Tag: uwe reinhardt

Is the Individual Mandate a Tax?

From my 2010 paper “Obama’s Prescription for Low-Wage Workers; High Implicit Taxes, Higher Premiums”:

President Obama argues that a legal requirement for individuals to purchase health insurance is not a tax. Yet many economists, including some of President Obama’s economic advisers, consider it to be a type of tax.

Princeton University health economist Uwe Reinhardt writes, “[Just because] the fiscal flows triggered by [the] mandate would not flow directly through the public budgets does not detract from the measure’s status of a bona fide tax.”

MIT health economist Jonathan Gruber writes, “Suppose … the government mandated that everyone buy full insurance at the average price… . This would not be a very attractive plan to careful consumers … who could view themselves as essentially being taxed in order to support this market, by paying higher premiums than they should based on their risk.”

President Obama’s National Economic Council chairman Larry Summers writes, “Essentially, mandated benefits are like public programs financed by benefit taxes.”

Sherry Glied, President Obama’s appointee to assistant secretary for planning and evaluation at the Department of Health and Human Services, writes, “The individual mandate … is in many respects analogous to a tax. It requires people to make payments for something whether they want it or not.”

When the Clinton administration proposed an individual mandate in 1993, the CBO went so far as to treat the mandatory premiums that Americans would pay as federal revenues and include them in the federal budget. So far, the CBO has not done the same for the mandates in the House and Senate bills. (As Reinhardt suggests, that does not imply that those mandates are not a tax.)

Each bill would also impose penalties on individuals (and employers) who do not comply with the health-insurance mandates. Those penalties would be paid to the Internal Revenue Service along with one’s income taxes.

Libertarianism and Big Business: A Dissent

The March-April issue of Cato Policy Report featured a discussion among Timothy Carney, Uwe Reinhardt, and Ross Douthat of Carney’s book Obamanomics: How Barack Obama Is Bankrupting You and Enriching His Wall Street Friends, Corporate Lobbyists, and Union Bosses. The tenor of the discussion was reflected in the title, ”Big Business, Big Government, and Libertarian Populism.” Richard L. Gordon, a distinguished economist emeritus at Pennsylvania State University and a Cato adjunct scholar, took strong issue with all three commenters and sent us the following rebuttal, which we’re pleased to publish here:

The March/April Cato Policy Report covered a January 2010 Cato Book Forum on Timothy P. Carney’s Obamanomics. Carney summarized his book and there were responses from Uwe Reinhardt, a Professor at Princeton noted for advocacy of strong government intervention in health care, and Ross Douthat, a (first-year) New York Times columnist, a self-styled conservative who (from scanning his columns) seems a weak one. The result was three tirades about how big business runs government. It is surprising in the twenty-first century to see outside of WhiteHouse.gov, movies, and television dramas such naïve attacks on the power of big business. This is not the libertarianism that I know. However, superficially plausible dominance theories are too convenient not to revive frequently, regardless of enormous refutations. Thus, some key, familiar points need recollection.

The charge of big-business dominance has at least three flaws. First, it is a myth. Politicians created the massive growth of government with more input from intellectuals than from business executives. Second, it reverses causation; government ensnares industry. Third, it is absurd since big business, however defined, consists of diverse, often conflicting companies.

Much, including the most problematic, expansion of government, has almost nothing to do with big business and is certainly not what any big (or small) firms would want. The entitlements explosion is in social security, government-employee pensions, Medicaid, and Medicare. The first is notoriously a shifting of savings from private firms to an entirely government-run program with a rigid reliance on treasury paper debt whose repayment is dubious. Other government pension plans do invest in the private sector so they rely somewhat on private firms. Again, this only displaces what individuals would have done for themselves, despite the fears of libertarian interventionists.

The messes that are Medicaid and Medicare do involve among many others big businesses in pharmacy and medical insurance. In the latter case, the non-profit Blue Cross and Blue Shield companies are major, often dominant factors. The other, more important participants are the large number of separate medical providers and hospitals. The final involved sector is much of American business. To lessen the impact of World-War II wage and price controls, the U.S. government extended to medical insurance the legal fiction used for Social Security that part of insurance costs could be called “employer contributions” and not considered income subject to personal income tax. Basic economic theory amply confirmed by empirical research shows that these payments are labor costs and lead to reduced direct compensation.

