I am a low-tax guy. I have worked on tax issues for 12 of my 15 years in Washington, helping elected officials lower taxes and prevent tax increases. You can see a list of the taxes President Bush cut here. I would like to cut taxes far below where they are today, and I will continue to make the case that America is better off with a bigger private sector and a smaller government. America’s long run fiscal debate, however, is instead principally about whether we will allow future spending increases to force taxes to increase dramatically above where they are today.
I believe that America’s greatest economic policy challenge is the projected long run growth of spending on three programs: Social Security, Medicare, and Medicaid.
I would like to show you why I believe this, and how it relates to taxes.
Now that we have reviewed how big a bite the government has taken out of the economy over time, let’s examine the competing tax proposals for the near future.
Revenues are only one element of a budget proposal. For a complete picture of the effect of a budget proposal on the rest of the economy, we should also look at deficits. At the same time, it’s useful to start by understanding how much each budget proposal would take from the economy in total taxes.
We are using the same graph format as before, in which we measure total federal revenues as a share of the economy. Please remember that even a flat line on this graph means the federal government is collecting more taxes in inflation-adjusted dollars each year.
Let’s compare the President’s proposed total federal revenues, with proposals from House Republicans and House Democrats. The House Republican proposal was authored by the ranking Republican on the House Budget Committeee, Rep. Paul Ryan (R-WI). The House Democrat proposal passed the House, and was authored by the House Budget Committee Chairman, Rep. John Spratt (D-SC).
From this graph you can see:
- Over the next few years, all three proposals show a steep dip in revenues, followed by a steep increase. This has nothing to do with policy and is entirely about the predicted recession and recovery.
- The President’s budget would have the government take 0.9 percentage points more of the economy than the Ryan proposal. That’s an extra 90 cents out of each $100 of income. This is a fairly steady gap over time.
- The budget passed by House Democrats has higher taxes than even the President’s budget. The House Democrat budget is only a 5-year proposal, so the long run gap could be bigger, but the House is collecting at least another 0.5 percentage points more than the President’s budget. The budget passed by House Democrats means that government will take an additional 50 cents out of each $100 of income above what the President proposed. Compared to the House Republican alternative, the House-passed budget would take an additional $1.40 out of each $100 of income for the federal government. That’s a lot.
Now let’s compare these proposals to the historic average. I’m a low-tax guy, so I would like to use the post-WWII average of 17.9%. In most discussions, however, the range ends up being between the 50-year average of 18.1%, and the 30-year average of 18.4%. I will include those bounds on this graph, even though my preferred comparison path is a bit lower than the lowest line.
By adding these historic averages, we can see that the House Republican proposal would bring revenues down to a bit below the 50-year historic average. Even under this proposal, the federal government would be getting more inflation-adjusted dollars each year, because a constant percentage still grows in real dollars as the economy grows.
The Obama tax proposal is above the top end of the historic range, and the Democrat House-passed budget is above even that.
There is always a lot of rhetoric on Tax Day. Later I will comment on some of today’s rhetoric. In this post I will instead focus on some basic facts that are not earth-shattering, but provide some important historic context for the current tax and spending debate.
Let’s start by looking at just the total amount of taxes collected by the Federal government over time, adjusting for inflation.
You can see taxes growing fairly steadily over time. The various bumps are a combination of changes in law and economic cycles. Still, even given those factors, the total amount of inflation-adjusted dollars going to the federal government has clearly climbed over time. In real terms, government’s take has gotten bigger.
Some argue that we should instead measure total federal taxes as a share of the economy. This presumes that as the economy gets bigger, government “should” get bigger proportionately. I disagree with that view. Some things that government does clearly are related to the size of our population, or are related to other measures of society’s income or wealth. I do not buy that principle as a general matter. Still, let’s look at that perspective.
You can see that the federal government’s take from the economy has remained roughly constant since the end of World War II. The flat line is at 18.1%, and shows that, on average over the past 50 years, Uncle Sam takes about 18.1% out of every dollar earned in America. This graph makes the policy changes and economic fluctuations easier to see. For instance, you can see the effects of the 1993 reconciliation bill (which raised taxes), plus the economic growth of the 90s, ending in the stock market “bubble” (I use that term loosely) in 1999 and 2000 with phenomenally high capital gains revenues, followed by the stock market decline and recession in 2001 and 2002, combined with the effects of the 2001 tax cuts.
There’s actually a slight upward trend to this line. If you look at share of GDP since the end of World War II, the average is 17.9%. If you look over the past 50 years, it’s the 18.1% I have displayed on the graph. Over the past 40 years, it’s 18.3%, and over the past 30 years it’s 18.4%. So there is a creeping upward (measured as a share of the economy), but it’s pretty slow: one or two tenths of a percent of GDP over time. Remember that a flat line on this graph would still represent more real dollars each year going to the federal government.
Still, the overwhelming impression this graph should give you is that of a basic constancy since World War II.
Now let’s add State & local taxes to this graph.
You can see that while Federal taxes have remained roughly constant (with fluctuations), State & local taxes have grown fairly steadily over time, measured as a share of GDP.
Now let’s add the two lines together to see government’s total take from taxpayers. Check out the orange line up top.
It’s a little hard to see the long-term trends on the orange and red lines, but the greatest graphing program ever, Swiff Chart, allows me to add trend lines that make it easier to see.
From this graph, you can see our conclusions:
- Federal taxes have remained roughly constant as a share of the economy since the end of World War II, at just over 18% of GDP (I use 18.1%, others use 18.3%).
- Even if federal taxes remain constant as a share of GDP, total taxes collected by the federal government are going up in real terms.
- In contrast to federal taxes, State and local taxes have grown fairly steadily since 1950.
- So the trend line of government’s take of the U.S. economy is steadily upward since the end of World War II, from around 21% of GDP in 1950 to about 28% now. Seven cents more of each dollar earned are going to government now than in 1950.
Please remember that just-over-18 percent of GDP number from #1. You’re going to need it later.
