Saturday, March 21, 2009

President Obama's health benefits tax plans

Vindicating McCain. WSJ Editorial
WSJ, Mar 21, 2009

The worst-kept secret on Capitol Hill is that Democrats have always planned to tax health benefits to pay for their "universal" health-care plans. Now White House aides are whispering that they're also open to the idea. Maybe they will all now apologize to John McCain for trashing his proposal to do the same thing in the Presidential campaign.

Democrats are desperately searching for the $1.2 trillion and more they'll need to subsidize middle-class health coverage. With deficits already at epic levels, more spending is politically a harder sell. So they're now circling the tax deduction that employers receive to offer insurance to their workers for the same reason that Willie Sutton robbed banks, because that's where the money is.

Most likely, Democrats will cap the exclusion by income or cost of the health plan, so that those with the most gold-plated benefits pay more for the privilege. The Congressional Budget Office estimates that a ceiling at the 75th percentile of current levels would generate $452 billion over 10 years.

But hold on. John McCain also wanted to reform this tax break, which goes only to business. Individuals don't get the same tax break if they buy insurance themselves. Mr. McCain proposed to gradually replace the workplace deduction with a refundable tax credit available to all Americans, regardless of where they acquired their coverage. Mr. Obama attacked him ruthlessly for it.

"And this is your plan, John," he said at one debate. "For the first time in history, you will be taxing people's health-care benefits." Mr. Obama added that the McCain proposal was "radical," "the biggest middle-class tax increase in history," "out of line with our basic values" and that "the choice you'll have is having your employer no longer provide you health care." Combined with heavy advertising and Mr. McCain's inability to defend his own ideas, these distortions were highly effective.

In a deeply cynical turnabout, the White House now says a tax on employer benefits is acceptable as long as someone else proposes it. We suppose anyone would be embarrassed to endorse a fundamental insight that he once claimed was vile and destructive.

The reality is that the employer-based tax deduction is the original sin of our health-care system. Particularly indefensible is the coverage gap it creates between those who receive it from their employers and those who pay (or can't afford to pay) for their own policies with after-tax dollars. A universal deduction or credit would restore tax parity -- and gradually stimulate the demand for new, less expensive insurance where consumers, not their bosses, are in charge.

This relic of the World War II era has also left us with a health-care financing "system" that only a central planner could love, with neither a functional price mechanism nor the capacity to recognize value. The employer-exclusive deduction has created what is essentially a giant money laundering operation, an endless cycle of third parties lacking any direct stake in controlling costs elsewhere -- when they're not profiting from the waste.

Capping the open-ended tax exclusion is a perfectly sensible idea, which would discipline the excess health insurance that contributes to rising health spending. The problem is that reducing the exclusion means withdrawing a benefit, which is easy to demagogue, as Mr. Obama showed in 2008. It is also unpopular among unions, which have often secured Cadillac health plans in labor contracts. But we suspect the unions will come around if they get the taxpayers to pay for health care instead.

The deeper problem is that Democrats don't want to create a new private market for individual health insurance. Their goal in reducing the employer tax deduction is to apply the revenue to finance a new "public option," a subsidized program modeled after Medicare and open to the middle class that would crowd out private insurers. Another idea is to provide the tax subsidy only to businesses that comply with a new federally mandated benefits package.

The almost certain long-run outcome of these efforts is the total nationalization of health care. Anyone who believed Mr. Obama when he said that under his plan "you can keep your health insurance, keep your choice of doctor, keep your plan" should think twice. Everything else he said during his campaign is obviously subject to change, as John McCain can attest.

Governor: Why South Carolina doesn't want 'stimulus'

Why South Carolina doesn't want 'stimulus'. By Mark Sanford
WSJ, Mar 21, 2009

Columbia, S.C.

America's states are laboratories of democracy. They are both affected by, and relevant to, the larger national debate. What we've found in our own corner of the country is that carrying a substantial debt load limits our options when it comes to running government.

A recent report by the American Legislative Exchange Council ranked us 47th worst in the nation for annual debt service as a percentage of tax revenue. Our state dedicates nearly 11% of its annual tax revenue to paying debt. On top of that, South Carolina has another $20 billion in unfunded, long-term political promises for pensions and other liabilities. The state budget has already been cut four times in recent months as the national economic downturn has impacted South Carolina and driven down tax revenue.

