James Pethokoukis

Politics and policy from inside Washington

Even Obama’s debt panel doesn’t buy Obamacare

Dec 6, 2010 03:43 UTC

President Barack Obama’s debt reduction commission defined tough fiscal choices for Washington, though its members weren’t unanimous enough to force the ideas on lawmakers. But even if they had, the panel pulled punches on healthcare cuts. Reducing that burden may be central to the next presidential election.

The 18-member panel needed 14 votes in support of its recommendations to trigger concrete action in Congress. Few if any members ever thought it was possible to clear such a high bar. Still, half of the 12 commission members drawn from Congress backed the final plan, with the recommendations getting the support of 11 members altogether.

That was a pleasantly surprising result for deficit hawks because any decent political consultant would tell clients to flee most of the ideas in the blueprint. It would, for instance, sharply limit the tax deductibility of mortgage interest. The plan would also cut Social Security benefits for higher-income retirees and accelerate the rise in the eligibility age. Three conservative Republicans on the panel even supported a package that included higher taxes.

Many elements of the commission plan may resurface over the next two years. House Republican leaders hint they will include the majority of the panel’s suggestions in their official budget plan next spring. There could be compromises over Social Security and corporate tax reform.

Yet the biggest stumbling block remains healthcare, which accounts for three-quarters of the U.S. government’s long-term budget woes. A presentation from Medicare’s chief actuary persuaded many panel members that Obama’s recently-passed reform law does less than estimated to reduce future government outlays. Despite this and the legacy of successive administrations’ overgenerous commitments on health spending, the panel danced around the issue in its recommendations.

Democrats in Congress have little desire to revisit the issue anytime soon. Republicans, on the other hand, want to make it a central issue of the 2012 White House campaign so that a positive electoral outcome, if they achieve one, would be a mandate for their plan — whatever it turns out to be. Though Obama’s commission provides useful direction, the endgame for healthcare spending could be more significant for America’s fiscal future.

Now it’s Tom Coburn vs. Grover Norquist

Dec 2, 2010 20:06 UTC

It is getting interesting. On Twitter, Ryan Ellis (@taxplayer) of Grover Norquist’s Americans for Tax Reform had this to say about Judd Gregg, Tom Coburn and Mike Crapo supporting the Obama debt panel recommendations: “by agreeing to the simpson-bowles tax hikes, pledge breakers coburn, crapo, and gregg have admitted they lied about taxes to get elected.”

John Hart from Tom Coburn’s office emailed me this fiery response:

We don’t want to argue with someone calls himself a “taxplaya” but Ryan might want to cool it or tell his boss to come over and tell Dr. Coburn in person that he is a liar and tax-hiker.  Dr. Coburn was asked about the pledge this morning.  He said that if he was a pledge breaker then so was Reagan.   This plan actually brings tax rates to their lowest level since 1916.

Paul Ryan vs. Tom Coburn over Obama’s debt commission

Dec 2, 2010 18:47 UTC

Rep. Paul Ryan says he will vote “no” on the recommendations of the Obama debt commission: “Obviously, I’m not going to vote for it. … Not only didn’t it address the elephant in the room, healthcare, it made it fatter.”

But Sen. Tom Coburn, along with Sen. Mike Crapo, will vote “yes.” Coburn: “We are at a day of reckoning. This is a starting point, that’s all this is. You pass this package, then you do more.”

Here’s how I see it: Both men are genuinely frightened about America’s exploding debt problem. Of that I have no doubt. Both are also in favor of a dramatically smaller Federal government. But for Ryan, healthcare — maybe even more than the tax increases — is a poison pill. Coburn, I think, believes the panel’s report moves the ball forward overall and wants to keep the debate open. In response, my friends over at Americans for Tax Reform are already unloading on Coburn, Crapo and Judd Gregg since the plan does contain a net tax increase. On his Twitter account, ATR’s Ryan Ellis wrote: “by agreeing to the simpson-bowles tax hikes, pledge breakers coburn, crapo, and gregg have admitted they lied about taxes to get elected.”

