Robert Reich's Blog

"What Can I Do?"

2009-06-25T12:30:00.001-07:00

Someone recently approached me at the cheese counter of a local supermarket, asking "what can I do?" At first I thought the person was seeking advice about a choice of cheese. But I soon realized the question was larger than that. It was: what can I do about the way things are going in Washington?

People who voted for Barack Obama tend to fall into one of two camps: Trusters, who believe he's a good man with the right values and he's doing everything he can; and cynics, who have become disillusioned with his bailouts of Wall Street, flimsy proposals for taming the Street, willingness to give away 85 percent of cap-and-trade pollution permits, seeming reversals on eavesdropping and torture, and squishiness on a public option for health care.

In my view, both positions are wrong. A new president -- even one as talented and well-motivated as Obama -- can't get a thing done in Washington unless the public is actively behind him. As FDR said in the reelection campaign of 1936 when a lady insisted that if she were to vote for him he must commit to a long list of objectives, "Maam, I want to do those things, but you must make me."

We must make Obama do the right things. Email, write, and phone the White House. Do the same with your members of Congress. Round up others to do so. Also: Find friends and family members in red states who agree with you, and get them fired up to do the same. For example, if you happen to have a good friend or family member in Montana, you might ask him or her to write Max Baucus and tell him they want a public option included in any healthcare bill.

(I'm back here July 10.)

Why the Critics of a Public Option for Health Care Are Wrong

2009-06-23T22:17:00.000-07:00

Without a public option, the other parties that comprise America's non-system of health care -- private insurers, doctors, hospitals, drug companies, and medical suppliers -- have little or no incentive to supply high-quality care at a lower cost than they do now.

Which is precisely why the public option has become such a lightening rod. The American Medical Association is dead-set against it, Big Pharma rejects it out of hand, and the biggest insurance companies won't consider it. No other issue in the current health-care debate is as fiercely opposed by the medical establishment and their lobbies now swarming over Capitol Hill. Of course, they don't want it. A public option would squeeze their profits and force them to undertake major reforms. That's the whole point.

Critics say the public option is really a Trojan horse for a government takeover of all of health insurance. But nothing could be further from the truth. It's an option. No one has to choose it. Individuals and families will merely be invited to compare costs and outcomes. Presumably they will choose the public plan only if it offers them and their families the best deal -- more and better health care for less.

Private insurers say a public option would have an unfair advantage in achieving this goal. Being the one public plan, it will have large economies of scale that will enable it to negotiate more favorable terms with pharmaceutical companies and other providers. But why, exactly, is this unfair? Isn't the whole point of cost containment to provide the public with health care on more favorable terms? If the public plan negotiates better terms -- thereby demonstrating that drug companies and other providers can meet them -- private plans could seek similar deals.

But, say the critics, the public plan starts off with an unfair advantage because it's likely to have lower administrative costs. That may be true -- Medicare's administrative costs per enrollee are a small fraction of typical private insurance costs -- but here again, why exactly is this unfair? Isn't one of the goals of health-care cost containment to lower administrative costs? If the public option pushes private plans to trim their bureaucracies and become more efficient, that's fine.

Critics complain that a public plan has an inherent advantage over private plans because the public won't have to show profits. But plenty of private plans are already not-for-profit. And if nonprofit plans can offer high-quality health care more cheaply than for-profit plans, why should for-profit plans be coddled? The public plan would merely force profit-making private plans to take whatever steps were necessary to become more competitive. Once again, that's a plus.

Critics charge that the public plan will be subsidized by the government. Here they have their facts wrong. Under every plan that's being discussed on Capitol Hill, subsidies go to individuals and families who need them in order to afford health care, not to a public plan. Individuals and families use the subsidies to shop for the best care they can find. They're free to choose the public plan, but that's only one option. They could take their subsidy and buy a private plan just as easily. Legislation should also make crystal clear that the public plan, for its part, may not dip into general revenues to cover its costs. It must pay for itself. And any government entity that oversees the health-insurance pool or acts as referee in setting ground rules for all plans must not favor the public plan.

Finally, critics say that because of its breadth and national reach, the public plan will be able to collect and analyze patient information on a large scale to discover the best ways to improve care. The public plan might even allow clinicians who form accountable-care organizations to keep a portion of the savings they generate. Those opposed to a public option ask how private plans can ever compete with all this. The answer is they can and should. It's the only way we have a prayer of taming health-care costs. But here's some good news for the private plans. The information gleaned by the public plan about best practices will be made available to the private plans as they try to achieve the same or better outputs.

As a practical matter, the choice people make between private plans and a public one is likely to function as a check on both. Such competition will encourage private plans to do better -- offering more value at less cost. At the same time, it will encourage the public plan to be as flexible as possible. In this way, private and public plans will offer one other benchmarks of what's possible and desirable.

Mr. Obama says he wants a public plan. But the strength of the opposition to it, along with his own commitment to making the emerging bill "bipartisan," is leading toward some oddball compromises. One would substitute nonprofit health insurance cooperatives for a public plan. But such cooperatives would lack the scale and authority to negotiate lower rates with drug companies and other providers, collect wide data on outcomes, or effect major change in the system.

Another emerging compromise is to hold off on a public option altogether unless or until private insurers fail to meet some targets for expanding coverage and lowering health-care costs years from now. But without a public option from the start, private insurers won't have the incentives or system-wide model they need to reach these targets. And in politics, years from now usually means never.

To get health care moving again in Congress, the president will have to be clear about how to deal with its costs and whether and how a public plan is to be included as an option. The two are intimately related. Enough talk. He should come out swinging for the public option.

Memo to the President: What You Must Do To Save Universal Health Care

2009-06-19T15:39:00.001-07:00

Mr. President:

Momentum for universal health care is slowing dramatically on Capitol Hill. Moderates are worried, Republicans are digging in, and the medical-industrial complex is firing up its lobbying and propaganda machine.

But, as you know, the worst news came days ago when the Congressional Budget Office weighed in with awful projections about how much the leading healthcare plans would cost and how many Americans would still be left out in the cold. Yet these projections didn't include the savings that a public option would generate by negotiating lower drug prices, doctor fees, and hospital costs, and forcing private insurers to be more competitive. Projecting the future costs of universal health care without including the public option is like predicting the number of people who will get sunburns this summer if nobody is allowed to buy sun lotion. Of course the costs of universal health care will be huge if the most important way of controlling them is left out of the calculation.

If you want to save universal health care, you must do several things, and soon:

1. Go to the nation. You must build public support by forcefully making the case for universal health care everywhere around the country. The latest Wall Street Journal/NBC poll shows that three out of four Americans want universal health care. But the vast majority don't know what's happening on the Hill, don't know how much money the medical-industrial lobbies are spending to defeat it, and have no idea how much demagoguery they're about to be exposed to. You must tell them. And don't be reluctant to take on those vested interests directly. Name names. They've decided to fight you. You must fight them.

2. Be LBJ. So far, Lyndon Johnson has been the only president to defeat American Medical Association and the rest of the medical-industrial complex. He got Medicare and Medicaid enacted despite their cries of "socialized medicine" because he knocked heads on the Hill. He told Congress exactly what he wanted, cajoled and threatened those who resisted, and counted noses every hour until he had the votes he needed. When you're not on the road, you need to be twisting congressional arms and drawing a line in the sand. Be tough.

3. Forget the Republicans. Forget bipartisanship. Universal health care can pass with 51 votes. You can get 51 votes if you give up on trying to persuade a handful of Republicans to cross over. Eight year ago George W. Bush passed his huge tax cut, mostly for the wealthy, by wrapping it in an all-or-nothing reconciliation measure and daring Democrats to vote against it. You should do the same with health care.

4. Insist on a real public option. It's the lynchpin of universal health care. Don't accept Kent Conrad's ersatz public option masquerading as a "healthcare cooperative." Cooperatives won't have the authority, scale, or leverage to negotiate low prices and keep private insurers honest.

5. Demand that taxes be raised on the wealthy to ensure that all Americans get affordable health care. At the rate healthcare costs are rising, not even a real public option will hold down costs enough to make health care affordable to most American families in years to come. So you'll need to tax the wealthy. Don't back down on your original proposal to limit their deductions. And support a cap on how much employee-provided health care can be provided tax free. (Yes, you opposed this during your campaign. But you have no choice but to reverse yourself on this.) These are the only two big pots of money.

6. Put everything else on hold. As important as they are, your other agenda items -- financial reform, home mortgage mitigation, cap-and-trade legislation -- pale in significance relative to universal health care. By pushing everything at once, you take the public's mind off the biggest goal, diffuse your energies, blur your public message, and fuel the demagogues who say you're trying to take over the private sector.

You have to win this.

