Obama and the American Dream

It seems Obama went temporarily off script at his town hall on financial reform in this short clip:

“We’re not trying to push financial reform because we begrudge success that is fairly earned. I do think at a certain point you’ve made enough money, but you know, part of the American way is, you know, you can just keep on making it if you’re providing a good product or you’re providing a good service.” [emphasis mine]

While he did qualify his remarks, I was still struck by that statement because it exposes a bit of his philosophy, and opens up a discussion on the American dream.  So what is the American dream? Let's turn to Eddie Izzard for an explanation, who compares the American dream to the European dream: 

America, you have the American Dream, you have the American Dream! We haven’t got the European Dream yet, that’s what we’ve got to get; we’ve got to get a dream to build on. You have the American Dream; the dream is to be born in the gutter, and raise, and grow up and get all the money in the world and stick it in your ears and go ( blows raspberry ) The American Dream! A fantastic dream of money in your ears and swimming through fivers. The American Dream!

In Europe… I don’t know, we haven’t got a dream yet. Well, the dream was… (mimics sleeping and dreaming ) “Oh… get off, you fuckin’…! Flag. No! ( wakes up with a gasp )

“Hilda, Hilda, wake up, Hilda!”

“What is it, Dr. Heimlich, you waking-up type person?”

“I’ve dreamed the European Dream. I dreamt that every country in Europe spoke a different language and they hated each other… Oh, that’s true, isn’t it? Yes.”

That was the dream, but now, maybe now, the dream is to be in the South of Europe – to be in Greece, in Italy, in Spain, and to be on a moped with no helmet on, riding along, going, “ciao!”

That’s a pretty cool dream; it’s not much of a dream, but it’s as good as we’vegot so far, and it’s pretty funky, ‘cause when you die… you look a mess, but I don’t know, I just like it. ( mimics riding on a Vespa ) ‘Cause you’re in a fucking hairdryer. There’s dogs walking faster than you! It’s just pretty damn cool for me. That’s the European Dream, thank you very much. 

On a personal note, it's not my American dream to make gobs of money.  But what Eddie is alluding to in his joke is that with America, the sky's the limit.  That optimism is part of our cultural fabric; we simply do not have the fatalism in our culture that plagues many other societies.  Most of us believe and smile knowingly when parents tell their kids to work and study hard, and you can be anything you want. Some American dreams are modest. They want a good college education, or to open up their own cozy neighborhood restaurant. For others it's to be the American Idol winner, or a CEO of a multi-national corporation where you can make an unspeakable amount of $ so your family will be insanely rich until the cows come home.  The point is, the American dream is precisely that, without limit.

Iran: So Much for those "Crippling" Sanctions

The Washington Times is reporting that the White House is asking Congress to water down sanctions on foreign companies that invest in Iran's energy sector.  Specifically, it's asking to exclude "cooperating countries," namely Russia and China.  Which means essentially the sanctions will have no bite. Talk about an inversion of words--if Russia and China were cooperative about economic sanctions against Iran in the first place, there would be no need to exempt them from legislation.

It's one thing to argue about whether targeted sanctions against the regime and its guarantor of security, the IRGC, would be more effective than general sanctions against Iran's oil refining capability. This argument has some merit. This CRS report indicates:

While the oil and gas sector has been a focus of U.S. sanctions since the 1990s, the Obama Administration appears to be shifting—in U.S. regulations and in discussions with U.S. allies on a possible new U.N. Security Council Resolution—to targeting Iran’s Islamic Revolutionary Guard Corps for sanctions. This shift is intended to weaken the Guard as a proliferation- supporting organization, as well as to expose its role in trying to crush the democratic opposition in Iran.

The same CRS report notes that 80% of the government's revenues come from its oil sector. Sanctions against Iran's refining capability and against foreign investment in its energy sector would hit a key economic vulnerability. In response, many point out the Green Movement finds these sort of broad based sanctions unpopular. While broader sanctions may initially ignite a nationalist reaction, with the Iranian economy on such shaky ground, its plausible the Iranian people's frustration will turn on the regime instead of just blaming the Great Satan for all its problems.

If the administration believes it's better to narrowly target the regime, it should inform Congress of its policy assuring them they will act if the UNSC won't.  It can use this as badly needed leverage in a 2-level game with Russia and China.  Instead, the administration seems to hold out hope that Russia and China will agree to some sort of UNSC action. With Pres Admendinhad showing up next week at the UN's nuclear non-proliferation summit, it's highly unlikely the UNSC will agree to any meaningful resolution (see HuffPo). With the nuclear clock ticking, at some point, the administration will have to act without the UNSC's stated permission in regards to Iran.  We can do so with European support, as countries like France and the UK have indicated they would be willing to look at EU based sanctions. Yet there is no indication this administration is willing to go down that road.

The Illusion of MidEast Peace

With the Obama administration contemplating a new peace plan on the Israeli-Palestinian conflict, a timely article by Aaron David Miller published in Foreign Policy titled, "The False Religion of MidEast Peace: Why I'm No Longer a Believer," questions the conventional wisdom on 1) the centrality of MidEast peace to solving of all America's interests in the region, and 2) America's ability to really solve the issue. Miller is an experienced State Dept hand who was a policy adviser on MidEast peace to 6 secretaries of state. He was a true believer in the vital importance of MidEast peace to American interests, and also faithfully believed in US efforts to shore up negotiations to produce a solution:

Today, I couldn't write those same memos or anything like them with a clear conscience or a straight face. Although many experts' beliefs haven't changed, the region has, and dramatically, becoming nastier and more complex. U.S. priorities and interests, too, have changed. The notion that there's a single or simple fix to protecting those interests, let alone that Arab-Israeli peace would, like some magic potion, bullet, or elixir, make it all better, is just flat wrong. In a broken, angry region with so many problems -- from stagnant, inequitable economies to extractive and authoritarian governments that abuse human rights and deny rule of law, to a popular culture mired in conspiracy and denial -- it stretches the bounds of credulity to the breaking point to argue that settling the Arab-Israeli conflict is the most critical issue, or that its resolution would somehow guarantee Middle East stability.

