I will be on CNBC’s Street Signs this afternoon at 2 PM EDT.  Governor Howard Dean and I will be discussing health care reform with host Erin Burnett.

Update:  We’ve got video.

Wednesday the President spoke in the Rose Garden about health care reform.  He said:

And [nurses] understand that this is a problem that we can no longer defer.  We can’t kick the can down the road any longer.  Deferring reform is nothing more than defending the status quo — and those who would oppose our efforts should take a hard look at just what it is that they’re defending.  Over the last decade, health insurance premiums have risen three times faster than wages.  Deductibles and out-of-pocket costs are skyrocketing.  And every single day we wait to act, thousands of Americans lose their insurance, some turning to nurses in emergency rooms as their only recourse.

So make no mistake, the status quo on health care is not an option for the United States of America.  It’s threatening the financial stability of families, of businesses, and of government.  It’s unsustainable, and it has to change.

I agree with all of this, except “those who oppose our efforts should take a hard look at just what it is that they’re defending.”

I strongly oppose the House tri-committee bill and the Kennedy-Dodd HELP committee bill.  I do not support the status quo.  I want different and even more aggressive reform than is being proposed in Congress.  It is unfair to characterize those who oppose the current legislation as opposing all health care reform, or as defenders of the status quo.

I therefore want to be explicit about what I support.  I propose Congress adopt the following plan instead of the legislation they are now considering.

A full description of a health care reform bill would probably take a few thousand words.  Today I instead offer just the basic description of what I propose.  This is not as polished or detailed as I would like, but it’s the core, and I would like to get it out there before our CNBC discussion today.  I am going to label this v1.  I may tweak it a bit over time, but the core will not change.  If you follow the health care debate closely, many parts of this will look familiar.  I may flesh out details in the future.

This should be a debate among alternatives, not “Are you for health care reform or the status quo?”

Keith Hennessey’s health care reform plan (v1)

Do:

1. Replace the tax exclusion for employer provided health insurance with a $7500 (single) / $15K (family) flat deduction for buying health insurance.
2. Allow the purchase of health insurance sold anywhere in the U.S.
3. Make health insurance portable
4. Expand Health Savings Accounts
5. Aggressively reform medical liability
6. Aggressively slow Medicare and Medicaid spending growth, and use the savings for long-term deficit reduction

Don’t:

1. Raise taxes
2. Create a new government health entitlement
3. Mandate the purchase of health insurance
4. Have government set private premiums
5. Create a government-run health plan option
6. Have the government mandate benefits
7. Expand Medicaid

Results:

• Lower premiums, higher wages
• Portable health insurance reduces “job lock”
• +5 million insured (net)
• 100 million people will pay lower taxes
• 30m with expensive health plans pay higher taxes
• No net tax increase overall
• Reduces short-term and long-term deficit
• Fair to small business employees & self-employed
• Incentives and individual decisions “bend the cost curve down”
• More individual control & responsibility for medical decisions

(photo credit:  Burnett: CNBC, Dean: Wikipedia)

Hennessey’s health care reform plan

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Hennessey’s health care reform plan, v2
2. A counterpoint to the President’s health care reform email
3. Fishy statements about health care reform

Provoked by the Vice President’s comment on Sunday that the Administration “misread the economy,” the Obama Administration is partway through an unplanned shift in their topline economic message.  It is painful to see this transition play out in public as the Obama Administration and its allies try to find their footing on the most basic questions about the U.S. economy and their macroeconomic policy.

Last Thursday the President spoke in the Rose Garden after meeting with some alternative energy CEOs.  His statement included only a placeholder about the jobs report:

And obviously, this is a timely discussion, on a day of sobering news.  The job figures released this morning show that we lost 467,000 jobs last month.  And while the average loss of about 400,000 jobs per month this quarter is less devastating than the 700,000 per month that we lost in the previous quarter, and while there are continuing signs that the recession is slowing, obviously this is little comfort to all those Americans who’ve lost their jobs.

There’s no real substance there, so last Thursday the Administration’s basic economic message appeared unchanged by the new jobs data.

Then on Sunday, when asked about why unemployment is now higher than the Administration predicted it would be, the Vice President said:

The truth is, we and everyone misread the economy.  The figures we worked off of in January were the consensus figures and most of the blue chip indexes out there.

… And so the truth is, there was a misreading of just how bad an economy we inherited.

In Moscow yesterday, the President tried to correct the Vice President:

THE PRESIDENT (to NBC):  No, no, no, no, no.  Rather than say ‘misread,’ we had incomplete information.

THE PRESIDENT (to ABC):  There’s nothing that we would have done differently.

THE PRESIDENT (to Fox News):  I think it’s important to understand that we’ve got a short-term challenge which, no matter how big our stimulus was, was going to be a challenge – partly because we’ve got fiscal constraints. … You just can’t push that out that quickly, partly, not just because the federal government has to process applications, but also because states and local governments have to gear up to get these projects going.  …  I don’t take anything off the table when unemployment is close to 10 percent and a lot of Americans are hurting out there.