Your obedient servant, RBR

Does the Obama Plan for Reforming Wall Street Measure Up?

2009-06-18T08:00:00.001-07:00

In a word: No.

The plan doesn't stop stop bankers from making huge, risky bets with other peoples’ money. It does increase capital requirements and oversight, but it doesn't require bankers to take their pay in long-term stock options or warrants, and it doesn't even hint that banks should go back to being partnerships instead of publicly-held corporations.

All this means traders still have very incentive to place big and often wildly risky bets as long as the potential winnings are big enough, and top executives have very little incentive to monitor what traders are up to as long as the traders are collecting large commissions on the bets.

Nor does the plan do anything to prevent banks from becoming too big to fail. It doesn't hint at a return to the days before the late 1990s when commercial banks were separate entities from investment banks -- before mammoth bank supermarkets like Citigroup came to be so tied up with so many other commercial and investment vehicles that they couldn't be allowed to go under. And there's not the slightest mention of antitrust, to break up the largest banks.

The plan does focus on a few conflicts of interest, such as how credit rating agencies are paid. And it does establish a new agency to oversee all forms of consumer loans -- thereby helping make sure borrowers know what they're getting into, and can comparison shop. But these are small potatoes relative to the size of the overall problem. The Fed is given new oversight powers, but there's no suggestion that regional Fed bank presidents, who already have a substantial oversight role, should be recruited from the ranks of people who are not bankers and don't have a big financial stake in keeping oversight to a minimum.

In short: It's a mere filigree of reform, a sheer gossamer of government. Wall Street must be toasting its good fortune. Unless Congress shows some spine, the great Wall Street meltdown of 2007 and 2008 -- which lead to the biggest taxpayer bailout in history, very likely the largest taxpayer losses on record, and the largest investor losses since 1929 -- will repeat itself within a decade, if not sooner.

In fact, the banks that have repaid their TARP money are already planning to resume supersize bonuses, even though many of them are still awash in toxic assets and their non-performing loans are up. Bad credit-card and commercial property debts are mounting. Foreclosures are soaring. Yet several of the big banks are showing profits. How are they pulling this off? First, they strong-armed the Financial Accounting Standards Board into allowing them to assign whatever value they wanted to all the junk on their balance sheets. Then they played hardball with the Treasury staffers whose so-called "stress tests" lapsed into little more than negotiations over numbers and probabilities. (The national unemployment rate is already approaching the highest unemployment rate in the stress tests.) Then they convinced investors that financials have hit bottom and were now good bets. Presto!

Watch your wallets. The Street is up to its old tricks. And the White House's so-called reform is little more than a whitewash.

The Three Essentials of Financial Reform

2009-06-16T11:05:00.000-07:00

As the White House unveils its long-awaited proposals to prevent another Wall Street meltdown in the future, keep a lookout for three essentials. Without them the Street will revert to its old ways as soon as the coast clears. In fact, now that the government has bailed out the Street, the biggest banks will take even larger and more irresponsible risks because they’re officially too big to fail. So these three reforms are critical.

1. Stop bankers from making huge, risky bets with other peoples’ money. At the least, require they back their bets with a large percentage of their own capital, and bar them from raising money off their balance sheets through derivative trades. Also require they take their pay in stock options or warrants that can’t be cashed in for at least three years, so they’ll take a longer-term view. Best of all would be a requirement that investment banks return to being partnerships and the capital on their books be their own, not yours or your pension fund’s. When investment banks were partnerships, every partner took an active interest in what every other partner and trader was doing. The real mischief started once they started selling shares to the public.

2. Prevent any bank from becoming too big to fail. Separate commercial from investment banking, as they were before the late 1990s. Commercial banks should return to their basic function of linking savers with borrowers. Investment bankers should return to their casino function of placing bets in the stock market and advising you and others about where to place your own own bets. Combining the basic utility with the casino only made bankers far richer and subjected you and me to risks we didn’t bargain for. If separating commercial from investment banking isn’t enough to bring all banks down to reasonable size, use antitrust laws to break them up.

3. Root out three major conflicts of interest. (1) Credit-rating agencies should no longer be paid by the companies whose issues are being rated; they should be paid by those who use their ratings. (2) Institutional investors like pension funds and mutual funds should not be getting investment advice from the same banks that profit off their investments; the advice should come from sources without a financial stake; (3) the regional Feds that are responsible for much bank oversight should no longer be headed by presidents appointed by the region’s bankers; non-bankers should have the major say, and the regional presidents should have to be confirmed by the Senate.

These three reforms will reduce the possibility that you and I and other taxpayers will ever again have to spend billions bailing out bankers who robbed us blind while amassing fortunes. But because that would make it next to impossible to make such fortunes in the future, the big bankers will fight every one of these with all guns blazing, and their lobbyists in full force. They’ll try to inundate you in a blizzard of buzz words. They want your eyes to gaze over, but don’t let them. Keep focused on these three issues. Congress, for its part, may not be much help. It’s awash in money from Wall Street. Big Finance is second only to the health-industrial complex in owning a large portion of the Hill. Barney Frank at House Banking can be relied on to try his best but others in the House and Senate may well roll over. The President wants to do the right thing but he’s spread thin and spending political capital on health care. Tim Geithner doesn’t have the stomach to take on the Street; the plan he announced a few days ago to regulate pay is a bad joke. Expect lots of blather about rearranging boxes on the regulatory organization chart.

Bottom line: Genuine financial reform will be almost as difficult to achieve as real universal health care. Immense private interests are amassed against the public interest in both cases because staggering amounts of money are at stake. But they are the two most important domestic issues right now. Keep careful watch, and weigh in.

The Healthcare War is Now Official

2009-06-11T15:20:00.001-07:00

Yesterday the American Medical Association came out against a public option for health care. And yesterday the President reaffirmed his support for it. The next weeks will show what Obama is made of -- whether he's willing and able to take on the most formidable lobbying coalition he has faced so far on an issue that will define his presidency.

And make no mistake: A public option large enough to have bargaining leverage to drive down drug prices and private-insurance premiums is the defining issue of universal health care. It's the only way to make health care affordable. It's the only way to prevent Medicare and Medicaid from eating up future federal budgets. An ersatz public option -- whether Kent Conrad's non-profit cooperatives, Olympia Snowe's "trigger," or regulated state-run plans -- won't do squat.

The last president to successfully take on the giant health care lobbies was LBJ. He got Medicare and Medicaid enacted because he weighed into the details, twisted congressional arms, threatened and cajoled, drew lines in the sand, and went to war against the AMA and the other giant lobbyists standing in the way. The question now is how much LBJ is in Barack Obama.

The big guns are out and they're firing. All major lobbying firms in Washington -- many of them brimming with ex-members of Congress -- are now crawling all over the Hill. Lots of money is on the table. AMA's political action committee has contributed $9.8 million to congressional candidates since 2000, and its lobbying arm is one of the most formidable on the Hill. Meanwhile, Big Insurance and Big Pharma are increasing their firepower. The five largest private insurers and their trade group America's Health Insurance Plans spent a total of $6.4 million on lobbying in the first quarter of this year, up more than $1 million from the first quarter last year, and are spending even more now. United Health Group spent $1.5 million in the first quarter, up 34 percent from the $1.1 million it spent in the first quarter last year. Aetna spent $809,793 between January and the end of March, up 41 percent from last year. Pfizer, the world's biggest drugmaker, spent more than $6.1 million on lobbying between January and March, more than double what it spent last year. It also spent nearly $3.3 million lobbying in the fourth quarter of 2008. Every one of them is upping their spending.

Some congressional Democrats are willing and able to stand up to this barrage. Many are not. They need cover from the White House.

The President can't do this alone. You must weigh in and get everyone you know to weigh in, too. Bombard your senators and representatives. Organize and mobilize others. And let the White House know how strongly you feel. This is one of those battles that define a presidency. But more importantly, it's one of those battles that define the state of American democracy.

The Latest Public Option Bamboozle, and How to Recognize the Real Thing

2009-06-11T07:50:00.000-07:00

Here's the latest contortion from Senate Dems trying to win over a few Republicans to a "public option:" Let nonprofits create health-care cooperatives, and call them the public option. Kent Conrad came up with this bamboozle. Finance chair Baucus is impressed, and some Republicans -- even Grassley -- seem interested. Watch your wallets.

Nonprofit health-care cooperatives won't have any real bargaining leverage to get lower prices because they'll be too small and too numerous. Pharma and Insurance know they can roll them. That's why the Conrad compromise is getting a good reception from across the aisle, just as Olympia Snowe's "trigger" (whereby no public option until some time down the pike, and only if Pharma and Insurance don't bring down and extend coverage a tad) is also gaining traction.