The unresolved Arab-Israeli conflict is still a big problem for America and its friends: It stokes a white-hot anger toward the United States, has already demonstrated the danger of confrontation and war (see Lebanon, 2006; Gaza, 2008), and confronts Israel with a demographic nightmare. But three other issues, at least, have emerged to compete for center stage, and they might prove far more telling about the fate of U.S. influence, power, and security than the ongoing story of what I've come to call the much-too-promised land.
First, there are the wars in Iraq and Afghanistan, where tens of thousands of Americans are in harm's way and are likely to be for some time to come. Add to the mix the dangerous situation in Pakistan, and you see volatility, threat, and consequences that go well beyond Palestine. Second, though U.S. foreign policy can't be held hostage to the war on terror (or whatever it's now called), the 9/11 attacks were a fundamental turning point for an America that had always felt secure within its borders. And finally there's Iran, whose nuclear aspirations are clearly a more urgent U.S. priority than Palestine. Should sanctions and/or diplomacy fail, the default position -- military action by Israel or even the United States -- can't be ruled out, with galactic consequences for the region and the world. In any event, it's hard to imagine Netanyahu making any big decisions on the peace process until there's much more clarity on what he and most Israelis regard as the existential threat of an Iran with a bomb.

As Obama surely reckoned, moving fast on Arab-Israeli peacemaking would help the United States deal with these issues. But that linkage wasn't compelling when Bush used it to suggest that victory in Iraq would make the Arab-Israeli conflict easier to resolve; it's not compelling now as an exit strategy from Iraq either, as if engaging in Arab-Israeli diplomacy will make the potential mess we could leave behind in Iraq easier for the Arabs to swallow. Nor can the Arab-Israeli issue be used effectively to mobilize Arabs against Iran, because the United States could never do enough diplomatically (or soon enough) to have it make much of a difference. Finally, linking the United States' willingness to help the Israelis with Iran to their willingness to make concessions on Jerusalem and borders isn't much of a policy either. If anything, it risks the United States losing its leverage with Israel on the Iranian issue and raising the odds that Israel would act alone. [my emphasis]

It's an excellent article that covers the complexity of MidEast peace, and America's ability to solve the equation. I remember the contempt the foreign policy establishment felt towards George W. Bush and his "cabal of neo-cons" for their belief that democracy could be imposed in Iraq. Occupation was a kinder phrase for US troops in Iraq; most called it American imperialism. While the situation to Iraq is not exactly analogous to the MidEast peace issue, I'm struck that the same elites seem to believe that somehow, the US can want peace more than the most affected parties, parties who view it through the lens of affecting their national existence, and audaciously, imposing such a "solution" on the 2 parties. Miller sums up why peace is much more elusive than ever, and if it can be achieved:

Looking ahead, that process looks much, much tougher -- and peace more and more elusive -- for three reasons.

First, Arab-Israeli peacemaking is politically risky and life-threatening. Consider the murders of Egyptian President Anwar Sadat and Israeli Prime Minister Yitzhak Rabin. At Camp David, I heard Palestinian leader Yasir Arafat say at least three times, "You Americans will not walk behind my coffin." Leaders take risks only when prospects of pain and gain compel them to do so. Today's Middle East leaders -- Israel's Netanyahu, Syria's Bashar al-Assad, and Palestine's Mahmoud Abbas -- aren't suicidal. It was Netanyahu, after all, who once told me: "You live in Chevy Chase. Don't play with our future."

Second, big decisions require strong leaders -- think Jordan's King Hussein or Israel's Menachem Begin -- because the issues on the table cut to the core of their political and religious identity and physical survival. This requires leaders with the legitimacy, authority, and command of their politics to make a deal stick. But the current crop are more prisoners of their constituencies than masters of them: Netanyahu presides over a divided coalition and a country without consensus on what price Israel will pay for agreements with Palestinians and Syria; Abbas is part of a broken Palestinian national movement and shares control over Palestine's guns, authority, and legitimacy with Hamas. It's hard to see how either can marshal the will and authority to make big decisions.

Third, even with strong leaders, you still need a project that doesn't exceed the carrying capacity of either side. In the past, U.S. diplomacy succeeded because the post-1973-war disengagement agreements, a separate Egypt-Israel accord, and a three-day peace conference at Madrid aligned with each side's capabilities. Today, issues such as Jerusalem (as a capital of two states), borders (based on June 1967 lines), and refugees (rights, return, and compensation) present gigantic political and security challenges for Arabs and Israelis. One accord will be hard enough. The prospect of negotiating a comprehensive peace; concluding three agreements between Israel and the Palestinians, between Israel and Syria, and between Israel and Lebanon; dismantling settlements in the Golan Heights and West Bank; and withdrawing to borders based on June 1967 lines seems even more fantastical.

Bottom line: Negotiations can work, but both Arabs and Israelis (and American leaders) need to be willing and able to pay the price. And they are not.

Obama has stated that peace cannot be imposed by America, but the WaPo article describes the deal being linked to the Iranian question. It's hard to see how it's not designed to pressure Israel. Indeed, Abbas is reiterating his call for America to impose a solution. So what will Obama do if the proposal is scuttled by either party? He will have further reduced the little mystique of American power that is left, not to mention our leverage over negotiations as both sides will likely entrench into cynicism, further damaging the process.  Even if both sides move forward, the Iranians certainly do not want MidEast peace to succeed; they will use Hezbollah to stop any agreement like they've done in the past.  And they will hasten their track to secure a nuclear weapons capability to enable their hegemonic aspirations. That doesn't bode well in the long run.

#4 How Obamacare will Transform America

1.    #4: Obamacare will put a heavier burden on small businesses in these fragile economic times, jeopardizing the economic recovery.

      

      According to recent stats from the Small Business Association, small businesses, defined as having less than 500 employees, make up over 99% of all employer firms, and employ over half of private sector employees. Small businesses drive the economy; they produce over 50% of non-farm US GDP. Over half of small businesses are home-based and face higher compliance costs with tax laws than their larger counterparts. They constituted nearly 65% of hiring of net new jobs between 1993 and 2008. 

