James Pethokoukis

First a few numbers on U.S. healthcare, courtesy of Ed Yardeni:

1) Federal spending on Medicare combined with Federal and State spending on Medicaid over the 12 months ending July totaled a record $923.5bn.

2) Medicare totaled $439.9bn. Federal spending on Medicaid was $241.8bn. To derive the grand total, we doubled this last number to reflect that Medicaid spending is split roughly evenly between the Federal and State government.

3) Personal consumption expenditures on health care services and prescription drugs totaled a record $1,837bn over the 12 months through June, and the government picked up a record 48.6% of the tab.

4) Medicare outlays per senior citizen totaled a record $11,582 during July, up 50% since July 2000. Over this same period, the CPI rose 24.2%, while the CPI for medical care goods and services (covering urban workers) rose 43.9%. The PCED for medical care goods and services (covering all consumers) was up 31.5% from July 2000 through June 2009.

Yardeni’s bottom line:

Proponents of ObamaCare repeatedly ask senior citizens if they are happy with Medicare. Not surprisingly, they love it. It’s free, and places few restrictions on the services and drugs that are covered by the program. Medicaid works the same way for non-senior citizens who are too poor to pay for health care insurance. So why don’t we all get Medicare? Because it is a fraud.

Ask doctors and hospital administrators about Medicare and Medicaid and they will tell you that it amounts to a theft of their services because the government doesn’t pay them enough to cover their expenses for the care they provide. So they pass those costs on to patients covered by private health insurance. This is why medical care prices are rising faster in the CPI–which includes workers’ out-of-pocket expenses, but not the government’s costs of coverage–than in the PCED, which includes both. Then the audacious proponents of more government in health care have the audacity to claim that costs are rising too fast because of waste, inefficiencies, and fraud in the privately-run system!

Thinker extraordinaire Joel Kotkin gives an outline:

Given this sad political picture, the best hope now is to build an alternative perspective that focuses on the basic economic issues. This would not be the media celebrated movement of moderates–Democrats-lite and Republicans-lite–who seek kumbaya through compromise. It would, instead, require a radical third tendency–neither strictly left or right–that would draw on long-term American priorities and values.

These new radicals would focus on basic issues like improving infrastructure, and primary education and bolstering the nation’s productive economy. Their inspiration would come from a long tradition of federal successes–from the Homestead Act and the WPA to the Interstate Highway and the space program. They would view the financial crisis not as an imperative for protecting the well-connected but for financial reform, decentralization and innovation.

Such an approach would address what the British author Austin Williams calls our ”poverty of ambition.” Americans historically have rejected a future constrained by entrenched hierarchies. Most, I believe, would support spending money and paying taxes, if it was spent to achieve big things that would lead to a greater, more widespread prosperity and opportunity.

Just imagine if the upward of $1 trillion spent guaranteeing Goldman Sachs and Citigroup executives giant paydays had instead gone into roads, bridges, subways, buses, port development, skills training, energy transmission lines and basic scientific research. And imagine if instead of protecting Citigroup and Bank of America, we encouraged stronger local banks and solvent financial entrepreneurs to fill the breach left behind by gross failures.

Me: I think this sort of approach would have tremendous appeal. The $800 billion stimulus plan will go down as a tremendous missed opportunity. The most important thing here is the focus on the “productive economy.” If America doesn’t have that, nothing else works.

President Barack Obama has told Americans to be skeptical of reports of an end to the recession, saying the downturn has “many more months” to run. Given the recent retail sales data, Americans seem to be listening to their economist-in-chief.

Obama may well be right in his dour forecast. Whatever the next quarter or two of GDP numbers say, continuing high unemployment and depleted personal wealth should keep the vibe more recessionary than expansionary. It’s tough to be cheerleader-in-chief, after all, when people’s pocketbooks are telling them a starkly different story.

But another issue is exacerbating Americans’ sour attitudes and raising doubts about the president’s competence: healthcare reform. Indeed, a recent Gallup poll shows identical pluralities of 49 percent disapproving of both Obama’s handling of the overall economy and his handling of healthcare policy.

Healthcare reform poses three problems for Obama. First, it seems to cost way too much in an era of trillion-dollar budget deficits. Americans are now as obsessed with budget deficits as they were in 1992, when fiscal concerns helped make Ross Perot a presidential contender. Second, many Americans are skittish about increased government involvement in the sector. Third, an inability to push healthcare reform through a Democrat-dominated Congress makes both the president and his Congressional allies appear ineffectual (as does the dithering over whether a public option needs to be part of any reform plan).

Now, political historians will note that a healthcare reform fiasco helped sink Democrats in the 1994 midterm elections — despite a fairly strong economy — and forced President Bill Clinton to shift to the right and work with congressional Republicans. Together, Clinton and the Republicans balanced budgets, cut taxes and reformed welfare.

But why wait for a political disaster to change course? If Obama wants to deliver meaningful change to the nation’s healthcare system, why not a grand compromise with Republicans that would also bring along centrist Democrats.

Call it the Purple Plan, one that brings red and blue together. Make health insurance mandatory and subsidize those who can’t afford it. (That’s the blue part.) But at the same time dismantle employer-based health plans, which prevent consumers from understanding the true costs of their healthcare decisions. In any case, employer plans are just an accident of history. (That’s the red part.)

The simplest way of dismantling them, according to an analysis by McKinsey, would be to make the money spent on health insurance by employers available as cash, tax free, to employees. “Insurers would then compete for customers with policies that offer better value for the money,” according to McKinsey. “The combination of invigorated supply and demand is the only healthcare reform plan that will avert the economic disaster that otherwise awaits us.”

