James Pethokoukis

Politics and policy from inside Washington

VAT Attack! The mysterious Christina Romer and higher taxes

Oct 28, 2009 18:21 UTC

Christina Romer’s speech on Monday had this overlooked bit, which I put into bold:

Our calculations showed that slowing the growth rate of health care costs by one and a half percentage points starting in 2014 would result in a budget deficit in 2020 that was 1 percent of GDP smaller than it otherwise would have been. By 2030, the impact is a reduction in the budget deficit of 3 percent of GDP; by 2040, it is a reduction of 6 percent of GDP.23 These estimates make vivid the notion that the number-one thing we can do to help get the long-run budget deficit under control is to slow the growth rate of health care costs.

Now, slowing the growth rate of costs will not solve all of our long-run budget problems. Our population is aging and even lowering the growth rate of health care costs quite substantially leaves them growing faster than GDP. As a result, other actions will also need to be taken. While health care reform may not be the “silver bullet,” it clearly must be a significant part of the solution to our deficit woes. It is the key step that we can take right now to bring the long-run budget problem down to manageable proportions.

Me:  What “other actions” might she be referring to? Obviously higher taxes. Indeed, earlier in the speech she references the work of economists William Gale and Alan Auberach in this Brookings report:

Even if rising health care costs are an important component of the long-term problem, they are not necessarily “the” cause of the fiscal gap. The estimated gap is increased by more than 5 percentage points of GDP just by continuation of the policies that were enacted during the Bush Administration. … It will prove difficult to close the gap entirely via modifications to existing taxes and spending programs. A new revenue source, such as a value added tax (VAT), may be needed. A VAT imposed at a rate between 15 and 20 percent would essentially close the fiscal gap under the Administration’s budget.

Healthcare Reform: The Day After

Oct 27, 2009 16:34 UTC

Paul Krugman takes a look at the impact of  healthcare reform:

Like the bill that will probably emerge from Congress, the Massachusetts reform mainly relies on a combination of regulation and subsidies to chivy a mostly private system into providing near-universal coverage. It is, to be frank, a bit of a Rube Goldberg device — a complicated way of achieving something that could have been done much more simply with a Medicare-type program. Yet it has gone a long way toward achieving the goal of health insurance for all, although it’s not quite there: according to state estimates, only 2.6 percent of residents remain uninsured.

There are, of course, major problems remaining in Massachusetts. In particular, while employers are required to provide a minimum standard of coverage, in a number of cases this standard seems to be too low, with lower-income workers still unable to afford necessary care. And the Massachusetts plan hasn’t yet done anything significant to contain costs.

Me: What? What was that last part? Oh, right. ObamaCare probably won’t do much to stop the explosive rise in healthcare costs. Indeed, the Massachusetts plan didn’t really try to reign in healthcare costs, putting the carrot in front of the stick. So now the system is running out of money, forcing service cuts. Some might even call that rationing. ObamaCare creates the illusion of cost control, but likely will be more carrot than stick in practice.


CBO reports that the House health reform bill will reduce the budget deficit by $100 billion over the next ten years. That sounds like cost containment to me.

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The deficit’s risk to the dollar

Oct 26, 2009 18:02 UTC

Allan Meltzer on deficits and the dollar:

The administration admits to about $1 trillion budget deficits per year, on average, for the next 10 years. That’s clearly an underestimate, because it counts on the projected $200 billion to $300 billion of projected reductions in Medicare spending that will not be realized. And who can believe that the projected increase in state spending for Medicaid can be paid by the states, or that payments to doctors will be reduced by about 25%?

While Chinese government purchases of U.S. debt may delay a dollar and debt crisis, they also delay any effective program to reduce the size of that crisis. It is far better to begin containing the problem before the U.S. blows a hole in the dollar and starts another downturn.

A weak economy is a poor time to reduce current government spending or raise tax rates, but we don’t require draconian immediate changes. We do need a fully specified, multi-year program to restore fiscal probity by reducing spending, and a budget rule that limits the size and frequency of deficits. The plan should be announced in a rousing speech by the president. The emphasis should be on reducing government spending.