S    Some major impacts on small businesses are reported by Fox and CNN:

• States, by no later than 2014, must establish Small Business Health Options Programs (SHOPs), which will enable small businesses to pool their resources to buy insurance;
• Until the SHOPs are established, businesses with 10 or fewer full-time employees earning less than $25,000 on average will be eligible for a 35 percent tax credit; firms with up to 25 workers who average up to $50,000 will receive partial credits, while businesses with more than 25 workers will receive no credit;
• Those tax credits will remain steady at up to 50 percent of costs for the first two years any company buys insurance via state exchanges;
• Beginning in 2014, under the reconciliation plan, firms with more than 50 employees must offer health care to employees or pay penalties of up to $2,000 per employee for all but the first 30 workers. (The penalty would initially be $750/employee but would eventually rise to $2000). This also includes mandated coverage for part-time employees.

      However, small business owners don’t seem to take comfort in these tax credits. The National Federation of Independent Business, a major small business association, sent Sen Harry Reid and Sen Mitch McConnell a letter about 6 months ago warning that the health care bill raise costs for small businesses. Factors cited that were included in the final bill:

• Incentives for small businesses to cut back hiring of employees (the bill mandates that businesses provide all employees health care coverage once they have 50 employees)
• Due to the rise in premiums that will come about because of the mandates on the type of insurance people must purchase, small businesses may be forced to drop coverage since they are especially sensitive to price changes. Small businesses have lot less capital cushion than large businesses.
• The change in precedent for steeper payroll taxes on specific wage owners (those who make over $200K annually); businesses still have to pay a portion of these taxes.
• Higher paperwork costs to meet government compliance standards

NFIB is not the only small business group worried. The chairman of the National Small Business Association said the following:

"There's going to be a lot of incentive to drop coverage, even with the penalty," Ashmus said. "And will we not be getting subsidies because of our size, and we are still in the small-group  market because not all of our employees get coverage through us. That will impact us  significantly."

Like other NSBA officials, Ashmus said other shortcomings of the legislation include the sharp and continual rise of small business health premiums and tax increases on both earned and unearned income.

"This bill will place significant new pressures on small businesses to both offer and pay for employee health insurance, starting in the earliest stages of reform," the National Small Business Association (NSBA) said in a statement. "However, the provider-level reforms that could contain costs and enable small business to afford this commitment will not be fully effective for many years — if at all. We justifiably expect that small companies caught between these twin pressures will see their ability to grow, prosper and create jobs greatly diminish." 

Because this bill will drive up health insurance premiums, the incentive to drop coverage and pay the fine grows stronger as costs escalate. We analyzed earlier how premiums in the individual insurance market will also rise under this bill. Many people are going to be forced into the exchanges, or will simply opt to pay the fine for not having insurance. The latter will most likely be cheaper. This will most likely exacerbate health care costs, potentially creating a downward spiral where more businesses drop coverage and pay the penalty as cost rises, and so on.

Upward costs are not the only way small businesses will feel a hit. ABC reports new investment taxes: a 3.8% tax would be imposed on interest, dividends, capital gains and other investment income for individuals making more than $200K a year, and couples making more than $250K. The bill also increases the Medicare payroll tax by 0.9 percentage point to 2.35 percent on wages above $200,000 for individuals and $250,000 for married couples filing jointly. While the majority of small business owners make under $200K (many small businesses are one-man shops or only employ a handful of people), the largest ones that fall in that income bracket are the job creators.  Heritage estimates that while companies with 50–199 workers represent only 8 percent of total firms in the U.S., workers across these companies comprise an estimated 22 percent of total employment in the U.S. 

Moreover, these taxes are not indexed to inflation, meaning more businesses will eventually fall in this category.   Higher taxes on their investments will lead to some sort of trade off, most likely, negatively impacting job creation or wages.  Since many of these mandates do not take effect until 2014, it's possible we'll make an economic recovery before then despite the law. But income and investment is simply zero sum: the more you tax it, sooner or later, the less there will be--the only thing that grows with higher taxes is the government.

Sunday Reflections

House of the Virgin Mary in Ephesus, Turkey

It was believed the Apostle John brought Mary to Ephesus after the Resurrection, and her last days were spent here.

John 19:26-27 (King James Version)

 26When Jesus therefore saw his mother, and the disciple standing by, whom he loved, he saith unto his mother, Woman, behold thy son!

 27Then saith he to the disciple, Behold thy mother! And from that hour that disciple took her unto his own home.

Blogging has been light, but I'll be back posting next week.

Sunday Reflections

Hikers Walk Through Mosaic Canyon, Death Valley National Park

American Un-Exceptionalism, and the Limits of Soft Power

The WaPo reports that at Iran's nuclear summit, Pres Ahmadinejad called on the US to disarm first, and to end its "blind support" of Israel which has over 200 nuclear weapons but has not yet signed the NPT.  Criticizing the administration's nuclear strategy that does not rule out the use of nuclear weapons against North Korea and Iran, Ahmadinejad states "Threatening with nuclear weapons only dishonored the American government officials and more fully exposed their inhumane and aggressive policies." Meanwhile, Charles Krauthammer criticizes Obama's recent nuclear summit pointing out that the most urgent threats to nuclear terrorism and proliferation, Pakistani plutonium and Iran's uranium enrichment, were not on the table for discussion. In a similar vein, Shadow Government points out in a post titled "Did We Come Away from the Nuclear Summit Empty-Handed?", that in regards to Iran, China and Russia both said diplomacy instead of sanctions should be pursued, and that Turkey stated prior to the summit that Israel was a greater threat to peace in the mideast region, and that sanctions would be ineffective. Shadow Gov't concludes:

The danger is that the blizzard of documents and words will be mistaken for action by those who fear nuclear terrorism but seek to avoid the costs of doing something about it. The greater danger is that others will conclude that they face only such words if they continue to develop or acquire nuclear weapons.

In short, while the nuclear summit produced some marginally useful steps towards nuclear non-proliferation, it nibbled around the edges avoiding the tough problems of Iran, Pakistan, North Korea, and to some extent, Syria, whose facility was bombed by Israel last year.