NEC Director Dr. Larry Summers said Tuesday:

It is clear from the data that there needs to be more fiscal stimulus in the second half of the year than there was in the first half of the year.  Fortunately, the stimulus program designed by the president and passed by Congress provides exactly that.

The Vice President’s economic advisor, Dr. Jared Brenstein, said:

It’s working, it’s demonstrably working. … There is no conceivable stimulus package on the face of this earth that would fully offset the deepest recession since the Great Depression.

White House Press Secretary Robert Gibbs said today in a press gaggle on Air Force One en route to Rome:

Q I know I might get crosswise with you on this, but is the White House considering a second stimulus?

MR. GIBBS: Well, I would say — I’ll repeat what I’ve said and I think the President and Vice President have said, and I think the President said this yesterday, he’s not ruling anything out, but at the same time he’s not ruling anything in. Obviously we passed a hefty recovery plan that implements over the course of about a two-year period of time, and we’re on track with that implementation.

The Gibbs statement was reinforced by an emailed statement from one of his deputies, Jen Psaki:

We remain focused on putting thousands of Americans back to work through the implementation of the recovery act and any discussion of a second stimulus is premature at this point.

These comments lead me to conclude that the Administration’s policy is unchanged:  their answer on a second stimulus is “No for now,” while reserving the right to change their minds later as new data comes in.

This answer is, however, being lost on some of their friends and allies:

Dr. Laura Tyson, characterized as “an outside adviser to President Barack Obama” said:

The stimulus is performing close to expectations but not in timing. … The stimulus was a bit too small.  (Source: Bloomberg)

and

We should be planning on a contingency basis for a second round of stimulus.  (Source:  NBC)

Here’s House Majority Leader Steny Hoyer:

We need to be open to whether or not we need additional action.

And here is Senate Majority Leader Harry Reid:

As far as I’m concerned, there’s no showing to me that another stimulus is needed.  Things are – things, as Bernanke said, the crops have been planted, the shoots are now appearing above the ground.  And that certainly is evident based on the fact that slightly over 10 percent of the dollars are out among the people.

It’s hard to reconcile a “stay the course” strategy with (a) new bad data, (b) “we misread the economy” and (c) “we had incomplete information.”

Last week’s jobs report provoked this chaos.  For the first five months, the Administration’s macroeconomic message was simple and internally consistent:

• We inherited huge problems.  [set a low bar]
• We took bold action to fix these problems, most prominently the stimulus law.  [show leadership]
• The stimulus law is working.  [show specific examples which don’t actually prove this in the aggregate, but which demonstrate action]
• This is going to take a while.  Be patient.  But look, it’s working.  Things are getting better bit by bit.  GDP should start to grow by the end of the year, and job growth should resume early in 2010.  [lower expectations]
• Other stuff like our budget, health care reform, financial regulatory reform, and our climate change policies are good for the economy and should become law.  [push the legislative agenda]

I disagree with several of these points, but this is/was their message.

Until last Thursday, the employment data was consistent with this message, and in particular with “Things are getting better bit by bit.”  The economy lost fewer jobs in March than in February, fewer still in April, and even fewer in May.  A topline message of “Things are still bad and we feel your pain, but they’re getting better” was consistent with the most fundamental monthly metric of the country’s economic health.

Last week’s employment report fouled up this message.  June’s job losses were significantly worse than May’s.

This data point is significant and poses a challenge to the President and his team.  If it is the beginning of a new downward trend, then both the Administration’s stimulus policy and their message about the economy and economic policy need to change.  If, however, it is a random deviation from the previous trend, then the old policy and message still works, and they’ll just have to ride out the next few weeks until new data confirms that things are actually still on a gradual upward trend.

Monthly employment data has large “error bars.”  For a while, the standard joke among our CEA economists was that the forecast for the upcoming monthly jobs report was “+50,000 jobs, plus or minus 100,000.”  There’s a decent chance that the June employment report was just a bad luck data point (although the report was consistently bad throughout, which is scary).

Thus the President, aided by his advisors, has to make a macroeconomic judgment and a a policy decision:  Does Thursday’s jobs report necessitate a change in policy now, or should we stick with our policy and wait for additional data to see if it confirms a new downward trend?  This economic judgment and policy decision should then drive their public messages to the press, markets, and Congress.  Within the White House, I imagine this judgment call is primarily a Summers/Romer responsibility, supplemented by views from Treasury Secretary Geithner, Budget Director Orszag, and Labor Secretary Solis.

For the time being, the Administration and its allies are implicitly wagering that the new jobs report is not an early warning sign of a new downward trend.  They are sticking to their existing policy and message.