Me: This could be just like in 2004 when President Bush ordered the Marines to take Fallujah right after the election. Maybe right after the 2010 midterms, Obama will announced a VAT.

Study: US healthcare system wastes $800 billion a year

Oct 26, 2009 14:11 UTC

This study from the healthcare analysis unit of Thomson Reuters has a high degree of truthiness, it seems to confirm what many Americans intuitively think and believe:

One example — a paper-based system that discourages sharing of medical records accounts for 6 percent of annual overspending.

“It is waste when caregivers duplicate tests because results recorded in a patient’s record with one provider are not available to another or when medical staff provides inappropriate treatment because relevant history of previous treatment cannot be accessed,” the report reads.

Some other findings in the report from Thomson Reuters, the parent company of Reuters:

* Unnecessary care such as the overuse of antibiotics and lab tests to protect against malpractice exposure makes up 37 percent of healthcare waste or $200 to $300 a year.

* Fraud makes up 22 percent of healthcare waste, or up to $200 billion a year in fraudulent Medicare claims, kickbacks for referrals for unnecessary services and other scams.

* Administrative inefficiency and redundant paperwork account for 18 percent of healthcare waste.

* Medical mistakes account for $50 billion to $100 billion in unnecessary spending each year, or 11 percent of the total.

* Preventable conditions such as uncontrolled diabetes cost $30 billion to $50 billion a year.

Me:  In one way this does confirm what Democrats have been saying, that it is possible to cut spending without hurting quality.  Getting at the waste and inefficiency is tough, though. Obamacrats seems to have scant interest in tort reform. And one reason that Medicare has low administrative costs is that it doesn’t make the same effort as private insurance companies to go after fraud. And doing IT reform over such a large and complex system is already proving difficult and is some cases making patient care worse.


On the contrary, the current Health Care legislation does not address the “waste” problems. In fact, these reforms have more potential to acerbate the problems. Tort reform would go a long way towards reducing unnecessary care, if in fact this is about malpractice exposure. How is (current) reform going to change the fraud aspect. Fraud and government programs go hand-in-hand. By adding more government, it will not only increase the fraud, but it will add to the third item, administrative inefficiency and overhead. There are things that can be done to attack these problems, but the “democrats” just want bigger government–not better.

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Is another ‘Perot Moment’ on its way?

Oct 23, 2009 18:57 UTC

I found this to be a very interesting quote from Even Bayh (in the WaPo):

People understand that we’re stealing from future generations …We’re setting the stage for another Perot moment.

Although the common wisdom is that voters don’t care about deficits, I think the word “trillion” changes the political calculus. As do charts like this one (via Megan McArdle):



I certainly hope people have the idea that the deficit is out of control. Most in congress appear totally oblivious to the amount of debt they are racking up. There must be some rules,limits, and definition: on public debt, on current accounts deficits, and of the free market concept. I do intend to vote to try to correct these problems.

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How the Baucus bill pays for healthcare reform

Oct 22, 2009 17:55 UTC

If those Medicare cuts don’t happen, forget about it, gang (via the Tax Foundation):


America’s Blade Runner economy

Oct 21, 2009 14:18 UTC

In the 1982 sci-fi film “Blade Runner,” it appears as if Japan is the world’s leading economy and culture. It is a cinematic portrayal of the future sketched by many economists in the 1980s who wanted America to adopt Japanese-style industrial policy. But America may yet have an economy that resembles Japan’s. This NY Times story looks at how Japan amassed such a huge national debt, twice the size of its economy:

How Japan got into such a deep hole, and kept digging, is a tale of reckless spending.

The country poured hundreds of billions of dollars into civil engineering projects in the postwar era, marbling Japan with highways, dams and ports.

The spending initially fueled Japan’s rapid postwar growth and kept the Liberal Democratic Party in power for most of the last half-century. But after a spectacular asset and stock market boom collapsed in 1990, the country fell into a long economic malaise.

The Democratic Party, which swept to victory in August, promises to rein in public works spending. But the party’s generous welfare agenda — like cash support to families with children and free high schools — could ultimately enlarge budget deficits.

“It’s dangerous for the Democrats to push on with all of their policies when tax revenues are so low,” said Chotaro Morita, head of fixed-income strategy at Barclays Capital Japan. “From a global perspective, Japan’s debt ratio is way off the charts,” he said.