The truth is that there's only one "public option" that will truly bring down costs and premiums -- one that's national in scale and combines its bargaining power with Medicare, and is allowed to negotiate lower drug prices and lower doctor and hospital fees. And that's precisely what Pharma and Insurance detest, for exactly the same reason.

Whatever it's called -- public option or chopped liver -- it has to be able to squeeze Pharma, Insurance, and the rest of the medical-industrial complex. And the more likely it is to squeeze them, the more they'll fight it. And the greater the opposition from Republicans, and from Dems who either believe any bill has to have some Republican support or who have sold themselves out to the medical biggies.

As long as single payer is off the table, then we need a real public option. Don't be fooled by labels. Demand the real thing.

The Great Debt Scare: Why Has It Returned?

2009-06-10T21:03:00.000-07:00

It’s the kind of thing I expect to hear from deficit hawks and chicken littles -- from the self-described "fiscally responsible" right, from the scolds Ross Perot and Pete Peterson, from my former cabinet colleague Bob Rubin. But yesterday I was shown slides developed by the putatively liberal Center for American Progress intended to make the point. And today’s front page story in the New York Times, by the eminent David Leonhardt, entitled "Sea of Red Ink: How It Spread From A Puddle," puts the issue right before our progressive noses, so to speak.

The Great Debt Scare is back.

Odd that it would return right now, when the economy is still mired in the worst depression since the Great one. After all, consumers are still deep in debt and incapable of buying. Unemployment continues to soar. Businesses still are not purchasing or investing, for lack of customers. Exports are still dead, because much of the global economy continues to shrink. So the purchaser of last resort -- the government -- has to create larger deficits if the economy is to get anywhere near full capacity, and start to grow again.

Odder still that the Debt Scare returns at the precise moment that bills are emerging from Congress on universal health care, which, by almost everyone’s reckoning, will not increase the long-term debt one bit because universal health care has to be paid for in the budget. In fact, universal health care will reduce the deficit and cumulative debt -- especially if it includes a public option capable of negotiating lower costs from drug makers, doctors, and insurers, and thereby reducing the future costs of Medicare and Medicaid.

Even odder that the Debt Scare rears its frightening head just as the President’s stimulus is moving into high gear with more spending on infrastructure. Every expert who has looked closely at the nation’s crumbling infrastructure knows how badly it suffers from decades of deferred maintenance -- bridges collapsing, water pipes bursting, sewers backed up, highways impassable, public transit in disrepair. The stimulus, along with the President’s long-term budget, also focus on the nation’s schools, as well as America’s capacity to reduce emissions of greenhouse gases. These public investments are as important to the nation’s future as are private investments.

First, some background: Deficit and debt numbers mean nothing in and of themselves. They take on meaning only in relation to something else. And the most important something else, in terms of deciding whether the nation can afford such deficits or debts, is the size of the national economy.

Pay close attention, in particular, to the debt/GDP ratio. True, that ratio is heading in the wrong direction right now. It may reach 70 percent by the end of 2010. That’s high, but it’s not high compared to the 120 percent it was in 1946, after the ravages of Depression and war.

Over time, the basic way America has reduced the debt/GDP ratio is by growing the U.S. economy. GDP growth makes even large debts manageable. When the economy is cooking, more people have jobs and better wages. So they pay more taxes. And they require less unemployment assistance and other social insurance. That’s why it’s so important now, in the depths of depression, that government, as purchaser of last resort, steps in and runs large deficits. Without large deficits this year and next, and perhaps the year after, the economy doesn’t have a prayer of getting back on a growth path, and the debt/GDP ratio could really get ugly.

That growth path, by the way, will be faster and stronger if the nation invests in our infrastructure, our schools, and our environment -- which is exactly what Obama aims to do. In this respect, national budgets are like family budgets. It’s dumb for an indebted family to borrow more money to take a world cruise. But it’s smart even for an indebted family to borrow money to send their kids to college. So too with the Obama budget. Public investments, just like family investments, build future wealth. They allow faster growth. They make the debt/GDP ratio even lower and more manageable over time.

Don't get me wrong. I'm not saying there's nothing to worry about when it comes to long-term deficit and debt projections. I'm just saying now's not the time to worry, and we ought to temper our worries by understanding the larger context.

Not every expert agrees that a deficit-driven stimulus is the best and fastest way to get the economy back on a growth track, or that public investments can speed growth. Conservative economists, Republicans, and many Wall Streeters are skeptical because they don’t think government can do anything well. But look at the record of the last seventy-five years -- look at how the nation got out of the Great Depression, and consider the critical role public investments have played since then in speeding the nation’s growth, investments such as the interstate highway system -- and you have ample evidence that the deficit hawks are wrong. They were wrong when they convinced Bill Clinton to chuck a large part of his investment agenda (the nation is now paying the price) and they're wrong now.

So, back to the mystery. Why are the ostensibly liberal Center for American Progress and New York Times participating in the Debt Scare right now? Is it possible that among the President’s top economic advisors and top ranking members the Fed are people who agree more with conservative Republicans and Wall Streeters on this issue than with the President? Is it conceivable that they are quietly encouraging the Debt Scare even in traditionally liberal precincts, in order to reduce support in the Democratic base for what Obama wants to accomplish? Hmmm.

Watching Out for the Details in Healthcare, and How Hard the White House Pushes for Them

2009-06-08T06:59:00.000-07:00

In an interesting piece in Sunday's New York Times Magazine, Matt Bai suggests that the White House has learned the main lesson of Bill Clinton's failed attempt at universal health care, which is not to deliver a finished product to Congress but instead give Congress a set of goals and let it decide how to reach them.

The question to my mind is whether the Obama White House has over-learned that lesson. Without strong White House leadership, individual members of Congress are particularly susceptible to the threats and promises of powerful lobbies. A statement of White House goals that leaves the details to Congress will likely result in legislation that superficially meets those goals but whose details undermine them. That's the biggest danger now with the inchoate healthcare legislation.

Fortunately, the White House now intends to get more involved in the emerging healthcare bill. Following are the three biggest issues where powerful lobbies on the other side are working the details to their advantage. The question is how hard the Obama White House will push back.

1. A real public option or a public option in name only? Big Pharma and Big Insurance are dead against, and are pressuring lawmakers. Republicans are also opposed. The President said he wants a public option. But the real question is whether he'll be willing to allow the public option to be watered down into essentially nothing (broken up into regional or state-run plans, or be required to charge the same as private insurance, or be triggered only if private insurers and pharma fail to bring down costs and extend coverage). If the President wants Republicans on board even though he doesn't need them (the bill requires only 51 Senate votes), he will have to buy a watered down version.

2. A requirement that all businesses "pay or play," or a broad exemption for smaller businesses? Most emerging versions of the bill require employers to supply health insurance for workers or contribute to the cost of a plan, but exempt small employers. The issue to watch is how "small employers" are defined -- and how many, as a result, won't have to either pay or play. Small business lobbies are all over the Hill arguing for a broad exemption. Republicans agree. The White House will have to push back very hard to include enough businesses to make "pay or play" work.

3. Additional tax revenues from taxing employer-provided benefits on higher-incomes or from limiting deductions on higher incomes? Congressional Dems originally nixed the second and haven't supported the first. Organized labor is dead-set against taxing any employer-provided health benefits because it doesn't want to set a precedent that might someday erode all such benefits. Accordingly, the White House is signaling it won't take this route. Yet there's powerful resistance on limiting deductions for higher incomes, from many of the beneficiaries of these deductions (such as big charities and state and local governments). Unless the White House demands that those deductions be limited for all taxpayers earning over $250,000 a year, adjusted for inflation in future years, it won't have enough revenue to support the overall bill.

So the question right now is how hard the President will push to get a real public option, a broad mandate, and enough revenues to support universal health care. The Republicans are showing remarkable unity, as they did on the stimulus package and the budget. Yet the President seems intent on a bipartisan bill. Meanwhile, Pharma, Insurance, charities, state and local governments, and labor are all putting maximum pressure on individual Democrats. Yet the President seems wary of twisting arms. What's the result? Keep your eyes on the details.

How Pharma and Insurance Intend to Kill the Public Option, And What Obama and the Rest of Us Must Do

2009-06-05T19:19:00.000-07:00

I'ved poked around Washington today, talking with friends on the Hill who confirm the worst: Big Pharma and Big Insurance are gaining ground in their campaign to kill the public option in the emerging health care bill.

You know why, of course. They don't want a public option that would compete with private insurers and use its bargaining power to negotiate better rates with drug companies. They argue that would be unfair. Unfair? Unfair to give more people better health care at lower cost? To Pharma and Insurance, "unfair" is anything that undermines their profits.

