Archives: 06/2011

Romney Can Run, but He Can’t Hide from Romneycare

Massachusetts Governor Mitt Romney announces today that he will be a candidate for president.   His announcement is expected to tout his business experience and to portray him as the candidate best able to deal with the country’s economic problems.  But one thing you are not likely to hear him talk about is his Massachusetts health plan, Romneycare.

Of course, Romney has already tried to put this issue away with a speech in Detroit last month, and he would probably be happy to never talk about it again.   But if Romney really believes he can hide from the Romneycare fallout, he is badly mistaken. 

Cato scholars have issued several reports detailing the many failings of Romneycare.  Those studies can be found here , here , here and here for instance.  

In his Detroit speech, Romney trotted out three defenses.  First, he says that his plan, unlike Obamacare, did not increase taxes. That is technically true — if you consider only the legislation as Romney signed it. However, it is also true that the legislation relied heavily on federal subsidies — more than $300 million — and was still underfunded. Romney’s successor was forced both to cut back on some benefits that the plan originally offered and to raise the state’s cigarette tax by $1 per pack ($154 million annually) to help pay for the program. The state also imposed approximately $89 million in fees and assessments on health-care providers and insurers. 

Similarly, Romney claims that his plan only costs about one percent of the Massachusetts budget and is, therefore, not a budget-busting, big government program.  In making this claim, however, Romney fails to note that that accounting does not take into account more than $300 million annually in federal funds.  Nor does it count the costs that were pushed off onto Massachusetts businesses and taxpayers through the individual and employer mandates, or the costs of increased insurance premiums.

And, finally, Romney criticizes Obamacare as a “one size fits all” federal plan, whereas his plan was implemented in only one state. That’s true. Governor Romney only messed up the health-care system in Massachusetts, while President Obama has messed up health care for the entire country. Of course, as governor, Romney didn’t have the power to impose his model outside of his state. He now says that he opposes any national plan, calling for states to experiment with different approaches as the “laboratories of democracy.” That would certainly be an improvement over Obamacare. On the other hand, he has repeatedly said that he sees the Massachusetts plan as a model for the nation and has urged other states to copy his approach.

Governor Romney faces many challenges in convincing voters that he really does want to reduce the size, cost, and intrusiveness of government.  For example, Romney has recently been pandering to Iowa voters by renewing his support for ethanol subsidies.  On other issues, he has been a big supporter of federal involvement in education. He backed No Child Left Behind and once called for the federal government to buy a laptop computer for every child born in America. His record as Massachusetts governor was decidedly mixed. In the Cato Institute’s biannual ranking of governors on fiscal issues, Romney received a grade of only “C.” His philosophy of governing can be seen from his comment, “I’d be embarrassed if I didn’t always ask for federal money whenever I got the chance.”

But the biggest single obstacle to his candidacy remains Romneycare.  Unless and until he finds a way to deal with this albatross, he will be a weak and wounded frontrunner.

From This Morning’s Health Care News

Indiana learns just how much flexibility states have when administering federal health care programs.

A Medicare pilot program bearing a striking resemblance to ObamaCare’s “accountable care organization” program turns out to be a flop.

Newsflash: Medicare’s Soviet-style price controls get the prices wrong.

Report: ‘The Global War on Drugs Has Failed’

“The global war on drugs has failed, with devastating consequences for individuals and societies around the world.” That is the opening sentence of a report released today by the Global Commission on Drug Policy, a nineteen-member panel that includes, among others, world figures such as former United Nations Secretary General Kofi Annan, former Brazilian President Fernando Henrique Cardoso and former NATO Secretary General Javier Solana. The report is also signed by the current Prime Minister of Greece, George Papandreou, making him the only sitting head of government to openly denounce global drug prohibition.

The 20-page report says all the right things: prohibition has failed in tackling global consumption of drugs, and has instead led to the creation of black markets and criminal networks that resort to violence and corruption in order to carry out their business. This drug-related violence now threatens the institutional stability of entire nations, particularly in the developing world. Also, prohibition has caused the stigmatization and marginalization of people who use illegal drugs, making it more difficult to help people who are addicted to drugs. The report also denounces what it properly calls “drug control imperialism,” that is, how the United States has “worked strenuously over the last 50 years to ensure that all countries adopt the same rigid approach to drug policy.”