I see at least five challenges on the path they have chosen:

1. It might be wrong.  If the July employment report (to be released August 7th) is worse than the June report, the Obama team will look like they have missed a turning point.  In their preemptive defense, it’s often quite difficult to identify turning points.
2. The Vice President’s comment that “we misread the economy,” followed by the President’s comment that “we had incomplete information,” undermines confidence in the Administration’s ability to diagnose and address major macroeconomic trends.  Sticking with the current path under potentially changed circumstances risks reinforcing this feeling.
3. They have to rally nervous allies to echo their message that “the stimulus is working,” while the evidence to prove this is in question.  Just as it’s impossible for opponents to prove that the stimulus did not “save or create” jobs, it’s impossible for the Administration to demonstrate that 467,000 lost jobs is better than it would have been without the stimulus.  On a raw political level, how do you convince people that the stimulus is working when the economy is still in visible decline?
4. They have to publish the Mid-Session Review of the President’s Budget this month, with a new updated economic forecast.  That forecast was almost certainly locked down weeks ago.  Do they revise it downward based on last week’s bad jobs data?  Either choice has significant downsides.
5. They have to combat a press trend for a “weakening U.S. economy” storyline to overwhelm their desire to move health care legislation through the Congress in July.  This storyline has exploded today in the Washington-centric press.

I conclude with two quotes that crystallize the Administration’s current challenge.  The first is from a good analysis by Dan Balz in today’s Washington Post:

It seems hard to square an assessment that the administration underestimated the severity of the recession and the assertion that the White House wouldn’t have done anything differently had it known how bad things really were.

And since this is a debate about Keynesian macroeconomic fiscal stimulus, here is how John Maynard Keynes replied to a criticism during the Great Depression of having changed his mind on monetary policy:

When the facts change, I change my mind.  What do you do, sir?

(photo credit: humpty dumpty sat on a wall by paul peracchia)

Scrambling for a macroeconomic message

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Many mixed signals
2. Misreading the economy
3. Are we pointed in the right direction yet?

This note is just a collection of primary source documents from today’s announcement.  Generalists will likely be interested in the first six documents, as well as #10.  The other documents will be of interest primarily to financial experts.

Here you will find:

1. The President’s remarks in the Rose Garden this morning
2. A joint statement by Treasury Secretary Henry Paulson, Federal Reserve Chairman Ben Bernanke, and FDIC Chairman Sheila Bair
3. A summary document that describes the package as a whole
4. Statement by Treasury Secretary Henry Paulson
5. Statement by Federal Reserve Chairman Ben Bernanke
6. Statement by FDIC Chairman Sheila Bair

Treasury documents

1. Capital Purchase program description
2. Capital Purchase program term sheet
3. Executive Compensation rules
4. Speech by Interim Assistant Secretary for Financial Stability Neel Kashkari on Implementation of the Economic Stabilization Act (delivered Monday 13 October)

FDIC documents

1. FDIC press release

Fed documents

1. Commercial Paper Funding Facility press release
2. Commercial Paper Funding Facility: Program Terms and Conditions
3. Commercial Paper Funding Facility: Frequently Asked Questions

President’s Working Group on Financial Markets documents

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Address by President Bush on financial markets
2. Rose Garden Statement by President Bush on financial markets
3. Rose Garden Statement by President Bush on the Economy

Good morning.  I just completed a meeting with my working group on financial markets.  We discussed the unprecedented and aggressive steps the federal government is taking to address the financial crisis.  Over the past few weeks, my administration has worked with both parties in Congress to pass a financial rescue plan.  Federal agencies have moved decisively to shore up struggling institutions and stabilize our markets.  And the United States has worked with partners around the world to coordinate our actions to get our economies back on track.

This weekend, I met with finance ministers from the G7 and the G20 — organizations representing some of the world’s largest and fastest-growing economies.  We agreed on a coordinated plan for action to provide new liquidity, strengthen financial institutions, protect our citizens’ savings, and ensure fairness and integrity in the markets.  Yesterday, leaders in Europe moved forward with this plan.  They announced significant steps to inject capital into their financial systems by purchasing equity in major banks.  And they announced a new effort to jumpstart lending by providing temporary government guarantees for bank loans.  These are wise and timely actions, and they have the full support of the United States.

Today, I am announcing new measures America is taking to implement the G7 action plan and strengthen banks across our country.

First, the federal government will use a portion of the $700 billion financial rescue plan to inject capital into banks by purchasing equity shares.  This new capital will help healthy banks continue making loans to businesses and consumers.  And this new capital will help struggling banks fill the hole created by losses during the financial crisis, so they can resume lending and help spur job creation and economic growth.  This is an essential short-term measure to ensure the viability of America’s banking system.  And the program is carefully designed to encourage banks to buy these shares back from the government when the markets stabilize and they can raise capital from private investors.

Second, and effective immediately, the FDIC will temporarily guarantee most new debt issued by insured banks.  This will address one of the central problems plaguing our financial system — banks have been unable to borrow money, and that has restricted their ability to lend to consumers and businesses.  When money flows more freely between banks, it will make it easier for Americans to borrow for cars, and homes, and for small businesses to expand.