So they're pulling out all the stops -- pushing Democrats and a handful of so-called "moderate" Republicans who say they're in favor of a public option to support legislation that would include it in name only. One of their proposals is to break up the public option into small pieces under multiple regional third-party administrators that would have little or no bargaining leverage. A second is to give the public option to the states where Big Pharma and Big Insurance can easily buy off legislators and officials, as they've been doing for years. A third is bind the public plan to the same rules private insurers have already wangled, thereby making it impossible for the public plan to put competitive pressure on the insurers.

Max Baucus, Chair of Senate Finance (now exactly why does the Senate Finance Committee have so much say over health care?) hasn't shown his cards but staffers tell me he's more than happy to sign on to any one of these. But Baucus is waiting for more support from his colleagues, and none of the three proposals has emerged as the leading candidate for those who want to kill the public option without showing they're killing it. Meanwhile, Ted Kennedy and his staff are still pushing for a full public option, but with Kennedy ailing, he might not be able to round up the votes. (Kennedy's health committee released a draft of a bill today, which contains the full public option.)

Enter Olympia Snowe. Her move is important, not because she's Republican (the Senate needs only 51 votes to pass this) but because she's well-respected and considered non-partisan, and therefore offers some cover to Democrats who may need it. Last night Snowe hosted a private meeting between members and staffers about a new proposal Pharma and Insurance are floating, and apparently she's already gained the tentative support of several Democrats (including Ron Wyden and Thomas Carper). Under Snowe's proposal, the public option would kick in years from now, but it would be triggered only if insurance companies fail to bring down healthcare costs and expand coverage in he meantime.

What's the catch? First, these conditions are likely to be achieved by other pieces of the emerging legislation; for example, computerized records will bring down costs a tad, and a mandate requiring everyone to have coverage will automatically expand coverage. If it ever comes to it, Pharma and Insurance can argue that their mere participation fulfills their part of the bargain, so no public option will need to be triggered. Second, as Pharma and Insurance well know, "years from now" in legislative terms means never. There will never be a better time than now to enact a public option. If it's not included, in a few years the public's attention will be elsewhere.

Much the same dynamic is occurring in the House. Two members who had originally supported single payer told me that Pharma and Insurance have launched the same strategy there, and many House members are looking to see what happens in the Senate. Snowe's "trigger" is already buzzing among members.

All this will be decided within days or weeks. And once those who want to kill the public option without their fingerprints on the murder weapon begin to agree on a proposal -- Snowe's "trigger" or any other -- the public option will be very hard to revive. The White House must now insist on a genuine public option. And you, dear reader, must insist as well.

This is it, folks. The concrete is being mixed and about to be poured. And after it's poured and hardens, universal health care will be with us for years to come in whatever form it now takes. Let your representative and senators know you want a public option without conditions or triggers -- one that gives the public insurer bargaining leverage over drug companies, and pushes insurers to do what they've promised to do. Don't wait until the concrete hardens and we've lost this battle.

Bernanke's Real Message About Budget Deficits

2009-06-03T15:27:00.000-07:00

Has Ben Bernanke suddenly become a deficit hawk? In remarks to the House Budget Committee he sounded like one -- calling on Congress to come up with a plan to restore fiscal balance over the long term. “Unless we demonstrate a strong commitment to fiscal sustainability in the longer term, we will have neither financial stability nor healthy economic growth.” This from a Fed Chair who's loosened the money supply more than any Fed chair in recent history, printing money as if it were going out of style. What's going on?

Begin with the fact that Bernanke is working more closely with the Treasury any Fed chair since the Second World War. It's doubtful that Bernanke would make a statement like this without it being at least tacitly approved by the White House. Second, Bernanke and the Treasury know that investors are getting antsy about inflation down the road; yields on long-term bonds are increasing. Third, the White House is having trouble getting Congress to come up with some $600 billion it needs to finance universal health care.

My guess is Bernanke is trying to reassure investors he won't let inflation get out of control in coming years. If he has to, when the economy is safely out of the morass, he'll crank up short-term interest rates and squeeze the money supply.

But Bernanke also wants to deliver a message to Congress, a message the White House doesn't want to deliver because it's politically awkward: Congress will have to raise taxes on the wealthy in order to finance universal health care and reduce looming budget deficits. Such tax increases won't slow down the economy because the wealthy don't spend that much anyway (that's what it means to be wealthy -- you've already got most of what you need), but may be necessary, at least to ward off inflation fears.

What sort of higher taxes on the wealthy? Bernanke didn't say, of course, but the White House has already floated limits on deductions and seems willing to consider taxing employee-provided health benefits for employees over a certain income. And maybe lifting the cap on Social Security payroll taxes, at least for workers earning over $250,000 a year.

The Future of Manufacturing, GM, and American Workers (Part III)

2009-06-01T07:38:00.000-07:00

As president of General Motors when Eisenhower tapped him to become secretary of defense in 1953, “Engine Charlie” Wilson voiced at his Senate confirmation hearing what was then the conventional view. When asked whether he could make a decision in the interest of the US that was adverse to the interest of GM, he said he could.

Then he reassured them that such a conflict would never arise. “I cannot conceive of one because for years I thought what was good for our country was good for General Motors, and vice versa. Our company is too big. It goes with the welfare of the country.”

Wilson was only slightly exaggerating. At the time, the fate of GM was inextricably linked to that of the nation. In 1953, GM was the world’s biggest manufacturer, the symbol of US economic might. It generated 3 per cent of US gross national product. GM’s expansion in the 1950s was credited with stalling a business slump. It was also America’s largest employer, with over 460,000 employees. Its blue-collar workers received (in today's dollars) $60 an hour that year in wages and benefits.

Today, Wal-Mart is America’s largest employer, the majority of whose employees receive just over $10 an hour. And General Motors is filing for bankruptcy. Wilson’s reassuring words in 1953 now have an ironic twist. There will be little difference between what is good for America and for GM because it is soon to be owned by US taxpayers who have forked out more than $60 billion to buy it.

But why would US taxpayers want to own today’s GM? Surely not because the shares promise a high return when the economy turns up. GM has been on a downward slide for years. In the 1960s, consumer advocate Ralph Nader revealed its cars were unsafe. In the 1970s, Middle East oil producers showed its cars were uneconomic. In the 1980s, Japanese auto makers exposed them as unreliable and costly. Many younger Americans have never bought a GM car and would not think of doing so. Given this record, it seems doubtful that taxpayers will even be repaid our $60 billion. But getting repaid cannot be the main goal of the bail-out. Presumably, the reason is to serve some larger public purpose. But the goal is not obvious.

It cannot be to preserve GM jobs, because the US Treasury has signaled GM must slim to get the cash. The company has only slightly more than 60,000 Americans today (83,000 around the world), and plans to shut half-a-dozen factories and sack at least 20,000 more U.S. workers this year. It has already culled its dealership network. Plans call for laying off another 18,000 U.S. workers by the end of 2010.

The purpose cannot be to create a new, lean, debt-free company that might one day turn a profit. That is what the private sector is supposed to achieve on its own and what a reorganization under bankruptcy would do.

Nor is the purpose of the bail-out to create a new generation of fuel-efficient cars. Congress has already given auto makers money to do this. Besides, the Treasury has said it has no interest in being an active investor or telling the industry what cars to make.

The only practical purpose I can imagine for the bail-out is to slow the decline of GM to create enough time for its workers, suppliers, dealers and communities to adjust to its eventual demise. Yet if this is the goal, surely there are better ways to allocate $60 billion than to buy GM? The funds would be better spent helping the Midwest diversify away from cars, as the auto industry continues to shrink. And eventually, for the reasons stated in Parts I and II of this series, diversify away from manufacturing assembly. Cash could be used to retrain car workers, giving them extended unemployment insurance as they retrain.

But US politicians dare not talk openly about industrial adjustment because the public does not want to hear about it. A strong constituency wants to preserve jobs and communities as they are, regardless of the public cost. Another equally powerful group wants to let markets work their will, regardless of the short-term social costs. Polls show most Americans are against bailing out GM, but if their own jobs were at stake I am sure they would have a different view.

So the Obama administration is, in effect, paying $60 billion to buy off both constituencies. It is telling the first group that jobs and communities dependent on GM will be better preserved because of the bail-out, and the second that taxpayers and creditors will be rewarded by it. But it is not telling anyone the complete truth: GM will disappear, eventually. The bail-out is designed to give the economy time to reduce the social costs of the blow.

Behind all of this is a growing public fear, of which GM’s demise is a small but telling part. Half a century ago, the prosperity of America’s middle class was one of democratic capitalism’s greatest triumphs. By the time Wilson left GM, almost half of all US families fell within the middle range of income. Most were headed not by professionals or executives but by skilled and semi-skilled factory workers. Jobs were steady and health benefits secure. Americans were becoming more equal economically.

