James Pethokoukis

Chris Edwards of the Cato Institute notices that several New Europe countries are raising their VATs to deal with huge budget deficits and concludes thusly:

1) VATs are handy money machines for governments. Governments fear raising income taxes during recessions because of concerns over damaging their economies. But they have less such concerns with respect to VATs.

2) International tax competition continues to generate pressure for countries to keep income tax rates down. Policymakers don’t want businesses and investment capital fleeing abroad for lower taxes, particularly during economic downturns.

VATs are generally less damaging to economic growth than income taxes. But the flip side to that widely-understood result is that politicians have less fear about using them to grow the size of governments during good times and bad.

What’s good for the donkey is good for the elephant — or at least as politically effective.

For years, Democrats hampered Republican efforts to overhaul Social Security by making three main arguments. First, reform was a just a euphemism for kill, thus Republicans were violating the social-insurance contract with older Americans Second, building a new Social Security system around personal investment accounts would subject peoples old-age to the vagaries of the financial markets. Third, there was no Social Security crisis, only a successful, decades-old program that merely would need a couple of tweaks down the road (presumably when Democrats again controlled the White House and Congress).

Did these argument hold water? Not really. Various Republican ideas would have changed the program only for younger people. And if you don’t think the stock market is a good long-term investment, then you’re also betting that the American economy will underperform, thus calling into question the country’s ability to meet its long-term Social Security obligations. Finally, it is indisputable that Social Security is underfunded and benefits will need to be cut or taxes raised sharply.

Whatever the accuracy of their arguments, Democrats were able to stymie Republican efforts to fix Social Security, most notably President George W. Bush’s 2005 attempt. Now Republicans are using the same playbook to stop President Barack Obama’s plan to reform America’s healthcare system.

Today’s arguments are similar to those from 2005. Healthcare reform would eviscerate Medicare for the elderly by making cuts to pay for expanded coverage for younger Americans, and that’s unfair since seniors have paid for their benefits. Treatment decisions would be left to the vagaries of Washington bureaucrats. And hey, there really is no crisis since a) polls show most people are satisfied with their current healthcare plan, and b) even if healthcare spending takes up a greater share of GDP in the future, it’s not a big problem since the entire American economy will be much bigger.

But Republican arguments are just as flimsy as the Democrat version four years ago. Rising costs mean less take-home pay for American workers, and Medicare, to a great degree, is what’s driving those costs since it makes using pricey, premium medicine seem cost free to seniors. (And despite Republican claims, the average senior will get $100,000 from Medicare than what he puts in.) What’s more, the U.S. could be spending far less on healthcare, including Medicare, and getting equally good results. Still, those economic realities are just a distraction when your goal is more about political victory than solving a national problem.

The politics may be dicey, but anyone truly serious about overhauling the American healthcare system needs to acknowledge that total spending must be reduced and that any aspect of the system — including Medicare and employer-based health insurance — that distances patients from the true costs of their healthcare is part of the problem. Republicans could even, theoretically, support a bare-bones public option if it had low premiums but high deductibles and co-payments to increase consumer awareness. (Just as Democrats should be able to support a system based on more private health insurance if there were substantial subsidies for the poor.)

Of course, that would be sound economic policy and the current debate has precious little to do with that.

ISH Global Insight is looking for a U-shaped recovery: 2 percent growth in 3Q, 2.4 percent in 4Q and then 1.8 percent next year. This would be typical following a banking crisis/recession.  I think this will make for a very unhappy electorate.

The main driver of growth in the second half of the year remains the turn in the inventory cycle. Firms will at first cut their inventories less rapidly, and then by the fourth quarter begin to add to them. The success of the “Cash for Clunkers” program is accentuating the cycle in the autos sector, as the surge in demand is depleting supplies of popular vehicles and manufacturers are raising their production plans in response. There is some growth payback in the first half of 2010, since we think that some of the Cash for Clunkers demand is pulling sales forward. In addition, compared with our July forecast, the turn in residential investment, business equipment spending, and exports begins earlier, helping the third and fourth quarters. But the forecast profile remains a U-shaped one, since it takes a long time (not until 2011 and 2012) to move into higher gear.