Third, the FDIC will immediately and temporarily expand government insurance to cover all non-interest bearing transaction accounts.  These accounts are used primarily by small businesses to cover day-to-day operations.  By insuring every dollar in these accounts, we will give small business owners peace of mind and bring stability to the — and bring greater stability to the banking system.

Fourth, the Federal Reserve will soon finalize work on a new program to serve as a buyer of last resort for commercial paper.  This is a key source of short-term financing for American businesses and financial institutions.  And by unfreezing the market for commercial paper, the Federal Reserve will help American businesses meet payroll, and purchase inventory, and invest to create jobs.

In a few moments, Secretary Paulson and other members of my Working Group on Financial Markets will explain these steps in greater detail.  They will make clear that each of these new programs contains safeguards to protect the taxpayers.  They will make clear that the government’s role will be limited and temporary.  And they will make clear that these measures are not intended to take over the free market, but to preserve it.

The measures I have announced today are the latest steps in this systematic approach to address the crisis.  I know Americans are deeply concerned about the stress in our financial markets, and the impact it is having on their retirement accounts, and 401(k)s, and college savings, and other investments.  I recognize that the action leaders are taking here in Washington and in European capitals can seem distant from those concerns.  But these efforts are designed to directly benefit the American people by stabilizing our overall financial system and helping our economy recover.

It will take time for our efforts to have their full impact, but the American people can have confidence about our long-term economic future.  We have a strategy that is broad, that is flexible, and that is aimed at the root cause of our problem.  Nations around the world are working together to overcome this challenge.  And with confidence and determination, we will return our economies to the path of growth and prosperity.

Thank you.

Rose Garden Statement by President Bush on financial markets

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Rose Garden Statement by President Bush on the Economy
2. Address by President Bush on financial markets
3. President Bush’s speech on financial markets and the world economy

This is really important.

Good morning.  I thank Treasury Secretary Hank Paulson, Federal Reserve Chairman Ben Bernanke, and SEC Chairman Chris Cox for joining me today.

This is a pivotal moment for America’s economy.  Problems that originated in the credit markets — and first showed up in the area of subprime mortgages — have spread throughout our financial system.  This has led to an erosion of confidence that has frozen many financial transactions, including loans to consumers and to businesses seeking to expand and create jobs.  As a result, we must act now to protect our nation’s economic health from serious risk.

There will be ample opportunity to debate the origins of this problem.  Now is the time to solve it.  In our nation’s history, there have been moments that require us to come together across party lines to address major challenges.  This is such a moment.  Last night, Secretary Paulson and Chairman Bernanke and Chairman Cox met with congressional leaders of both parties — and they had a very good meeting.  I appreciate the willingness of congressional leaders to confront this situation head on.

Our system of free enterprise rests on the conviction that the federal government should interfere in the marketplace only when necessary.  Given the precarious state of today’s financial markets — and their vital importance to the daily lives of the American people — government intervention is not only warranted, it is essential.

In recent weeks, the federal government has taken a series of measures to help promote stability in the overall economy.  To avoid severe disruptions in the financial markets and to support home financing, we took action to address the situation at Fannie Mae and Freddie Mac.  The Federal Reserve also acted to prevent the disorderly liquidation of the insurance company AIG.  And in coordination with central banks around the world, the Fed has injected much-needed liquidity into our financial system.

These were targeted measures designed primarily to stop the problems of individual firms from spreading even more broadly.  But more action is needed.  We must address the root cause behind much of the instability in our markets — the mortgage assets that have lost value during the housing decline and are now restricting the flow of credit.  America’s economy is facing unprecedented challenges, and we are responding with unprecedented action.

Secretary Paulson, Chairman Bernanke, and Chairman Cox have briefed leaders on Capitol Hill on the urgent need for Congress to pass legislation approving the federal government’s purchase of illiquid assets, such as troubled mortgages, from banks and other financial institutions.  This is a decisive step that will address underlying problems in our financial system.  It will help take pressure off the balance sheets of banks and other financial institutions.  It will allow them to resume lending and get our financial system moving again.

Additionally, the federal government is taking several other steps to address the trouble of our financial markets.

The Department of the Treasury is acting to restore confidence in a key element of America’s financial system — money market mutual funds.  In the past, government insurance was not available for these funds, and the recent stresses on the markets have caused some to question whether these investments are safe and accessible.  The Treasury Department’s actions address that concern by offering government insurance for money market mutual funds.  For every dollar invested in an insured fund, you will be able to take a dollar out.

The Federal Reserve is also taking steps to provide additional liquidity to money market mutual funds, which will help ease pressure on our financial markets.  These measures will act as grease for the gears of our financial system, which were at risk of grinding to a halt.  They will support the flow of credit to households and businesses.