But starting three decades ago, these trends have been turned upside down. Middle-class jobs that do not need a college degree are disappearing. Job security is all but gone. And the nation is more unequal. GM in its heyday was the model of economic security and widening prosperity. Its decline has mirrored the disappearance of both.

Middle-class taxpayers worry they cannot afford to bail out companies like GM. Yet they worry they cannot afford to lose their jobs. Wilson’s edict, too, has been turned upside down: in many ways, what has been bad for GM has been bad for much of America. The answer is not to bail out GM. It is to smooth the way to a new, post-manufacturing economy.

The Future of Manufacturing, GM, and American Workers (Part II)

2009-05-31T18:37:00.000-07:00

Symbolic analysts have been hit by the current downturn, just as everyone else has. But over the long term, symbolic analysts will do just fine – as long as they stay away from job functions that are becoming routinized. They will continue to benefit from economic change. Computer technology gives them more tools for thinking, creating and communicating. The global market gives them more potential customers for their insights.

To be sure, symbolic analysts are popping up all over the world. More than half of all Fortune 500 companies say they're outsourcing some software development or expanding their own development centers outside the U.S. But apart from recessions, demand for symbolic analysts in the U.S. will continue to grow faster than the supply. Innovation creates that demand, and demand for it, in turn, generates more innovation.

It's simply wrong to assume a zero-sum game among nations. There is no finite amount of symbolic-analytic work to be parceled out around the globe. There is no limit to the capacity of the human brain to discover new problems needing to be solved, or to create better solutions to old problems. And no limit to the number of problems needing solutions.

In decades to come, nations with the highest percentages of their working populations able to do symbolic-analytic tasks will have the highest standard of living and be the most competitive internationally.

America’s biggest challenge is to educate more of our people sufficiently to excel at such tasks. We do remarkably well with the children from relatively affluent families. Our universities are the envy of the world. and no other nation surpasses us in providing intellectual and creative experience within entire regions specializing in one or another kind of symbolic analytic work (LA for music and film, Silicon Valley for software and the Internet, greater Boston for bio-med engineering, and so on).

But we’re in danger of losing ground because too many of our kids, especially those from lower-middle class and poor families, can’t get the foundational education they need. The consequence is a yawning gap in income and wealth which continues to widen. More and more of our working people finds themselves in the local service economy -- in hotels, hospitals, restaurant chains, and big-box retailers -- earning low wages with little or no benefits. Unions could help raise their wages by giving them more bargaining leverage. A higher minimum wage and larger Earned Income Tax Credit could help as well.

Not all of our young people can or should receive a four-year college degree, but we can do far better for them than we're doing now. At the least, every young person should have access to a year or two beyond high school, in order to gain a certificate attesting to their expertise in a particular area of technical competence. Technicians who install, upgrade, and service automated and computerized machinery -- office technicians, auto technicians, computer technicians, environmental technicians -- will be in ever-greater demand.

Some argue that even if I’m correct about all this, the erosion of traditional manufacturing impedes the capacity of Americans to learn important symbolic-analytic tasks, because such learning depends on an intimate understanding of the manufacturing process. This may be true for a few of these tasks: manufacturing engineers surely need to know manufacturing inside out and some design engineers need that knowledge as well. But most symbolic analysts do not. Whatever they need to learn about manufacturing can usually be discovered online.

Others argue we need more manufacturing in the U.S. because our national security depends on it. That seems doubtful. U.S. military contractors subcontract all over the world. As long as they diversify their sources so as not to be dependent on one location or country, we’re safe. In the unlikely event that much of the rest of the world where manufacturing is now done suddenly turns on us, we can create the factories and equipment we need. We’ve mobilized for war before, quite successfully.

Still others say that eventually the dollar will drop so low that global firms will find it profitable to locate traditional manufacturing assembly in the United States. Don't hold your breath. But if and when that should happen, Americans will be far poorer than even low-wage workers are today, because everything we purchase from anywhere will be far more costly.

Obviously, the market is fallible, as we’ve recently and painfully experienced. And sometimes we need to consider what’s good for our economy and society as a whole regardless of where the market may lead us. But that’s exactly where I depart from those who believe we need to protect or bring back traditional manufacturing in the United States. To do so would be enormously costly. I just don’t get how those costs can possibly be justified.

Tomorrow: Where does GM come in?

The Future of Manufacturing, GM, and American Workers (Part I)

2009-05-29T07:40:00.000-07:00

What's the Administration's specific aim in bailing out GM? I'll give you my theory later.

For now, though, some background. First and most broadly, it doesn't make sense for America to try to maintain or enlarge manufacturing as a portion of the economy. Even if the U.S. were to seal its borders and bar any manufactured goods from coming in from abroad--something I don't recommend--we'd still be losing manufacturing jobs. That's mainly because of technology.

When we think of manufacturing jobs, we tend to imagine old-time assembly lines populated by millions of blue-collar workers who had well-paying jobs with good benefits. But that picture no longer describes most manufacturing. I recently toured a U.S. factory containing two employees and 400 computerized robots. The two live people sat in front of computer screens and instructed the robots. In a few years this factory won't have a single employee on site, except for an occasional visiting technician who repairs and upgrades the robots.

Factory jobs are vanishing all over the world. Even China is losing them. The Chinese are doing more manufacturing than ever, but they're also becoming far more efficient at it. They've shuttered most of the old state-run factories. Their new factories are chock full of automated and computerized machines. As a result, they don't need as many manufacturing workers as before.

Economists at Alliance Capital Management took a look at employment trends in twenty large economies and found that between 1995 and 2002--before the asset bubble and subsequent bust--twenty-two million manufacturing jobs disappeared. The United States wasn't even the biggest loser. We lost about 11% of our manufacturing jobs in that period, but the Japanese lost 16% of theirs. Even developing nations lost factory jobs: Brazil suffered a 20% decline, and China had a 15% drop.

What happened to manufacturing? In two words, higher productivity. As productivity rises, employment falls because fewer people are needed. In this, manufacturing is following the same trend as agriculture. A century ago, almost 30% of adult Americans worked on a farm. Nowadays, fewer than 5% do. That doesn't mean the U.S. failed at agriculture. Quite the opposite. American agriculture is a huge success story. America can generate far larger crops than a century ago with far fewer people. New technologies, more efficient machines, new methods of fertilizing, better systems of crop rotation, and efficiencies of large scale have all made farming much more productive.

Manufacturing is analogous. In America and elsewhere around the world, it's a success. Since 1995, even as manufacturing employment has dropped around the world, global industrial output has risen more than 30%.

We should stop pining after the days when millions of Americans stood along assembly lines and continuously bolted, fit, soldered or clamped what went by. Those days are over. And stop blaming poor nations whose workers get very low wages. Of course their wages are low; these nations are poor. They can become more prosperous only by exporting to rich nations. When America blocks their exports by erecting tariffs and subsidizing our domestic industries, we prevent them from doing better. Helping poorer nations become more prosperous is not only in the interest of humanity but also wise because it lessens global instability.

Want to blame something? Blame new knowledge. Knowledge created the electronic gadgets and software that can now do almost any routine task. This goes well beyond the factory floor. America also used to have lots of elevator operators, telephone operators, bank tellers and service-station attendants. Remember? Most have been replaced by technology. Supermarket check-out clerks are being replaced by automatic scanners. The Internet has taken over the routine tasks of travel agents, real estate brokers, stock brokers and even accountants. With digitization and high-speed data networks a lot of back office work can now be done more cheaply abroad.

Any job that's even slightly routine is disappearing from the U.S. But this doesn't mean we are left with fewer jobs. It means only that we have fewer routine jobs, including traditional manufacturing. When the U.S. economy gets back on track, many routine jobs won't be returning--but new jobs will take their place. A quarter of all Americans now work in jobs that weren't listed in the Census Bureau's occupation codes in 1967. Technophobes, neo-Luddites and anti-globalists be warned: You're on the wrong side of history. You see only the loss of old jobs. You're overlooking all the new ones.

The reason they're so easy to overlook is that so much of the new value added is invisible. A growing percent of every consumer dollar goes to people who analyze, manipulate, innovate and create. These people are responsible for research and development, design and engineering. Or for high-level sales, marketing and advertising. They're composers, writers and producers. They're lawyers, journalists, doctors and management consultants. I call this "symbolic analytic" work because most of it has to do with analyzing, manipulating and communicating through numbers, shapes, words, ideas.

Symbolic-analytic work can't be directly touched or held in your hands, as goods that come out of factories can be. In fact, many of these tasks are officially classified as services rather than manufacturing. Yet almost whatever consumers buy these days, they're paying more for these sorts of tasks than for the physical material or its assemblage. On the back of every iPod is the notice "Designed by Apple in California, Assembled in China." You can bet iPod's design garners a bigger share of the iPod's purchase price than its assembly.