Critics of Bush's foreign policy would often point out the limits of hard power, which is getting other countries to do what you want them to do. Iraq was their vindication on the limits of military force enabling one country to impose its will on another.  They mourned for the loss of US moral authority and with it, soft power.  Soft power is based on cooperation and moral suasion, as its architect Joseph Nye puts it, on getting countries to want what you want.  The foreign policy establishment like all other elite academic institutions, was enthralled when Pres Obama took office based on the premise he would resuscitate America's moral standing in the world. Soft power was back and in vogue again. Ushered in with this new era of soft power came realpolitik--as Secretary of State Hillary Clinton pointed out, ideology is so yesterday.

Yet Nye also says that soft power is rooted in a country's values, institutions, and policies. These values, combined with overlapping nat'l interests that realists key on, should attract other countries in the international arena for cooperation. But what moral authority has Pres Obama restored?  To some degree, his administration has offered a more consultative tone to other countries.  But in other areas, the administration does little to showcase American values. The persecution of the CIA and upholding of the torture narrative have only confirmed and given fodder to what our adversaries already think of us. Only through mirror imaging can one naively believe that other cultures will somehow seek to emulate or appreciate the US style of openness, making them magically more prone to cooperate with us.

Democracy and human rights, the latter a potentially effective tool against the Iranian regime in wake of the protests, are not a priority for this administration. Longtime allies such as Great Britain, have had their special relationship with us donwgraded. Obama abrogated the BMD agreement with Poland and the Czech Republic, and has ignored the President of Georgia, a country who dedicated 5000 troops to Iraq, a large sacrifice for so small a country. Instead, he chases after Putin and Medveded on START treaties. They gladly accept the great power stage Obama hands to him, while clearly refusing to play along on Iranian sanctions, stating instead they will complete Iran's Bushehr nuclear reactor this year. And Israel--well, in the administration's mind, they are part of the problem. So there seems to be very little effort on the administration's part to work with allies already predisposed to cooperate with America on the problem of nuclear proliferation, or even to defend fellow democracies rhetorically. 

Some foreign policy wonks like Walter Russell Mead believe Obama's view is more along the lines of the Jeffersonian tradition, mixed with Wilsonian idealism. The former seeks to minimize American commitments and to dismantle the national security state as much as possible, seeking instead to be the best example of democracy for others by living up to it at home. The latter seeks a moral authority through international cooperation thru multi-lateral institutions like the UN.

However, I believe Obama's worldview goes beyond the traditional academic circles of theory.   There is a difference in approaching others with humility, or to "talk softly and carry a big stick," and constantly apologizing, bowing to monarchs and autocrats, and refusing to acknowledge American exceptionalism.  It's symptomatic of a perspective that views the world through moral relativism and equivalence.  As Melanie Phillips points out, "Obama believes America has to expiate its sins: both its original, Founding sins of slavery and racism, and its latter-day sins against the world of Islam."  This moral equivalence is used against us by our rivals--because if America is badly flawed and has committed atrocities to the same extent as others, than there's no point really, in following our lead. We see this reasoning in Pres Ahmadinejad's words. To be sure, he would have probably used this same sort of rhetoric against any US administration, but what's interesting is that others like Turkey, are agreeing with Iran that the bigger problem for proliferation is Israel.  Iran's own nuclear summit attracted 60 countries while the US included 47 countries, showing Iran is not alone in its thinking.  Why not pound away at America's moral standing when the President himself will not speak convincingly of America's values overseas, and instead seems to be embarrassed of his country when he speaks about its past? Why give up your nuclear potential and instead demand that America disarm itself and Israel, since the American President himself clearly devalued the possession and use of nuclear weapons?

As Rich Lowry notes:

Obama hopes that throwing America's past under the bus will win him diplomatic chits abroad, as we "break free" from "stale debates and old ideologies." What he doesn't realize is that for enemies like Iran and Venezuela, the debates aren't stale and the ideologies aren't old. For these players, Obama's rhetorical concessions aren't ways to move beyond the debates but to make advances within them.

Nye acknowledges that soft power must be combined with hard power--he argues that it makes hard power more effective. But with nuclear terrorism, an issue the administration rightfully presented as being one of the biggest challenges to our national security in our lifetime, there is very little hard power to accompany it. And as such, Iran, North Korea, and others continue defiantly to undermine the administration's non-nuclear proliferation push.  If you view it thru the lens of moral equivalence--that after all, Israel has nukes, we've used nukes as Pres Obama has reminded the world, and America really isn't exceptional, it makes sense to resign yourself to a nuclear-capable Iran.

#3: How Obamacare Transforms America

In our continuing series on Obamacare:

3.  Obamacare will add an unsustainable entitlement that will increase the national debt, requiring higher taxes in the future that will negatively impact economic growth.

Can you imagine balancing your checkbook by counting 10 weeks of revenue versus 6 week of pay-outs to produce a net plus in your balance? Or running your business in such a manner?  By Washington standards, this bill does that-- just substitute weeks for years.

For an in-depth look at the accounting gimmicks in this bill, the person who really explains this best is Rep. Paul Ryan who takes Pres Obama to task on this:

Former CBO director Douglas Holtz-Eatin estimates that if you strip the accounting gimmicks from the HCR bill, the cost of Obamacare over the next decade will add at least $562 billion to the deficit. In the long run, it’s likely much higher as the numbers of insured rises, and consume more health care.  