In the recommendations section, the report praises the experience of Portugal with drug decriminalization, mentioning Cato’s study on the subject. But perhaps more importantly, it states that drug legalization “is a policy option that should be explored with the same rigor as any other.” Until now, similar reports have denounced the war on drugs and perhaps called for the decriminalization of marijuana and other soft drugs, but they also have stopped short of mentioning drug legalization as a policy alternative.

This report is certainly going to receive a lot of media coverage in the upcoming days. It is, until now, the highest profile endorsement of drug policy reform that we have seen at a global level. And, by having Prime Minister Papandreou as one of the signatories, it offers the hope that other top office holders will also call for an end to the failed war on drugs.

Tax Cuts, Loopholes, and Government Size

President Obama wants to raise revenues by reducing tax deductions and other tax breaks, which the administration calls “spending in the tax code.” Donald Marron of the Tax Policy Center argues that “hundreds of billions of dollars of spending are disguised as tax cuts.”

Don is a very good economist, and he is concerned that special interest tax breaks can misallocate resources the same way that spending subsidies do. I agree. But I’m also concerned that tax breaks and spending subsidies have different implications for the size of government, which is where I part ways with Don and the president.

The following Tax Policy Matrix helps sort out which sorts of tax cuts make economic sense when government size is also a consideration.

The government distorts the economy and reduces GDP through both its taxing and spending actions. One reason is that both taxes and spending cause individuals and businesses to change their behaviors and reallocate resources in suboptimal ways. The table has columns for tax and spending distortions. It also has a column for government debt because running deficits today may translate into higher levels of distortionary taxes tomorrow.

The table includes two Starve-the-Beast scenarios. “With Starve-the-Beast” means that tax cuts will reduce government spending to some extent over time. A narrow tax base shot full of loopholes creates allocation distortions, but if starve-the-beast works that sort of tax base also limits the government’s size creating a counterbalancing benefit to GDP.

In the short run, starve-the-beast may or may not work. Bill Niskanen says that it does not, but I think the effectiveness of it changes over time as political culture changes. In the 1980s and 1990s, policymakers took corrective actions when deficits rose, but the revival of Keynesianism in recent years changed the political culture and, for a while, nullified the fear of deficits for many politicians.

In the long run, it seems obvious that the inflow of tax revenues to the government is a hard check on spending because there are financial market limits to government borrowing.

Let’s go through the rows in the table:

Row 1. The government starts off with a balanced budget and with tax and spending systems that cause medium damage.

Row 2. The government cuts taxes $100 by way of a loophole. Tax distortions rise because marginal tax rates are unchanged and we’ve added a new distortion. Higher debt likely pushes up future tax distortions. This appears to be a poor policy choice.

Row 3. The government cuts taxes $100 by way of marginal rate cut. Tax distortions are reduced, which increases economic growth. The downside is higher debt. This may or may be a good policy depending on the quality of the tax cut. If the cut is to a very distortionary part of the tax code—such as the corporate income tax rate—this policy could make sense. One reason is that the deficit increase might end up being quite small because of the positive economic response to the pro-efficiency tax cut.

Row 4. With starve-the-beast operational, a special interest tax cut becomes a bit of a closer call. Tax distortions and debt rise, but government spending falls somewhat, so the net effect on the economy is unclear. However, I think there are considerations here aside from economics. Special interest tax breaks—such as the ethanol tax break—are troubling because they represent a corruption of the law, an affront to the American ideal of “equal justice under law.” So just on that basis, I’m against special interest breaks, and indeed am in favor replacing the current code with a flat tax.

Row 5. A pro-efficiency tax cut is very likely a winner if you assume that starve-the-beast is operational. Tax and spending distortions both fall, although there is a modest increase in debt.

