’s narrowing in a direction that favors the Democrats.”

Both Tanner and Klein have read page 5 of the bill’s summary and this sentence in particular: “Many states have led the nation in finding comprehensive healthcare solutions for their citizens, including the well-known, bi-partisan achievement of universal healthcare through a private system in Massachusetts.”

Now many on the right consider that state’s 2006 healthcare reform, led by former Governor Mitt Romney, to be a big-government system which mandates every resident buy health insurance.

Even worse, in their view, is the Connector, a “state exchange” that Tanner describes as “a super-regulatory body, adding new mandated benefits, restricting consumer’s choice of plans, and adding both regulatory and administrative costs to insurance.”

Indeed, the Coburn-Burr-Ryan-Nunes bill explicitly states that it “will utilize state-driven exchanges to facilitate real competition between private plans and give Americans — for the first time — a choice of health care plans.”

But no worries, say the bill sponsors who have been reassuring worried conservatives privately that their version of a state exchange is similar to the one found in Utah which acts more like a matchmaker between insurers on one side and individuals and small businesses on the other than a big regulatory body.

When pressed on whether the Coburn-Burr-Ryan-Nunes plan increases the role of the government in healthcare or diminishes it, Tanner can conclude only that “it’s mixed”.

Now all this brings to mind what a high-ranking Republican House member asked me earlier this spring: “So what should we do about healthcare? More health savings accounts?”

Given both the member’s snarky tone and the context of our preceding conversation, this is what I’m pretty sure the high-ranking House Republican actually meant by those questions: “We are going to get our collective heads kicked in if we don’t come up with a strong alternative to Obamacare. Health savings accounts alone ain’t going to cut it. We need to raise our game, and fast.”

And part of that “game raising” means accepting that it won’t be easy to budge voters.

Not all American families are going to prefer high-deductible HSAs — previously the Republican healthcare policy of choice — especially when one of the supposed selling points of these plans is the ability to invest money from accounts into the battered stock market.

And certainly voters are not ready for a hypermarket approach such as the one advocated by libertarian economist Arnold Kling. He has argued that “real” health insurance would pay only for treatments that are “unavoidable, prohibitively expensive and relatively rare.” Everything else would be out of pocket.

And that “game raising” also apparently means adopting some of the Democratic rhetoric on healthcare to appeal to more centrist voters.

In addition to using the Massachusetts plan as an example rather than the plan from conservative Utah, the authors employ a liberal-flavoured critique of America’s healthcare system:

“The health care system in America is broken. Costs are rising at an unacceptable rate — more than doubling over the last 10 years, which is nearly four times the rate of wage growth. Too many patients feel trapped by healthcare decisions dictated by HMOs. Too many doctors are torn between practicing medicine and practicing insurance. And 47 million Americans worry what will happen to them or their children if they get sick.” Ted Kennedy couldn’t have said it better.

The big risk to Republicans is that if they adopt the language and critique of Democrats, the public will miss the policy subtleties and start viewing the Dem and GOP approaches as more less the same. That could give further momentum to Democratic healthcare efforts and actually bring about the outcome Republicans are trying to avoid.

A AAA excuse for Obama tax hikes?

May 26, 2009 17:16 UTC

Brian Wesbury and Bob Stein of First Trust Advisors raise an interesting conjecture (bold is mine):

Back during the budget showdown of 1995, when President Clinton faced off against the new Republican Congress, then-Treasury Secretary Robert Rubin repeatedly warned that the rating agencies could put the US on review for failing to increase the debt limit. The political angle was that a review would jack up interest rates, leading the Republicans to capitulate on trying to reduce government spending. The markets, however, scoffed at Rubin, and interest rates fell during the budget “crisis.”

This time around, we wonder whether in the next couple of years President Obama will declare a fiscal emergency that only a tax hike can solve, using the threat of a rating downgrade as a way to put political pressure on his opponents. If so, we need only look at the UK, where the threat of a downgrade comes despite large tax increases already built into their budget.