Critical policy fights sometimes happen long before a bill comes up for a vote. Legislative process and strategy intersect early to determine the balance of power for a future vote on policy. Health care legislation is several months away from a floor vote, but the tactical maneuvering has already begun.
Fair warning: we’re going to work through some fairly thick procedural weeds. This is the most in-depth post I have written so far. If you really want to understand the tactical chess of legislating and its enormous effects on policy, you need to know this level of detail. With that caution … <deep breath>
The House and Senate each have passed their versions of the Congressional budget resolution, which sets the procedural rules for spending and tax legislation throughout the year. For these rules to take effect, designees from each body must now work out their differences and produce a common text (a “conference report”) that then passes both the House and Senate. The Congressional budget resolution is an internal management tool of the Congress, and never goes to the President for a signature or veto.
The New York Times argues (“The First Showdown on Health Care“) that Senate Majority Leader Harry Reid (D-NV) and Senate Budget Committee Chairman Kent Conrad (D-ND) should put into the budget resolution conference report a Senate reconciliation instruction, to give Leader Reid leverage over moderate Senate Republicans in future negotiations on health care legislation.
If Senators Reid and Conrad do what the Times recommends, then Senate Democrats can in theory, pass a special type of bill, called a reconciliation bill, with only a majority of the Senate. Since the Minnesota Senate seat is still vacant, this means Leader Reid would need 50 of 99 Senators to vote for a health care bill if he uses the reconciliation process. If the budget resolution conference report does not create the process for a reconciliation bill, then he would need 60 votes to overcome any Republican filibuster. There are now 58 Senators who “caucus” as Democrats, including two labeled as Independents, Sen. Lieberman (CT) and Sen. Sanders (VT).
I assume that if he only needs 50 votes to pass a health care bill, Leader Reid will try to start the policy near the left edge of his caucus and then negotiate toward the center as needed to get to 50 votes. The bulk of his caucus is liberal, especially on health care. He will have an eight vote margin to play with, if he limits his universe to just the 58 Democrats and Independents. That gives him a lot of room to maneuver.
If instead he needs 60 votes, he will have to win the support of the most conservative of the 58, and at least two Senate Republicans. Obvious targets would include Senators Snowe and Collins from Maine, or maybe Senator Specter from Pennsylvania.
Thus, I would expect a bill passed under reconciliation to be much farther Left than a bill passed outside of reconciliation. But as we will see in a moment, reconciliation is a limited tool, and cannot be used for every kind of legislative change he might want.
The Times argues that Senator Reid should make sure he has a stick to use against moderate Senate Republicans, in case carrots don’t work. Having this fast-track process in which he would not need their votes would appear to give him and his designees (Sen. Baucus? Sen. Rockefeller? Sen. Kennedy?) leverage in negotiations with those moderates. Note the Times‘ use of the word “weapon”:
Reconciliation is not a weapon that should be deployed immediately. The conferees should agree on language that would allow it to kick in by a date in the fall if the two parties cannot agree on a reform bill. A bipartisan agreement would be nice, but what the country needs right now is effective health care reform.
The Times is imagining a scenario in which Leader Reid would say to moderate Senate Republicans, “I would like to have your votes, and I’m willing to compromise somewhat to get them, but not too much. If you’re not willing to be reasonable, then I will use this reconciliation weapon and pass a more liberal bill without you.”
What does the Times want in this health care reform legislation?
That would make it easier to adopt such important measures as a tightly regulated insurance exchange for those without group coverage, a new public plan to compete with private plans, and mandates that employers contribute to the cost of covering their employees.
The Times wants Leader Reid to wield a stick as he negotiates with moderate Republicans. But if the stick is only a twig, then it will not provide leverage to Leader Reid or his negotiators, and the moderate Senate Republicans are smart enough to know this. The reconciliation threat is effective only if it is a viable path to producing the kind of health care reform that Leader Reid or the Times wants.
The Times hints at why the stick may only be a twig:
The reconciliation approach is not bulletproof. It is primarily designed to deal with spending and revenue issues that affect the deficit. Under current rules, senators can seek to remove any provisions deemed extraneous or “merely incidental” to such budgetary concerns. Nobody is quite sure how the Senate parliamentarian would rule on such items as tighter regulation of private insurers or creation of a new public plan or incentives to improve the coordination of care.
Let’s examine in a bit more detail how the reconciliation rules make this an imperfect weapon for Leader Reid. The Senate reconciliation process is a fast-track procedure that limits the rights of Senators to amend, filibuster, or otherwise delay a bill that they strongly oppose. It is an incredibly powerful legislative tool, created in 1974 as part of a law that comprehensively changed Congressional budget procedures. The law that creates the reconciliation process strictly limits its use to matters that have to do with spending and taxes. (The process exists in the House as well, but I’m going to focus on the Senate where it has a greater effect and is more relevant to the current tactical issue.)
To oversimplify, you can use a reconciliation bill only to change taxes or spending. The process was created to facilitate deficit reduction — various Senate committees would each be given a deficit reduction target, and would be “instructed” by the budget resolution to produce bills that reduced the deficit by those amounts. The Senate Budget Committee would then package all those deficit reduction bills into a single bill, and report it to the Senate floor for debate, amendments, and voting, all under a fast-track process that limits the minority’s ability to filibuster or kill the bill by amendment.
Laws that reduce the deficit either cut spending or raise taxes. Both are politically painful votes for Senators. By combining several smaller deficit reduction bills into a single bill, the reconciliation process was used to create a single bill that reduced the budget deficit by a lot. This gave Senators the excuse to say, “While I oppose the spending cut in section XXX of this bill that would hurt people in my State, the overall benefits of shared sacrifice and deficit reduction make it worth it. I wish
Now any time there is a change of party control in the Senate, advocates for the new majority party argue that reconciliation should be used for everything. If you don’t have the support of 60 Senators to do what you want, then you cry “Let’s put that in reconciliation!” based on a mistaken (or misleading) view that reconciliation can be used to bypass any filibuster or delaying tactic on any type of legislation.