President Barack Obama recently signed a "stimulus" bill that will spend about $2 billion through "programmatic means" in South Carolina. In other words, the federal government will put this money directly into existing funding formulas and programs such as Medicaid. But there is an additional $700 million that I as governor have influence over, and it is the disposition of this money that has drawn the national spotlight to South Carolina.

Here's the background: Before the stimulus bill passed, I asked for states not to be bailed out. After it was signed into law, I said that a state bailout would create more problems than it solved, and that we shouldn't spend money we don't have. That debate was lost, so I looked for a reasonable middle ground. I asked the president for his support in using the $700 million to pay down state debt.

If we're going to spend money we don't have at the federal level, it becomes all the more important that our state balance sheet is in good order -- particularly if this is a protracted downturn. But many people do not realize that the stimulus money runs out in 24 months -- at which point South Carolina will be forced to find a new source of funding to sustain the new level of spending, or to make sharp cuts. Sure, I could kick the can down the road; in two years, I'll be safely out of office. But it would be irresponsible.

If South Carolina could use stimulus money to pay down debt, in two years we will be able to spend, cut taxes or invest even if the federal government can no longer provide more money -- not a remote possibility. In fact, paying debt related to education would free up over $162 million in debt service in the first two years and save roughly $125 million in interest payments over the next 13 years -- just as paying off a family's mortgage early frees up money for other uses.

When you're in a hole, the first order of business is stop digging. South Carolina is in a hole, and it's not a shallow one. Spending stimulus money on ongoing programs would mean 10% of our entire state budget would be paid for with one-time federal funds -- the largest recorded level in state history.

Also, spending stimulus money will delay needed state restructuring. General Motors recently found itself in a similar spot. It needs to be restructured if it is to prosper, but a federal bailout enabled it to put off hard decisions. Likewise, taking federal stimulus money will only postpone changes essential to South Carolina's prosperity. Though well-intended, it forestalls hard choices we must make.

One of Mr. Obama's central campaign themes was his pledge to do away with politics of the past. In his inaugural address, he proclaimed "an end to the petty grievances and false promises, the recriminations and worn-out dogmas, that for far too long have strangled our politics."

This idea connected with millions of voters, myself included. I've always believed ideas should rise and fall on their merits. In fact, I saw such historical significance in his candidacy and the change he spoke of that I published an op-ed on it before South Carolina's presidential primary last year. It was not an endorsement, but it did note the historic nature of his candidacy and the potential positive change in tone it represented. That potential may now be disappearing.

Last week I reached out to the president, asking for a federal waiver from restrictions on stimulus money. I got a most unusual response. Before I even received an acknowledgment of the request from the White House, I got word that the Democratic National Committee was launching campaign-style TV attack-ads against me for making it.

Is this the new brand of politics we were promised? Instead of engaging with me and other governors on the merits of our dissent, I am to be attacked in television ads? In the end, I just don't believe a problem created by too much debt will be solved by piling on more debt. This doesn't strike me as an unreasonable or extremist position.

Nevertheless, the White House declined my request for a waiver yesterday afternoon. That's unfortunate. But in coming months we'll continue advancing the debate at the state level about the merits of debt repayment. The fact remains that while we'd all like to spend unlimited dollars on the very real needs that exist in our state, we must spend in the context of what is sustainable.

Mr. Sanford, a Republican, is the governor of South Carolina.

Nobel Prize Becker: Now Is No Time to Give Up on Markets

Now Is No Time to Give Up on Markets. Gary Becker, the winner of the 1992 Nobel Prize in Economic Sciences
WSJ, Mar 21, 2009

"What can we do that would be beneficial? [One thing] is lower corporate taxes and businesses taxes and maybe taxes in general. Particularly, you want to lower the tax on capital so you raise the after-tax return to investing and get more investing going on."

Gary Becker, the winner of the 1992 Nobel Prize in Economic Sciences, is in New York to speak to a special meeting of the Mont Pelerin Society on the global meltdown. He has agreed to sit down to chat with me on the subject of his lecture.