The Securities and Exchange Commission has issued new rules temporarily suspending the practice of short selling on the stocks of financial institutions.  This is intended to prevent investors from intentionally driving down particular stocks for their own personal gain.  The SEC is also requiring certain investors to disclose their short selling, and has launched rigorous enforcement actions to detect fraud and manipulation in the market.  Anyone engaging in illegal financial transactions will be caught and persecuted [sic].

Finally, when we get past the immediate challenges, my administration looks forward to working with Congress on measures to bring greater long-term transparency and reliability to the financial system — including those in the regulatory blueprint submitted by Secretary Paulson earlier this year.  Many of the regulations governing the functioning of America’s markets were written in a different era.  It is vital that we update them to meet the realities of today’s global financial system.

The actions I just outlined reflect the considered judgment of Secretary Paulson, Chairman Bernanke, and Chairman Cox.  We believe that this decisive government action is needed to preserve America’s financial system and sustain America’s overall economy.  These measures will require us to put a significant amount of taxpayer dollars on the line.  This action does entail risk.  But we expect that this money will eventually be paid back.  The vast majority of assets the government is planning to purchase have good value over time, because the vast majority of homeowners continue to pay their mortgages.  And the risk of not acting would be far higher.  Further stress on our financial markets would cause massive job losses, devastate retirement accounts, and further erode housing values, as well as dry up loans for new homes and cars and college tuitions.  These are risks that America cannot afford to take.

In this difficult time, I know many Americans are wondering about the security of their finances.  Every American should know that the federal government continues to enforce laws and regulations protecting your money.  Through the FDIC, every savings account, checking account, and certificate of deposit is insured by the federal government for up to $100,000.  The FDIC has been in existence for 75 years, and no one has ever lost a penny on an insured deposit — and this will not change.

America’s financial system is intricate and complex.  But behind all the technical terminology and statistics is a critical human factor — confidence.  Confidence in our financial system and in its institutions is essential to the smooth operation of our economy, and recently that confidence has been shaken.  Investors should know that the United States government is taking action to restore confidence in America’s financial markets so they can thrive again.

In the long run, Americans have good reason to be confident in our economic strength.  America has the most talented, productive, and entrepreneurial workers in the world.  This country is the best place in the world to invest and do business.  Consumers around the world continue to seek out American products, as evidenced by record-high exports.  We have a flexible and resilient system that absorbs challenges and makes corrections and bounces back.

We’ve seen that resilience over the past eight years.  Since 2001, our economy has faced a recession, the bursting of the dot-com bubble, major corporate scandals, an unprecedented attack on our homeland, a global war on terror, a series of devastating natural disasters.  Our economy has weathered every one of these challenges, and still managed to grow.

We will weather this challenge too, and we must do so together.  This is no time for partisanship.  We must join to move urgently needed legislation as quickly as possible, without adding controversial provisions that could delay action.  I will work with Democrats and Republicans alike to steer our economy through these difficult times and get back to the path of long-term growth.  Thank you very much.

Rose Garden Statement by President Bush on the Economy

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Rose Garden Statement by President Bush on financial markets
2. Address by President Bush on financial markets
3. Statement by Treasury Secretary Hank Paulson

Here is our Statement of Administration Policy (SAP) on this bill.  It’s four pages, but a very easy read.  If you’re at all interested in climate change policy, I highly recommend you read the whole thing.

Here’s the bottom line from the SAP:

For these and other reasons stated below, the President would veto this bill.

Before I dive into the problems with what this bill does, it’s important to understand what it doesn’t do.  The Boxer amendment would not fix the problems with current law and climate change.  Here’s what the President said about this on April 16^th in the Rose Garden:

As we approach this challenge, we face a growing problem here at home. Some courts are taking laws written more than 30 years ago — to primarily address local and regional environmental effects — and applying them to global climate change. The Clean Air Act, the Endangered Species Act, and the National Environmental Policy Act were never meant to regulate global climate. For example, under a Supreme Court decision last year, the Clean Air Act could be applied to regulate greenhouse gas emissions from vehicles. This would automatically trigger regulation under the Clean Air Act of greenhouse gases all across our economy — leading to what Energy and Commerce Committee Chairman John Dingell last week called, “a glorious mess.”

If these laws are stretched beyond their original intent, they could override the programs Congress just adopted, and force the government to regulate more than just power plant emissions. They could also force the government to regulate smaller users and producers of energy — from schools and stores to hospitals and apartment buildings. This would make the federal government act like a local planning and zoning board, have crippling effects on our entire economy.

Decisions with such far-reaching impact should not be left to unelected regulators and judges. Such decisions should be opened — debated openly; such decisions should be made by the elected representatives of the people they affect. The American people deserve an honest assessment of the costs, benefits and feasibility of any proposed solution.

The Boxer amendment does nothing to fix this problem.

The President thinks there is a right way and a wrong way to address climate change.  This bill falls squarely in the “wrong way” category.  It’s costly, bureaucratically dangerous, internationally counterproductive, and environmentally ineffective.

