James Pethokoukis

Politics and policy from inside Washington

Another look at the Growth Gap

Jun 20, 2011 20:45 UTC

I just ran across this great chart from Jim Glassman over at JPMorgan that illustrates the Growth Gap and how it is imperative we grow this economy faster.

It’s not just McKinsey suggesting Obamacare is a mess

Jun 20, 2011 20:34 UTC

Editor’s Note: This piece has been updated. Please see the update below.

Consulting firm McKinsey kicked up a hornet’s nest with these recent findings:

The Congressional Budget Office has estimated that only about 7 percent of employees currently covered by employer-sponsored insurance (ESI) will have to switch to subsidized-exchange policies in 2014. However, our early-2011 survey of more than 1,300 employers across industries, geographies, and employer sizes, as well as other proprietary research, found that reform will provoke a much greater response.

· Overall, 30 percent of employers will definitely or probably stop offering ESI in the years after 2014.

· Among employers with a high awareness of reform, this proportion increases to more than 50 percent, and upward of 60 percent will pursue some alternative to traditional ESI.

· At least 30 percent of employers would gain economically from dropping coverage even if they completely compensated employees for the change through other benefit offerings or higher salaries.

· Contrary to what many employers assume, more than 85 percent of employees would remain at their jobs even if their employer stopped offering ESI, although about 60 percent would expect increased compensation.

As I have written, there was pressure on McKinsey to release its methodology, which it finally has.

Yet missed in all this was another consulting firm which also found some worrisome Obamacare trends (as explained by the Heritage Foundation):

PricewaterhouseCoopers (PWC) recently released its annual report on medical cost trends for 2012, and it is revealing.

1) The report shows health care costs and premiums continuing to rise—and uncertainty increasing for employers who offer insurance to their workers. Health care spending increased by 7.5 percent in 2010 and will grow by 8 percent this year.

2) In 2012, it will rise again by 8.5 percent. This is exactly the opposite of the President’s promise that his health care plan would reduce premiums by $2,500 per person.

3) Perhaps most concerning are the findings of a survey also released by PWC divulging how employers are likely to react to Obamacare.  The survey showed that nearly half of employers will drop their coverage, dumping employees into the government-run exchanges. Individuals who qualify would then receive generous federal subsidies to purchase insurance. If more employers than expected dump coverage, as other experts have predicted, the cost of the subsidy program will explode deficit spending. The results of the PWC survey indicate this is likely to be reality.

4) Even if employers do not dump coverage entirely under the new law, according to the survey, five out of six employers will completely re-evaluate their benefits strategy. Four out of five employers will make changes to help cover new costs under Obamacare, including raising premiums, deductibles, and co-payments.

5) Employers who offer coverage to their workers face growing uncertainty regarding costs under the new law. The negative consequences of Obamacare’s changes will be threefold: higher costs for those with employer-sponsored coverage; a greater debt burden on current and future taxpayers; and slower growth in job creation and the overall economy.


The folks at PricewaterhouseCoopers disagree with Heritage’s interpretation of its report:

As you will see, the Heritage Foundation’s statement that PwC’s survey found that nearly half of employers will drop their coverage and dump employees into government-run exchanges is false.

In fact, PwC asked about “employer subsidies” not “coverage.” These are different. Employers can decrease the level at which they subsidize employees premiums and still retain health insurance coverage. Furthermore, PwC found that employers’ subsidy level has not changed. The question PwC asked was: “As a result of the new healthcare reform PPACA provisions, how likely is it that your company will significantly change or eliminate company subsidies for employee medical coverage? “

Very likely: 11%

Somewhat likely: 34%

Unlikely 55%

It would be inappropriate and inaccurate to interpret that employers who answered “very likely” or “somewhat likely” would eliminate coverage, and it is impossible to allocate which employers are consider which option to take. Furthermore, PwC found that fewer than 7 percent of employers (not half) said they were very likely to cover employees through state-run health insurance exchange pools. Interestingly, the primary approach that employers intend to take in the future is to increase health and wellness programs to improve the health and productivity of their workforce.

Furthermore, PwC clearly clarified in both its report and news release dated May 18, 2011 that “The health reform law will have minimal effect on the medical cost trend in 2012. Provisions of the Patient Protection and Affordable Care Act that took place prior to 2012 were small changes that employers already have fully accounted for.”




when the “worlds greatest” nation fails to provide medical care for its most needy and they are forced to something similar to this: www DOT guardian.co.uk/world/2011/jun/21/verone- one-dollar-robbery-healthcare, just to get basic medical care. you really need to consider what is wrong with your country.

This heathbill can only spell good for America and should be heralded as a genuine change for the better, advancing medical care and taking money away from Corporations who aren’t looking out for your interests (ie health), only their profits.

The right wing media (read Bill O’Reilly, FOX etc) would like to make you believe this is bad, but really, open your damn eyes… Countries in Europe have a healthy balance of State and Private medical care, why doesnt the US?

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The Growth Gap

Jun 20, 2011 19:49 UTC

The main reason we have a big budget deficit right now is that the U.S. economy has been growing too slowly for a decade, including the Great Recession and Terrible Recovery. That means less tax revenue and more government services like unemployment insurance and Medicaid. So perhaps the real way Obamanomics has worsened our debt situation is by contributing to this extended period of weak growth.