Slumped in a soft chair in a noisy hotel coffee lounge, the 78-year-old University of Chicago professor is relaxed and remarkably humble for a guy who has achieved so much. As I pepper him with the economic and financial riddles of our time, I am impressed by how many times his answers, delivered in a pronounced Brooklyn accent, include an "I think" and sometimes even an "I don't know the answer to that." It is a reminder of why he is so highly valued. In contrast to a number of other big-name practitioners of the dismal science, he is a solid empiricist genuinely in search of answers -- not the job as the next chairman of the Federal Reserve. What he sees is what you get.

What Mr. Becker has seen over a career spanning more than five decades is that free markets are good for human progress. And at a time when increasing government intervention in the economy is all the rage, he insists that economic liberals must not withdraw from the debate simply because their cause, for now, appears quixotic.

As a young academic in 1956, Mr. Becker wrote an important paper against conscription. He was discouraged from publishing it because, at the time, the popular view was that the military draft could never be abolished. Of course it was, and looking back, he says, "that taught me a lesson." Today as Washington appears unstoppable in its quest for more power and lovers of liberty are accused of tilting at windmills, he says it is no time to concede.

Mr. Becker sees the finger prints of big government all over today's economic woes. When I ask him about the sources of the mania in housing prices, the first culprit he names is the Fed. Low interest rates, he says, were "partly, maybe mainly, due to the Fed's policy of keeping [its] interest rates very low during 2002-2004." A second reason rates were low was the "high savings rates primarily from Asia and also from the rest of the world."

"People debate the relative importance of the two and I don't think we know exactly," Mr. Becker admits. But what is clear is that "when you have low interest rates, any long-lived assets tend to go up in price because they are based upon returns accruing over many years. When interest rates are low you don't discount these returns very much and you get high asset prices."

On top of that, Mr. Becker says, there were government policies aimed at "extending the scope of homeownership in the United States to low-credit, low-income families." This was done through "the Community Reinvestment Act in the '70s and then Fannie Mae and Freddie Mac later on" and it put many unqualified borrowers into the mix.

The third effect, Mr. Becker says, was the "bubble mentality." By this "I mean that much of the additional lending and borrowing was based on expectations that prices would continue to rise at rates we now recognize, and should have recognized then, were unsustainable."

Could this behavior be considered rational? "There is a lot of debate in economics about whether we can understand bubbles within a rational framework. There are models where you can do it, but it's not easy," he says. What he does seem sure about is that "the lending would not have continued unless there was this expectation that prices would continue to rise and therefore one could refinance these assets through the higher prices." That mentality was at least partly related to Fed action, he says, because the low interest rates "generated an increase in prices and I think that helped generate some of this excess of optimism."

Mr. Becker says that the market-clearing process, so important to recovery, is well underway. "Construction in new residential housing is way down and prices are way down. Maybe 25% down. Lower prices stimulate demand, reduced construction reduces supply."

That's the good news. But he complains about "counterproductive" government policies "designed to lower mortgage rates to stimulate demand." He says he was against the Bush Treasury's idea of capping mortgage rates (which was only floated) and he has "opposed the mortgage plan of President Obama." "It goes against both these adjustments . . . it would hold up prices and increase construction. I think that's a bad idea at this time."

Yet the professor is no laissez-faire ideologue. He says we have to think about what the government can do to "moderate the hit to the real economy," and he says it should start with "the first law of medicine: Do no harm." Instead it has done harmful things, and chief among them has been the "inconsistent policies with the large institutions . . . We let some big banks fail, like Lehman Brothers. We let less-good banks, big [ones] like Bear Stearns, sort of get bailed out and now we bailed out AIG, an insurance company."

Mr. Becker says that he opposed the "implicit protection" that the government gave to Bear Stearns bondholders to the tune of "$30 billion or so." So I wonder if letting Lehman Brothers go belly up was a good idea. "I'm not sure it was a bad idea, aside from the inconsistency." He points out that "the good assets were bought by Nomura and a number of other banks," and he refers to a paper by Stanford economics professor John Taylor showing that the market initially digested the Lehman failure with calm. It was only days later, Mr. Taylor maintains, that the market panicked when it saw more uncertainty from the Treasury. Mr. Becker says Mr. Taylor's work is "not 100% persuasive but it sort of suggest[s] that maybe the Lehman collapse wasn't the cause of the eventual collapse" of the credit markets.