Costly

The SAP addresses costs on an individual and economy-wide level.  It also describes the enormous expansion of government that this bill would entail.  The following numbers come from two analyses:  one done by the Environmental Protection Agency, and another by the Energy Information Administration at the Department of Energy.

At an individual level:

• The bill would increase gasoline prices 53¢/gallon in 2030, and $1.40/gallon in 2050.  (The effects of climate change policies are typically measured many years in the future, since the changes build up over time).
• It would increase electricity prices 44% in 2030, and 26% in 2050.
• It would reduce a typical household’s purchases by nearly $1400 in 2030, and by as much as $4400 in 2050.

At an economy-wide level:

• The bill could reduce U.S. GDP by as much as seven percent in 2050.
• It could reduce U.S. manufacturing output by almost 10% in 2030, before even half of the bill’s required emissions reductions have taken effect.
• EPA estimates the bill would impose $10 trillion of costs on the U.S. private sector through 2050.  These costs would be passed through to you, the consumer, through the higher fuel and power costs described above.  This would make the Boxer bill by far the most expensive regulatory bill in our Nation’s history.

And for the federal government:

• The bill would increase revenues by $6.2 trillion through 2050.  That’s “trillion” with a “T”.  It does this by creating “auction allowances”, and then auctioning those allowances to those who produce power.  The vast majority of these higher costs will be passed through to you in the form of higher energy costs, producing the gasoline and power price increases described above.
• It would also give a bunch of these allowances away to States, foreign governments, and private entities.  Our experts estimate the value of these allowances given away to be about $3.2 trillion.  Again, that’s with a T.  That’s a big giveaway.  Strike that.  It’s an enormous an unprecedented giveaway.
• The bill would increase federal mandatory (think “entitlement”) spending by $2.6 trillion through 2050, including $346 billion on new training and income support programs, and $750 billion in new foreign aid.  This spending would be on autopilot, and not automatically subject to annual review as “discretionary” appropriated programs are.

Bureaucratically dangerous

The bill creates a staggering number of funds, commissions, and programs to oversee the market and provide “transition relief,” giving an unprecedented amount of control over the U.S. economy to unelected bureaucrats.

Two of the most powerful new bureaucracies are the Carbon Market Efficiency Board and the International Climate Change Commission.  The Carbon Market Efficiency Board would oversee and regulate the new carbon trading markets, and would use “Emergency Off Ramps” and supplemental auctions to affect the supply of emission allowances if they believe the price is too high, allowing the emissions “market” to be subject to the whims of appointed bureaucrats (and the interest groups that lobby them).  The International Climate Change Commission would dictate to importers which countries they can import from, and force importers to submit emission allowances (priced by the Commission) for each category of goods they import from each source country.  The Commission would also auction off a separate pool of international allowances, the proceeds of which would be spent on a new State Department program established to “mitigate the negative impacts of global climate change on disadvantaged communities in other countries.”

These two new government organizations would have unprecedented and terrifying power to influence the growth rate of the U.S. economy, the composition of the economy, and our trading relations with other nations.  The old Interstate Commerce Commission, which regulated railroads for more than a century, pales in comparison.

Internationally counterproductive

Last year the President launched an international effort that we call the “Major Economies” process.  The Major Economies process is premised on the thought that if you want to have a measurable effect on the global climate, then all of the largest emitters of greenhouse gases need to work together.  A solution doesn’t work if the emissions of the big developing nations (like China and India) keep growing unconstrained, while those of the big developed nations (like the U.S.) are limited.

The President’s lead negotiators on the major economies process, Dan Price and Jim Connaughton, have been working with their counterparts from the 16 other largest economies in the world.  They’re trying to reach agreement this summer on a “leaders’ declaration” that would serve as an input into the broader U.N. discussion with 180+ countries.  In this declaration, we are seeking agreement on a long-term emissions reduction goal, and on the need for all major economies to do their part.

The Major Economies process is an attempt at international cooperation with 16 other big countries.  The Boxer amendment would mess this effort up at least in four ways:

1. It would unilaterally impose large costs on the U.S. by limiting our emissions, whether or not other major economies do the same.  This is silly, for even though the U.S. is the world’s second largest producer of GHGs, and we’re about 20% of the world total now, our share will become smaller over time as the developing country emissions grow faster than ours.  Why impose a big cost on ourselves when we don’t even know that others are committed to take actions to do their part?  (This was the flaw in the Kyoto agreement in the late 90’s.)
2. If we were to limit our emissions and a big developing economy did not, then some U.S. factories would close and their firms would build new factories overseas.  The emissions source would shift to this economy.  So U.S. workers and the U.S. economy lose, and global emissions aren’t reduced.  We call this “emissions leakage” and “economic leakage”.
3. The Boxer Amendment would then impose an “import surcharge” on goods from countries that don’t limit their emissions.  Think about this – if China doesn’t change their emissions, we make Chinese goods more expensive for Americans to buy.  Sure, that hurts Chinese producers, which someone might believe would encourage the Chinese to cap their own emissions (we disagree).  But it also hurts American consumers.
4. Threatening import surcharges impairs our ability to get major developing nations onboard with a new agreement.  It could also start a trade war.