The result is a system in which payment is widely separated from decisions about medical procedures. Physicians err on the side of ordering additional tests because they know that neither they nor the patient directly incur the costs. (The fear of lawsuits may increase that bias, but it is unclear that tort reform without reform of insurance provision would make a big difference.) The prime fault of Obama care is that it reinforces, rather than lessens, the separation of patient from payee. This again is hardly an ideal for business.

Even more obviously, another great problem area, education, suffers from a government takeover so ancient and thorough that only specialists are aware of its existence. The federal government increasingly intervenes into pre-college education. Since World War II, all government has greatly expanded its role in higher education to the extent that the great private universities are heavily government dependent. Congress tacked on to the health-care bill the total government takeover of college loans. Only a lunatic would postulate that any of this is due to a big-business conspiracy to control minds, particularly given the massive leftward tilt of academia.

The largest non-entitlement component of the federal government, defense, does notoriously, in part, involve an excessively cozy relationship with suppliers. However, spending for equipment is dwarfed by direct and indirect personnel costs. The spending on equipment, like many government decisions, is distorted by Congressional obsession with bringing jobs to their districts. No big-business excuse applies to nondefense discretionary spending. In short, it is a mockery to assert big business is the primary source of excessive government spending.

Second, politicians, rather than business executives, generate the dependence on government. What was described as a craven sellout to big pharma was actually part of the ruthless blackmail through which the Obama administration silenced a wide range of the potential criticism of its health-care monstrosity. Aside from all the normal government tools of torture such as the Internal Revenue Service, the antitrust agencies, and the Environmental Protection Agency, drug companies are subject to special and critical government scrutiny. The companies must endure the cumbersome, slow, expensive, ineffective Food and Drug Administration approval process. The industry relies on patent protection and re-importation bans to secure profits sufficient to recover research costs bloated by regulation.

The “big” drug and insurance companies were far from the only frightened firms. Despite widespread physician concerns, the American Medical Association abandoned its long-time opposition. More strikingly, AARP, the relentlessly wrong-headed self-created representative of seniors, flooded its publications with distorted pro-legislation articles.

This is unfortunately typical of the pressures companies face. Anyone who argues that lobbying is improper fails to recognize the excessive power that government possesses. It becomes essential to resist in every legitimate way widespread unbridled pressure. As Obama and his admirers constantly demonstrate, response to outrageous interventionist claims is regularly defamed. Efforts are made to discredit and even ban critics. In such a situation, limiting lobbying and other forms of response is an outrageous threat to constitutional government.

Famously, Microsoft did not take lobbying seriously until hit by dubious antitrust suits. In the energy sector, clearly pressures to go green and not oppose global-warming policies caused enormous fawning by a distressingly wide range of companies. Many leading retailers have jumped on green initiatives such as the long-life-bulb bandwagon arising because legislators responded to three decades of public resistance by forcing use of these bulbs. Exxon, after slander over its support, far smaller than that of the U.S. government, of research skeptical of global-warming concerns, has added a green tinge to its advertising, albeit not as blatantly as BP and Chevron. General Electric became a sell-out due to its involvement in financing, medical equipment, and power generating devices. The major banks and brokers faced and suffered badly from the political pressures to lend heavily to potential homebuyers with questionable financial situations.

At best, we can admit that big business is no less, but not no more, likely than any interest group to seek to twist the web of government control in its favor. A prime example of the defects is that Obama regularly assumes away trade-union influence in his attacks on interest groups. One of my great teachers, M.A. Adelman, forcefully argued that it is the voting power of interest groups that matters. He reached that conclusion in studying the antitrust attack on A&P that was driven by the extensive anti-chain store outlook of the thirties. His student Peter Pashigian showed that similarly automobile dealers secured protection from automobile manufacturers. When Adelman turned to oil, he found that “small” oil producers were sheltered at great cost to consumers from competition, domestic as well as imported, by big oil. A long-time concern about banking was the legislation limiting bank consolidation. A well-known, but regularly neglected part of this is the unreality of the big versus small company distinction. In most of these cases, the protected were rich local notables. In contrast, through pension funds and mutual funds increasingly, big companies are ultimately owned by much less affluent people.