It cannot because of the Byrd Rule, named after Sen. Robert Byrd (D-WV), who included it in the law that originally created the reconciliation process. Basically, the Byrd rule limits reconciliation bills to containing only provisions that turn spending or tax dials. You cannot make broader policy changes that are unrelated to increasing or decreasing spending or taxes, unless you can demonstrate that those policy changes are a “necessary term or condition” of another provision that turns a tax or spending dial. And while this is an exception that lets you include some non-budgetary policies in a reconciliation bill, in practice it is a narrow and limited exception. You cannot in a reconciliation bill make a major non-budgetary policy change if it has a budgetary effect that is “merely incidental” to the scope of the non-budgetary change.
Let us follow the path of the Times’ recommendation, and suppose that the budget resolution conference report were to contain a reconciliation instruction, either to be used to pass health care reform legislation with only 50 votes, or instead to create leverage for Senate Democrats as they negotiate with moderate Senate Republicans (or both).
Now suppose Senate Democrats produced a bill like the Times describes, which created “a tightly regulated insurance exchange for those without group coverage, a new public plan to compete with private plans, and mandates that employers contribute to the cost of covering their employees.”
Creating a new insurance exchange is a policy change that does not affect the federal budget. Sure there would be some expenses for the setup and administration of the exchange (possibly totaling billions of dollars) , but clearly the tax or spending change is incidental to the creation of the new insurance market, which is an enormous policy change by itself. This policy would violate the Byrd rule. If it were included in a final reconciliation bill conference report and there were not 60 Senate votes to waive the Byrd rule, the entire health care reform bill would die. Knowing this, Senator Reid would have no choice but to jettison this policy to avoid jeopardizing the entire bill.
The same is true for an employer mandate. Technically, such a mandate would reduce federal revenues for reasons I won’t get into, but the budgetary effects would again be incidental to the overall policy change proposed. I cannot see how an employer mandate could be included in such a bill and still allow the bill “protected” reconciliation status that would allow Senator Reid to avoid a filibuster.
I think the same is true for the establishment of “a new public plan to compete with private plans,” precisely because it is new. I am less certain of this, and it might depend on how it was written.
The same is true for many other elements of what you would expect in a big health care reform bill. This parliamentary vetting process, which occurs at the very end of a conference negotiation, is called a “Byrd bath.” Budget Committee staff from both sides of the aisle argue their cases to the Senate Parliamentarian. If the Parliamentarian says that a provision violates this rule, then the majority always chooses to remove it rather than risk losing the entire bill. I was the Senate Budget Committee staffer responding for the health portion of the Byrd Bath in the 1995 reconciliation bill, and I helped manage the Byrd Bath process in reconciliation bills in the late 90’s when I worked for Senate Majority Leader Trent Lott.
Returning to the beginning, Senator Reid’s stick is not as big as the Times might like. Yes, he can use reconciliation to expand Medicaid or S-CHIP, or even Medicare, especially if he’s willing to offset those spending increases with spending cuts or tax increases. To the extent he is willing to limit his threat to these areas, reconciliation provides him with leverage.
If, however, he wants health care reform to include the creation of a national health insurance exchange, or employer (or individual) mandates, or other insurance mandates, or a wide range of other health care policy changes that are not principally about taxes or spending, then he won’t be able to use reconciliation to do these things, and he will need moderate Republicans. Those moderate Republicans know that, and should not be fooled if he tries to bluff them.
Speak softly, Mr. Leader. That big stick the New York Times wants you to wield is more like a twig.
Despite Secretary Geithner’s statement to the contrary, I still think the Administration is running out of room within the $700 B Troubled Assets Relief Program (TARP). In my last four posts on TARP funding (1 2 3 4), I have stuck to what I think I can demonstrate analytically. I am now going to shift to some educated guessing about what may be going on within the Administration that is contributing to confusion on the outside. The prior posts involved math, while now I am analyzing people, so I am far less certain about what you read here than when I walked through the TARP arithmetic.
I think the senior economic policymakers in the Administration are overconstrained and have several bad options in front of them. This is not an unusual situation, but to a certain extent they put themselves into this box by spending TARP money on every problem that popped up. $50 B on housing, $5 B on auto parts suppliers, $15 B on small business loans, additional unspecified sums for GM and Chrysler, and new as well as old mortgage-backed securities — things add up. I think they’re in a box.
The box has three sides:
- They have created expectations among various constituencies for programs announced over the past two months. These expectations would consume most of the remaining $700 B of TARP funds. If their new programs are successful, they will want to expand them to further strengthen financial institutions and markets. If they are unsuccessful, they will need more TARP funds to try something else.
- They are justifiably afraid of asking Congress for more TARP funds.
- They could create some room for themselves by taking taxpayer funds back from some of the healthy big banks, but they may be worried about the signals that sends about the others.
It appears that they are testing all three sides of this triangular box to figure out which is their least worst option.
Senior Administration policymakers are operating in an ever-changing financial, economic, and legislative environment. When they developed the President’s budget in February, asking Congress for more TARP funds probably seemed difficult but not necessarily impossible. In that circumstance, it was reasonable and responsible for them to put a $250 B placeholder in their budget for a potential future TARP request.
The legislative environment is now much more hostile. It would not surprise me if, for the moment, they have ruled out asking Congress for more TARP funds, and are instead trying to figure out how to create as much room as possible within their existing constraint.
Commenter Wayne Marr asked a good question.
… But the main point is that Obama and team (Larry, Christy, Austan, Geithner, etc) can simply go to[the] well (Congress) since Democrats can pass pretty much what they want. The recovery plan was not named the “Great Bailout:” but the “American Reconstruction and Recovery Plan” or some such nonsense for a reason.
