James Pethokoukis

Politics and policy from inside Washington

Why Obama, Dems are trying to rush through healthcare reform

Jul 15, 2009 15:13 UTC

Falling poll numbers and rising joblessness = time is not on the Dems side for passing healthcare reform — as liberal blogger Matthew Yglesias just realized:

Obama remains quite popular, but his popularity is shrinking and as best one can tell the culprit is the bad economy. I think this underscores the fact that if Democratic legislative leaders are serious about reforming health care they’ll want to get as much as possible of the work done before leaving on their August recess. The unemployment rate is almost certain to be higher in four or five months than it is today and that’s very likely to weaken Obama’s ability to be an effective advocate.  … If there’s an “Obama plan” on the table in August, a lot of Republican members will be hearing mostly good things about it from their constituents. If it takes until October, they may hear different things.

COMMENT

rising joblessness = increase awareness of a safety net.

I have lost my job and I’m wondering if I can find a job with health care benefits to replace it. When my employer was paying my $800.00 a month insurance premium it was easy to be in the “keep government off our backs crowd”. But now as an early stage boomer, I’m worried sick that I a might go bankrupt over a unexpected major medical problem or if I will even find a job with benefits. I’m starting to believe that the US will become more like Japan, where most new hires are “temporary” employees which offer no benefits- but at least in Japan everyone if covered for medical.

Posted by DR | Report as abusive

9 reasons Pelosi’s healthcare surtax is disastrous

Jul 15, 2009 10:17 UTC

So what explains the crazy, cockeyed optimism of House Democrats? Maybe they still believe Team Obama’s rosy-scenario forecast that shows the stimulus package a) keeping unemployment under 8 percent this year and b) launching an economic boom next year and beyond. For some reason, though, they think the battered U.S. economy is so strong that politicians can pile tax upon tax on it with no fear of further harm. Less than three weeks after passing a costly cap-and-trade carbon emission plan, Pelosi & Co. have giddily unveiled a $1.2 trillion healthcare plan partially funded by a $544 billion surtax on the work and investment income of wealthier Americans, including small business owners.

[See why Obama's economic gamble is failing.]

The ten-year proposal calls for a 1 percent surtax on adjusted gross income — including capital gains — between $350,000 and $500,000; a 1.5% surtax on income between $500,000 and $1 million; and a 5.4% surtax on income exceeding $1 million. (Interestingly, the House fact sheet on the surtax forgets to mention the highest tax rate. Hey, they were in a rush.) How bad an idea is this? Let me count the ways:

It’s not the first Obama tax hike. This tax would be in addition to the $1 trillion in new taxes that Obama called for in his budget released earlier this year. (And then there’s cap and trade, remember.) And if healthcare reform costs more than expected — what are the odds of that, you think? — the surtax would go up.

[See 5 economic stimulus plans better than the one we've got.]

It pushes income tax rates above a key threshhold. Once you take into account state income taxes, the top tax rate would sneak above 50 percent. Research by former White House economist Lawrence Lindsey has found that rates above 40 percent really start to hit economic growth especially hard.

It’s risky in a weak economy. Democrats love the “consensus view” when it comes to climate change, so how about the economy? The consensus view is for unemployment to hit double digits this year and stay high throughout 2010 and beyond as the economy staggers to its feet. Even Treasury Secretary Tim Geithner said “it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.” In a “long recession” environment, do we really want a policy that, according to research that current White House economic adviser Christina Romer conducted at Stanford University, is “highly contractionary.”

It actually makes America’s healthcare problem worse. Entitlements, including Medicare, will eventually bankrupt the economy unless action is taken. Agreed. But lowering the potential U.S. growth rate will only make those problems worse by generating lower tax revenue and making the overall pie smaller than it would be otherwise. Yet many economists think government interventions in finance, housing, autos, energy and now healthcare will do just that. And adding layers of additional new taxes helps how?

It makes the tax code more lopsided and inefficient. As it is, the top 1 percent of Americans in terms of income pay 40 percent of taxes. Not only would this plan exacerbate this imbalance, it adds further complexity to the tax code. Most tax reformers favor a simpler system with fewer brackets and deductions matched by a lower rate. Indeed, Howard Gleckman of the Tax Policy Center points out the following:

Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market.

It hurts U.S. competitiveness. America already has the second highest corporate tax rate in the world. Under the House plan, the top U.S. income tax rate would be higher than the OECD (advanced economies) average of 42 percent. France and Germany, by contrast, are looking to keep rates stable or lower them. Pro-growth China doesn’t even tax investment income.