But tax rates can be raised and lowered. Structural changes to entitlements and the tax system are longer lasting and are worth fighting for.  Now I don’t know whether Coburn and Crapo would actually vote in the Senate for the package as is. But if the Ryan-Rivlin plan were also part of the deal? That would be tempting, even with the tax increases. UPDATE: It seems Coburn would vote “as is” though he says he will work hard for changes.

Replacing Larry Summers …

Nov 22, 2010 16:07 UTC

From the White House’s perspective, the ideal replacement for Larry Summers as chief economic brain would be a female chief executive who could reach out to Republicans and the business community without irking liberals. Buzz about the candidacy of Roger Altman, the founder of investment bank Evercore, shows how difficult it may be for President Barack Obama to land that dream candidate.

The only thing more challenging than filling that job spec might be finding another Summers. He’s a brilliant academic and former Treasury Secretary who handled emerging market crises in the 1990s. As director of Obama’s National Economic Council, he’s been less a dispassionate coordinator of policymaking than the president’s maximum economist during a time of extreme financial tumult.

But Obama doesn’t necessarily need a Summers sequel at the halfway point of his presidency. With Republicans flooding Capitol Hill, the final two years of his term likely won’t see many big policy initiatives. Frankly, Obama needs a political symbol that shows Corporate America’s leaders he views them as more than just background staging for photo ops.

Ideally, he’d find that figure outside of Wall Street, which many in his liberal base blame for the economic crisis. Also, given that the Treasury Secretary and chair of the Council of Economic Advisers are now both men, adding a high-profile female to the economic team might be preferable. And just in case the Republicans want to play ball, a reputation as a deficit hawk would be a great kicker.

Two potential choices, and former CEOs, Anne Mulcahy of Xerox and Ann Fudge of Young & Rubicam, either passed or were dropped from the initial shortlist. Fudge seemed a natural – not least because her work on Obama’s debt panel has impressed Republicans. Remaining short-listers have also major drawbacks. Former NEC chair Laura Tyson has no business experience other than serving on the board of Morgan Stanley. Jared Bernstein, the chief economic adviser to Vice President Biden, comes from a union-backed think tank. Moreover, many CEOs privately profess concern about the unglamorous nature of the staff job.

So, by comparison, Altman makes some sense. Although from Wall Street, he’s built a successful mid-sized firm, met a payroll, successfully created wealth and served in President Bill Clinton’s Treasury. He’s also expressed concern about Obama’s relationship with business, most recently in a Wall Street Journal op-ed that read like a NEC job application. Altman may offer one other plus: He’d probably take the gig.

Paul Ryan’s pro-market healthcare reform

Nov 19, 2010 16:41 UTC

Rep. Paul Ryan, along with fellow Obama deficit panel member Alice Rivlin, has put together a plan to cut the growth of government healthcare spending. This is the heart of it:

A new Medicare program should be created for future retirees (those who first become eligible by turning 65 on or after January 1, 2021). The new Medicare program would provide a payment – based on what the average annual per-capita expenditure is in 2021 – to purchase health insurance. The payment would grow annually at a rate of GDP +1 percent.

The annual payment would be adjusted by income, with high-income seniors receiving a reduced payment and low-income seniors receiving extra support. The payment would also be geographically rated and adjusted for health risk. In addition to a higher Medicare payment amount, low-income “dual-eligibles” would also receive a fully funded account from which to pay out-of-pocket expenses.

In order to receive the Medicare payment, a beneficiary would select a plan from a newly created Medicare Exchange. Health plans which choose to participate in the Medicare Exchange must agree to offer insurance to all Medicare beneficiaries, thereby preventing cherry picking and ensuring that Medicare’s sickest and highest cost beneficiaries receive coverage.

For those now enrolled in Medicare, or becoming eligible before 2021, the traditional fee-for-service Medicare program would continue. Premiums for the current program would be held harmless from the effects of the creation of the new Medicare program.

This plan is based on the Medicare fix outlined in Ryan’s fantastic Roadmap for America (as translated by the Congressional Budget Office).