Why not another funding program called “The Better Banking Plan for the 21th Century” to provide more cash for technically insolvent banks? Or those that posed a systemic risk? So does it really matter that we have 30B left of TARP or 100B left for TARP?
While I generally agree that the President has tremendous leverage to get Congress to pass his agenda on a wide range of topics, I seriously doubt that is the case here:
- 95 of 235 House Democrats voted no the first time on TARP (on September 29, 2008), and 63 House Democrats voted no on the successful vote four days later. Speaker Pelosi now has a significantly larger majority (254), but she would still need Republican votes.
- TARP is far more unpopular now than last Fall.
- President Obama could undoubtedly get some House D votes who we (the Bush Administration) could not, but not enough to pass such a bill.
- I surmise that House Republicans are in no mood to go out of their way to help the majority or the White House, given how aggressively the Speaker and White House have been in passing other legislation without their input. That does not mean that all of them would vote no, merely that the Administration will have a hard sell to make.
- Finally, even if she had the votes, I would bet heavily against the Speaker bringing up such a bill if she thought the vote would be partisan, because she would conclude that such a vote would expose her House Democrats to too great of a political risk in the next election. I think that she thinks that she would need bipartisan cover from Republicans as a condition for bringing such a bill to the floor.
As background, the Temporary Asset-Backed Securities Loan Facility (TALF) is what the Fed and Treasury are doing together to keep securitization markets going for things like student loans and car loans. They now want to expand it to include securitizations for new mortgages, and to use it to buy toxic mortgage-backed securities. TALF was created during the Bush Administration. This is the second major expansion since President Obama took office.
PPIP is the Public-Private Investment Partnership, Secretary Geithner’s plan to buy toxic assets from banks. It has two parts, one of which works in conjunction with the Fed, and the other with the FDIC.
Secretary Geithner’s comments that they have $135 B of room left in the TARP is testing side #1 of the triangular box to its maximum possible extent. In an attempt to convince people that they have sufficient room, to reassure both markets and the Congress, I think his staff put together the biggest number they could plausibly say with a straight face. They have not, to my knowledge, explained what $135 B of room would mean for the TALF and buying toxic assets, and I fear that such an answer would tremendously disappoint market participants who are expecting a $1+ trillion TALF and a $100 B PPIP. If the Administration has made policy decisions that lock in $135 B of room, then they have scaled something way back beyond what they had previously said publicly.
The Administration faces a choice: scale back these two programs to be smaller than what they had previously suggested to market participants, or squeeze something else hard to create more room within the $700 B limit.
The other option is to get some TARP funds back from the healthiest big banks. Since the law allows the Administration to recycle returned funds for other purposes, every invested dollar repaid can be spent again.
Certain large banks (e.g., JP Morgan Chase and Goldman Sachs) are publicly signaling that they would like to repay the Treasury. It is hard to blame them, considering the political and legislative environment. Martha MacCallum of Fox News pushed me on this point, correctly pointing out that it seems un-American to dissuade banks from paying back the taxpayer.
The banks are reportedly being told “not yet” by the Administration. I will guess that the Administration is concerned about something that worried some of our experts — if healthy banks return their funds, then investors will conclude that every bank who is not returning their funds must therefore be unhealthy.
This logic becomes strained, however, when those banks find other avenues for signaling to the market that they are healthy, as they are doing now by screaming “WE WANT TO GIVE IT BACK.”
At some point the banking policy concern may be overwhelmed by the near-impossibility of getting more funding from Congress and the policy and political undesirability of scaling back on PPIP, TALF, or the housing commitment. If this happens, then the Administration will happily start accepting funds from banks. The numbers are large enough that this could create room for them to do other things, and as a long-run policy matter, we want the taxpayer to be paid back. These are supposed to be temporary investments in the banks, in which public capital substitutes for private capital that was unwilling to show up last Fall.
There is another outside-the-box possibility that I am sure the White House has considered. Part of their resource constraint arises from having made a $50 B TARP commitment to housing.
They could push this program out of the TARP, and ask Congress for these housing funds anew. It would be much easier for a heavily Democratic Congress to pass $50 B for housing than for them to pass the same amount (or much more) for “Wall Streeet banks.”
I would oppose such a request, because I oppose this housing spending inside or outside of TARP. But I’m sure they could pass it, given their large partisan majorities in both bodies. This option would cause the White House political pain on its left, which pushed hard for these programs, and could cause FDIC Chairman Bair heartburn, given her impassioned support for these housing programs.
Things probably look a little different to the folks sitting inside the West Wing and at Treasury than I have described here, but I would wager heavily that a discussion at least similar to this is ongoing within the senior ranks of the Administration. As long as that decision is unresolved, it will be confusing as we try to interpret statements like Secretary Geithner’s that he has $135 B of room within the $700 B TARP allocation. Those policymakers need to balance the benefits of decision-making flexibility with the costs and repercussions, from markets and/or Congress, of the bad news when it is eventually delivered. They may be waiting for the right time to signal that a previous commitment will be scaled back, or instead for the right time to ask Congress for more funds. I think it is better for market participants and Congress to have early clarity, especially if it’s bad news.
In my experience, it is better to deliver the bad news as soon as you have made the decision. Rip off the band-aid quickly.
I will end with a thought experiment. Suppose my analysis is roughly correct. It is easy to figure out what you don’t want to do. It is much more difficult to decide what you do want to do. If the President asked you for your recommendation, what would it be?
- Scale back on PPIP and TALF as necessary to avoid having to ask Congress for more funds.
- Ask Congress for more funds. Follow-up: how much more?
- Tell banks that you welcome them repaying the Treasury early.
- Push housing outside of TARP and make a separate request of Congress for those funds.
- Wait and hope.
The traditional Beltway logic on health care reform goes like this:
- The problem is that 46 million Americans lack health insurance. (I addressed why this number is incorrect and misleading last Thursday.)
- Government should provide health insurance to those 46 million people, or at least pay for it.
- Let’s expand a taxpayer-subsidized health insurance program to cover the 46 million, or maybe create a new program.