By my back of the envelope calculations, the CBO forecasts a roughly 10% of GDP budget deficit this year. If revenues were at their historical average, that number would be more like 6%. And if the economy way rebounding as it should, the automatic stabilizers would be more like 3% of GDP, instead of 6%. So that would bring the budget deficit down to around 3% of GDP. The rest you can blame on Obama-”investment” spending.  Of course, one big problem is that Obama’s future budget plans would never bring spending down to historic levels — it stays right around 24% of GDP for a decade —  even as its assumes a growth splurge that would supposedly reduce annual deficits.

A chart from Forbes.com give a few for the growth gap:




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Why we need a tax holiday for overseas earnings

Jun 20, 2011 16:05 UTC

U.S. companies have huge profits sitting offshore, and some in Congress want to give them a tax break as incentive to bring nearly $1 trillion back to America. The New York Times describes the plan this way:

Under the proposal, known as a repatriation holiday, the federal income tax owed on such profits returned to the United States would fall to 5.25 percent for one year, from 35 percent. In the short term, the measure could generate tens of billions in tax revenues as companies transfer money that would otherwise remain abroad, and it could help ease the huge budget deficit.

Corporations and their lobbyists say the tax break could resuscitate the gasping recovery by inducing multinational corporations to inject $1 trillion or more into the economy, and they promoted the proposal as “the next stimulus” at a conference last Wednesday in Washington.

But the story — reflecting the agenda of the Obama White House and liberal think tanks —  is skeptical about the whole idea. It highlights research that shows when companies got tax amnesty in 2005, 92% of the $312 billion brought back was used for dividends and share buybacks — not directly hiring workers, boosting salaries or purchasing equipment.

Economist Douglas Holtz-Eakin is working on a study for the U.S. Chamber of Commerce that supports a tax holiday. I chatted with him briefly this morning and here is the thrust of what he told me:

I am strong believer in a territorial tax system period, and this is a step toward fundamental tax reform. Now it’s short of fundamental tax reform in two ways: Number one, the rate’s not zero and, number two, it’s not permanent.

I would go for zero and permanent in a heartbeat if that was on the legislative agenda, but it’s not. I also think it would have substantial near-term beneficial economic impacts.

If you think of it this way: There’s over a $1 trillion out there, so let’s suppose something like $830 billion came back, which I chose specifically to match exactly what [President Obama's American Recovery and Reinvestment Act] was. Like the [ARRA], this would flow into the economy and go into corporations first, but they would then either make real purchases with it – salaries, payroll, capital investment, R&D and that would would further flow into the economy – or they would change their financial structure: share repurchases, debt reduction, dividends.

And in each case, that would flow to someone else. So on a cash-flow basis, it’s the same model. … And those balance-sheet effects would drive consumption further because of the wealth effects. That’s got to be at the heart of any response to any wealth-destroying bubble. We need pro-wealth creation policies. This is one of them.

Holtz-Eakin says his study will highlight these broader macroeconomic impacts. But his major point echoes what I wrote last March:

Treasury is stretching a point in assuming the government would somehow lose revenue by taxing repatriated income at a sharply lower rate. In reality, without the reduction most of the money will remain offshore.

And even if all the cash returning to the United States went to companies’ shareholders, that could still generate more consumption, growth and jobs, a knock-on effect Treasury ignores. Yet this so-called wealth effect is explicitly part of the rationale behind the Fed’s second round of quantitative easing. Some economists dispute the linkages, but not the ones that work for Obama. So despite some political risks, it might be time go on holiday — as long Washington also continues the work of reform.


That’s one of the reasons I like Cain. He is a businessman nor a politician.

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Digging down into America’s weak labor market

Jun 20, 2011 14:49 UTC

The main reason the unemployment rate is so high is that the recession was so deep and the economic “recovery” is so anemic. But part of the problem may be a mismatch between job opening and the skills of unemployed workers. Here is WaPo’s Robert Samuelson:

Economist Harry Holzer of Georgetown University thinks the unemployment rate might be closer to 8 percent than today’s 9.1 percent if most of these jobs were filled. That implies up to 1.5 million more jobs. Economist Prakash Loungani of the International Monetary Fund estimates that 25 percent of unemployment is structural; that’s more than 3 million jobs. A recent survey of 2,000 firms by the McKinsey Global Institute, a research group, found that 40 percent had positions open at least six months because they couldn’t find suitable candidates.

Samuelson partly finds fault in high schools and businesses offering less training, while community colleges aren’t in sync with local job markets. I also suspect that college graduates are majoring in the wrong subjects. Too many history and business majors, two few engineers. More from Samuelson:

In any dynamic economy, constant changes in technologies, products and companies naturally create gaps between skills available and skills wanted. But today’s gaps seem to transcend this. A survey for the National Association of Manufacturers in 2009, near the recession’s nadir, found that a third of companies still faced shortages. These were largest for engineers and scientists and among aerospace, defense and biotechnology firms.

This may also be a huge problem going forward: Here is the McKinsey Global Institute:

For example, MGI estimates that the United States may face a shortfall of almost two million technical and analytical workers and a shortage of several hundred thousand nurses and as many as 100,000 physicians over the next ten years. In aerospace, 60 percent of the workforce is aged over 45 years old compared with 40 percent in the overall economy.


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