So far we’ve left out the most important fiscal tool available to policymakers—spending cuts to unneeded and damaging programs to reduce government harm to the economy. The best policy choice would be to combine pro-growth tax cuts with spending cuts to harmful programs. That would reduce government distortions on both sides of the budget, and thus unambiguously increase GDP.

In sum, without matching spending cuts, tax cuts may or may not make sense depending on the type of cut and whether reducing Uncle Sam’s diet will force him to slim down in subsequent years. But it is a fiscal policy win-win to match spending cuts with cuts to the most damaging parts of the tax code.

Thursday Links

“But He’s Our Imperial President”

My Washington Examiner column today closes out a three-part series this week on “Obama’s Imperial Presidency” (also running at Reason.com). Tuesday’s column covered Obama’s expansion of executive power abroad, and Wednesday’s looked at the ways in which Obama has turned the Imperial Presidency inward against the private sector.

Today’s column begins with a recap of the powers 44 holds:

Abroad, Obama claims the power to start wars at will; scoop up your email and phone records without answering to a judge; assassinate you via drone strike far from any battlefield, and – should your relatives complain – keep the whole thing secret in the name of national security.

At home, Obama has summarily fired the CEO of General Motors, America’s largest automaker; flouted bankruptcy law to shaft Chrysler’s creditors and pay off his union allies; pressured half-nationalized car companies to produce pokey little electric cars, had his National Labor Relations Board assert veto power over a private company’s decision to move a factory to a “right to work” state; and, via imperial edict, began restructuring the industrial economy by imposing restrictions on carbon dioxide emissions despite Congress’ refusal to pass cap-and-trade legislation.

Left or Right, Red or Blue, no American should be comfortable with any one man wielding that much power. Yet too many Americans embrace a philosophy of “situational constitutionalism”: they only get disturbed about the menacing concentration of power in the executive branch when they don’t care for the guy who has the scepter and the crown:

Conservatives who defended every excess of the Bush administration now rail against Obama’s Imperial Presidency, and liberals who considered the Bush era one long descent into the dark night of fascism seem blithely indifferent to the present Oval Office occupant’s multiplying executive power grabs.

Apparently, phrases like “he killed his own people” only grate when pronounced in a clipped, West Texas accent – otherwise, “wars of choice” against third-rate dictators go down smoothly.

But “situational constitutionalism” is the constitutionalism of fools: there’s something absurd–or at least insincere–about people who decide to worry about the Imperial Presidency only every four to eight years, and only when the “other team” holds the office.

Blame power-hungry presidents and feckless Congresses all you want.  We’ll never solve the problem of the Imperial Presidency until more Americans manage to pry their eyes away from the Red-Team/Blue Team sideshow and recognize that who holds the office is less important than the powers the office holds.

‘Gainful Employment’ Regs Softened, Still a Diversionary Sideshow

The hotly anticipated – and dreaded – “gainful employment” regulations aimed at for-profit colleges were released this morning, and based on media reports the big news is that they are a little more lenient than originally expected. Most importantly, schools that fail to meet debt-to-income and debt-repayment requirements will not be cut off from federal student aid – the financial crack on which almost every college and university depends – until 2015.

That’s the big news, at least as reported. But it isn’t the important story.

The real story remains that the Obama administration, and at least the education leadership in the Senate, continues to divert the public’s eye towards for-profit schools when the entire higher education system is a waste-engorged, parasitic mess.

Yes, for-profit schools have low program completion rates, but the overall six-year completion rate for four-year programs is just around 57 percent. And yes, for-profit schools leave many students with big debt, but the average debt for all four-year undergraduate students who have taken loans is around $24,000. And yes, students at for-profit institutions draw heavily on the public treasury to pay for the studies they don’t complete, but higher education overall is a gigantic leech feeding off  taxpayers, taking in hundreds of billions of dollars every year from all levels of government. And it is ever-growing aid to students from vote-hungry federal politicians that is likely the most potent force enabling rampant price inflation and massive college overconsumption. After all, the price becomes a lot less important – and extravagances more enticing – when someone else is footing much of the bill.

Now that these rules have been published, let’s move on to what really needs to happen: Phasing out government subsidies for the entire draining Ivory Tower.