- (Alternately: Let’s mandate that everyone has to buy/have health insurance.)
- This means everyone will have health insurance. We have solved the problem.
Much of the health policy debate centers on how to solve this problem. Liberals want to expand government programs: Medcaid, S-CHIP, Medicare, or the federal employee health benefit program (FEHBP). Conservatives argue that we should instead provide tax incentives to subsidize the purchase of private health insurance.
I fall in the latter camp. My preferred health reform includes taxpayer subsidies for the purchase of private health insurance. But before we jump into the argument about the solution, it is important that we define the problem correctly. Today I would like to challenge the premise that the goal of health reform should be only, or even primarily, to provide taxpayer-subsidized health insurance to those who are uninsured. That defines the problem too narrowly.
Here is my alternate logic:
- The problems are (a) health insurance is expensive, and (b) the cost of health insurance grows faster than compensation.
- These two factors (expensive and getting more so) mean that:
- Private health insurance gets more expensive each year for the 202 million Americans who have it. This directly squeezes wages when health insurance is provided by an employer, and household budgets no matter how it is purchased.
- Uninsured people cannot afford health insurance. Those who can just barely afford it this year risk losing it next year and becoming uninsured as their premiums grow faster than their wages.
- Public health insurance expenditures for Medicare, Medicaid, S-CHIP, and FEHBP roughly track private health insurance expenditures over time. High and rapidly-growing health insurance costs therefore crush federal and state government budgets.
- If we can figure out ways to make health insurance less expensive, and/or slow the growth of health insurance premiums, we will solve all three of these problems.
- If our solution slows the growth rate of health insurance premiums, we will have a lasting solution, unlike those solutions which just shift costs from one payor to another (usually, the taxpayer).
Washington focuses on the blue box problem, driven by the phrases “46 million uninsured” and “universal coverage.” In doing so, policymakers often forget that the red box problem is the primary cause of the blue box problem.
I argue that policymakers should try to solve the red box problem, not the blue box problem, for two reasons:
- Solving the red box problem solves the blue box problem of the 11-35 million uninsured. It also helps the 200+ million people who have private health insurance, and it helps solve the #1 problem of federal and state government budgets.
- If you just try to solve the blue box problem, and if you do so by shifting the costs onto someone else (the taxpayer), you will end up chasing your tail, because within a few years the growth of health insurance premiums will put you right back where you started. You will create an additional unsustainable burden on the taxpayer.
Rather than just trying to expand taxpayer-financed health insurance to the uninsured, policymakers should try to understand and address why health insurance is expensive and getting more so each year. If they can address the red box problem, they will solve all three symptoms and create a longer-lasting solution.
My alternate logic may seem trivially obvious. Yet in Washington it is frequently forgotten or ignored.
Howdy! This is a test post for migrating my main policy blog to WordPress.com.
When discussing health insurance we frequently hear that there are “46 million uninsured” in America. This figure is from a monthly survey of about 50,000 households done by the Bureau of Labor Statistics and the Census Bureau. This Current Population Survey (CPS) then uses statistical techniques to paint a picture of the entire U.S. population.
Advocates for expanding taxpayer-subsidized health insurance, and their allies in the press, repeat this 46 million number constantly. It paints the following technically accurate but misleading picture:
This looks really bad. At least there are more than 250 million people with health insurance – that is clearly a good thing that we never hear it in the press. Still, there’s a lot of red there. It means that in 2007 (15%) of Americans lacked health insurance, according to the CPS. Advocates, some elected officials, and the press round that number up to “1 in 6 Americans.” We hear that there are “46 million uninsured,” and then we jump to the conclusion that government needs to help 46 million people buy health insurance, subsidized by taxpayers.
Let’s look inside that 45.7 million number and see what we can learn. Here is our key graph:
First, I need to make a technical disclaimer. I had this same detailed breakdown for 2005 data, done by health experts when I was part of the Bush Administration. I now have a 2007 total (45.7 million), and so I have proportionately adjusted the components to match that new total. It is a back-of-the-envelope calculation, but I am confident that it is solid, and it does not move any component by more than two hundred thousand. In addition, the expert analysis I am using ensures that the subdivisions shown above do not overlap. I will slightly oversimplify that point in the following description of the breakdown to make the explanation readable.
Let us walk through the graph from top to bottom.
- There were 45.7 million uninsured people in the U.S. in 2007.
- Of that amount, 6.4 million are the Medicaid undercount. These are people who are on one of two government health insurance programs, Medicaid or S-CHIP, but mistakenly (intentionally or not) tell the Census taker that they are uninsured. There is disagreement about the size of the Medicaid undercount. This figure is based on a 2005 analysis from the Department of Health and Human Services.
- Another 4.3 million are eligible for free or heavily subsidized government health insurance (again, either Medcaid or SCHIP), but have not yet signed up. While these people are not pre-enrolled in a health insurance program and are therefore counted as uninsured, if they were to go to an emergency room (or a free clinic), they would be automatically enrolled in that program by the provider after receiving medical care. There’s an interesting philosophical question that I will skip about whether they are, in fact, uninsured, if technically they are protected from risk.
- Another 9.3 million are non-citizens. I cannot break that down into documented vs. undocumented citizens.
- Another 10.1 million do not fit into any of the above categories, and they have incomes more than 3X the poverty level. For a single person that means their income exceeded $30,600 in 2007, when the median income for a single male was $33,200 and for a female, $21,000. For a family of four, if your income was more than 3X the poverty level in 2007, you had $62,000 of income or more, and you were above the national median.
- Of the remaining 15.6 million uninsured, 5 million are adults between ages 18 and 34 and without kids.
- The remaining 10.6 million do not fit into any of the above categories, so they are:
- U.S. citizens;
- with income below 300% of poverty;
- not on or eligible for a taxpayer-subsidized health insurance program;
- and not a childless adult between age 18 and 34.