This is a great analysis of healthcare polling by Humphrey Taylor, head of The Harris Poll (via The Health Care Blog):

However, if you study all the polls, as opposed to cherry picking them as many politicians do, a  clear picture of public opinion emerges:

1. Most people are unhappy with the current health care system and favor reform.  They want to have a system that gives them affordable access to quality care for the rest of their lives.  International surveys show that Americans are more dissatisfied with the U.S. health care system than are people in all, or almost all, other developed countries.
2. Most people think that some kind of government intervention is needed to fix the system, to expand coverage, and to contain costs.  However, support for government intervention does not, in most case, translate into support for a “government-run” system.  (Though what people understand by that phrase is far from clear.)
3. While most people believe that fundamental changes are needed in our health care system, only a minority wants to completely rebuild it.  Most people favor building on the present system and the bits of it that seem to work well.
4. There is substantial support for health care reform not only among the public but from large majorities of almost all major interest groups.  Only small minorities of doctors, employers or insurers think that the system works pretty well now.  However, they also have different interests and tend to see very different problems and support or oppose different proposals.
5. Most people are at least reasonably satisfied with their own health insurance (if they have it) and with the quality of care that they receive.  However, that does not mean that they like the system.  Most people believe that the costs are too high and that everyone should be covered.
6. More people think that both the total cost and the out-of-pocket costs of care are too high, but their perceptions of why this is so are different from those of most health economists.  They often blame greedy insurers and pharmaceutical companies and think there is a lot of fraud and abuse.  But they are less likely to focus on over-utilization, the impact of fee-for-service incentives and the relatively (compared to other countries) high price of medical services.
7. Few people seem to worry much about the unfunded liability for Medicare that economists tell us is a huge problem.
8. Proposals that people believe will take away the health insurance they have now, or force them to change doctors, that “ration” care, or prevent them from getting the treatments they think they need are deeply unpopular.
9. There is no consensus on the appropriate roles of the government, employers and individuals.  Half of the population thinks that health insurance and health care should be “an entitlement paid for by taxes,” while a third believes that it should be like other products and services, where you get what you can pay for.
10. Republicans and Democrats are highly polarized on many aspects of reform.  Most Democrats think that this is a very important issue and focus on expanding coverage and limiting out-of-pocket costs.  They tend to favor an expanded role for government.  Most Republicans focus on cost containment and oppose a bigger role for government.  Democrats are much more likely than Republicans to think that health care is a “right.”
11. There are many things that many people do not want.  They do not want to pay much higher taxes and out-of-pocket costs.  They don’t want to damage the economy or increase unemployment.  They dislike the idea of rationing and oppose anything that they think might reduce the quality of their care or limit their choices.
12. Most people do not think or talk about the issues that are the focus of much debate among policy wonks, think-tanks, and legislators.  They rarely mention health information technology, comparative effectiveness reviews, a health information exchange, reimbursement reform, pay-for-performance, quality measures, or outcomes research.  When asked about these issues, the public’s replies vary dramatically, depending on whether the language used is that of the proponents or opponents of proposals.  For example, a new agency to provide information on which treatments work better or worse sounds pretty good – but not if it is used to deny care that a doctor or patient wants.
13. Most people do not seem to see a conflict between giving patients every test and treatment they and their doctors  want, however expensive, and containing costs.

Not that “W’ (as in the 43rd president), but a W-shaped economy.  I was on CNBC today talking healthcare with Howard Dean, and he said he thought the economy would improve and then worsen again. Would that be good or bad for the Obama agenda? Certainly it was a weak economy that got Obama elected and helped him push through the $800 billion American Reinvestment and Recovery Act. But high unemployment has been sapping his popularity. And that has been bad for his agenda, especially healthcare reform. If Dean’s forecast is correct, the Dems better pass healthcare while they can. There might be a lot fewer of them in Congress after 2010.