Spend, spend, spend…Solvency will soon become America’s # 1 issue placing us in the world’s bankruptcy court for restructuring, just like GM and Chrysler. Who could have ever imagined such a thing like the top two auto makers going bankrupt? But America has the “gimmees,” the “I wannits,” and the “poor mees” real bad lately. And our leaders keep handing the kiddies the cookie jar. We just cannot continue to keep spending like this on credit while unemployment is eating away at the revenues coming in folks! We must demand a ballanced, carefull, pay-as-you-go approach to solving our nation’s problems. And we have to let the people who will not act responcibly fail, so that they can pick themselves up by their bootstraps and learn from their mistakes. We must not feel sorry for adults who will not grow up!
Or they will never grow up!

Who is going to pay for all this magnimity?

The backsides of the stupid drowns who still go to work everyday while the users take advantage of their labor… That’s who! We conervative, hard-working folks are being outnumbered by the users who have no problems feeling entitled because they were raised on other people’s money, the “Do it for me Mommy” mentality and MTV.

Sickening! Just sickening! America is no longer the land where the industrious, independant, responcible people are rewarded for their efforts. No, Robin Hood is robbing the “rich” responcible people to reward the “poor me” folks who will not act responcibly.

My question is…how much leaway does our leadership think there is between our current net earnings weekly and the actual cost of living we tax payers face? That difference is the headroom there exists between the taxpayer being able to stay solvent themselves and the possible increase in taxes our leaders can tax us further to pay for all this warm-fuzziness. For most of us the cost of living runs pretty close to our net income… So where is there room for all our taxes to increase to pay for all this philanthropy going to come from?

Consumers: The world is not ending

May 26, 2009 17:11 UTC

That, I think, is the message from today’s big jump in consumer confidence. The Conference Board’s index vaulted by 14.1 points in May, following a gain of 13.9 points in April. The overall index now stands at 54.9. That’s double the February level of 25.3, a level which looks more and more like the nadir. But there is one whole long stretch of road between economic Armageddon and a robust recovery. We have avoided the former but we are nowhere near the latter. Let me know when consumers start spending ….


In your currency. Joe was good to me, when you donate

Deficit fears

May 26, 2009 16:56 UTC

I think strategist Andy Busch of BMO Capital Markets makes a great point in his morning note:

The issue of the radical fiscal experiment that is now underway in the United States is dominating stock, bond, and currency markets.  During World War II, the US debt had exceeded the size of GDP and had to be reduced by draconian methods.  The US is embarking upon a debt issuance program which is on track to take the debt total back above the size of GDP.


The “perfect storm” is happening because we have people in office who don’t have a clue how business really works! They do know how to milk a buck out of our back-sides though. They know how to spend money we don’t have to play “richy-rich” like “yo bling-bling” big spenders!

First they….

*Demanded that the automakers turn over to politically correct green cars overnight last summer, as if the auto makers don’t rely on the profits from their current inventory for capitol to make the next generation of cars…Now what do we get?
A once-not-so-long-ago solvent industry forced onto life-support, GM failing, thanks to the GREEN bunch and their party!
And vast unemployment is coming as the plants shut their doors!Now that’s worth it to save the planet! Forget the GDP!
(BRAIN DAMAGE, that’s all I can say.)

The greenies still want to…

*Fully shut down the oil exploration and drilling in the US…What will we get this winter and beyond for that high-minded foolishness?
Higher oil and gas prices! We need that! That move will make the UN and Al G.happy instead of employ and sustain our people. What will that do to the GDP when we have to buy foreign oil instead of produce it ourselves becaue we have no new wells to rely on in the future?


Right away we just had to implement the Democrat’s whole agenda, never-mind that we just had bailed out the banking industry spending billions….Gee it’s only barrowed money we’re spending on the folks who elected us!!!

*So we’re spending barrowed money like it is going out of style on drivel stuff and projects and non-existantgreen jobs…Now what do you get?
Thanks for the huge deficites for very little return, and a wellfare nation.

And of course we…
*Bail out every creep who got us into this mess with greed and corruption to aid them. Instead of throwing their buttoms in jail for not paying their taxes and the corruption…What justice do we get?
Absolutely nothing but drained investment accounts.

That’s the problem! It costs lots of money to make CHANGE happen…more than we have so we are spending faster than we make it.

And now the big spenders want health care for everybody, even those who don’t put into the pot as much as they’ll take out! A free-for-all!
Where’s the debt limit going to end up with that pie-in-the-sky idea, Democrats?