Starting in 2021, new enrollees would no longer receive coverage through the current program but, instead, would be given a voucher with which to purchase private health insurance. In 2021, when enrollees would first receive the voucher, the average voucher for 65-year-olds would be worth $5,900 (in 2010 dollars). The voucher would be adjusted to reflect the age and health status of enrollees. If all Medicare beneficiaries (including older people with higher average expenditures) were to receive a voucher in 2021, the average voucher amount would be $11,000 (in 2010 dollars). …  The amount of the Medicare voucher … would be indexed to grow at a rate halfway between the general inflation rate, as measured by the consumer price index for all urban consumers (CPI-U), and the rate of price inflation for medical care, as measured by the consumer price index for medical care (CPI-M). Using that blended rate, CBO estimates that those amounts would increase at an average annual rate of 2.7 percent for the next 75 years, in comparison with the average annual growth rate of nearly 5 percent that CBO expects for per capita national spending for health care under current law.

So one big difference between the Ryan Roadmap and Ryan-Rivlin is that the growth rate for the Medicare payment/voucher is higher under Ryan-Rivlin. Also, the  Ryan Roadmap is more aggressive on raising the age for Medicare eligibility. Compare the two. First, the Roadmap:

The age of eligibility for Medicare would increase incrementally from 65 (for people born before 1956), as it is under current law, to 69 years and 6 months for people born in 2022 and later.

Now Ryan-Rivlin:

In 2021, begin raising the Medicare eligibility age to correspond to OASDI normal retirement age (2 months per year beginning in 2021 and stopping at age 67).

Now both the Ryan Roadmap and Ryan-Rivlin are far preferable to Obamacare and the modified-Obamacare plan outlined in Bowles-Simpson which relies on government technocrats to lower costs rather than market forces. Here is how Ryan-Rivlin compares to the status quo:


A huge improvement, but the Ryan Roadmap would lower health spending to roughly 5 percent of GDP in 2050 — half of Ryan-Rivlin –which is why the Roadamap’s long-term budget chart looks like this:



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Balance the U.S. budget? I did it in under a minute

Nov 15, 2010 17:20 UTC

So I took a crack at the budget simulator cooked up over at the NYTimes Web site. It starts out with a projected 2015 deficit of $418 billion and a projected 2030 deficit of $1.355 trillion. My goal was to do it through 100 percent spending cuts.


Here is what I did:

1.  Eliminated earmarks  ($14 billion)

2. Cut the pay of civilian workers by 5 percent ($17 billion)

3. Reduced the federal workforce by 10 percent ($15 billion)

4. Reduced nuclear arsenal and space spending  ($38 billion)

5. Reduce military to pre-Iraq War size and further reduce troops in Asia and Europe ($49 billion)

6. Reduce Navy and Air Force fleets ($24 billion)

7.  Cancel or delay some weapons programs ($18 billion)

8. Reduce the number of troops in Iraq and Afghanistan to 60,000 by 2015 ($149 billion)

9. Enact medical malpractice reform ($13 billion)

10. Increase the Medicare eligibility age to 68  ($56 billion)

11. Reduce the tax break for employer-provided health insurance ($157 billion)

12. Cap Medicare growth starting in 2013 ($562 billion)

13. Raise the Social Security retirement age to 70 ($247 billion)

14. Reduce Social Security benefits for those with high incomes ($54 billion)

15. Tighten eligibility for disability ($17 billion)

16. Use an alternate measure for inflation ($82 billion)

In the end, my budget would have a minuscule 2015 deficit of $80 billion and a 2030 surplus of $187 billion. Now I would have preferred an option for deeper domestic spending cuts. The Heritage Foundation has ideas for over $300 billion worth. And I think eliminating hundreds of billions of tax breaks and lowering tax rates across the board would boost growth and revenue. The simulator only lets me use the Bowles-Simpson plan which would lower rates by cutting tax expenditures —  but uses some of the dough for deficit reduction. Plus, the simulator assumes no impact on growth from higher taxes or lower taxes. Also, there is no doubt the Medicare cuts would be rightly labeled as “rationing.”  But Americans really have only two choices, I think: severe government healthcare rationing (since right now healthcare costs are rising much faster than GDP growth) or voucherization.

