Category Archives: Obama Administration

Why Republicans Can’t Reform Health Care

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July 26, 2017 —    Why do Republican politicians seem unable to come together on a bill to “repeal and replace” the 2010 Affordable Care Act, also known as Obamacare?  After all, they have spent 7 years with that as their single-minded goal, they campaigned on it in the 2016 presidential election, and they now control all branches of government.

It is tempting to blame lack of experience and competence on the part of the president.  But that doesn’t explain why the Republican congress can’t do it without him.  Some Republicans blame unwillingness of the Democrats to cooperate.  But given their majorities it should not be necessary for the other party to cooperate in dismantling its most important achievement of the last eight years, nor is it remotely reasonable to expect them to do so.

Don’t be misled by the reasonable-sounding formulation that, since everyone agrees that Obamacare has flaws, a bi-partisan replacement to improve it should be possible.  The most important of the existing flaws in Obamacare are there because Republicans insisted on putting them there, not because of unforeseen consequences of the original proposal.

It is a little closer to the truth to say that the Republicans negligently forgot to formulate an acceptable replacement in all their years of voting to repeal Obamacare.  But that makes it sound like they could come up with an acceptable replacement if they tried hard enough.  They cannot.

The relevant division among Republicans

Republicans in Congress are divided.  Whatever version of the bill they try out, they cannot seem to put together the necessary majority.  But the familiar distinction between “hard-core conservatives” and supposed “moderates” is not the most useful way of looking at the split.  They are divided, rather, between those who acknowledge the laws of arithmetic and those who do not.

By the way, it is the same division that has plagued the Republicans over tax policy for almost 40 years: they all want massive tax cuts but some also proclaim their commitments to pay down the national debt while preserving military spending, social security and Medicare, while others recognize that this combination is arithmetically impossible.

When Republicans say they want to repeal and replace Obamacare they mean not just a change in name, but a general reduction in the role of government in the health care system and, in particular, an end to the individual mandate that requires all Americans to have insurance.  They are divided between those who recognize that the result of the various repeal and replace proposals would be a loss of insurance by many and are willing to accept this reality, on the one hand, and those who do not recognize it, on the other hand.   The decline in the number of citizens who have coverage would exceed 20 million, according to estimates of the Congressional Budget Office (which, contrary to some desperate claims, have a very good track record).

An example of the first category is Rand Paul of Kentucky, one of the few more-or-less-consistent libertarians who deserve acknowledgment for intellectual honesty.  But if his policies prevailed, the losses inflicted on lower- and middle-income workers would be so severe that the Republicans would probably be voted out of office for a generation.   That logic assumes that there exists a limit to the scope for large numbers of Americans to vote against their self-interest.  (Indeed, Republican proposals to take away benefits are now very unpopular.)

The second category of Republicans finds the loss of health insurance by 20 million citizens unacceptable.  This group still doesn’t know what it wants, even after all this time.  Some of them may take refuge in a solution where millions end up on skeletal health care plans that don’t offer true protection against the cost of serious health problems, so-called junk insurance.  But this solution is no more attractive than the loss of coverage altogether.

Logically there should be a third group that acknowledges the arithmetic, finds the loss of 20 million uninsured unacceptable, and then chooses to face reality by working for a version of Obamacare or some other plan that can continue to expand the numbers of Americans who have health insurance.  This third group would properly be labeled the moderate Republicans.  Unfortunately there is nobody left in this group (except perhaps Susan Collins of Maine).

Options with an expanded government role

Consider a birds-eye perspective on alternative health care systems.  At one polar extreme is socialized medicine: the government directly provides health care to all.  The British are attached to their National Health Insurance.  But different nationalities have different preferences.   Nobody in US politics is arguing for a government takeover of the health care system, even though some opponents of Obamacare have falsely described it in this way.