It ignores the lessons of Clinton. Democrats love to point out how the Clinton tax increases didn’t tank the economy back in the 1990s. Oh, you mean the economy that was expanding for more than two years before he signed his tax increases? The economy is far weaker today and may be anemic for some time given the history of economies that suffered a banking crisis.

It ignores the lessons of 1937. The slowly recovering 1930s economy weakened again in 1937 and 1938. Again, Christina Romer tells all:

In this fragile environment, fiscal policy turned sharply contractionary. The one-time veterans’ bonus ended, and Social Security taxes were collected for the first time in 1937. … GDP rose by only 5% in 1937 and then fell by 3% in 1938, and unemployment rose dramatically, reaching 19% in 1938. The 1937 episode is an important cautionary tale for modern policymakers. At some point, recovery will take on a life of its own, as rising output generates rising investment and inventory demand through accelerator effects, and confidence and optimism replace caution and pessimism. But, we will need to monitor the economy closely to be sure that the private sector is back in the saddle before government takes away its crucial lifeline.

Except in this the case, Uncle Sam is not taking away a lifeline but tightening the noose.

It pays for a wrong-headed healthcare reform plan. Health exchanges, a public option, subsidies, taxes … well, we could go on and on. Or we could try to create a simpler consumer-driven market. Harvard Business economist Regina Herzlinger recommends reforming the tax system by making the money spent by employers on health insurance available as cash, tax-free, to employees. “Insurers would then compete for customers with policies that offer better value for the money,” she wrote in an analysis for consultancy McKinsey. Not even on the Obamacrat radar screen, though.

All in all, it’s another sign from the Obama administration and the Obamacrats in Congress that their top priority is redistributing existing wealth — at least what’s left of it — rather than creating new wealth. That, I guess, explains those ear-to-ear smiles on Capitol Hill.

COMMENT

One difference between publicly and privately run enterprises is that public ones are publicly accountable. They not only have to account for costs, but also account for the way they’re serving their function in the community. It’s not always as simple as calculating shareholder equity. That’s what is at the heart of the injustices in the current insurance system. It’s also the reason people support fire departments as a public enterprise. Even the volunteer ones are supported by the community, in order that they be accountable to the people they serve. It would seem the enterprises protecting the health of people might benefit from the same oversight we give enterprises that protect the buildings they live in.

Posted by jt | Report as abusive

The healthcare surtax and bull semen partnerships

Jul 14, 2009 14:06 UTC

Howard Gleckman of the Tax Policy Center throws cold water on Obamacrat attempts to raise income taxes to pay for healthcare reform:

Many of the uber-rich are unlikely to pay much more in taxes than they do now, despite the rate increase. Since we’d be returning to pre-1986 rates, we shouldn’t be surprised when the very wealthy reprise their pre-1986 sheltering behavior. The hoary financial alchemy of turning ordinary income into capital gains, morphing individuals into corporations, and deferring compensation will return. Remember, the targets of these tax hikes are the people who can most easily manipulate their income. The bad old days of bull semen partnerships may not return, but I suspect the financial Merlins are already cooking up new shelters for what promises to be a booming new market. … Raising the top rates to pay for health reform would make President Obama’s fiscal math approximately impossible. We’d have a top rate of nearly 45 percent, a promise never to raise taxes for those making less than $250,000 annually, little or no government revenue from a cap-and-trade system that gives away rather than auctions pollution credits, and trillion dollar deficits as far as the eye can see.

Geithner on economy: Two steps forward and one step back

Jul 14, 2009 13:58 UTC

America’s Treasury Secretary speaks in Saudi Arabia: “Given the extent of damage to financial systems, the loss of wealth, the necessary adjustments to a long period of excessive borrowing around the world, it seems realistic to expect a gradual recovery, with more than the usual ups and downs and temporary reversals.”

My spin: This sounds closer to a W-shaped recovery than a V-shaped recovery to me. Ugh.