My liberal friends often say regarding the deficit: You Republicans are a bunch of hypocrites—you guys drove up the deficit! (Note: while the budget deficit refers to the difference between government revenues and expenditures, national debt refers to total $ the government owes. You can think of debt as accumulated deficits, which the government funds through borrowing by selling Treasury bills, savings bonds, etc.  Our national debt is the money owed to holders of those bonds and bills. I use both terms in this section as appropriate).  They point out Reagan drove up the deficit, Clinton had a budget surplus, and Bush 43 ran a deficit.  While Bush 43 did increase entitlement spending with the prescription drug benefit for Medicare, most economists generally accept deficit spending is legitimate when you’re financing wars. This is not a value judgment on the wars we’re in; it’s merely to point out that historically, deficits due to wartime spending are normally temporary.  The deficits under Reagan can largely be attributed to an increase in defense spending during the Cold War, and Bush 43 had to deal with 9-11.  Clinton’s air war on Serbia lasted only 76 days. So overall defense spending should eventually come down as we start executing exit strategies from Iraq and Afghanistan (unless of course, Congress decides to expand the military or buy expensive new weapons systems). The deficit during the Reagan years were partially offset by the largest peacetime expansion of the economy due to his tax cuts.  After the Cold War was over, the deficit was further tackled by his successor, Bush 41, who cut military spending with the “peace dividend,” and raised taxes (remember the latter part of that didn’t turn out so well for him). Clinton continued the trend of cutting defense spending.

Further this type of fingerpointing of he-created-deficits-too does not distinguish between a cyclical deficit produced by the business cycle, and a structural deficit that is made up of entitlement spending. Megan McArdle sums this up well:

As I've been writing about the deficits, one of the things that occurs to me is that conservative and liberal policy analysts are really talking past each other on this issue, because they're talking about different sorts of deficits. Liberals are focusing on the cyclical deficit, which is not a big problem. Conservatives are talking about the structural deficit, which is a huge problem. And so one side says, "the deficit is a problem," and the other side says, "the deficit is manageable," and both sides are both right and wrong.

Cyclical deficits are the kind of deficit you run when you lose your job: you've had a temporary income shock, and so you're going to be spending more than you take in. In the case of government this is actually a good thing -- "automatic fiscal stabilizers" like welfare, unemployment insurance, and food stamps keep recessions from being as bad as they used to get. (I know you think this recession is bad, but trust me, in neither absolute misery, nor the size of the relative decline, does it even approach the convulsions of the Great Depression, or several of the 19th century "panics".)

Even if you think the government shouldn't be doing stimulus spending, cyclical deficits just aren't that much of a problem. We have a recession on the order of this one about once every thirty years, which turns even a $1.3 trillion dollar deficit into a manageable $43 billion per year, or less than $200 per person. Given the misery that would obtain if we slashed outlays to meet intake, or raised taxes, that's not a terribly bad sum for what you might think of as Great Depression insurance. Plus the debt's going to be eaten away by inflation, so it will cost even less than that in real terms.

The problem is our structural deficit: the mismatch between our spending and tax revenues that remains even when the economy is just plugging along. That mismatch was manageable in the pre-Obama era; as long as your debt is growing at roughly the rate of your GDP, or less, even persistent structural deficits can be tolerated. (I don't think they should be--but they will not drive either your economy, or your government, into serious trouble.) But as the structural deficit begins to exceed the rate at which the economy is growing, you rapidly start to run into trouble. Interest payments start to grow as a proportion of your budget, and as they get bigger, the size of the tax increase or spending cuts needed to close the budget deficit starts to grow. Naturally, the bigger the tax hike or spending cut required, the less likely it is to happen.

To put it in a historical perspective using OMB numbers, our debt is approaching its highest point in history—the only time it was higher was during WWII.

Defense spending is discretionary spending that rises and falls as determined by the administration. Congress must appropriate for discretionary spending annually. While it’s not politically easy to cut defense spending, it has been done numerous times throughout history at the end of major wars, and can be done if necessary.  Mandatory spending, on the other hand, is entitlement spending that is signed into law. It cannot be changed unless there are changes to the law; money must be paid out to those entitled to it according to the law.  Politically, it’s nearly impossible to cut.  Entitlement spending has continued to grow with social security, pensions, Medicare, Medicaid, and now the recent health care entitlement plus direct lending of student loans to boot. Mandatory spending makes up ~ 60% of overall government spending. If you add interest to pay down the debt, mandatory spending approaches about 2/3 of all government spending. Defense makes up about half of discretionary spending. The bottom line: Even with cuts in defense due to a theoretical drawdown, the debt is not going to greatly decrease due to the upward trajectory of health care spending. The GAO also confirms that entitlement spending is unsustainable:

The projected growth in entitlement spending under current law – chiefly for Social Security, Medicare, and Medicaid – will ultimately affect every citizen in the nation. Continued growth in health care costs is expected to cause government spending for its major health programs to grow faster than both the economy and Federal revenues over the next 75 years2 . Similarly, population aging is expected to cause the Government’s Social Security and health program costs and expenditures to increase as a share of GDP over that period. Consequently, total Government expenditures are projected to exceed total assumed revenue throughout the projection period, with the fiscal imbalance – between spending and revenue – growing larger each year into the future.

Keep in mind social security has gone into deficit already, and even with a brisk economy recovery, demographic forces will overtake the fund starting in 2014 and outlays will exceed revenue every year afterwards. When it scored the President’s 2011 budget, which included changes to health care, the CBO is projecting the national debt will increase to reach 90% of the GDP by the end of 2020:

The CBO determined that 1/3 of increased spending for mandatory outlays results from the proposed changes to health care—this assumes Medicare physician rates are frozen until 2020.  The CBO included a drop in spending for wartime operations from roughly $160 billion requested annually (based on FY2010 and 2011 numbers), to a $50 billion placeholder each year after 2011. 

And the impact of that number is explained by an opinion piece titled "When Deficits Become Dangerous--Stunningly Expensive Big Government" in the WSJ by Michael, Boskin, professor of economics at Stanford University who chaired the Council of Economic Advisers under President George H.W. Bush:

Ken Rogoff of Harvard and Carmen Reinhart of Maryland have studied the impact of high levels of national debt on economic growth in the U.S. and around the world in the last two centuries. In a study presented last month at the annual meeting of the American Economic Association in Atlanta, they conclude that, so long as the gross debt-GDP ratio is relatively modest, 30%-90% of GDP, the negative growth impact of higher debt is likely to be modest as well.

But as it gets to 90% of GDP, there is a dramatic slowing of economic growth by at least one percentage point a year. The likely causes are expectations of much higher taxes, uncertainty over resolution of the unsustainable deficits, and higher interest rates curtailing capital investment.