Here is a devastating critique of the idea of healthcare co-ops in place of a true public option (via Tim Foley at Change.org):

We’re guessing at the details, since they haven’t been divulged. How it would work? Does the government give seed money in the form of grants to set these up? Does it give loans? Who, pray tell, does it give this seed money to? How long would it take to get one of these co-ops up and running? How long would it take them to get a network of doctors? Since the co-op would start with no customers and presumably no bargaining power, how long would it take for insurance companies to be quaking in their boots?

That said, we do know a lot about them:

• We know that we used to have health care co-ops in this country. What happened to most of them? As Professor Timothy Stoltzfus Jost explains, “The Farm Security Administration withdrew support in 1947, and they collapsed. They had a hard time getting going anyway.”
• We know the ones that have been relatively successful have had their own network of providers, like Kaiser or the VA. However, the best of them took decades to develop – up to 60 years.
• The GAO looked at health insurance co-ops in 2000. These weren’t the same idea – they would allow small businesses to pool their employees in a co-op to shop for insurance. The GAO’s conclusion? They don’t work very well and did nothing to lower costs.
• The fact that a health co-op is a non-profit won’t in and of itself yield competition. As I pointed out earlier, “Conrad’s home state of North Dakota has 475,000 people enrolled in the not-for-profit North Dakota Blue Cross Blue Shield. That’s not just competition – it’s a monopoly, 60% of the market. Guess what? It hasn’t helped. Premiums jumped 74% in the past seven years.”
• Most co-ops won’t be as successful as already-existing Blue Cross plans, which means they won’t have market clout to lower costs or change the game for private insurance. Which is, you know, the whole point.
• Conrad introduced the co-op in June to solve a political problem – find common ground to allow the Senate Finance Committee to release their bill. So far, the Finance Committee remains at impasse, we’ve seen no bill, and every other committee has been done for weeks now. Great job.
• By the way, Republicans aren’t biting. They say the co-op is a public option in sheep’s clothing. So they’re against it.
• And, of course, progressives are furious at even the hint that there won’t be a public option, so they’re against it, too.

I guess Conrad succeeded in uniting the left and the right. Unfortunately, they seem to be united against his idea – the same idea whose sole existence is not to make American health care better but to win votes.

Will Americans go big in 2012? President Obama is a smidgen under 6’2″, Mitt Romney is 6’2″, Sarah Palin is 5’5″ … Tell us more, New Scientist:

When the going gets tough, the presidents get taller. So says social psychologist Terry Pettijohn of Coastal Carolina University in Conway, South Carolina.

He looked at the heights, ages and facial attributes of the 11 elected US presidents over the past 75 years, and compared them with economic and social indicators such as unemployment and birth rates. “What we’re seeing is that taller candidates are preferred when times are more difficult,” says Pettijohn.

Hard times also make for presidents with larger chins and smaller eyes, says Pettijohn. He thinks that voters associate these features with strength and maturity – qualities that could be perceived toprovide security in troubled times. The results were presented last week at a meeting of the American Psychological Association in Toronto, Canada.

This has been the major, major shift in the structure of the US Treasury market that was unanticipated. From Q1, US households held $643.9 billion in Treasury debt and that is up from $256.6 billion in Q4 2008. Households bought an astounding 84% of new US Treasury issuances in Q1. The total holdings represent about 1% of US household assets. According to the WSJ, “Although that is the highest since 2001, Treasurys regularly made up 5% of assets in the 1950s, and as recently as 1995 they were 2.6% of assets. History suggests there is plenty of room for households to increase their holdings.”

With the US current account shrinking, the US is less dependent on foreigners to fund it’s deficit as the trade red ink has slowed to below $10 a month ex oil. In the medium term, this is a strong positive for the US dollar as it means the United States is funding itself more domestically. The longer term issue is whether the United States continues down the fiscal path of becoming the Japanese where domestic savers fund a fiscal deficit that is above 180% of GDP.

… comes from my pal Dan Proft who is running for governor of Illinois: “Illinois isn’t broken. It’s fixed.” Nice.