Who supplies health care is a different question than who pays for it.  A substantial fraction of Americans would support a single-payer system.  It can be described as “Medicare for everyone.”  Other countries like Canada make it work, delivering high-quality health outcomes at a fraction of the cost of the US system.  Advocates point to cost savings from paperwork reduction, for example.  Still, it would be unrealistic to think that US government health insurance for all would be anything other than a very expensive new mandate – at a time when voters are unwilling to pay the taxes that would be necessary to finance the level of mandates that we already have.  Certainly it will continue to be opposed by three influential groups: the insurance industry, those consumers who are happy with their current employer-paid plans, and Republicans in general.

Is there a free-market option?

What would the oppose polar extreme look like, a system where the ethic of “personal responsibility” insists that nobody gets health care unless they or their employers pay for it?  It is hard to imagine such a system.  It is not what we had before Obamacare; that system was not a model of personal responsibility. The uninsured imposed costs not just on themselves but on the rest of us as well, in ways that go well beyond expensive medical attention in the emergency room.  Those who don’t see a doctor regularly are more likely to fall victim to alcoholism, obesity, smoking, and addiction to opioids or methamphetamine.  Even leaving aside the emergency room, many of the uninsured end up receiving some longer-term care for which hospitals are not reimbursed so that they must spread the cost to the rest of us.

If the objective were to stamp out such nefarious practices it would require an active reversal of government policy, to stop the medical profession from providing care that it feels ethically committed to provide.  Taking government policy out of health care would include depriving non-profit hospitals of their tax-exempt status, for example.  Perhaps there could be a new federal law requiring ambulances to leave accident victims by the side of the road unless they can show proof of health insurance.  I have yet to meet a free-market conservative so extreme as to favor such a system, when pushed.

No free lunch

So, as often, the right answer must lie somewhere between the polar extremes (socialized medicine at one end and a pursuit of pure laissez-faire at the other).  It must have something like the key features of Obamacare.  The famous three legs of the stool are:  the individual mandate, no discrimination against pre-existing conditions, and a means to pay for it.

The individual mandate is a key component that makes Obama’s Affordable Care Act work.  Many forget that it was originally an idea that conservative think tanks developed in order to devise a workable system of national health insurance with the minimum possible role for the government and a maximum possible role for the market.  It played the key role in the Massachusetts health care reform signed by Mitt Romney when he was Governor in 2006. (Analogously, two other ideas originally designed by conservatives to achieve agreed goals in a market-based manner were  the negative income tax and cap-and-trade environmental regulation.)

A heavy majority of Americans — including those who thought they hated Obamacare, at least until recently — want to retain the provision that insurance companies can’t discriminate against those with pre-existing conditions.  [They also tend to favor the provision that parents’ policies must cover children up to age 26.]  But they can’t have these popular benefits without also accepting the unpopular individual mandate.  It is simply not financially feasible for private insurance companies to insure people who are already sick or at high-risk, if the still-healthy can opt out of the pool.  The fundamental source of market failure is known to theorists as adverse selection.  This is the origin of the famous “death spiral” that dooms plans lacking the mandate or something like it.  The “no discrimination” leg won’t hold up the health care stool, if the individual mandate leg is removed.

So it doesn’t matter how many permutations of the legislation to replace Obamacare the Senate leadership tries.  They won‘t come up with something that decreases the role of government without increasing the ranks of the uninsured.

[A shorter version appeared at Project Syndicate.  Comments can be posted there or at Econbrowser.]

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Looking Back on Barack

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At the end of his time in office Barack Obama merits an enumeration of some of his many accomplishments.   The recollection should start as he started, on January 20, 2009: the pilot taking the cockpit just when the plane was in an uncontrolled dive.

The circumstances were the most adverse faced by any new president in many decades.  Two ill-conceived and ill-executed foreign wars were underway, which had done nothing to bring to justice the mastermind of September 11, 2001.  He inherited an economy that was in free-fall, whether measured by the seizing up of finance markets, the fall in GDP, or the hemorrhaging of employment.  (The rate of job loss was running ran at 800,000 per month.)  True, Franklin Roosevelt inherited the Great Depression and Abraham Lincoln took office just as the Civil War broke out.   But what other president has come in facing both an economic crisis and a national security crisis?