A Purple Plan for the centrist – or purple — president many Americans thought they were voting for. It would bolster the president’s popularity, lift American spirits and help restore the economy.

There was a Saturday Night Live skit after the 1988 election called “Dukakis after Dark.” In it, failed veep candidate Lloyd Bentsen asks failed presidential candidate Michael Dukakis, “You were going to raise taxes, weren’t you?” Dukakis, wearing a Hugh Hefneresque smoking jacket, shiftily replies: “Through the roof.”

Lots of Washington politicians could give the same response today. This blog post from TaxVox sums up the common wisdom around here:

Politically feasible tax increases alone won’t solve the problem. Neither will cutting spending. In fact, if history is any guide, we’re unlikely to do much of anything on the outlay side. We will certainly have to slash the growth of healthcare to keep the budget from spiraling totally out of control. But that’s likely to take the form of “bending the cost curve” to get gradual savings over many years. In the near term, I suspect taxes will do the heavy lifting. And that will require either major tax reform or tapping new revenue sources.

What might stand in the way of a robust economic turnaround. Gary Becker outlines the following factors:

The federal government is creating many programs, such as reducing student loan repayments and mortgage payments for persons with low incomes, which discourage the unemployed from finding jobs, and encourage the employed to become unemployed. The proposed caps of various kinds on executive pay, especially in the financial sector, the large government debt being created due to huge fiscal deficits that will put upward pressure on interest rates, the European style reorientation of anti-trust policies toward protecting competitors rather than consumers, the enormous excess reserves that have a considerable inflation potential, the federal government’s likely incompetent management of two of the three American auto companies and a major insurance company, and the planned creation of a consumer czar that will interfere with the goods and services offered consumers are examples of policies that are likely to discourage business investment and risk taking.

Me: It is not about aggregate demand, gang, it’s about confidence.

The great Jason Trennert of the Strategas Group recalls the beginning of the Reagan bull market (in the WSJ) in August 1982 and points out some key differences between then and now:

The only good news at the time was that America’s economic leadership, in the form of President Ronald Reagan and Fed Chairman Paul Volcker, were deeply committed to fiscal, monetary and regulatory reform. Put simply: business regulation, the tax code, inflation and interest rates were all at such dizzyingly high levels that they had room to improve in 1982. Today, interest rates and inflation are so low that they are unlikely to do anything but go higher.

Current headline inflation is near zero. Ten-year Treasurys are at a historically low level of 3.7%. Taxes on income and capital are low and are poised to go higher, while common valuation metrics for the market are hardly cheap. No investor should blame the current administration for what are likely to be lackluster market returns in the next few years. But it does seem fair to worry about the future of equities in an environment where government spending is poised to comprise a greater portion of the economic pie.

A really great article in the FT that serves to dispel some of the doom and gloom that pervades much of current thinking:

In spite of the economic implications of a more restrained credit environment and of rapid ageing, it would be as myopic to presume that our destiny is secular economic decline as it would be to believe that, in time, we will revert to the status quo ante. … The pressure on labour supply can be alleviated by strategies to raise the participation in the labour force of the two groups that are under-represented, namely, the over-55s and women. This is likely to involve extended working lives, changes in the organisation of work, more affordable childcare and family-friendly policies at work.  … The quality and productivity of the labour supply can be improved greatly by strengthening the education system, including universities, and by developing and expanding learning programmes throughout working lives.

Technological change may redefine the boundaries of future economic growth much as information technology has in the last 20 years. New IT applications are likely to augment production, design and the dissemination of information. Advances in materials will improve electronics, transport, energy systems and medicine. Genetic engineering is expected to lead to new products and processes in medicine, food production, plastics, chemicals and fuels. Nanotechnologies that build products more cheaply and precisely from individual atoms and molecules, could potentially revolutionise automation and robotics; and the fusion of nano, IT and genetic sciences could be as significant as any innovation so far.

Dude, you’re bringing me down! Or so says economist Robert Brusca:

Obama has been saying bad things about the economy ever since he got in office. As economic data improved he focused on how bad things were, not on the improvement or the trend. When the Q2 GDP figure fell by only 1% in the quarter he said there would be many more months of recession to come. … His administration was talking about deficits and about raising taxes before the recession was even over; that was reckless.  Japan got into its lost decade of growth by fearing the size of its own fiscal debt and hiking taxes on consumers before the economy was strong enough to take it. Is that the model Obama is pursuing?

The drop in sentiment in current conditions and in expectations is a depressing end to a week of mixed numbers. The consumer sentiment and consumer spending figures are on the same page. But job market improvement usually boosts these two series.. … If June was the end of the recession we are not seeing some very bad economic sentiment for early in the recovery period. It is the first ‘in recovery’ or ‘end recession’ variable that looks uncharacteristically weak.

How could sentiment be so bad with the impact of nearly $1trillion in spending on the horizon? I think it comes back to the president’s constant smashing of sentiment every time an economic statistic improved. If the President won’t cheer for this economy who will? I think that is the lesson of this report. Confidence should be leading the improvement in the cycle not trialing it. With all the positive news someone must take ownership of the failure in confidence.

The economy is leveling off, the Fed says. I think of things this way, as if your ship sunk and you thought you were going to drown. But you struggle to shore on some island. You are happy to be alive but then realize you are stuck on an island. Kind of exactly like Castaway. But who knows what the tide will bring in.

(Lightly microblogging from the Great White North)

I think it is hilarious that the protesters get criticized for being uninformed about an uber-compliated plan that has been marketed in talking points and catch phrases. How dare they! This administration loves complicated, only-an-economist-could-love approaches.