He returns to the perniciousness of Treasury's inconsistency. "I do believe that in a risky environment which is what we are in now, with the market pricing risk very high, to add additional risk is a big problem, and I think this is what we are doing when we don't have consistent policies. We add to the risk."

On the subject of recovery, Mr. Becker repeats his call for lower taxes, applauds the Fed's action to "raise reserves," (meaning money creation, though he said this before the Fed's action a few days ago), and he says "I do believe one has to try to do something more directly to help with the toxic assets of the banks."

How about getting rid of the mark-to-market pricing of bank assets [that is, pricing assets at the current market price] that some say has destroyed bank capital? Mr. Becker says he prefers mark-to-market over "pricing by cost because costs are often completely out of whack with what the real prices are." Then he adds this qualifier: "But when you have a very thin market, you have to be very careful about what it means to mark-to-market. . . . It's a big problem if you literally take mark-to-market in terms of prices continuously based on transactions when there are very few transactions in that market. I am a mark-to-market person but I think you have to do it in a sensible way."

However that issue is resolved in the short run, there will remain the problem of institutions growing so big that a collapse risks taking down the whole system. To deal with the "too big to fail" problem in the long run, Mr. Becker suggests increasing capital requirements for financial institutions, as the size of the institution increases, "so they can't have [so] much leverage." This, he says, "will discourage banks from getting so big" and "that's fine. That's what we want to do."

Mr. Becker is underwhelmed by the stimulus package: "Much of it doesn't have any short-term stimulus. If you raise research and development, I don't see how it's going to short-run stimulate the economy. You don't have excess unemployed labor in the scientific community, in the research community, or in the wind power creation community, or in the health sector. So I don't see that this will stimulate the economy, but it will raise the debt and lead to inefficient spending and a lot of problems."

There is also the more fundamental question of whether one dollar of government spending can produce one and a half dollars of economic output, as the administration claims. Mr. Becker is more than skeptical. "Keynesianism was out of fashion for so long that we stopped investigating variables the Keynesians would look at such as the multiplier, and there is almost no evidence on what the multiplier would be." He thinks that the paper by Christina Romer, chairman of the Council of Economic Advisors, "saying that the multiplier is about one and a half [is] based on very weak, even nonexistent evidence." His guess? "I think it is a lot less than one. It gets higher in recessions and depressions so it's above zero now but significantly below one. I don't have a number, I haven't estimated it, but I think it would be well below one, let me put it that way."

As the interview winds down, I'm thinking more about how people can make pretty crazy decisions with the right incentives from government. Does this explain what seems to be a decreasing amount of personal responsibility in our culture? "When you get a larger government, when you have the government taking over Social Security, government taking over health care and with further proposals now for the government to take over more activities, more entitlements, the rational response is to have less responsibility. You don't have to worry about things and plan on your own as much."

That suggests that there is a risk to the U.S. system with more people relying on entitlements. "Well, they become an interest group," Mr. Becker says. "The more you have dependence on the government, the stronger the interest group of people who want to maintain it. That's one reason why it is so hard to get any major reform in reducing government spending in Scandinavia and it is increasingly so in the United States. The government is spending -- at the federal, state and local level -- a third of GDP, and that share will go up now. The higher it is the more people who are directly or indirectly dependent on the government. I am worried about that. The basic theory of interest-group politics says that they will have more influence and their influence will be to try to maintain this, and it will be hard to go back."

Still, there remain many good reasons to continue the struggle against the current trend, Mr. Becker says. "When the market economy is compared to alternatives, nothing is better at raising productivity, reducing poverty, improving health and integrating the people of the world."

Ms. O'Grady writes the Journal's Americas column.

Japan, China differ over how to deal with North Korea

Japan, China differ over how to deal with North Korea
Saturday March 21, 2009, 06:50 AM JST

Japanese and Chinese defense ministers agreed Friday it would be best if North Korea refrains from a planned rocket launch, but made demands to each other over ways to deal with the issue. While Japan asked China, North Korea’s traditional ally, to urge Pyongyang’s restraint, Beijing asked Tokyo to handle the issue ‘‘in a calm manner,’’ Japanese Defense Minister Yasukazu Hamada and a Japanese government official said.