As a policy matter, we care not about the total number of uninsured, but about the subset of that group that we think “deserves” taxpayer-subsidized health insurance. That is a judgment call that involves some value choices.
I will make one value choice for you and boldly assert that, if you are already enrolled in or eligible for one free or heavily subsidized health insurance program, we can rule you out as needing a second. That simple statement reduces the 45.7 million number down to 35 million, by excluding the Medicaid undercount and Medicaid/SCHIP eligible from our potential target population.
I think most people would also say that the 10.6 million I have labeled as “remaining uninsured” and shaded in yellow above are the most sympathetic target population.
It then gets tricky.
- Should people with incomes near or above the national median get health insurance subsidized by taxpayers?
- How about non-citizens? Should we distinguish between documented and undocumented non-citizens? Between those who pay taxes and those who do not? Remember that we are not talking about who should get emergency medical care, but instead who should get taxpayer subsidies to finance the purchase of pre-paid health insurance. Does that change your answer?
- Many young adults and childless couples are in good to excellent health. Do they deserve subsidies, when they may be making what they believe to be a rational economic decision and using their financial resources for things other than buying health insurance? Should a 25-year old Yale graduate triathlete making $30K per year get his health insurance subsidized by taxpayers if he chooses not to buy it because his budget is tight?
There is no clear right or wrong answer to the above questions. You need to make your own value choices for them.
Now let us look at the effects on the totals for several hypothetical answers to these questions. Remember that the advocates, some elected officials, and press tell us that the numbers are: 46 million uninsured, 15% of the population, and 1 in 6 Americans “are uninsured.” I suggest you try to figure out which of the following is closest to your view.
- Ann wants to subsidize everybody, but agrees that we don’t need to double-subsidize. She excludes the Medicaid undercount and Medicaid/SHIP eligible from her target population and ends up with 35 million people. That is still an enormous amount, but it is 10.7 million less than the headline number she heard in the news. Her target population is now 11.7% of the total U.S. population, down from 15%. Put another way, she would like taxpayers to help between 1 in 8 and 1 in 9 Americans who she feels are deserving of subsidies to buy health insurance, rather than the 1 in 6 she heard in the press.
- Bob agrees with Ann, but thinks that subsidies should go to the poor, or at least not to those who have above the median (or near median) incomes. His target population is therefore about 25 million people, way down from 46 million. That is 8.4% of the total U.S. population, or 1 in 12 Americans. That is still a huge problem, but it is very different from 1 in 6.
- Carla agrees with Bob that subsidies should not go to those with incomes near or above the national median. She also thinks that undocumented citizens should get emergency medical care, but not taxpayer-subsidized pre-paid health insurance. I will guess a 50/50 split between documented and undocumented of the 9.3 million uninsured non-citizen, and I would appreciate it if someone could help me refine this. With this assumption, Carla’s target population is about 21 million, or 7% of the total U.S. population. That is roughly 1 in 14 Americans.
- Doug thinks only American citizens with incomes below the national median (and who are not already eligible for another program) should be eligible for additional aid. His target population is therefore the bottom two bars on the graph, or 15.6 million people. That is 5.2% of the U.S. population, or 1 in 19 Americans. If Doug were to further limit subsidies to those below 200% of poverty or 150%, his target population would be a few million people smaller.
- Edie agrees with Doug, but thinks that if you are a young adult without kids, you should fend for yourself. Her target population is 10.6 million people, or 3.5% of the total U.S. population. That is 1 in 28 Americans.
These are, of course, not the only possible answers, but I think they are a representative bunch. Even for the most “liberal” set of answers (Ann’s), the headline numbers we hear in the press overstate the extent of the problem by more than 10 million people.
Now even Edie’s narrowest 10.6 million target population is still a lot of people who lack health insurance. So why does it matter that the press gets the numbers wrong?
- If we misdiagnose the problem, we could easily design the wrong policy solution. A solid quantitative understanding of who we would like to help and why is important.
- Health insurance subsidies cost taxpayers tens of billions of dollars each year. If we target these funds well and prioritize, we can help more of the people whom we think are deserving of additional assistance, and fewer of those who need less help. If we target those funds poorly, we will waste a lot of money. This point is independent of the total amount we spend on subsidizing health insurance.
- Health insurance competes with other policy goals for an enormous but still ultimately limited pool of taxpayer funds. We should neither overstate nor understate the problem to be solved, so that the tradeoffs with other policy goals can be considered fairly.
When you hear “46 million uninsured,” or “1 in 6 Americans don’t have health insurance,” remember that this is technically correct but misleading. The more important question is, “How many uninsured people need additional help from taxpayers?”
What’s your answer?
Budget Director Peter Orszag wrote on his blog yesterday that he thinks “Debt held by the public net of financial assets is the most meaningful measure of current federal debt.”
I wrote earlier today why I think Director Orszag’s new metric is misleading and dangerous. Now, however, I’m going to take his argument and apply it to the President’s budget, for which Director Orszag is responsible.
It seems to me that his own logic invalidates his claim (and therefore President Obama’s statement) that the President’s budget would cut the deficit in half by the end of the President’s first term.
Therefore, while our Budget will run deficits, we must begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on sound fiscal footing. (President’s Message on the Budget, page 4)
You will remember from my earlier post that debt held by the public is simply the accumulation of the federal budget deficits and surpluses of prior years. It is the sum of all current and past borrowing by the federal government from those outside the government. The deficit is an annual measurement, and the debt is a total of deficits and surpluses over time.
Director Orszag writes that “the most meaningful measure of current federal debt” should net out financial assets held by the U.S. government. If he believes this when measuring debt, then logically you should do the same with the annual deficit. His logic argues that this year’s projected $1.752 trillion federal budget deficit (OMB numbers) is not as good a measure as if we net out the amount of financial assets the U.S. government will purchase this year, which according to OMB is $915 billion (my calculation from Table S-1 of the President’s Budget). The Director’s logic suggests that he would think that the most meaningful measure of this year’s federal budget deficit is to net out this year’s purchase of financial assets. Instead of $1.752 trillion, the “most meaningful” deficit figure for 2009 would be $837 billion.