The Obama budget takes the publicly held debt to 73% and the gross debt to 103% of GDP by 2015, over this precipice. The president’s economists peg long-run growth potential at 2.5% per year, implying per capita growth of 1.7%. A decline of one percentage point would cut this annual growth rate by over half. That’s eventually the difference between a strong economy that can project global power and a stagnant, ossified society.

Such vast debt implies immense future tax increases. Balancing the 2015 budget would require a 43% increase in everyone’s income taxes that year. It’s hard to imagine a worse detriment to economic growth.

(For a more in-depth discussion on the debt and likelihood of default, a good analysis can be found by Bruce Bartlett, who’s been a critic of the Bush administration and conservatives, as well as this article by Jeffrey Hummel).

Paul Volcker is publicly talking about a VAT to pay for all our expenditures.  Passage of this bill has worsened entitlement spending to the point of steering the Titanic straight towards the iceberg.  If this bill remains law, higher taxes and slower economic growth are in the cards for the future.

Sunday Reflections

Daytona Beach, FL

On Poland's Tragedy

What a shock to the people in Poland, to lose their top tier of government in today's plane crash. The tragic irony in this crash was that President Kaczynski was on his way to commemorate the massacre of thousands of Polish officers by the Soviet secret police in 1940.

A personal anecdote: I was part of a F-16 squadron in Germany that deployed to Poland in 1997 for the first-ever Partnership for Peace exercise between NATO and Poland. These exercises are a segue way into eventual NATO membership. I was a novelty to them--except in the medical fields, very few women were in the Polish military. Many of the men politely asked if they could take pictures with me at the air show, for most had never seen a female military officer. The lasting impression for all of us on that trip though, was the enthusiasm and gratefulness they expressed to us. You could see it in their faces: that finally, NATO and above all, the US, was holding open the door to the alliance for them. They were desperate for that security guarantee, for it was key to their newly found freedom. By our military standards, their accommodations were modest, but it was clear they took pains to put out the best they had for us in every way, whether it was barracks or mess.  Because of their overwhelming warmth, we were mindful to show our appreciation for their efforts.

To the people of Poland, my deepest sympathies in your time of national mourning.

No First Use of Nukes?

The big hub-bub over Obama's nuclear posture review is explained by the WaPo:

Under the new policy, the administration will foreswear the use of the deadly weapons against nonnuclear countries, officials said, in contrast to previous administrations, which indicated they might use nuclear arms against nonnuclear states in retaliation for a biological or chemical attack.

But Obama included a major caveat: The countries must be in compliance with their nonproliferation obligations under international treaties. That loophole would mean Iran would remain on the potential target list.

The new policy will also describe the purpose of U.S. weapons as being fundamentally for deterrence. Some Democratic legislators had urged Obama to go further and declare that the United States would not use nuclear weapons first in a conflict. But officials in the Defense and State departments worried that such a change could unnerve allies protected by the U.S. nuclear "umbrella."

Peter Feaver points out the loopholes in the new declaration. We can still reserve the right to use nukes against nuclear states that do meet the Nuclear Non-Proliferation Treaty (e.g. China and Russia), and against terrorist groups who chose to use weapons of mass destruction. There's even a loophole on the threat of a catastrophic bio or chem attack where the White House reserves the right to make adjustments in policy.

Obama's goal of a world without nuclear weapons is utopian. But he's not the first to articulate it--Ronald Reagan also wanted the abolishment of nuclear weapons.  Distinguished statesmen like former Secretary of States Shultz, Kissinger, former Secretary of Defense Schlesinger, and Sam Nunn also endorse this goal. So why do these elder statesmen endorse a policy that amounts to closing the barn door after the horse has already bolted?

The recent push to abolish nuclear weapons is an effort to limit the value of their possession in an attempt to solve the proliferation issue for rogue states like North Korea and Iran, and perhaps even more importantly, keep them out of the hands of terrorist groups. While it's in our own national interests to cut stockpiles, ensure tight security of these weapons, and take other measures to combat proliferation, it can only mitigate the issue and never really solve it.  Nuclear weapons are a symptom of the greater cause of conflict (Hobbesian world). We must make it a national security priority to combat proliferation and in particular, avoid the possession of nuclear weapons in a region as volatile as the Middle East. But we cannot turn back the tide on the knowledge that already exists to make these weapons. I believe all these statesmen know this, but feel the steps that accompany such a policy would help make us more secure, even if the goal is never fully realized, which means in the end, we'll always retain some nuclear weapons for deterrence.  In the op-ed from these statesmen, there is no mention of a change to our strategic ambiguity policy. So while they endorse the administration's treaty proposals with the Russian in reducing our stockpiles, it'll be interesting in the days ahead to see if the pundits ask these men their thoughts on changes to strategic ambiguity. On the administration's policy, Feaver notes:

The administration clearly believes that announcing new limits on our nuclear posture will be a strong reason for rogue states to become compliant. This seems hopelessly idealistic: we’ve given Iran and North Korea plenty of stronger incentives, with no progress.

So it seems we've tabled some options for the security of our country, and traded some of our deterrence in hopes of achieving an unrealistic goal.  My own judgement is we should never take any option off the table when it comes to the security of the US. Obama hasn't declared a policy of no-first use yet, but this is designed to edge closer to that path. A policy of no-first use would be morally disastrous and irresponsible in that it erode our deterrent value greatly, and would theoretically, for example, allow a nuclear attack on NYC before even considering any type of nuclear response. Our allies would lose faith in the US security umbrella and would pursue more independent policies, weakening our most potent incentives.  Some may rearm, neutralizing the very effect we would hope such a policy would bring.

  Fred Kaplan usefully sums this up: 

At the same time, though, it's equally hard to see what we'd get from a policy of no-first-use, even if other countries' leaders believed the promise. 

The idea behind no-first-use is to "delegitimize" nuclear weapons—to announce to the world that the foremost nuclear power, the only nation that has ever dropped A-bombs in anger, has concluded that these things have no military utility, no place in wars of the present or the future. 