The rapid policy response to the economic crisis included — in addition to aggressive and innovative monetary easing by the Federal Reserve — the Obama fiscal stimulus (the American Recovery and Reinvestment Act, passed by the Democratic Congress in February 2009) and rescue programs for the financial system and the auto industry.  Republicans were near unanimous in opposing the stimulus. And almost everybody was critical of the rescue programs – either urging nationalization of the banks and auto firms, on the one hand, or urging letting them go out of existence on the other.  There was and is insufficient recognition of how the Obama Administration succeeded, against all odds, at making the middle path work:  jobs were saved, while shareholders and managers suffered consequences of their mistakes  and the government got its money back after the recovery.

Most importantly, the free-fall ended promptly.  The timing and clarity of the turnaround is much more visible than one would think by listening to debates on what was the right counterfactual to evaluate the effect of Administration policies.  Economic output in the last quarter of 2008 had suffered a shattering 8.2 % p.a. rate of decline and job loss had been running at more than 600,000 per month.  Output and employment began to level out almost immediately after the February stimulus program.  The bottom of the recession came in June 2009; output growth turned positive in the next quarter.  Job creation turned positive early in 2010 and employment growth subsequently went on to set records all the way through the end of Obama’s time in office, adding more than 15 million jobs.

By the last half of Obama’s second term, the unemployment had fallen by half, to below 5% (2015 and 2016), wages were rising (by 2.9% nominal over the 12 months to Dec. 2016); and real median family income was finally growing too (by a record 5.2% in the most recently reported year, with lower-income groups advancing even more).

It is certainly true that the recovery was frustratingly long and slow.  Reasons include the depth and financial nature of the 2007-08 crash and the early reversal of the fiscal stimulus after the Republicans took back the Congress in the 2010 election and blocked Obama’s further efforts.   2011-14 are the years when the economy really could have used infrastructure spending and (the right) tax cuts.  But it would seem that Republicans only support fiscal stimulus when they are the ones in the White House — including when the economy is no longer in recession.

Obama’s other two biggest accomplishments in those first two years before the Congress starting blocking everything he tried were the Dodd-Frank financial reform bill and the Affordable Care Act (Obamacare).  In both cases, the reforms would have been better without a succession of steps by the opposition party to weaken them, both at the stage of passing the legislation and subsequently.

But each of those important reforms nonetheless succeeded in moving the country more clearly in the right direction than most people realize.  Dodd-Frank in a variety of ways helped make less likely a repeat of the 2007-08 financial crisis. Among other things, it increased transparency for derivatives, raised capital requirements for banks, imposed additional regulations on “systemically important” institutions, and, per the suggestion of Senator Elizabeth Warren, established the Consumer Financial Protection Bureau (CFPB).  Obamacare has succeeded in giving health insurance to 20-million-plus Americans who lacked it (for example, due to pre-existing conditions) and the cost of health care contrary to most predictions and perceptions slowed noticeably.

In the area of foreign policy, the wars in Afghanistan and Iraq were  intractable.   But the President made the tricky decisions that resulted in the elimination of Osama bin Laden (a goal in which George W. Bush had lost interest, in his eagerness to invade Iraq).  In 2015, just as the press was saying Obama was a lame duck, he achieved a string of foreign policy successes: a much-needed nuclear agreement with Iran, normalization of relations with Cuba, agreement on the Trans-Pacific Partnership (TPP), and important progress to address global climate change via a breakthrough with China.

Needless to say, the man who assumes the Presidency this month has said he will reverse most of these initiatives, if not all.  In some cases, he will do exactly that. TPP is certainly dead, at least for the time being.  (And four years from now will probably be too late to revive it, as East Asian countries may by then have responded to America’s withdrawal from the region by joining China’s trade grouping instead.)