If the Director disagrees with me extending his logic from the debt to the deficit, I would be intrigued to hear his rationale.
The President has said that his budget will “cut the deficit in half by the end of my first term in office.” Director Orszag has defined that to mean that the 2013 deficit is less than half of the 2009 deficit, as measured on January 20th before they implemented any policy changes:
We project that the deficit for the current fiscal year, including the recovery and stability plans, will be $1.75 trillion, or 12.3 percent of GDP. Of that, $1.3 trillion, or 9.2 percent of GDP, was already in place when we assumed office.
The President is determined to cut this $1.3 trillion deficit by at least half in four years. This would bring the deficit down to $533 billion by fiscal year 2013. More importantly, it would reduce the deficit to about 3 percent of GDP. (Director Orszag’s testimony before the House Budget Committee, March 3, 2009, p. 2.)
If you take the figures in the President’s budget as face value, the Director hits the goal:
- He projects that the 2009 deficit will be $1.752 trillion.
- He projected that the 2009 deficit before enacting their new policies would be $1.3 trillion.
- He projects a 2013 deficit under the President’s budget of $533 billion. That’s 41% of the $1.3 trillion figure, well below half.
Most economists and budgeteers prefer to measure deficits as a percent of the economy. They easily hit their goal using this measure:
- He projects that the 2009 deficit will be 12.3% of GDP.
- He projected that the 2009 deficit before enacting their new policies would be 9.2% of GDP.
- He projects a 2013 deficit under the President’s budget of 3.0% of GDP, well under half the 2009 deficit. They hit this goal with ease.
But his starting (and ending) point for these measurements includes the purchase in 2009 of more than $900 billion of financial assets by the U.S. government (using OMB numbers). According to his blog post yesterday,
If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.
It seems to me that this logic (which I don’t buy) should apply equally to the debt and the deficit. His logic suggests that his starting point in 2009 for measuring “cutting the deficit in half” is inflated by hundreds of billions of dollars used to purchase financial assets.
Look at what happens, though, if instead you look at the deficit net of financial assets purchased:
- The 2009 deficit, net of financial assets purchased in 2009, is $837 billion.
- The 2013 deficit, net of financial assets purchased (and sold) in 2013, is $565 billion. That’s 67% of the 2009 deficit, well more than half.
And if we do the same thing as a share of the economy, they still fail to hit the President’s goal:
- The 2009 deficit, net of financial assets purchased, is 5.1% of GDP.
- The 2013 deficit, net of financial assets purchased, is 3.2% of GDP. That’s 63% of the 2009 deficit, again well more than half.
Now the Director’s test as stated in his testimony uses the 2009 deficit, measured as of January 20th before President Obama’s policies were enacted, as a starting point. OMB’s public numbers do not allow me to net out the financial assets to develop a precise figure for comparison. But we know that logically it’s not bigger than the $837 billion figure given above, so this ambiguity shouldn’t matter, either for aggregate dollars, or for percent of GDP. If anything, it should mean that they miss their “cut in half” target by an even greater amount.
If Director Orszag thinks that debt held by the public net of financial assets is the most meaningful measure of current federal debt, then it would seem logical that the same should apply to the annual federal budget deficit.
But then, using the Administration’s own numbers, the President’s budget does not come close to meeting the President’s goal of cutting the deficit in half by the end of his first term.
(Note to budget reporters: If you hear a response from OMB and would like to share it with me, I’ll give you my reaction.)
Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. But I don’t think this should change my logic above about whether to net out the purchase or sale of financial assets. I don’t see why the differences between deficit and debt accounting should mean that the purchase or sale of financial assets should be treated differently. If the Director or his staff have an answer, I’m all ears.
Yesterday on his blog the President’s Budget Director, Peter Orszag, asks himself and then answers the question, “How much does the federal government owe?”
This sounds like a technical question of concern only to “those of us wearing the green eyeshades,” but the Director’s suggested answer has dangerous ramifications, and could mislead, or at least confuse taxpayers and financial market participants.
The Director’s answer makes the federal debt appear $1.4 trillion smaller than the way it is traditionally measured. He argues that we should, in effect, ignore 1.4 million million dollars borrowed by the federal government. That is breathtaking.
Let’s look at the Director’s argument and why I think it’s dangerous.
Most budget experts focus on debt held by the public, which Director Orszag accurately describes as “the amount that the federal government owes to others.” I will expand on that a bit with some concrete numbers:
- Take the total amount the Federal government will spend this year. Specifically, we’re looking at cash”paid” by the U.S. government to someone outside the government in 2009. A budget wonk would call these outlays. I’ll use the nonpartisan Congressional Budget Office’s numbers for current law, so I get $3.85 trillion of outlays for 2009. That is way (way) above historic norms, in part due to the financial stabilization efforts, and in part due to the new “stimulus” law.
- Now take the amount the Federal government will collect in revenues this year. This is cash coming into the U.S. government from someone outside it. Almost all of this is taxes. CBO says this is $2.186 trillion of revenues for 2009.
- If the U.S. government is paying out $3.85 trillion in cash (outlays) this year, but collecting “only” <sigh> $2.186 trillion in cash, then we need to come up with the difference somewhere. That difference is $1.667 trillion for 2009. This is what CBO says is the federal budget deficit for 2009.
- The U.S. government gets this cash by issuing IOUs to people outside the government, aka Treasury bonds. The government gets cash from anyone who buys Treasury bonds – individuals, firms, and foreign governments.
- The debt held by the public is simply the accumulation of these IOUs. It is the sum of money owed by the U.S. government to others. (Update: See the caveat at the bottom.)