The problem is that history reveals they do have value, whatever we might belatedly say—not necessarily in their actual use but merely in their possession. They elevate one's standing in a region (see Pakistan); they deter others from attacking (see China in the mid-1960s or North Korea now); they can be brandished as a way of keeping others from responding to lower level forms of aggression. (If Saddam Hussein had built some nukesbefore invading Kuwait in 1990, it's doubtful that George H.W. Bush and James Baker could have amassed a large coalition to push him back.) 

Which leads to the fourth point: No matter what Washington says, or how deeply the United States or Russia or the other established nuclear powers cut their own nuclear arsenals, it will probably have minimal impact on other countries' decisions to go, or not to go, nuclear themselves. Their own interests will determine those decisions. In fact, one could argue that a U.S. pullback of this sort may make some technologically advanced countries—which have relied on America's "nuclear umbrella" for their security—to take the leap and build their own bombs. 

The true value of this Nuclear Posture Review depends, in part, on how President Obama views—and presents—its purpose. If he sees it as a way to build institutional support for drastic arms cuts, it could be very valuable indeed. If he sees it as a first step toward his grander goal of wiping nuclear weapons off the face of the earth, he's going to be sorely disappointed. 

The Top 10 Ways ObamaCare Will Transform America

Due to the complexity of this topic, this will be Part I of a series of posts. The health care bill signed into law is H.R.3590, Patient Protection and Affordable Care Act, and the Reconciliation Bill, H.R. 4872.  You can read the bills side by side here.  Or you can query the Library of Congress.  The links to the bills change often, so you may have to query the bills by their numbers a few times if you take a break from reading them. But this view of the bill provides a hyperlinked table of contents so you can go back and forth to various sections that are referenced.  For those who want a 40 page summary, the Kaiser Family Foundation sums up the major components of the bill topically here.  For the 5-min version, a timeline of when benefits and taxes kick in can be found at CNN and the WSJ. 

1. Obamacare changes the social contract between free Americans and the government. Government is no longer accountable to the people. People are accountable to the government.

Individual Mandate: Section 1501 requires every American to purchase “minimum essential coverage” by 2014 or face a fine.  Employers with companies over 50 individuals must offer a plan for all employees to include part-timers.  Individuals or an employer who would normally decide what policy is in their own or employees’ best interests will not determine the minimum essential coverage. The all-knowing Secretary of HHS will tell you what you MUST purchase, and it’s much more than catastrophic plans would cover.  Shikha Dalmia in Forbes, explains:

A mandate will fundamentally alter the relationship between Americans and their government. Instead of the government being accountable to them, they will become accountable to their government. No less than the Congressional Budget Office--a non-partisan government agency--once admitted as much. "A mandate requiring all individuals to purchase health insurance would be an unprecedented form of federal action," it noted. "The government has never required people to buy any good or service as a condition of lawful residence in the United States."

If the government can force Americans to buy coverage on the threat of fines or even imprisonment--an option that Nancy Pelosi has pointedly refused to rule out--every other government diktat becomes small potatoes by contrast. In fact, it becomes necessary. If uninsured Americans must buy coverage, why shouldn't other Americans be taxed to subsidize them? Why shouldn't the insurance industry be required to sell them coverage? Why shouldn't government set insurance prices to ensure affordability? Why shouldn't doctors and hospitals be asked to charge only "reasonable" rates--or offer only government-sanctioned treatments?

As an article in the DC SCOTUS Examiner points out, the government is essentially fining you for economic inactivity.  I’m not a constitutional lawyer and the courts will have their say in this. The punditocracy seems convinced this will stand constitutional muster. But to me, it seems this mandate essentially tears apart the concept of a limited government as outlined by enumerated powers in the Constitution.  It makes the Bill of Rights the only guaranteed rights for Americans.  If the government can define any activity as economic to invoke the Commerce Clause, and regulate economic inactivity to boot, they can dictate and regulate just about anything.  Government paternalism with all the bureaucracy it entails will become an accepted way of life.
2.  Obamacare will make health care more expensive, causing premiums to rise. Obamacare essentially gets rid of risk-based insurance—and instead, turns insurance companies into regulated utilities that provide health care assurance for all. Within the first year of it being signed into law, Obamacare will provide the following benefits:

• Insurers will be barred from imposing exclusions on children with pre-existing conditions. Pools will cover those with pre-existing health conditions until health care coverage exchanges are operational.
• Young adults will be able stay on their parents' insurance until their 27th birthday.
• Insurers will not be able to rescind policies to avoid paying medical bills when a person becomes ill.
• Lifetime limits on benefits and restrictive annual limits will be prohibited.
• Subsidies begin for small businesses to provide coverage to employees.

Now the ban on pre-existing conditions (known as the guaranteed issue) is a popular reform, and this is where the for-profit system was truly failing people.  Insurers don’t want people with chronic conditions on their rolls since they drive up their costs.  The GOP had the guaranteed piece in most of its legislative proposals as well.  That could have been a starting point to passing a smaller, bipartisan bill.  The insurers wanted the mandate, particularly for young healthier people who normally don’t buy insurance, on the rolls to offset the costs of all the above benefits. However, the individual mandate does not kick in until 2014 while the guaranteed portion starts this year. This will make the individual insurance market more expensive, as ABC News pointed out when they fact-checked Obama on his claims:

Premiums would be 27-30% higher because coverage would be better. The law, for example, requires that all policies cover maternity care, prescription drugs, mental health & substance abuse and no denial of coverage for pre-existing conditions.

Premiums would be 7 to 10 percent lower b/c of changes to the way the individual market is structured.

Premiums would be 7 to 10 percent lower b/c of an influx of more people, many of them healthy, into the insurance market.

The net effect of those three factors: Premiums would be 10 to 13 percent higher for the average policyholders.

A rise in premiums was also confirmed by an Aetna’s CEO, Ron Williams in a Businessweek interview:

 Will insurance premiums go up?

The answer is yes, and some of the things that will drive those premiums are significant additional taxes the industry will ultimately have to pay in the first year.