In other cases, real-world constraints will make it harder for Mr. Trump to translate crowd-pleasing sound-bites into reality.  Repealing Obamacare is apparently top of the list.  But the Republicans are likely to be stymied by the absence of an alternative that does not take health insurance away from those 20 million Americans nor raise the net cost.  Some important innovations, such as the switch to electronic patient record-keeping and more emphasis on preventative care, are bound to survive in any case.  Perhaps the eventual outcome will be relatively minor changes in the substance of the Affordable Care Act, together with a new name – the analog of building a big beautiful wall on a quarter-mile of the Mexican border as a sort of stage set suitable for photo opportunities.

Similarly, it is hard to see how pushing harder on China would produce desirable results.  To take the most ironic example of ill-informed policy positions, if the Chinese authorities were to acquiesce to Mr. Trump’s demands that it stop manipulating its exchange rate, its currency would depreciate and its competitiveness would improve.

Similarly, if the Administration tries to carry out its promise to tear up the nuclear agreement with Iran, it will quickly find that US sanctions are ineffective without the participation of our allies.  Iran could rapidly renew and accelerate its nuclear program.  That is what happened with North Korea when George W. Bush essentially tore up the “agreed framework” upon taking office in January 2001.

Do the voters hold presidents accountable?   Bush made other serious mistakes in economic and foreign policy as well in those early years, of course, with the predictable consequences for the economy, budget, and national security.  Yet his poll numbers soared in his first term.

Conversely President Obama’s popularity sagged during much of his eight years.  Yet he leaves office with substantially higher poll ratings than most presidents at this stage and – unusually – with much higher ratings than his successor, let alone his predecessor at the end.  So apparently the person who occupies the White House does eventually receive the credit he is due for the intelligence of his policies and the content of his character.  It just takes longer than it should.

[A shorter version of this column appeared at Project Syndicate.  Comments can be posted there.]

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Clinton Economics vs. Trump Economics

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[These two pages were written for an OMFIF report released Oct. 28.  They draw on some of my preceding columns.]

If one judges by the two candidates’ economic policy stances, the 2016 US presidential campaign is not quite as much of a departure from the past as it otherwise appears.   Hillary Clinton’s economic plans largely echo Democratic Party orthodoxy, with its focus on progressive tax rates which ease the burden on the lowest earners while raising it for those at the top; on expanding social welfare programmes, especially education and childcare; and on advocating greater regulation of financial institutions.  She also has a traditional focus on increasing labour force participation.   Donald Trump’s proposals for his part reflect important traditional policies of the Republican Party, including huge tax cuts for the rich and expanded military spending, despite the radical unorthodoxy of many of his statements such as contemplating renegotiation of the government debt.

Economic growth record of Democratic vs. Republican presidents

Analysis of the US economy since 1945 shows that it has performed better under Democratic presidents than Republican ones, judged by a wide variety of indicators. A recent paper by Princeton University economists reports that annual GDP growth has averaged 4.3% during Democratic administrations compared to 2.5% under Republicans, with the performance gap widening even further if the analysis is extended back to Herbert Hoover’s administration in 1929.

The figures are also stark when looking at the occurrence of recessions. Of the 256 quarters covered by post-war presidents from Truman to Obama, the US economy was in recession for an average of 1.1 quarters during Democratic presidencies and 4.6 quarters during the Republican terms. The odds that such a large difference is the result of mere chance are no more than one in 100.

On unemployment the Democrats have also fared better, with the rate falling by 0.8 percentage points on average under Democratic presidents, and rising by 1.1 percentage points under Republicans – a remarkable difference of 1.9 percentage points. The structural budget deficit has averaged 1.5% of GDP under Democratic presidents, against 2.2% for Republicans.