The simulator also shows how tough it is to balance the budget through tax increases alone. If you went for every tax increased offered, you would still have a slight deficit in 2030. And again, that assumes zero impact on economic growth from a) letting all the Bush tax cuts expire; b) eliminating tax breaks; c) adding a national sales tax, carbon tax and bank tax. That is a fantasy. Letting all the Bush tax cuts expire, for instance, would probably knock 2-3 percentage points from GDP next year.


I think there is a much better way to balance the budget.

1. Outsource all Goverment jobs to China
2. Creat Chinese outsourced Medical Centers at Walmart for all medicare and even consider using Chinese hearbal medicnes for Medicaid.
3. Sell Las Vegas to china in exchange for all the debt we owe them and all previous casino owners can divide up JP Morgan Chase.

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Bernanke probably agrees with the anti-QE2 letter

Nov 15, 2010 15:32 UTC

A bunch of right-of-center investors, economists and journalists (under the banner of the great e21 group) have signed an open letter to Ben Bernanke:

We believe the Federal Reserve’s large-scale asset purchase plan (so-called “quantitative easing”) should be reconsidered and discontinued. We do not believe such a plan is necessary or advisable under current circumstances. The planned asset purchases risk currency debasement and inflation, and we do not think they will achieve the Fed’s objective of promoting employment.

We subscribe to your statement in The Washington Post on November 4 that “the Federal Reserve cannot solve all the economy’s problems on its own.” In this case, we think improvements in tax, spending and regulatory policies must take precedence in a national growth program, not further monetary stimulus.

We disagree with the view that inflation needs to be pushed higher, and worry that another round of asset purchases, with interest rates still near zero over a year into the recovery, will distort financial markets and greatly complicate future Fed efforts to normalize monetary policy.

The Fed’s purchase program has also met broad opposition from other central banks and we share their concerns that quantitative easing by the Fed is neither warranted nor helpful in addressing either U.S. or global economic problems.

A few thoughts here:

1. I have no doubt that Bernanke would prefer not to be doing QE2, either. I think his preference, like those who signed the letter, would be for more fiscal action accompanied by a long-range deficit reduction plan. But, seeing that is not likely to happen, he is using what tools he has.

2. In most countries where the central banks are politicized, the pressure is to running the printing presses. In America, it’s just the opposite — at least from conservatives.

3. Is there any chance that Bernanke gets a third-term? Almost certainly not if a Republican wins the presidency in 2012.


The American gov’t and the Obama administration above all need to provide CERTAINTY for American businesspeople. Even if its bad certainty, there must be certainty so businesspeople can start planning and investing again. No one knows how the healthcare bill will ultimately impact business or even if it will ever get implemented. No one knows if or when the gov’t will stop its regulatory binge. When will they finally make a decision on taxes? Other things are beyond the President’s control, like a bottoming of the housing market, but he can still send some signals. Obama seems too fixated on his long-term social(ist) agenda to realize that the country needs some fundamental leadership on a day-to-day basis. Pres. Bush would have by now established a few (decidedly simple) guiding principles, giving the American people something to hold onto, i.e. CERTAINTY. The economic equivalent of “you’re with us or your against us.”

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Peter Orszag: Sorry, America, you are way undertaxed

Nov 13, 2010 16:50 UTC

Former Obama budget chief Peter Orszag says the Bowles-Simpson deficit reduction plan — which would raise the U.S. tax burden to its highest level in history as a percentage of GPP — doesn’t go far enough:

Once you move beyond Social Security reform, the other components of the proposals are well-intentioned in general but, as could be expected when many proposals are put forward, some of them are problematic in detail. The revenue cap is one of those; I wouldn’t favor it personally, although getting up to 21 percent of GDP in revenue would be a lot better than the current path we are on. We’re at about 15 percent now, but that will increase as the economy recovers.