America’s banana republic economy

Oct 20, 2009 13:57 UTC

Is the decline in the dollar merely a “return to normalcy” story, as many bulls contend, and not a harbinger of a coming currency crisis?

Short version: The 2008 financial crisis and ensuing collapse in confidence drove investors to dollars and dollar-based instruments. And as the crisis has ebbed, investors are rebalancing back toward riskier assets.

Thus the falling dollar should rightly be interpreted as a sign of “new economic optimism,” argues JPMorgan Chase economist Jim Glassman.

Then again, perhaps future economic historians will look back at this stage of the dollar’s decline as the currency calm before the storm. Because at some point, investors may suddenly realize that America’s already somewhat devalued currency should not be trusted.

As Senator Judd Gregg, a New Hampshire Republican and noted budget hawk, said recently, “We’re basically on the path to a banana-republic type of financial situation in this country … You can’t keep throwing debt on top of debt.”

Indeed, the evidence points to a nation fairly far along that path. Healthcare reform is supposed to be deficit neutral — everything paid for via spending cuts or tax increases — while also helping bring government’s overall long-term budget into balance.

But to keep the 10-year price tag under $900 billion, Democrats have quietly shunted $247 billion in spending for Medicare physician payments into a separate bill. And no effort is being made to pay for it.

Just as egregious, though less expensive, is the Obama administration’s $14 billion plan to send a $250 “stimulus” check to 57 million American Social Security recipients in lieu of an annual cost-of-living increase.

See, a 5.8 percent COLA increase was paid last January to compensate for a 5.8 percent jump in consumer inflation driven by surging oil prices in 2008. Then oil prices and inflation collapsed.

“In effect, a COLA was paid on inflation that no longer existed,” notes Andrew Biggs of the American Enterprise Institute.

So even though none of this makes seniors essentially any worse off, Uncle Sucker is still going to cut them a check.

Two examples — one ridiculously expensive, one just ridiculous. But both reveal a nation completely unwilling to deal with current trillion-dollar deficits or long-term shortfalls many multiples of that number.

What confidence should dollar investors have that America will really cut entitlement spending? Very little. Instead, we are more likely to see huge tax increases that could cripple productivity, or further dollar neglect, or a central bank that turns dovish on inflation. Or perhaps all three.

If Washington doesn’t care to support the dollar, why should investors?


how can i contact banana republic company

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Healthcare math doesn’t work

Oct 20, 2009 13:36 UTC

Ed Yardeni runs the numbers:

Nominal GDP rose at a compounded rate of 4.2% from 1999-2009. It isn’t likely to grow any faster over the next 10-20 years. However, extrapolating the same growth rate of per capita retirement spending (5.1%) and adding the higher projected growth of the senior population (3.0%) suggests that social welfare outlays might grow by 8%. That’s significantly higher than the likely growth of nominal GDP (say 5%). Since the tax base can’t grow faster than nominal GDP on a sustainable basis, something has to give on the per capita spending side.

I’m not sure how we are going to pay for the welfare needs of all the Baby Boom seniors. The only logical solution is to continue to extend the retirement age for beneficiaries. Bismarck invented social security and picked 65 as the retirement age figuring that few Prussians would live that long. Retirement is a rather modern concept. In the not too distant past, people worked until they couldn’t, and then passed away soon after. Now we are living into our 70s, 80s, and even 90s.

Closing the budget gap

Oct 19, 2009 18:36 UTC

TaxVox tells us why the budget deficit is much worse that what the government is projecting:

Total federal revenue in 2009 amounted to just 14.9 percent of GDP, the smallest fraction since 1950 and far below the 26 percent of GDP spent by the federal government. That gap will narrow in coming years but CBO projects that it will average more than 4 percent of GDP over the next decade, and that’s only if the 2001-2006 tax cuts expire in 2011 as scheduled. Extending those cuts, even only for President Obama’s broad middle class, will mean deficits as far as the eye can see.

Me: Actually, you are looking at a gap more like 6 to 8 percentage points, long term. That is just unsustainable for any extended length of time.