The likelihood that luck alone could have produced such large and consistent differences in economic performance is extremely low. There is only a 100-to-one chance that nine out of the last 10 recessions would have begun under Republican presidents. Yet they did, as confirmed by the data of the NBER Business Cycle Dating Committee. The odds are even steeper – 256-to-one – against the likelihood of GDP growth slowing every time a Republican took office and speeding up every time a Democrat became president; yet this too has happened.

This pattern has continued under President Barack Obama.  In January 2009 he inherited an economy in freefall.   The nosedive ended almost immediately after he took office (whether measured by job losses, growth rates, or the financial markets). The recession ended in June 2009, aided by such measures as the Obama fiscal stimulus that was enacted in February over Republican opposition.  The economy went on to set a record for consecutive months of employment growth.  The last pre-election employment report showed that, as of October of this year, the cumulative number of private sector jobs created since early 2010 reached 15 ½ million.

Addressing inequality

If the total economic pie tends to grow faster under Democrats, what about the way the pie is divided up?  Much discussion in this election year has focused on inequality and particularly the role of globalization.

Trump emphasizes negative effects of globalization on low-wage manufacturing employment and wants to reverse the trend.  It is true that trade, like technological change and other sources of growth, creates both winners and losers. But a fundamental proposition in economics holds that when individuals are free to engage in trade, total income increases enough that the winners could, in theory, compensate the losers, leaving everyone better off.

Globalization skeptics correctly point out that, in practice, the compensation often remains hypothetical. But no president can undo globalization even if he or she wants to. Fortunately, there is a better option. We can take globalization as a given, and adopt measures to help improve life for those who lose out.  The two parties have historically differed on the latter approach and continue to do so.

Democrats have consistently supported policies to help those who have been left behind, such as Trade Adjustment Assistance, an expanded Earned Income Tax Credit, wage insurance, universal health insurance, universal high-quality pre-school education, and a big program for infrastructure investment.  Republican politicians have mostly opposed these policies.  A few of the policies, such as Obamacare, have managed to get through nonetheless.  They may help explain why, according to the annual statistics released on September 13 by the Census Bureau, last year finally saw a big drop in inequality.  Real median household income rose 5.2 percent in 2015 — the fastest growth on record — with lower-income groups advancing even more. The poverty rate experienced its largest one-year drop since 1968.

Thus we can expect from a new Clinton administration policies that would help produce both a larger economic pie and more even distribution… if she has the votes in Congress to pass them.

Weighing up Clinton’s plans versus Trump’s

Furthermore Secretary Clinton’s proposals are paid for.  Meanwhile, the arithmetic of Trump’s fiscal plans fails to add up. While proposing to cut the corporate tax rate to 15%, from 35% currently, his proposal fails to broaden the tax base, resulting in a significant loss of tax revenue.  Trump would also reduce the highest personal income tax rate sharply and abolish the estate tax for the wealthy.  He simply asserts that increased economic growth will make up the shortfalls, without offering any good reason to expect it to happen.

His fiscal plans have been so ill-defined and changeable that it is hard to evaluate them.  He says different things to different audiences.  But independent analysts have estimated that his announced tax policies would lead to $5 – $10 trillion in revenue losses over the course of just one decade (depending which of his “plans” one evaluates.)  This fiscal cost goes even beyond the trend of past Republican presidents, who propose large specific tax cuts, without specific spending cuts, and yet claim they will reduce the deficit. Instead, history shows they have produced much larger average budget deficits.

Despite the unconventional nature of much of this election, the underlying issues remain broadly similar to previous campaigns. The Democratic candidate still favours policies like progressive taxation, wage insurance and universal health insurance, and the Republican candidate still opposes them. So American voters on November 6 will still make a choice over the issues that have always divided the two parties. Whether this means the trend of historically stronger economic performance under a Democratic president – and weaker performance under a Republican – will be extended remains to be seen. But history suggests we would do better under a Hillary Clinton administration.

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