The biggest challenge we face over the long term -- beyond the current depression -- isn't how to bring manufacturing back. It's how to improve the earnings of America's expanding army of low-wage workers who are doing personal service jobs in hotels, hospitals, big-box retail stores, restaurant chains, and all the other businesses that need bodies but not high skills. More on that to come.

Sotomayor and the Republicans

2009-05-26T14:11:00.000-07:00

Put on your seatbelts. Many Republicans have been itching for this fight. They figure if they can make Sonia Sotomayor appear "too liberal," "too activist," or "intemperate" -- and cause Obama to withdraw her nomination, or if they can defeat her outright -- they can slow the Obamomentum that's leading to universal health care, cap-and-trade, more spending on education, and higher taxes on the rich. This would also give them a crack at winning back a number of seats next November, which they know they can't win if their major issues are torture and taxes and if their major spokesmen are Dick Cheney and Rush Limbaugh.

But if they choose to vilify Sotomayor, Republicans take a huge gamble. They could lose even more women and Hispanic voters in 2010 and beyond. And they could alienate even more Independents already turned off by the Republican "just-say-no" approach to almost everything.

Besides, it will be hard for Republicans to pigeonhole Sotomayor. Although as an appellate judge she has sided with defendants, inmates, convicted felons, and environmentalists, she has also taken decidedly conservative stances. In 2002, she ruled against an abortion rights group that claimed the so-called "Mexico City Policy," prohibiting U.S. funding for foreign groups performing or supporting abortion services, violated their First Amendment rights. She reasoned that the government is "free to favor the anti-abortion position over the pro-choice position." In a 2004 case she ruled in favor of anti-abortion protesters who claimed a city had improperly trained police officers who allegedly used excessive force on them. And she has ruled against a number of minority plaintiffs in discrimination cases.

And she has an impeccable upward-through-education-and-hard-work pedigree: She grew up in public housing in the Bronx, the daughter of a factory worker, and got a law degree from Yale.

Still, never underestimate the Republicans' capacity for taking big political risks that turn out badly. Remember Sarah Palin? Republicans may figure that they're so badly decimated already, so marginalized and irrelevant, there's little to lose and possibly much to gain by going negative on Sotomayor and unleashing their terror-TV and rant-radio attack dogs. It's also possible that without much remaining of any moderate view inside their own ranks, Republicans may simply lack the wisdom -- dare I call it judiciousness? -- to opt for a more sensible strategy.

The Only Sure Way to Fund Universal Health Care

2009-05-24T08:38:00.000-07:00

During the presidential campaign, I thought Obama made only one big policy mistake. He criticized John McCain for proposing to tax all employer-provided health benefits. McCain’s overall health plan was regressive – he would have turned the savings into tax credits for purchasing health care – but he was right about where the revenues should come from. I worried that Obama would come to regret the position he took.

Half a year later, it appears that the President will need to tax employer provided health benefits in order to finance universal health care. Or at least the tax-free benefits now enjoyed by higher-income employees. Many in Congress and in the White House are convinced it’s the only good option. Max Baucus, chair of Senate Finance, expliticly put it on the table last week. Peter Orszag, the President’s budget director, has told Congress the option should remain on the table.

The White House is in a revenue bind. The President had intended to raise money for health care by limiting the income tax deductions that wealthy taxpayers can claim. This would have generated some $318 billion over ten years, about half of Obama’s proposed “health care reserve fund.” But the proposal ran into a buzz saw of opposition from congressional Democrats. Not only did Baucus balk but so did Charles Rangel, chairman of the House Ways and Means Committee.

With deficit vultures already circling, Obama has to come up with a far more reliable way to fund health care. That’s where employee health benefits come in. According to the Congressional Budget Office, taxing all employee health benefits would yield a whopping $246 billion every year. Even limiting the tax to higher-income employees would go a long way to funding universal health care. Employer-provided health insurance is the biggest tax break in the whole federal income tax system.

Tax-free employer-provided health care is also, in effect, the government-backed health insurance system we now have. It now covers three-fifths of the American population under 65. Seventy percent of the 253 million Americans with health insurance receive at least some of it through their employers

Which is exactly the problem. Most middle class American families rely on it and won’t want to give it up even if a new universal system becomes available. Organized labor rightly considers these benefits among the union movement’s proudest achievements.

But, face it, it’s become a crazy system. You’re not eligible for these benefits when you and your family are likely to need them most – when you lose your job and your income plummets. And these days, as we’re witnessing, no job is safe. The system also distorts the labor market. It prevents lots of people from changing jobs for fear they’ll lose their health insurance, or won’t get the benefits they do now. And it invites employers to game the system by seeking young, healthy employees who pose low risks of ill health and will therefore keep insurance costs low, while rejecting older ones who are likely to have more costly health needs. The system also encourages employers to try to push married employees onto their spouses’s health insurance plan so that the spouse’s employer bears the cost.

It’s also an upside-down system. The biggest share of the $246 billion goes to upper-income people. The lower your pay, the less coverage you’re likely to have. Workers in lowest paying jobs don’t generally get any health insurance from their employers. Few people collecting $12 an hour at fast-food restaurants or big-box retailers see any part of the $246 billion. The higher your pay, the more health coverage you receive, and the bigger chunk of the $246 billion you get. Top executives and their families get gold-plated plans guaranteeing top-notch medical attention for just about every risk imaginable, along with extra coverage in retirement.

The good news is that a program providing universal health care doesn’t need the full $246 billion a year generated if every employee now receiving tax-free health benefits had to start paying taxes on them. Obama’s health care reserve fund needs around $650 billion over ten years. So a sensible and politically feasible alternative is to limit tax-free employer-provided health benefits to workers whose incomes are under, say, $100,000 a year, and subject those with higher incomes to progressively higher taxes on them.

It’s still not the position Obama took in the campaign. But, hey, circumstances change.

A Modest Plan For Paying College Costs

2009-05-22T07:50:00.000-07:00

I'm just about to head off to a commencement here at U Cal Berkeley. The news that keeps banging around in my head is that the state has just announced a whopping 9 percent increase in fees for next academic year, the third fee increase in three years.

The average young person now graduating from college anywhere in America has to repay almost $22,000 of student loans. That's a record, partly because college costs have continued to rise even during the downturn, because states are cutting their support for public universities, and because other sources of college funding have taken big hits -- like home equity loans and 529 plans that allowed families to sock money away for college.

But how can a young people repay this much money when the job market is so bad? The law doesn't allow college loans to be discharged in personal bankruptcy.

Even when they do find jobs, college grads have no choice but to take the job that pays the most. They can't afford to do what they might really want to do -- become, say, a social worker or writer or legal services attorney.

This problem won't go away when the economy recovers. College debt burdens have been rising for years, and the career choices of many newly-minted graduates are narrowing to those that help repay college loans. We need a new system. So here's my proposal: Any college student can get full funding from the government, with only one string attached. Once they've graduated and are in the work force, they pay 10 percent of their incomes for the first 10 years of full-time work into the same government fund they drew on to finance their college education.

Now maybe that formula will need to be adjusted up or down to cover all the costs. And surely some people will game the system as they do every other one. But the essential idea is that linking the costs of college to subsequent wages makes college affordable to everyone.

And linking repayment to a fixed percent of subsequent wages for a limited number of years enables all graduates to follow their dreams into whatever work they want, without worrying about earning enough to repay a loan. Those who end up in relatively high-paying jobs subsidize those who end up in relatively low-paying ones.

It's fair, it's simple, and good for society as well as the individual.

For those who are getting their degrees: Happy graduation.

What Industrial Policy Should Be

2009-05-19T16:55:00.000-07:00

America now has a full-blown industrial policy. But it's an odd one -- a combination of lemon socialism and taxpayer-financed regulation.

Consider GM and Chysler. To what purpose are our taxpayer dollars being put as we bail them out? Apparently only to help them survive, even as pale shadows of their former selves. Steve Rattner, the Administration's auto expert, explained last month that the government was "making an investment decision. We're not running these auto companies. We are helping them restructure and reposition themselves for the future." Which raises the question: Why bother at all, if a huge portion of their employees and those of their dealers and suppliers are losing their jobs?

This week the Administration announced new fuel economy targets. But auto buyers aren't particularly interested in fuel efficiency now that gas prices are low. So how are GM and Chrysler to pay the costs of achieving the new targets? One way, according to GM, will be to build lighter cars and trucks abroad. Even then, the new standards will raise costs. So tucked into the latest version of climate legislation unveiled this week by the House Energy and Commerce Committee is a provision that doubles to $50 billion loans to help auto makers comply.