When do you think those foreingners are going to degrade our rating and up the lending rates out of sight because we’ve surpassed our income tax revenues to make the payments? When do you think they’ll call in their debts like the oil futures buyers did when they saw the gig was up last October and pulled out their money?

Debt is not a toy to play with! Stop playing BIG DADDY pandering to every jerk who supported the party!
Stop spending!

Sotomayor and policy uncertainty

May 26, 2009 16:28 UTC

The following quote from Supreme Court nominee Sonia Sotomayor (made during a panel discussion at Duke University in 2005) is the sort thing that may raise red flags for investors and business folks:

All of the legal defense funds out there, they’re looking for people with court of appeals experience, because it is–court of appeals is where policy is made. And I know, and I know this is on tape and I should never say that, ’cause we don’t make law–I know.  Okay, I know, I know. I’m not promoting it, and I’m not advocating it, I’m, you know…

Fed’s Kohn: Economy showing signs of stabilization

May 24, 2009 00:33 UTC

Federal Reserve Vice Chairman Donald Kohn makes two big points in a speech today at Princeton: 1) Obama’s big spending won’t push up rates anytime soon; and 2) there will be no rush for the Fed to get constrictive:

Kohn on fiscal expansion:

In this situation, fiscal stimulus could lead to a considerably smaller increase in long-term interest rates and the foreign exchange value of the dollar, and to smaller decreases in asset prices, than under more normal circumstances. Indeed, if market participants anticipate the expansionary fiscal policy to be relatively temporary, and the period of weak economic activity and constrained traditional monetary policy to be relatively extended, they may not expect any increase in short-term interest rates for quite some time, thus damping any rise in long-term interest rates.  … All told, the result is likely to be considerably less of the usual crowding out of fiscal stimulus in these circumstances, thereby increasing the effectiveness of fiscal policy to boost the level of aggregate economic activity in the short to medium term.

Kohn on the Fed’s next move:

In my view, the economy is only now beginning to show signs that it might be stabilizing, and the upturn, when it begins, is likely to be gradual amid the balance sheet repair of financial intermediaries and households. As a consequence, it probably will be some time before the FOMC will need to begin to raise its target for the federal funds rate. Nonetheless, to ensure confidence in our ability to sustain price stability, we need to have a framework for managing our balance sheet when it is time to move to contain inflation pressures.

Don’t dismiss big budget deficits

May 24, 2009 00:24 UTC

While I know it’s fashionable to laugh off the big budget deficits that the U.S. is running and to pooh-pooh the chances of an S&P debt downgrade, guess who doesn’t think it’s a big joke? The Congressional Budget Office. This, from the blog of CBO Director Doug Elmendorf:

Thus, the large deficits that CBO projects for the years after the economy has returned to full employment are more worrisome. Moreover, the sharp increase in debt this year and next raises the risk that investors might lose confidence in U.S. government debt as a safe haven. This risk heightens the importance of putting the budget on a sustainable path as the economy returns to full employment.

Morgan Stanley: No V-shaped recovery

May 22, 2009 18:45 UTC

Economist Richard Berner lays out the case why the recovery won’t be a pretty sight:

First, financial conditions will stay relatively restrictive. Losses are still rising at lenders, limiting risk appetite and balance sheet capacity, and thus restraining the availability and boosting the cost of credit.  A slow cleaning up of lenders’ balance sheets will keep lending capacity low and the cost of using it comparatively high, and increased regulatory oversight will reinforce that restraint.  We think that such lingering restraint will affect all credit-sensitive areas of the economy, including housing, consumer durables, capital spending and working capital for businesses large and small.  As evidence, the National Federation of Independent Businesses just reported that, in April, credit was harder to obtain by small businesses than at any time in the past 29 years.  And while loan-to-value ratios at auto finance companies rose slightly in April – to 89% from 86% in January-February – required downpayments were still more than double what lenders wanted last year.

Moreover, the lags between the change in financial conditions and the economy will prevent rapid progress.  To be sure, as Morgan Stanley interest rate strategist Laurence Mutkin argues, when more capital comes into the financial system, and securitization revives, competition will erode the high rates lenders are able to charge for the use of their balance sheets today.   In our view, however, that time may be far off, and both the scars from the crisis and the regulatory response to it probably will keep those costs permanently higher than pre-crisis norms.