Finally, a pro-big-business or even a general pro-business outlook is a nonsense concept. Big businesses conflict, not just with small business, but with each other. Protection of the once-big business of steel production was at the expense of the manufacturers of automobiles and other durable goods and their customers. The oil industry disagreed with the automobile industry on the best policy, given the inevitability of action, to reduce gasoline consumption legislatively. Large retailers relentlessly turn to imports when domestic producers, big and small, become too expensive.

This last point is key to understanding what libertarian economics is about. Decades before tea parties, libertarians were for limited government that involves among other things free markets. We want the market to decide winners and losers. We feel that private monopoly is so rare and difficult to detect and reform or regulate that we oppose purportedly anti-monopoly policies.

The real danger is the unopposed monopoly power of government. The need is protection from politicians unaware of the limits of prudent, constitutional government. The heath-care debate provided many examples. The quintessence of the disgraceful process of passing Obamacare was Nancy Pelosi, yielding a grossly oversized gavel, leading an unnecessarily confrontational walk up the Capitol steps through a wall of peaceful protestors, instead of taking the underground access that is available. Less dramatic, but more chilling, was the consistent dismissal by the law’s proponents of constitutional flaws in the bill. It suggests a variant on what Jimmy Durante’s character in Jumbo said when caught with an elephant, “Constitution, what Constitution?” As Cato has validly argued, what we need is less, not more, restrictions on speech and stringent term limits.

Richard L. Gordon
Pennsylvania State University

For some other libertarian views on this topic, see Roy A. Childs, Jr., “Big Business and the Rise of American Statism” or this discussion at Cato Unbound.

By Pulling His Punches, Bernanke Shatters ObamaCare’s Credibility

Federal Reserve Chairman Ben Bernanke gave a speech in Dallas yesterday where he inadvertently discredited claims that ObamaCare would reduce health care costs and the federal deficit.  According to The Washington Post:

Federal Reserve Chairman Ben S. Bernanke warned Wednesday that Americans may have to accept higher taxes or changes in cherished entitlements such as Medicare and Social Security if the nation is to avoid staggering budget deficits that threaten to choke off economic growth…

While the immediate audience for the speech was the Dallas Regional Chamber, his message was intended for Congress and the Obama administration…

Bernanke has urged Congress to address long-term fiscal imbalances in congressional testimony before, but usually only when he is asked about them by lawmakers. His speech Wednesday aimed to reach a broader audience, steering away from technical economic speak and using plain, sometimes wry, language – a rare thing for a Fed chairman.

The non-partisan Congressional Budget Office projects the annual federal deficit will be at least $700 billion in each of the next 10 years.  Deficit spending is a form of taxation without representation, because it increases the tax burden of generations who cannot yet vote (often because they are as yet unborn).  Bernanke wants us to end deficit spending.  Kudos to him.

But consider the timing of his speech.  Why wait until April 7, 2010, to deliver that message directly to the public?  Why not give that speech in January? Or February? Or any time before March 21?

The reason is obvious: Bernanke held back to appease his political masters.

Until three weeks ago, the nation was locked in a debate over whether Congress should enact ObamaCare, the most sweeping piece of social legislation in American history.  That law includes two new health care entitlements – the very type of government spending driving the federal budget further into the red.  Democrats rigged the bill so that the CBO was obliged to score it as deficit-reducing, but 87 percent of the public weren’t buying it.

If Bernanke really wanted to warn the American public about the dangers of rising budget deficits, then a congressional debate over creating two new entitlement programs would be the most important time to deliver that message.  Democrats would have responded that ObamaCare would reduce the deficit.  But since voters believe ObamaCare to be a budget-buster, Bernanke’s warning would have dealt ObamaCare a serious blow.

Had Bernanke delivered his populist warning before January 28, it could have jeopardized his confirmation by the Senate to a second term as Fed chairman.  Had he done so between January 28 and March 21, he would have suffered a storm of criticism from Democrats (and possible retribution when his term came up for renewal in 2013) because his sensible, responsible warning would have made moderate House Democrats more skeptical about ObamaCare’s new entitlements.