This is left-of-center dogma: Since deep spending cuts are — we all know, right? —  politically impossible, taxes need to go up dramatically.  Yet, to cite one small piece of counter evidence,  a Washington state plan to raise taxes on the top 1 percent failed by two-to-one last week. Why do liberals assume raising taxes is easier than cutting spending? Maybe because they know Democrats will not cut social insurance spending. Even Orszag is amazed that they criticized the Social Security portion of Bowles-Simpson:

And on Social Security in particular, the reaction from the left seems off to me. If you look at the specific Social Security proposals in the co-chairs’ set of recommendations, they include a change that makes the benefits formula more progressive; they include a change that makes the payroll tax more progressive; they include changes to make the index used to measure cost of living increases more accurate. Most importantly, the proposals don’t include private accounts as part of social security, which, four of five years ago, had been the single most important thing that progressives were fighting against. The proposal now offers an opportunity to lock that in, because in ten, or fifteen, or twenty years, assuming there’s not a reform now, those issues may well be back on the table. Private accounts as part of Social Security are definitively dead for now, so I don’t fully understand why the left is not eager to lock in that victory.

Orzsag and the Brooking Institution and the Center for American Progress and Matt Miller and David Leonhardt and Ezra Klein and the Democratic Party seem to have missed the Tea Party revolt against Big Government over the past year. It’s like they had two 2009s and are moving straight on to 2011.


Funny country, the USA!

Cut my taxes–they are too high!
Stop spending more–we already have too much government spending!

If you look closely at the two statements, a smart person would realize quickly that the two will produce the debt burden–not tax burden–that exists.

God forbid, many social-democratic countries have high taxes and high spending. This has led to less poverty, income inequality, lack of saving(remember, if you live at or below poverty lines saving money is not possible).

The US has some stark choices to make:
1) increase safety nets and increase taxes
2) remove the black hole of HMO’s and military contractors
3) rebuild their manufacturing industry

Lets remember that the Big three-M, Ford, Chrysler–created manufacturing in Canada because of universal health care, which was helping–not hindering–business.

There are many fiscal conservatives who are congenitally incapable and blind to how economic forces work…unless their bluster is designed to allow de-industrialization,off-shore manufacturing, and other unpatriotic shenanigans to pad the profit line of those who benefit.

In closing, the US has 12-24 months to begin righting the ship before it gets foreclosed by other economic power houses

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How Felix Salmon ruined my lovely Friday

Nov 12, 2010 22:38 UTC

There I was, enjoying a lovely Washington afternoon — and then I read this from colleague Felix Salmon on the draft report from the Obama deficit panel:

One of the best parts of the chairmen’s plan is the way in which it raises the tax rate on capital gains and dividends so that they’re simply treated as ordinary income. The very wealthy, who often live off capital rather than labor, would definitely be hit hard by that move.

1) Of course, such tax reform would actually raise investment taxes above those on labor income because Obamacare slaps an additional 3.9 percentage point levy on investment income. Does the draft report repeal that?  I don’t think so, but if it does I stand corrected.

2) Also, does an annual income of $250,000 qualify as household  as “very wealthy? Really? Actually, the Bowles-Simpson reforms would raise capital gains taxes on all brackets.

3) In any event, we need a code than assesses less of a penalty on investment and savings,  not more.  Instead of scrapping the whole tax code in favor of a consumption tax — which many economists would recommend — why not just eliminate investment taxes? Since all you can do with income is save or spend it, you would get a de facto consumption tax.


Getting rid of the tax deduction for interest on mortgages and the tax deductions for kids too. But tax cuts for corporations. Love how this plan is being put together by rich old guys who won’t be effected by any of these changes. Brilliant.

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Is Jared Bernstein the next director of the NEC?

Nov 11, 2010 16:48 UTC

Who will replace Larry Summers as the director of the National Economic Council? One well-placed source of mine claims it is likely to be  Jared Bernstein, currently VP Joe Biden’s economic guru.

Jared is wonderful guy whom I frequently debated on CNBC when he worked at the Economic Policy Institute. But he is definitely a pro-union, pro-tax liberal whom business would frown upon.  I would guess he, like Christina Romer, also would have preferred to have seen a bigger stimulus package in 2009.

But in the traditional NEC role as a coordinator rather than a creator of economic policy — Summers is more the latter — Bernstein would probably do a fantastic job. He’s calm, personable and —  like Austan Goolsbee —  a wonderful explainer. But if it is not Bernstein, keep an eye out for these folks. And here are the current betting market odds (via Paddy Power):