Second, the imbalance between supply and demand in housing is still significant and likely will remain a drag on home prices and housing activity into 2010.
The single-family vacancy rate in existing homes is double the 1.2% historical average through 2004.  Given the persistently tight financing backdrop, vacancies might undershoot that old 1.2% norm for a while to bring down the supply/demand imbalance quickly, especially as foreclosures rise again.  Consequently, prospective buyers need to start occupying roughly 750,000 single-family vacant homes before the housing market and home prices stabilize.  In turn, this implies that new and existing home sales must rise by roughly 20-25% from the current pace.  Likewise, in commercial real estate, vacancy rates and cap rates are rising and rents are falling.

Third, consumers have only begun the process of deleveraging and repairing their balance sheets and saving positions, and we believe that the personal saving rate, currently at 4%, will rise to 7-10% in the next few years. This process will mean slower growth in US demand.  Some argue that pent-up demand for vehicles and durables is strong following the recent retrenchment in sales.  We disagree.  It’s true that to maintain the stock of vehicles on the road (245 million light vehicles) given normal scrappage would require about 13 million vehicles sold annually.  But with financing constrained, we think that consumers can endure 3-4 years of sales below those levels, since we spent the last 13 above them, especially with 15% more light vehicles on the road than licensed drivers.

Finally, the breadth of the recession limits the cushion from any stronger sectors. For example, while growth appears to be improving in Asia, the global recession will limit US exports.  Unlike the experience since the crisis began nearly two years ago, in which net exports contributed more than a full percentage point on average to real US growth, we expect that the cyclical contribution to US growth from overseas activity will be flat to down over the next 18 months.

America’s AAA bond rating

May 22, 2009 18:05 UTC

Will America’s lose its AAA S&P bond rating? Not anytime soon, says the econ team at Wachovia:

Any downgrade to the United States’ bond rating is not imminent. Some analysts speculated that any downgrade, should one even occur, probably would not happen for 3 or 4 years. In response to the concerns over the government’s fiscal position, Treasury Secretary Geithner said that the Obama administration is committed to bringing the budget deficit down “to a sustainable level over the medium term.”

Concerns over the U.S. fiscal outlook are not likely to disappear just because the Treasury Secretary uttered a few reassuring words. Therefore, the dollar could remain under downward pressure, at least in the near term. However, the scrutiny on the U.S. fiscal outlook will probably fade over time, and investors will likely start to re-focus on growth prospects.

Bernanke vs. Bond Market Vigilantes

May 22, 2009 17:10 UTC

Relying on the Fed cannot be the sum total of an economic policy to increase economic growth. In fact, current Fed policy may well be saving the U.S. banking system, but it is hardly setting the stage for a robust economic recovery. Scott Grannis (Calafia Beach Pundit) notices the rise in 10-year yields (bold is mine):

The Fed is trying to fight a force of nature—the bond market—and they are bound to lose. Purchasing long-maturity Treasuries, mortgage-backed securities or corporate bonds in an  to keep their yields low is a self-defeating strategy …  Ultimately, inflation and inflation expectations are what drive bond yields. If the Fed buys too many bonds, rising inflation expectations will kill the world’s demand to own bonds, and yields will rise. … So far this year, the yield on 10-year Treasuries has risen from 2.05% to 3.4%, and that is just a down payment on the eventual rise. … As politicians should know (though they refuse to believe), the economy is not something that can be easily manipulated according to their whims or preferences. As the Fed should know (but amazingly they seem to ignore this), long-term interest rates are set by market forces, not by the Fed’s Open Market Committee, whose only job is to attempt to control very short-term interest rates. Rising 10-year yields will put a floor under conforming mortgage rates, which have most likely already hit bottom. Yields on jumbo mortgages still have room to fall

Indeed, one shouldn’t mistake a healthier banking system for an economic recovery, so says David Goldman (Inner Workings bl)og, noting the price rise in commercial MBS:

Distressed assets yield enough to compensate for high losses elsewhere. The zombie strategy, in short, is working out just dandily, thank you. This means: No collapse of US national credit for the time being, and lower volatility (hedging costs) overall — but NOT economic growth.