The era of big government is not over (chart)

Jul 14, 2009 13:31 UTC

I think this chart show where the train is heading (via the econ team at Wachovia):

debt-july-14

The bull case for the economy and Democrats

Jul 13, 2009 16:33 UTC
Brian Wesbury and Bob Stein of First Trust Advisers give the bull case for the economy. If these smart guys are right, 2010 might well be the third consecutive wipeout for Republicans. Some excerpts (bold is mine):
To be more precise, we are forecasting that real GDP grows at a 3.5% rate in the second half of 2009 and 4.5% next year. But, in all truth, we are much more confident about the overall 4%+ figure for the full 18-month period then about the exact growth rate for any particular quarter. …
First, we project business inventories are going to end 2010 about $25 billionlower than they are right now. (But with businesses no longer reducing stockpiles as forcefully as they have been in recent months, inventories will contribute 1.3 points to the real GDP growth rate.)
Second, we expect continued declines in the trade deficit, although not as quickly as in the last two years. The trade deficit was 5.4% of GDP in early 2007 and is now only about 2.2% of GDP. If the trade gap declines to 1.1% by the end of 2010, net exports can contribute 0.9 points to the real GDP growth rate.
Third, we expect home building to bottom later this year and rise in 2010, contributing 0.4 points to the real GDP growth rate. Housing starts are now only one-third of the long-term trend, justifiably so due to excess home inventories. But excess inventories have already dropped from about 4.5 million a few years ago to 2 million today. We think, realistically, it will take another three or four years to fully eliminate the excess.
Fourth, for government, we assume government spending contributes its long-term average of 0.4 points to real GDP growth, despite massive stimulus spending.
Fifth, despite our gut instinct that business investment in plant and equipment is going to turn around much faster, we assume an annualized rate of decline of 3.2%, which subtracts 0.3 points from the real GDP growth rate.
And last, we expect real consumer spending to rise at a relatively modest 2.1% annual pace, adding 1.5 points to the real GDP growth rate. To put this in perspective, we are forecasting that real consumption will be up at only a 0.6% annual rate from the end of 2007 through the end of 2010, the slowest three-year period for real consumer spending since World War II, including the early 1980s, when the jobless rate went up to almost 11%. It also means consumer spending drops to the lowest share of GDP since 2001.

Larry Summers: US not doomed to low-growth future

Jul 11, 2009 12:34 UTC

This interesting bit from an FT chat with Larry Summers,  director of the National Economic Council

This new American economy, Summers hopes, will be “more export-oriented” and “less consumption-oriented”; “more environmentally oriented” and “less energy-production-oriented”; “more bio- and software- and civil-engineering-oriented and less financial-engineering-oriented”; and, finally, “more middle-class-oriented” and “less oriented to income growth that is disproportionate towards a very small share of the population”. Unlike many other economists, Summers does not believe that lower growth is the inevitable price of this economic paradigm shift.

COMMENT

Does Summers see the deficits and entitlement bomb coming our way?

Posted by Austrian School | Report as abusive

Here comes the healthcare surtax!

Jul 10, 2009 22:41 UTC

From The Hill:

The House will propose raising taxes on people earning more than $350,000 a year to pay $540 billion for healthcare reform, Ways and Means Committee Chairman Charlie Rangel (D-N.Y.) said Friday. … Rangel said Democrats will seek to enact one large tax increase targeting wealthier workers to generate the revenue they need to finance their $1 trillion-plus healthcare reform bill. “We have decided that instead of putting pieces of different revenue raisers together, that the best that we can do [is] we would have graduated surtaxes starting at [$]350],000],” Rangel said. The tax hikes would begin in 2011 and raise $540 billion over 10 years, he said after a meeting with Democratic committee members.

My spin: The Californication of US economic policy continues as a smaller and smaller group of taxpayers shoulder more of the tax burden. Also, one more reason why American might suffer a Lost Decade of subpar economic growth.

COMMENT

Is anyone paying attention here!?! Will we have the America we all know when this guy is done wrecking EVERYTHING and driving us into the ground? Me thinks the odds are against it. Sad, just sad.

Thanks for nothing Obama voters!

Btw James, great blog, how Reuters (read: yet another leftist media outlet) allows you to write this stuff is beyond me. By all means, keep it up as long as you can. Please.

Posted by Eric, Raleigh | Report as abusive

Does the U.S. need a dose of Viagra economics?

Jul 10, 2009 17:53 UTC

The Obama presidential campaign was one of the all-time great branding efforts, from message to packaging to platform. So how disappointing it must be for the Obama administration that its signature achievement so far, the $787 billion American Recovery and Reinvestment Act, has been utterly misunderstood by the American public.  Listen to what megabillionaire Warren Buffett, an unofficial Obama economic adviser, had to say earlier this week: “Our first stimulus bill, it seemed to me, was sort of like taking a half a tablet of Viagra and then having also a bunch of candy mixed in … It doesn’t have really quite the wallop that might have been anticipated there.”