North Korea’s planned rocket launch was a topic in Hamada’s meetings with his Chinese counterpart Liang Guanglie as well as Wu Bangguo, chairman of China’s legislature. Liang said ‘‘it would be best if North Korea did not fire’’ the rocket, Hamada said. But he added that countries such as Japan ‘‘should take a cool-headed attitude’’ on the issue, he said.

The Chinese official was believed to be reacting to recent discussions in Japan about intercepting the rocket, which North Korea has said will be launched in early April to put a satellite into orbit.
Countries such as Japan suspect the plan to be a cover for testing a long-range ballistic missile, given the similarities between the technology involved.

Japan has said that even if it is a satellite launch, North Korea would be violating existing U.N. Security Council resolutions that prohibit it from engaging in ballistic missile activities.
China has taken a more nuanced approach. Although it has indicated its desire for North Korea to refrain from the launch, it has not said whether it would view the act as a violation of the resolutions.

Hamada said that Chinese officials did not clarify what Beijing plans to do if the launch takes place.

A Japanese government official said that while Hamada urged China to urge North Korea’s restraint in his meeting with Wu, there was no direct response from the Chinese official.
In their talks, the two defense ministers agreed that the two countries will seek ways to cooperate in antipiracy operations off the coast of Somalia, according to the Japanese government official. Both countries have committed naval vessels to the operations.

Hamada also conveyed Japan’s concern over China’s growing military spending, which will mark the 21st year of double-digit growth in 2009, the official said.

Liang replied that there is no need for concern because Beijing’s policy is defensive, according to the official.

Liang also touched on China’s intention to build an aircraft carrier, telling Hamada that China is the only major nation in the world not to have one, the official said.

‘‘China has a vast sea area and the Chinese Navy needs to develop,’’ the official quoted Liang as saying.

WaPo on El Salvador's election: A presidential election produces a win for the left -- and for liberal democracy

Victory in El Salvador. WaPo Editorial
A presidential election produces a win for the left -- and for liberal democracy.
WaPo, Saturday, March 21, 2009; Page A12

IT'S POSSIBLE to view the outcome of El Salvador's presidential election on Sunday as another lamentable victory for the Latin American leftist populism represented by Hugo Chávez. Mr. Chávez himself was quick to do so, and with some reason: His Venezuelan government has been a financial backer of the Farabundo Marti National Liberation Front, the former guerrilla movement whose candidate, Mauricio Funes, won a narrow victory. But El Salvador's election was also a triumph for a system that Mr. Chávez has disregarded: liberal democracy. Seventeen years after the United Nations brokered a peace accord between the country's left and right -- and after four consecutive election victories by the rightist Nationalist Republican Alliance (ARENA) -- democracy produced an inevitable and necessary alternation of power.

If Mr. Funes as well as the election's losers now respect the rule of law, the result could be the consolidation of the political system the United States was aiming for when it intervened in El Salvador's civil war during the 1980s. At the time, the goal of a successful Salvadoran democracy was dismissed as a mission impossible, just as some now say democracy is unattainable in Iraq and Afghanistan. But the right-wing ARENA party, whose leaders were linked to death squads in the 1980s, proved during the last few years that it could embrace democratic practices. Its presidential candidate, Rodrigo Ávila, acknowledged his defeat on election night.

Now Mr. Funes, a former television anchor who did not fight in the war, is sending the message that the FMLN will also govern responsibly. Among other things, he has said that he will respect private property, preserve El Salvador's free-trade agreements and its use of the dollar as its currency, and seek to preserve close relations with the United States. As his political model, he has cited not Mr. Chávez, but Brazilian President Luiz Inácio Lula da Silva, who has led his country leftward while honoring democracy and the rule of law.

There are reasons for concern about these pledges: Mr. Funes's vice president and other senior FMLN members are more militant and anti-American. The danger is not that they will press for more socialism -- that is their right -- but that they will, like Mr. Chávez or Daniel Ortega in Nicaragua, seek to manipulate or dismantle the democratic system that placed them in office. The Obama administration should make clear to the new government that steps in that direction will endanger relations with the United States. But it should also seek to cooperate with a government that has the potential to complete a victory for Latin American democracy -- and U.S. foreign policy.