The President said that this bill would not have any impact on people who already had coverage, that it was about the uninsured, that there would be no change. Will this legislation change the coverage of people who are already paying for it?

My perception is, yes, things will change. You might not have a plan that includes the exact same doctors. You might have plans that have richer benefits, and therefore you're going to pay more for benefits you may or may not want. It would have been a better message to say, we're going to make certain you maintain your eligibility.

Additionally, even when the mandate kicks in, it’s not likely to offset costs. Most people have insurance through their employer. This is one of the main reasons health care costs are becoming more expensive—people who have low-deductible plans without co-pays are not sensitive to the pricing of services and therefore, consume more health care.  Professor Katherine Baicker, Professor of Health Economics at Harvard, testified before the Senate on this phenomenon:

Why does insurance cause greater consumption of health care? Insurance, particularly insurance with low cost-sharing, means that patients do not bear the full cost of the health resources they use. This is a good thing – having just made the case for the importance of the financial protections that insurance provides – but comes with the side-effect of promoting greater consumption of health resources, even when their health benefit is low. This well-documented phenomenon is known as “moral hazard,” even though there is nothing moral or immoral about it. The RAND Health Insurance Experiment (HIE), one of the largest and most famous experiments in social science, measured people’s responsiveness to the price of health care. Contrary to the view of many non-economists that consuming health care is unpleasant and thus not likely to be responsive to prices, the HIE found otherwise: people who paid nothing for health care consumed 30 percent more care than those with high deductibles.4 This is not done in bad faith: patients and their physicians evaluate whether the care is of sufficient value to the patient to be worth the out-of-pocket costs. The increase in care that individual patients use because of insurance has even greater system-wide ramifications. R&D in new medical technologies responds to the changes in aggregate incentives driven by health insurance. While these technologies may improve welfare, they also raise premiums because of larger armamentarium of treatments available to the sick. There is evidence of these system-wide effects: when Medicare was introduced in 1965, providers made spectacular investments beds in high-tech care, and hospital spending surged over 25 percent in 5 years.5

She goes on to point out that preventative care, which is mandated in Obamacare, will not lower prices either.

Even increases in preventive care do not usually pay for themselves: in general prevention is good for health, but does not reduce spending. Some preventive care has been shown to be cost- saving – such as flu vaccines for toddlers or targeted investments like initial colonoscopy screening for men aged 60-64 – but most preventative care results in greater spending along with better health outcomes. Indeed, some money spent on preventive care may not only cost money, but may be no more cost effective than some “high-tech” medical care For example, screening all 65-year-olds for diabetes, as opposed to only those with hypertension, may improve health but costs so much (about $600,000 per Quality Adjusted Life Year) that that money might be better spent elsewhere.6

The CBO has confirmed her analysis on preventative care costing more here, and cites several other studies confirming these results.  While preventative care may makes sense on an individual level, it is not cost effective at a group level, because doctors do not know ahead of time who will succumb to a particular disease.  While screening will catch a few illnesses to the benefits of those individuals, the cost of preventative care for everyone exceeds the savings for the individual.  While prevention is a positive factor in producing better health outcomes, the socialization of these costs in the current bill is a further entrenchment of a collectivist mindset than puts government in charge of our health care, using boards and bureaucracies to tell us what type of care we ought to be receiving, stripping individuals of responsibility for their own health.  This goes back to how the individual mandate changes the contract between the government and individuals.  It opens the door for society later to start demanding and mandating people engage in healthier behavior, for example, by taxing unhealthy foods, such as soda taxes that many states are starting to consider as a serious proposal. If you’re wondering what’s wrong with that logic, why not get rid of the marriage penalty and instead provide an additional tax to single people over the age of 25, or provide more government spending for faith based initiatives? Medical studies consistently show married, religious people are healthier than single people or those not religious. As Megan McArdle points out, we don't have any programs promoting those lifestyles, but elites have no problem insisting on calorie menus and sounding the alarm on obesity: "when you listen to obesity experts, or health wonks, talk, their assertions boil down to the idea that overweight people are either too stupid to understand why they get fat, or have not yet been made sufficiently aware of society's disgust for their condition."

But back to the cost issue.  The Dems will say these premium raises are offset by subsidies. However, the WSJ pulls back the curtain on this pretend savings:

So the bill will increase costs but it will then disguise those costs by transferring them to taxpayers from individuals. Higher costs can be conjured away because they're suddenly on the government balance sheet. The Reid bill's $371.9 billion in new health taxes are also apparently not a new cost because they can be passed along to consumers, or perhaps will be hidden in lost wages.

This is the paleoliberal school of brute-force wealth redistribution, and a very long way from the repeated White House claims that reform is all about "bending the cost curve." The only thing being bent here is the budget truth.

Moreover, CBO is almost certainly underestimating the cost increases. Based on its county-by-county actuarial data, the insurer WellPoint has calculated that Mr. Baucus's bill would cause some premiums to triple in the individual market. The Blue Cross Blue Shield Association came to similar conclusions. 

The health care debate is complicated but Americans aren’t economically illiterate—they understand the money to fund this entitlement has to come from the taxpayer.  And they understand when you have more services in your health care plan, as mandated by Congress, there will be increased costs that are passed onto the consumer. On both ends—not only through premium increases, but also likely, on increased taxes in the future.
In an upcoming series of posts, I'll discuss how Obamacare transforms America in these ways:
3. Obamacare will add an unsustainable entitlement that will increase the national debt, requiring higher taxes in the future that will negatively impact economic growth.


4. Obamacare will put a heavier burden on businesses in these fragile economic times, and jeopardize an economic recovery.

1.  

  5.  5. Obamacare will hamper medical innovation to produce the latest life-saving technologies.

2.   6. Obamacare will warp the patient-doctor relationship where cutting costs will be placed above what is right for the patient.

    

      7. Obamacare will lead to rationed care.

      8. Obamacare will lead to a two tiered system of health care, magnifying economic inequality.

9. Obamacare worsens the special interest alliance between government and big business.

10. Obamacare will transform America to a European style welfare state, leading to a loss of freedom.