And apparently the Oracle of Omaha isn’t the only person disappointed by the lack of a priapic jolt. A recent Rasmussen poll found that 45 percent of Americans think so little of the results so far that they want the rest of the new government spending in the plan canceled, compared to 36 percent who disagree and 20 percent who aren’t sure.  Not surprisingly, 60 percent oppose a second stimulus plan, against 27 percent in favor. Been there, done that, didn’t get much out of it.

But the Obama plan was never meant to be Viagra. It was designed so that three-fourths of the spending would occur after 2009.  Now the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan. And while government spending on infrastructure projects may provide more stimulus per dollar spent — at least this is what Team Obama believes — it is slower to come on line.  Even the name of the plan was designed to send a “be patient” message. It could have been called the Get America Moving Act or the American Job Creation Act, but those titles would have been tremendously out of sync with what the ARRA was actually intended to do: boost the economy and jobs over the course of a long recession while also providing a downpayment on Obama’s healthcare, energy and education agenda. A two-for-the-price-of-one sort of deal.

And that political and economic calculus might have worked had the economy not fallen off a cliff. The unemployment rate is already higher than the administration’s worst-case scenario from last January and perhaps headed higher than the worst-case scenario found in its stress test for the banks.

And rising joblessness has joined with the housing crisis to create a vicious economic circle. Given all that, a pure dose of Viagra economics for the economy doesn’t sound like such a bad idea right about now, perhaps in the form a massive payroll tax cut.  “The payroll tax cut of US$400 billion that we advocated last fall, if enacted in February, would likely have pushed us out of recession by now,” argue Morgan Stanley economists Richard Berner and David Greenlaw in a new research note. Instead, American got a program that was “heavily back-loaded and full of spending that is unlikely to be stimulative.”

Or perhaps with business and investor confidence so depressed, we need some Prozac economics, via a cut in corporate and capital gains taxes.  At this point, the White House seems inclined to do none of the above, arguing for a wait-and-see approach, given than only 10 percent of the “stimulus” money has been pushed out the door. Maybe Team Obama fears a nasty bond market reaction at the prospect of even more government spending? Perhaps, though deflation rather than inflation seems in vogue among Wall Street worries.

But if a bond vigilante revolt is a concern — and it probably should be a consideration — why not combine a second stimulus with a plan to fix Social Security by moving back the retirement age and indexing benefits to wages rather than inflation?  Such a move would turn the program’s long-term deficit into a surplus and show the United States is serious about fiscal reform.

In any event, cutting taxes seems to be nowhere on the congressional agenda. For instance, higher taxes on incomes and capital gains are being floated as one way to pay for healthcare reform. But as the jobless rate continues to rise — Buffett thinks 11 percent isn’t out of the question — both the White House and Congress might finally start reaching for the pills.

COMMENT

“the fastest way to inject money into a struggling economy is through tax cuts to individuals. But those made up just 70 percent of the Obama plan”

7 %?

Posted by Ash | Report as abusive

The all-powerful consumer? Feh. Boost business …

Jul 10, 2009 17:42 UTC

My colleague, confidant and occasional kick-boxing sparring partner, the fantastic Felix Salmon is worried about what comes the Day after Tomorrow:

While previous recessions were part of economic cycles within a certain economy, what we’re going through right now is a painful disruption from that economy to something else. I fear that the flat or declining median wages, however, might well survive the transition — at least so long as unemployment continues to remain as high as it is now. Which is one reason not to worry overmuch about inflation: if consumer spending accounts for 70% of the economy, and consumers don’t have any money, it’s really hard for prices to rise very quickly.

Well maybe we should quit worrying about the banks and The Consumer and pay attention to a different sector of the economy (via another friend of mine and occasional kick-boxing sparring partner, Larry Kudlow):

So here’s a novel thought for all the geniuses down in Washington. Help businesses for a change. You can begin by stopping the taxing of overseas corporate profits. Do not hike the minimum wage. Back off cap-and-trade. Do not nationalize health care. Stop the anti-trust assault on phone companies, pharmas, Google, airlines, and multi-nationals.

And how about a six-to-twelve-month payroll-tax holiday? That would make it cheaper to hire new workers. What about a corporate tax cut? And immediate cash expensing for business-investment write-offs? In other words, cut the tax cost of hiring, investing, and doing business. Because it’s businesses that create the jobs and the incomes for families all throughout America.

And if you are still worried about the housing story or bank toxic assets, how about a capital-gains tax holiday?

Does anyone in Washington understand the way the world really works? It’s called incentives. That’s what this is all about. And we’re going to need many more of them if businesses, investors, and families are to start prospering once again.

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