Industrial policy ought to fill in where the market fails -- providing basic research to help spur new technologies and industries, reducing the negative side-effects of the market (such as carbon pollution), and easing the adjustment of workers and communities out of older industries that are shrinking toward new ones. Ideally, these three parts of industrial policy would be synchronized so the new technologies and industries address negative side-effects while also creating opportunities for communities and workers to gain new employment.

Much of the industrial Midwest desperately needs new technologies and industries to take the place of the shrinking U.S. auto industry, and workers who have been (or are about to be) laid off need help transitioning to those new jobs. Could chunks of the old auto industry be adapted to producing high-speed rail or, more generally, highly-efficient people-moving systems of the future or, even more generally, green technologies that support such systems? Could some of the billions now slated to fund new non-carbon based energy sources be targeted to this?

I don't know the answers but I worry no one is asking these questions. Bailing out the auto companies while forcing them to lay off tens of thousands of their workers, imposing higher fuel-economy targets on them that prompts them to build more cars abroad, and lending them billions more to meet those new targets seems oddly unrelated to the large structural transformation the economy must go through. We need a broader and more imaginative approach to industrial policy -- one that integrates all the different ways government influences industry, and achieves overarching public goals.

The Health Care Cave-In

2009-05-18T07:15:00.000-07:00

"Don't make the perfect the enemy of the better" is a favorite slogan in Washington because compromise is necessary to get anything done. But the way things are going with health care, a better admonition would be: "Don't give away the store."

Many experts have long agreed that a so-called "single-payer" plan is the ideal, because competition among private insurers who pay health-care bills inevitably causes them to spend big bucks trying to find and market policies to healthy and younger people at relatively low risk of health problems while avoiding sicker and older people with higher risks (and rejecting those with pre-existing conditions altogether), and also contesting and litigating many claims. A single payer saves all this money and focuses on caring for sick people and preventing the healthy from becoming sick. The other advantage of a single payer is it can use its vast bargaining power to negotiate lower prices from pharmaceutical companies, hospitals, and suppliers.

Not surprisingly, insurance and drug companies have been dead-set against a single payer for years. And they've so frightened the public into thinking that "single payer" means loss of choice of doctor (that's wrong -- many single payer plans in other nations allow choices of medical deliverers) that politicians no longer even mention it.

On the campaign trail, Barack Obama pushed a compromise -- a universal health plan that would include a "public insurance option" resembling Medicare, which individual members of the public and their families could choose if they wished. This Medicare-like option would at least be able to negotiate low rates and impose some discipline on private insurers.

But now the Medicare-like option is being taken off the table. Insurance and drug companies have thrown their weight around the Senate. And, sadly, the White House -- eager to get a bill enacted in 2009 rather than risk it during the mid-term election year of 2010 -- is signaling it's open to other approaches. What other approaches? One would create a public insurance plan run by multiple regional third-party administrators. In other words, the putative "public plan" would be broken into little pieces, none of which could exert much bargaining leverage on Big Pharma and Big Insurance. These pieces would also be so decentralized that the drug companies and private insurers could easily bully (or bribe) regional third-party administrators.

Another approach now being considered in the Senate would have states create their own insurance plans. That's even worse: Big Pharma and Big Insurance are used to buying off state legislators and officials. They'd just continue their current practices.

A third option is to create a public plan that pays for itself and, according to the office of Senator Charles Schumer, who came up with it, "adheres to private-insurance rules." But adhering to private insurance rules is exactly what the public plan is not supposed to do. How can it possibly discipline private insurers and get good deals from drug companies and medical providers if it adheres to the same rules that private insurers have wangled?

It's still possible that the House could come up with a real Medicare-like public option and that Senate Dems could pass it under a reconciliation bill needing just 51 votes. But it won't happen without a great deal of pressure from the White House and the public. Big Pharma, Big Insurance, and the rest of Big Med are pushing hard in the opposite direction. And Democrats are now giving away the store. As things are now going, we'll end up with a universal health-care bill this year that politicians, including our President, will claim as a big step forward when it's really a step sideways.

The Truth Behind the Social Security and Medicare Alarm Bells

2009-05-13T05:01:00.000-07:00

What are we to make of yesterday's report from the trustees of the Social Security and Medicare trust funds that Social Security will run out of assets in 2037, four years sooner than previously forecast, and Medicare’s hospital fund will be exhausted by 2017, two years earlier than predicted a year ago?

Reports of these two funds' demise are not new. Fifteen years ago, when I was a trustee of the Social Security and the Medicare trust funds (which meant, essentially, that I and a few others met periodically with the official actuary of the funds, received his report, asked a few questions, and signed some papers) both funds were supposedly in trouble. But as I learned, the timing and magnitude of the trouble depended a great deal on what assumptions the actuary used in his models. As I recall, he then assumed that the economy would grow by about 2.6 percent a year over the next seventy-five years. But go back into American history all the way to the Civil War -- including the Great Depression and the severe depressions of the late 19th century -- and the economy's average annual growth is closer to 3 percent. Use a 3 percent assumption and Social Security is flush for the next seventy-five years.

Yes, I know, the post-war Baby Boom is moving through the population like a pig through a python. The number of retirees eligible for benefits will almost double to 79.5 million in 2045 from 40.5 million this year. But we knew that the Boomers were coming then, too. What we didn't know then was the surge in immigration. Yet immigrants are mostly young. Rather than being a drain on Social Security when the Boomers need it, most immigrants will be contributing to the system during these years, which should take more of the pressure off.

Even if you assume Social Security is a problem, it's not a big problem. Raise the ceiling slightly on yearly wages subject to Social Security payroll taxes (now a bit over $100,000), and the problem vanishes under harsher assumptions than I'd use about the future. President Obama suggested this in the campaign and stirred up a hornet's nest because this solution apparently dips too deeply into the middle class, which made him backtrack and begin talking about raising additional Social Security payroll taxes on people earning over $250,000. Social Security would also be in safe shape if it were slightly more means tested, or if the retirement age were raised just a bit. The main point is that Social Security is a tiny problem, as these things go.

Medicare is entirely different. It's a monster. But fixing it has everything to do with slowing the rate of growth of medical costs -- including, let's not forget, having a public option when it comes to choosing insurance plans under the emerging universal health insurance bill. With a public option, the government can use its bargaining power with drug companies and suppliers of medical services to reduce prices. And, as I've noted, keep pressure on private insurers to trim costs yet provide effective medical outcomes.

Don't be confused by these alarms from the Social Security and Medicare trustees. Social Security is a tiny problem. Medicare is a terrible one, but the problem is not really Medicare; it's quickly rising health-care costs. Look more closely and the real problem isn't even health-care costs; it's a system that pushes up costs by rewarding inefficiency, causing unbelievable waste, pushing over-medication, providing inadequate prevention, over-using emergency rooms because many uninsured people can't afford regular doctor checkups, and spending billions on advertising and marketing seeking to enroll healthy people and avoid sick ones.

Obama on Health Reform: The Dog That Didn't Bark

2009-05-11T11:55:00.000-07:00

The only troubling thing about the President's statements today concerning health care reform was what he did not say: that he wanted a any health plan that emerges from Congress to include a public insurance option for Americans who do not want to buy private insurance. But without this option, there will be no pressure on private insurers to adopt all the other reforms to control costs or give all Americans access to affordable care.

Every other reform proposal announced to date -- electronic medical records, comparative effectiveness research, prevention of chronic disease, payments for services rather than for outcomes, and so on -- has been talked about for years. The reason none have been adopted is health providers and insurers can make more money without them. Only with a government plan that competes with private insurers, and offers Americans lower costs if the providers and insurers fail to reform themselves, will the system be genuinely reformed.

Hopefully, the President's failure to mention a public insurance option today was not intended to signal to Congress that the White House is no longer especially interested in it. The Administration should quickly inform policymakers how important this option is as a spur to real change.

What Will Happen to Banks that Fail the Stress Test, When You and I Own Wall Street

2009-05-07T10:48:00.000-07:00

The outcome of the "stress tests" will be that the banks needing extra capital will get it from the Treasury. But where will the money come from, now that the TARP fund is almost exhausted and Congress is dead set against providing more bank bailout money? The Treasury will simply swap debt for equity – turning what the banks owe the government into shares of stock in the banks. Presto. Ailing banks will get more capital, and Tim Geithner won’t have to go back to Congress to ask for it.

But by this sleight-of-hand, the public takes on more risk. Much of the money we originally gave Wall Street took the form of senior debt. We were preferred creditors, meaning that in the event of bankruptcy (or some form of it) we’d get repaid first. But as shareholders, we’d get nothing. As we’ve seen time and again during this economic crisis, shareholders lose big.