So Bernanke pulled his punches.  As Dick Morris would put it, anyone who doesn’t think that political concerns affected Bernanke’s timing is too naive for politics.

Bernanke’s behavior thus reveals why ObamaCare’s cost would exceed projections and would increase the deficit.

Knowledgeable leftists, notably Tom Daschle and Uwe Reinhardt, recognize that Congress is no good at eliminating wasteful health care spending because politics gets in the way.  (Every dollar of wasteful health care spending is a dollar of income to somebody, and that somebody has a lobbyist.)

The Left’s central planners believe they can contain health care costs by creating an independent government bureaucracy that sets prices and otherwise rations care without interference from (read: without being accountable to) Congress.  ObamaCare’s new Independent Payment Advisory Board is a precursor to what Daschle calls a “Health Fed,” so named to convey that this new bureaucracy would have the same vaunted reputation for independence as the Federal Reserve.

Yet Fed scholar Allan Meltzer reports, and Bernanke’s behavior confirms, that not even the hallowed Federal Reserve can escape politics:

In reading the minutes of the Fed and watching what they do, the Fed has always been very much afraid of Congress…The idea of having a really independent agency in Washington, that’s just not going to happen…[The Fed] is very much concerned — always — about what the Congress is doing, and doesn’t want to deviate very far from that.

Politics affects Bernanke’s behavior and the Fed’s behavior.  Politics will defang the Independent Payment Advisory Board, and many of  ObamaCare’s other purported cost-cutting measures.  ObamaCare’s cost will outpace projections. The deficit will rise.

Repeal the bill.

Universal Coverage Means ‘Willing to Let You Die Sooner’

I cannot disagree with Uwe Reinhardt’s response to my previous post at National Journal’s Health Care Experts blog. But his response bears clarification and emphasis.

Improving “population health” generally means “helping people live longer.”

To paraphrase, Reinhardt then writes:

If helping people live longer were our objective in health reform, we could do better than universal coverage. But health reform is not (solely or primarily) about helping people live longer. It is (also or primarily) about other things, like relieving the anxiety of the uninsured.

I applaud Reinhardt for acknowledging a reality that most advocates of universal coverage avoid: that universal coverage is not solely or primarily about improving health.

Will Reinhardt go further and acknowledge that, since universal coverage is largely about some other X-factor(s), that necessarily means that advocates of universal coverage are willing to let some people die sooner in order to serve that X-factor?

(Cross-posted at National Journal’s Health Care Experts blog.)

Why the Democrats’ Health Care Overhaul May Die

The problem that Democrats have faced from Day One is finally coming to a head.

The Left and the health care industry both want universal health insurance coverage.  The industry, because universal coverage means massive new government subsidies. The Left, because that’s their religion.

But universal coverage is so expensive that Congress can’t get there without taxing Democrats.

  • Sen. Jay Rockefeller (D-WV) is the biggest opponent of Sen. Max Baucus’ (D-MT) tax on expensive health plans because that tax would hit West Virginia coal miners.
  • Unions vigorously oppose that tax because it would hit their members.
  • Moderate Democrats in the House oppose Rep. Charlie Rangel’s (D-NY) supposed “millionaires surtax” because they know it would hit small businesses in their districts.

And on and on…

But if congressional leaders pare back those taxes, they lose the support of the health care industry, which wants its subsidies.

  • That’s why the health insurance lobby funded this PriceWaterhouseCoopers study saying that premiums would rise under the Baucus bill: the $500 billion bailout they would receive isn’t enough.  They also want – they demand –  steep taxes on Americans who don’t buy their products.
  • The drug companies, the hospitals, and the physician groups are likewise demanding big subsidies, and will run ads to kill the whole effort if those subsidies aren’t big enough.

As always, health economist Uwe Reinhardt put it colorfully:

It’s no different from Iraq with all the different tribes…‘How does it affect the money flow to my interest group?’  They are all sitting in the woods with their machine guns, waiting to shoot.

Once the shooting starts, industry opposition will sway even Democratic members, because there are physicians and hospitals and employers and insurance-industry employees in every state and congressional district.

Can President Obama and the congressional leadership satisfy both groups?  My guess is, probably not, and this misguided effort at “reform” will therefore die.  Again.