Thirteen months into his administration, Obama has deigned to release an outline of his proposal for his signature policy issue: health care “reform.” So glad he was able to make the time, even though what has been produced in all these months is only slightly more complete than the infamous produced-over-a-weekend-under-crisis Bernanke-Paulson TARP legislation outline. It is quite a performance.
In a nutshell: it strips out from the pending bills noxious but irrelevant-in-the-scheme-of-things elements like Bribes for Ben; takes the worst elements from the House and Senate bills; and adds (as hard as it is to believe) even more destructive elements.
Two features are particularly destructive: the creation of a body empowered to review and reject insurer premium increases, and taxes on capital income to finance the huge costs of the proposal.
Price controls like those included in the Obama proposal are the last refuge of economically illiterate. Lenin called anti-Semitism the socialism of fools: the epithet fits price controls as well. Like anti-Semitism, Obama’s call for price controls is economically ignorant demagoguery.
There are examples stretching back over millennia demonstrating the destructive effects of such controls. Except in exceedingly rare cases of true monopoly—which the health care insurance market is most definitely not—these controls result in shortages, rationing, declines in quality, rent seeking, regulatory arbitrage and corruption. (Regarding regulatory arbitrage and rent seeking, some of the provocatively-named Enron California electricity trading strategies were intended to circumvent price controls, pure and simple. Price controls also lead to otherwise-inefficient organizational choices, such as excessive vertical integration.)
Price controls will be the death of a private market for insurance. But perhaps that’s exactly the intent, no?
Hard as it is to believe, the Obama proposal is even more costly than the Senate bill; definitive estimates are unavailable (and would be unbelievable in any event) due to the paucity of details, but guesstimates put the cost within hailing distance of a trillion dollars. (Leading me to endorse the wisdom of a bumper sticker I saw: “I hope Obama doesn’t know what comes after trillion.”)
Part of this additional cost is due to undoing Bribes for Ben and related special favors with a “free ice cream for EVERYONE not just Ben (or Mary)” strategy. But what the heck, it’s not their money, right? Well, not yet, anyways.
As is his wont, Obama attempts to deflect criticisms of budgetary impact by striking the Fiscally Responsible pose by claiming that the proposal includes sufficient sources of additional revenue to make it budget neutral.
Several things. First of all: IT’S THE SPENDING, STUPID. The deficit issue is of the Fram Oil Filters you-can-pay-me-now-or-pay-me-later variety. What really matters is whether the spending is justified.
Second, some of the purported sources of money to cover the cost are, quite frankly, figments of the imagination. A big chunk is from cracking down on Medicare waste, fraud, and abuse. Well, what has been done about that in the last year? (Crickets chirping.) Well, nothing. Not because waste/fraud doesn’t exist, but because it’s virtually impossible to eliminate. Promises to eliminate “waste, fraud, and abuse” were baloney when Reagan made them to argue that his policies would not create deficits. They are baloney now. Indeed, at this late date, claiming to pay for any huge program by eliminating waste, fraud, and abuse is itself an abusive fraud. (And again, if waste can be wrung from Medicare, the question remains: is this health care proposal the best way to spend that money?)
Third, and most importantly, the tax elements of the proposal are extremely destructive. In particular, not only (like the existing bills) does it effectively increase substantially marginal tax rates (through the phase out of subsidies on insurance premia), it increases taxes on capital income by extending Medicare taxes to various sources of capital income (pejoratively described as “unearned income”).
Capital taxes are a terrible idea. Capital is already heavily taxed. What’s more, as elegantly described by Steve Landsberg here and here, capital taxes are particularly distortive. As Landsberg notes, capital taxes are really a tax on “earned income” because in the first instance you have to earn the income that you save to generate capital income. It is, therefore, categorically false to sell these as taxes on “unearned income.”
As a result of these distortions, these taxes are inimical to growth. They discourage capital formation and bias decisions towards current consumption rather than future consumption.
But we should not be surprised. Obama demonstrated his ignorance of, and indeed disdain for, the economic consequences of capital taxation during the Democrat primary debates. He said he didn’t know whether capital gains tax cuts would cause revenue to rise or decline, and what’s more, didn’t care, because it was all about “fairness”:
GIBSON: And in each instance, when the rate dropped, revenues from the tax increased; the government took in more money. And in the 1980s, when the tax was increased to 28 percent, the revenues went down.
So why raise it at all, especially given the fact that 100 million people in this country own stock and would be affected?
OBAMA: Well, Charlie, what I’ve said is that I would look at raising the capital gains tax for purposes of fairness.
We saw an article today which showed that the top 50 hedge fund managers made $29 billion last year — $29 billion for 50 individuals. And part of what has happened is that those who are able to work the stock market and amass huge fortunes on capital gains are paying a lower tax rate than their secretaries. That’s not fair.
And what I want is not oppressive taxation. I want businesses to thrive, and I want people to be rewarded for their success. But what I also want to make sure is that our tax system is fair and that we are able to finance health care for Americans who currently don’t have it and that we’re able to invest in our infrastructure and invest in our schools.
And you can’t do that for free.
. . . .
GIBSON: But history shows that when you drop the capital gains tax, the revenues go up.
OBAMA: Well, that might happen, or it might not.
Obama says he wants growth, but virtually all of his policies are aggressively anti-growth. The tax features of his health care proposal are just a particularly egregious example of that.
The climax of the conflict over healthcare is impending. Nothing in Obama’s plan addresses the fundamental, and completely merited, sources of widespread hatred of the existing legislation; indeed, it incorporates all of these, and adds more. Thus, it will only further stoke the political conflict. Despite Obama’s Nixonian denials that he is not an ideologue, he has decided to wage an all out battle over a highly divisive ideological vision. One can only hope and trust that the checks and balances baked into the system for the very purpose of stemming such recklessness are sufficient to overcome what has become the greatest act of political adventurism in American history.