It’s possible, of course, that this is the perfect time to get shares in major Wall Street banks, because the economy is poised for recovery. But it’s just as possible this is the worst time – especially in banks judged by the Treasury to be inadequately capitalized – because nonperforming loans keep mounting. They won’t be repaid because so many people continue to lose their jobs, even though the pace of job losses may be slowing. And because they’re losing their jobs, they can’t pay their mortgages or credit card balances, or even shop at stores that are closing on Main Street, thereby threatening commercial real estate as well.

There’s a second problem with the debt-for-equity swaps. We the public become controlling shareholders in several large Wall Street banks. Should we be active shareholders – using our clout to get management to do things management might not otherwise do? Or passive shareholders, relying on the remaining private shareholders to police management? I’d say we should be active. But that only raises a whole host of questions. First, who represents us?

More importantly, if we’re active shareholders, is our main objective to make sure the banks become profitable and our we get repaid? Or should we push management to take actions that are in the public interest but not necessarily geared toward higher shareholder returns in the foreseeable future – such as limiting executive compensation, limiting the payout of dividends, and pushing the banks to make more loans to Main Street? I’d say we should do the latter. Otherwise, why bother bailing out the banks to begin with?

Obama and Pragmatism: Thinking Through Values

2009-05-05T16:18:00.000-07:00

I keep hearing the White House staff describe the President as a pragmatist. David Axelrod, one of his chief advisors whom I admire enormously, recently called him a "ruthless pragmatist." Soon, I expect, he’ll be called a "take-no-prisoners pragmatist," or perhaps a "remorseless, merciless, and unrelenting pragmatist."

I’m relieved the President is a pragmatist, but that doesn’t let him or anyone around him off the hook for describing what he wants to achieve and why. Being a pragmatist is a statement about means, not ends. It describes someone who chooses the most practical way of achieving a certain goal but it does not explain why he chooses one goal over another.

The President seems to me especially thoughtful and passionate about one of the great moral questions of domestic policy today: widening inequality of income and wealth, and therefore of opportunity and political power. As I’ve noted before, as recently as 1980, the richest 1 percent of Americans took home about 9 percent of total national income. But since then, income has concentrated in fewer and fewer hands. By 2007, the richest 1 percent took home 22 percent of total national income.

This trend cannot be sustained, either morally, economically, or politically. That’s why, I believe, the President in recent weeks has criticized the heads of Wall Street banks who continue to take home seven figure incomes even as taxpayers bail them out; giant companies that shelter their income in places like Bermuda or the British Virgin Islands; the rich who say they need huge tax deductions in order to continue to make charitable contributions; and other forms of unwarranted privilege in our society, especially at a time when millions of Americans are losing their jobs, their savings, and their homes.

To call his stance "pragmatic" is to rob it of its moral authority.

To be sure, all Presidents want to be seen as political centrists. They dare not proclaim themselves "Right" or "Left," or even "conservative" or "liberal," on an ideological spectrum that’s become ever more highly polarized. It is politically safer – yes, even pragmatic – to describe one’s values as "commonsensical" or "middle of the road." But even this description minimizes and distorts a president’s capacity for leadership. A true leader does not take the public to where the public happens to be, because the public is already there. A leader takes the public to where the public should be, according to that leader’s view of the society’s highest ideals – ideals that the public shares but which have not yet been realized.

Obama did this several times during the presidential campaign, most notably in his courageous speech on race. He took America to a higher place by explaining what we all knew and felt but giving it a larger and nobler frame. He educated us in the best sense of the word. Doing so may have been politically pragmatic but his goal was not solely to get elected. Nor was it simply to demonstrate to us the leadership of which he is capable, although the speech did that. His goal was also to make us more aware about how race is used divisively. In doing so he drew on what in retrospect seem "commonsensical" positions and "middle of the road" values. But that’s not how the speech struck most of us then. We were transformed by the power of his thinking and the values that underlay it – values that we share but had not thought through.

President Obama can afford to do the same with regard to the overriding issue of widening inequality in American society. He can connect the dots for us, allowing us to understand why inequality is widening without deriding the rich or castigating the fortunate. Doing so would allow us to understand what he is seeking to do and why, and empower us to seek and do the same.

Why Obama is Taking on Corporate Tax Havens

2009-05-04T10:13:00.000-07:00

Why, one may ask, is Obama taking on yet another huge fight by taking aim at foreign tax havens? Yes, it's unfair that multinationals pay an average tax rate of only 2 percent on their foreign revenues, and it's unfair that some wealthy Americans are avoiding taxes altogether by parking their fortunes abroad. But, hey, these have been true for decades. So why take them on now, when the President is also taking on universal health insurance and global warming, and trying to get the economy going again?

The White House says that some jobs go abroad because American companies are lured there by tax loopholes which, if closed, would bring the jobs home. True. But a crackdown on tax havens might also cost American jobs if companies decided that a higher tax burden here required them to cut payrolls in order to stay competitive or to simply leave the United States altogether.

Another possible explanation is that it was a campaign promise. Obama frequently criticized the tax code for allowing American companies with overseas operations to defer paying taxes on corporate profits if they placed the money back into their foreign subsidiaries. But this can't be it, either. He criticized several other things as well -- such as the North American Free Trade Agreement -- which he now seems comfortable with.

So again: why this, and why now?

Two reasons, both strategic. The President needs the cooperation of many big corporations if he's going to get universal health insurance enacted this year. Many of these companies would benefit from lower health costs but they're reluctant to take on Big Pharma, big health insurance companies, and major health providers, all of whom are dead set against a provision in the emerging health insurance proposal that would allow the public to opt for a government health plan. How does it help for him to take on corporate tax havens? Because the President needs as many bargaining chips with the rest of corporate America as possible. The proposed crackdown on foreign tax avoidance is one such chip. He might be willing to take it off the table if big corporations lend him active support on health insurance.

The second reason has to do with revenues. Originally the White House had planned to pay for universal health insurance by limiting tax deductions for wealthier Americans. But the Democratic leadership nixed that source. The rich Americans who take the deductions, and the groups benefiting from the wealthy's tax-deductible expenditures on them, had enough political leverage to make it a non-starter. That means the White House has to find other sources of money.

By some measures, $700 billion or more in U.S. corporate earnings is now sitting in overseas accounts. A portion of that might be made available to help pay for universal health insurance. The Administration figures it could raise over $100 billion over ten years by preventing companies from taking immediate deductions for overseas expenses while deferring tax payments on profits there, and claiming inflated credit against American taxes for foreign taxes paid. It could raise another $95 billion by making it harder for individuals to hide their income in offshore accounts, and harder for companies to shift income from one foreign subsidiary to another in search of the lowest-tax jurisdiction.

The White House is preparing to release a more detailed budget blueprint later this week. That blueprint has to contain some credible ways to pay for universal health insurance. Otherwise the measure could become vulnerable to deficit hawks who, like vultures over road kill, continue to circle ominously.

The Auto Bailout Is Going Off the Road

2009-04-30T10:20:00.000-07:00

GM just announced it was laying of 21,000 more of its workers, as a means of assurring the Treasury Department the company is worthy of more bailout money. A Treasury official was quoted as saying approvingly that the goal is a "slimmed-down" GM.

What? Having General Motors or Chrysler cut tens of thousands of jobs in order to be eligible for a government bailout reminds me of "saving" Vietnam by bombing it to smithereens. Aren't we giving these companies billions of taxpayer dollars to save jobs? If not, we're just transferring money from taxpayers to GM and Chrysler bondholders and shareholders.

I agree with those who say the United States needs an auto industry. But there's no point spending tens of billions of taxpayer dollars for an auto industry that's a tiny fragment of what it was before. We could achieve that objective by doing nothing.

Besides, as I've said before, the "American auto industry" shouldn't be defined as auto companies whose headquarters are in the United States. The true "American auto industry" is Americans who make automobiles. At the rate the Big Three are shrinking even as they’re bailed out, foreign automakers with American plants may soon employ more Americans than the Big Three do. The Big Three have gone global anyway. A Pontiac G8 shipped by GM from Australia contains far less American labor than a BMW X5 assembled in the United States. General Motors' European subsidiaries include Opel and Saab. Ford also has operations around the world. It even owns Volvo.

The purpose of any auto bailout ought to be to help American auto workers keep their jobs, regardless of whether they work for GM or Toyota or anyone else. Or if they lose their jobs, help them get new ones that pay almost as well. Yet we’re doing exactly the opposite: We're paying GM and Chrysler billions of taxpayer dollars to keep them afloat while they cut tens of thousands of American jobs and slash wages. There's no good reason why taxpayers should foot any of this bill unless the Big Three agree to keep their workers employed while they try to turn themselves around.