There’s so much bad in this bill, that’s it hard to rank the problems.  But the international consequences, and the possibility of provoking a trade war, are at or near the top of the list.

In contrast, in addition to the Major Economies process, the President has proposed to immediately eliminate all trade barriers on clean energy technologies.  He has also proposed creating an international clean energy technology fund, and has pledged $2 billion on behalf of the U.S. if others will chip in as well.  That’s the right way to address climate change internationally.

Environmentally ineffective

You would think that a bill which imposes such large costs on the U.S. economy would at least do a lot to reduce the amount of greenhouse gases in the atmosphere, the future global temperature, and therefore the chance of severe global climate change.

Here are the numbers:

• Based on estimates from the U.N.’s Intergovernmental Panel on Climate Change, an increase of 90 parts of CO₂ per million parts of atmosphere (ppm) would, over many decades, increase the global temperature by about 1º Celsius (I’m oversimplifying.)
• The Boxer amendment would reduce the CO₂ in the atmosphere by between 7 and 10 ppm by 2050, and by between 25 and 28 ppm by 2095.  (EPA estimate)

The scientists tell me I can’t just divide 7 or 10 by 90 (it’s not linear), but the basic point still holds:  the Boxer amendment would reduce future global temperatures by far, far less than one degree Celsius.

So the Boxer amendment would reduce annual U.S. GDP in 2050 by as much as 7%, and U.S. manufacturing output by about 10% in  2030, in exchange for provoking a trade war and lowering the global temperature by less than one degree.

That’s the wrong way to address climate change, and it’s part of the reason why the President would veto this bill.

The wrong way to address climate change

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. What did President Bush announce today on climate change?
2. The G-8 agreement (especially on climate change)
3. Parsing the President: no “climate change”?

I’m going to do this in three parts:  (1) give a few definitions for those who are new to the housing finance world; (2) define the problem; and (3) explain the President’s new proposals.

Let’s begin with a few definitions:

1. A subprime mortgage is one in which there is more risk to the lender than from a “prime” borrower.  A subprime mortgage may be to a borrower with poor credit, or for a loan with little or no down payment, no mortgage insurance, or little or no documentation of income.  Note that subprime does not necessarily mean low income.  Subprime mortgages are just as high a percentage of big loans (“jumbos”, in which the loan amount is >$417K) as of smaller loans.
2. An ARM is an adjustable rate mortgage.  This is in contrast to a fixed rate mortgage.  In an ARM, the interest rate changes over time.
3. A 2/28 mortgage is a specific type of subprime ARM.  Typically, you pay a low fixed teaser interest rate for two years (and often no principal).  In month 25, your interest rate resets to a (much) higher rate.  Your monthly mortgage payments jump, in some cases quite dramatically.  And your interest rate continues to reset every six months after the first reset.  A 2/28 mortgage (or its cousin, a 3/27) is one in which the interest rate starts low, then jumps after two years.  In most cases, you put little or no money down, and you’re hoping that the value of the home will appreciate significantly during those first two years.  If it does, you can probably refinance with an affordable fixed rate, since you now have equity in the home.  But if the house does not appreciate in value (or if it depreciates), you’re stuck with much higher monthly payments.  Problem:  In some cases, people bought such a mortgage where they realistically would never be able to afford the higher monthly payments after the reset.  In some markets housing prices have declined over the past two years.  These people are having trouble making their higher (post-teaser) monthly mortgage payments.  So, for instance, imagine a $200,000 30-year subprime ARM, which has a 7% teaser rate for 2 years, followed by a steadily climbing rate beginning in year 3.  If market interest rates rise, your monthly mortgage payments could increase from $1,531 in years one and two, to $1,939 in year three, to $2,370 by year five.
4. Refinancing is when you get a new loan (presumably, with a better payment stream) that replaces the original loan.  Modification is when your lender helps you out – by reducing the interest rate, or forgiving a portion of the loan, or allowing you to skip payments for a while, or allowing you to defer payments to the back end of the loan.  Foreclosure is when the lender gives up on the mortgage and takes your house.

Now here’s your crash course in the subprime problem.

In 2005, 2006, and the first half of 2007:

• interest rates were low,
• home prices were appreciating,
• the economy was strong, and
• financial innovation had increased the ability of lenders to raise capital from markets, and to provide credit to borrowers.

There was also a proliferation of adjustable rate mortgages, especially subprime ARMs.

Much of what is happening now is driven simply by the calendar.  Earlier this year, the first big chunk of subprime ARMs issued in early 2005 hit their two-year interest rate reset.  Those homeowners suddenly saw their monthly mortgage payments jump.

At the same time, interest rates were rising, and housing prices were depreciating in some areas (especially California, Arizona, and Florida).  Nationwide, the economy outside of the housing and financial sectors is strong, but in some areas of the country (such as Michigan and Ohio) the regional economies are still slow.