Nothing I have said so far is the slightest bit controversial, but this is where Director Orszag and I part ways. Tuesday he wrote:
As I said at the beginning of this post, I think the most meaningful measure of federal debt is debt held by the public net of financial assets. If I take a $100 loan from my bank and stick that amount into my bank account without spending any of it, my family and I aren’t poorer, because even as I owe $100 to my bank, my bank owes $100 to me. On net, and as long as the new asset is equal in value to the new liability, there’s no change in my overall financial state. There’s a similar effect when the federal government borrows money in order to invest in financial assets.
Suppose I tweak the Director’s metaphor to make it better fit the current situation and illustrate my point. If he takes a $100 loan from his bank and invests it in the business of his deadbeat neighbor Alan I. Gorp, he still owes the bank $100. The bank cannot loan that $100 to anyone else. His (the government’s) borrowing has “crowded out” borrowing by someone else. And who knows how much his $100 investment will be worth next month? We should care not just about his net position, but also about his total liabilities, and especially about how much he (the government) is borrowing from the bank (private sector).
In normal times this would not be a big difference, because the U.S. government in large part stays away from owning financial assets. Now, however, the federal government is buying equity stakes in banks and other large financial firms, and issuing loans to financial and non-financial firms. Director Orszag’s numbers show that the U.S. government owned $506 billion of financial assets last year, and will buy another $915 billion this year. (I’m subtracting “Debt net of financial assets” from “Debt held by the public” on Table S-1 of the President’s budget.) Those are huge numbers, and have a huge effect on what figure you cite for the federal debt.
If you look at the traditional measure of debt held by the public, which you’ll remember is the sum of all IOUs (Treasury bonds) issued by the Federal government, then under the President’s budget and using OMB numbers, that’s equal to $8.36 trillion. Compared to one year of our entire national output (GDP), that’s almost 59% of GDP.
If, however, you net out OMB’s estimate of the value of the financial assets, then the debt held by the public net of financial assets, is “only” $6.94 trillion, equivalent to almost 49% of GDP. That’s still a big bad number, but it’s $1.4 trillion and 10% of GDP less bad than the debt held by the public numbers. That’s a convenient way to make the problem look much smaller. Director Orszag argues that it is also the “most meaningful measure of current federal debt.”
Here is his key paragraph:
As the federal government has acted to stabilize the financial sector amidst the worst financial crisis since the Great Depression, the federal government has purchased significant financial assets … such as preferred equity stakes in Fannie Mae and Freddie Mac. The federal government will likely take a loss on these purchases, but the assets have value. And just as what my bank owes me should be netted against what I owe the bank in determining the health of my personal finances, the value of these assets should be netted against publicly held debt in determining the health of the government’s finances. … Debt held by the public net of financial assets is the most meaningful measure of current federal debt …” (emphasis added)
I disagree with this last statement, but I think I understand why he says it. From his perspective of the federal budget, he’s netting out some of his liabilities with a somewhat liquid asset that he now holds and hopes someday to sell. He concedes the point, however, that he is including some assets and liabilities with his new measure, but excluding others. This makes his new metric suspect.
From the perspective of the U.S. economy, the “netting” comes from different places. The U.S. Treasury has to issue $905 billion of Treasury bonds this year to raise the cash to buy those financial assets. This makes it harder for private firms and individuals to borrow, because they are competing with the government for cash, so they have to pay a higher interest rate. Those funds are then invested in other parts of the economy.
Another way to see why this is a poor metric is to imagine that the U.S. government were to borrow another trillion dollars by issuing even more Treasuries, and then immediately buy one trillion dollars of credit default swaps with the cash raised. According to Director Orszag’s preferred measure, nothing would have changed, because the two transactions would net out. But clearly we would have just had a major impact on the U.S. (and global) financial economies. U.S. government borrowing in these enormous amounts hurts financial markets, no matter what is done with the funds raised.
Director Orszag touches on another problem with his new metric when he writes “The federal government will likely take a loss on these purchases, but the assets have value.” He’s right, but the value of the particular assets being purchased by the government is highly uncertain. How much is he counting as the value of the $19.4 B loaned (so far) to General Motors? I sure hope he is not counting it at face value. What about the $70 B “invested” in AIG, or the $5.5 B in Chrysler? Any private firm valuing these assets would say their values need to be discounted.
The values of these financial assets are highly uncertain and depend heavily on what assumptions OMB uses about the likelihood of them being repaid. For people to trust this metric, they need to understand how it is calculated, which means that OMB should divulge the discounts they are applying to their financial assets. I will guess that he does not want to divulge those assumptions. I wouldn’t if I had his job.
I think the most meaningful measure of current federal debt is still debt held by the public. I think the public policy debate can be further informed by also disclosing the estimated value of the financial assets held by the U.S. government. But policymakers should not net out the two and use that measure instead of the one that most directly measures how much the U.S. government is borrowing from the private sector. This is particularly true when that new measure hides $1.4 trillion of debt borrowed by the U.S. government from the private sector.
Director Orszag, and those measuring his performance, should continue to use debt held by the public as the most meaningful measure of current federal debt. Budget projections will account for that measure to come down over time as the financial assets are sold and funds recouped.
Net measures can hide meaningful information. This is a theme I will return to often. Any time someone in economic policy gives you a net figure, see if you can learn something more by asking about the components that make up the net calculation.
The President’s Budget is titled “A New Era of Responsibility.” In his February 24th Address to the Congress, the President said,
The only way this century will be another American century is if we confront … the mountain of debt they stand to inherit. That is our responsibility.
A new era of responsibility does not begin with hiding $1.4 trillion of that mountain of debt. These IOU’s will not go away just because we ignore them.
Update (12:20 PM Wed): A friend corrects my statement that the debt is simply the accumulation of past deficits. It’s not. The Credit Reform Act measures credit subsidies (like for federal loan or loan guarantee programs) differently than it measures cash flows, and the deficit does not capture “means of financing and cash management, like when Treasury borrows funds and deposits the cash at the Fed.” I stand corrected on these points. I don’t think this changes my logic above about whether to net out the purchase or sale of financial assets.