These factors combined to increase the number of mortgage holders who were facing financial pressure.  In the extreme case, there was an increase in the number of foreclosures.

You can see from this graph that resets will continue through the first quarter of 2009.  Again, this is driven by the calendar.  It means this problem will be with us for a while, as more homeowners will face financial pressures as the mortgages issued in 2006 and the first half of 2007 reset.  Remember that when you’re still hearing about housing all next year.

Not everyone who faces an interest rate reset loses their home.  In fact, we expect more than half of them to either refinance, or just tolerate (and pay) the higher monthly payments.  On TV you can now see ads for lending firms that are offering to help you refinance before your reset hits.

Some will be on the margin – they can’t quite afford their mortgage, but with a little flexibility from their lender, or a little help from the government, they can stay current.  The President’s new proposals fall into this category.

Others bought homes they just couldn’t afford.  Some of these people knew their payments would increase, and planned for it (imagine a married grad student planning to graduate before his rate resets).  Others were betting that future increases in the value of the home would give them enough equity to refinance when their reset hit.  Still others didn’t know, or were bamboozled by whoever sold them the loan.  For whatever reason, some of these people still have no equity in the home, and they simply can’t afford the higher monthly payments.  These are the subprime borrowers most likely to face foreclosure.

Subprime mortgages, and the financial securities derived from them, are also a principal causal factor in recent problems in the financial markets.

Last Friday, the President announced three new initiatives aimed at helping homeowners who are struggling to meet their mortgage payments:

1. We’re expanding the availability of mortgage insurance sold by the Federal Housing Administration (FHA).  You have to meet certain credit requirements to buy mortgage insurance from FHA.  One of those requirements is that you have to be current on your mortgage payments.  (“Current” means you’re not behind.)  Our new initiative would allow you to buy FHA insurance even if you’re not current, as long as the reason you were late was because of an interest rate reset (I’ll explain this more in a bit.)  You also still need to meet FHA’s other credit tests.  This mortgage refinancing product is designed to help homeowners who recently saw their monthly payments jump, and are now having trouble making those payments.  We don’t need to change the law to do this – FHA is doing it administratively.  We call this FHASecure.  The President also renewed his call on Congress to pass our FHA modernization proposal.  The President proposed this over a year ago.  The House passed a close version of it with more than 400 votes last year.  So far, neither the House nor the Senate has acted this year.  The proposal would allow FHA to offer lower down payment requirements, to insure bigger loans, and to allow FHA to price premiums based on risk.  These reforms would help more first-time homebuyers and those with low and moderate incomes, and would give those refinancing their homes more mortgage insurance options.
2. The President proposed changing the tax code.  We would make “cancellation of mortgage debt” a non-taxable event.

   Example:  You bought a $200,000 house two years ago with no down payment.  Housing prices in your area have declined dramatically, so your house is now worth only $180,000.  Your monthly mortgage payments just jumped, and you and your lender agree that you won’t be able to make your mortgage payments going forward.  Since a lender typically loses 20% (rule of thumb) when they foreclose, your lender wants to modify your loan to work something out with you, so you can keep your house, and your lender will lose less than 20% of the loan.  Let’s say your lender decides to forgive (“cancel”) $20,000 of your $200,000 mortgage, so now your $180,000 home is paired with a $180,000 mortgage (I’m oversimplifying.)

   Under current law, the $20K of debt your lender “canceled” counts as taxable income.  If you’re in the 25% income tax bracket, you have to pay $5,000 of taxes on that.  Since you’re only in this position because you’re strapped for cash, the one thing you can’t afford is to pay $5,000 more taxes.  This makes it less likely that you and your lender will be able to work out the loan modification in the first place, and makes it more likely that you’ll face foreclosure.  Conceptually, the tax code now recognizes the decline in your debt, but ignores the decline in the value of the corresponding asset.

   The President is joining Senator Stabenow (D-MI) and Senator Voinovich (R-OH) in proposing to exempt this cancellation of mortgage debt from taxation.  We would have this be a temporary change, and apply only to your primary residence.  In the House, Rep. Rob Andrews (D-NJ) and Ron Lewis (R-KY) have proposed a similar change.

3. Treasury and HUD are reaching out to interested parties in the home financing world – lenders, loan servicers, FHA, the Government-Sponsored Enterprises (Fannie Mae and Freddie Mac), and especially community organizations like NeighborWorks that help struggling homeowners in these situations.  They’re looking for synergies to expand mortgage financing options, to educate homeowners about those options, and to match homeowners with lenders.

In addition to the above proposals, last Friday the President discussed policy changes that will reduce the chance that these problems recur in the future.  I will describe those soon.

Subprime mortgages

© 2010 Keith Hennessey - Your guide to American economic policy

Related posts:

1. Subprime mortgages, part 2
2. What caused this financial mess?
3. Address by President Bush on financial markets