The Insanity has not ended.

January 5, 2013 by

Aurora, CO is back in the news with four more people shot dead today:


Stop Gun Violence

December 22, 2012 by

Like many others, the members of the Weston Democratic Town Committee are shocked, stunned, and immeasurably saddened by the senseless murder of 20 children ages six and seven, as well as seven adults, in nearby Newtown, Connecticut on Friday, December14, 2012.

There is a range of issues raised by the Sandy Hook Massacre, the Aurora (CO) Massacre, the mass shooting at a Sikh Temple in Wisconsin, the shooting of Arizona Congresswoman Gabby Giffords and constituents as well as members of her staff, the Virginia Tech shootings, the Columbine (CO) High School Massacre.  These tragedies get nationwide headlines, but the sad fact is that there are more than 30,000 individual deaths due to guns every year in this country.

The government has a responsibility to protect school children. It may be the fault of the parents of the shooter that Adam Lanza murdered 20 little school children. However, that obviously does not provide solace to the parents who lost their children or to anyone else. No-one can absolve the government from blame because some parents don’t properly train their children to stay away from guns.

The proposal of the National Rifle Association to post armed guards at every school is not the answer to these tragedies.  However, the NRA response does not surprise us.  Despite its effort to portray itself as a grass-roots organization, the NRA is the tool of gun manufacturers.  The gun industry “has contributed between $14.7 million and $38.9 million to an N.R.A.-corporate-giving campaign since 2005, according to a report published last year by the Violence Policy Center, a nonprofit group that advocates greater gun control. The estimate is based on a study of the N.R.A.’s “Ring of Freedom” program and very likely understates the industry’s total financial support for the association, which does not publicly disclose a comprehensive list of its donors and how much they have given.”[i]

The Weston DTC has been discussing what should be done to reduce the incidence of mass shootings in America.  How can we protect our school children?  How can we change the gun culture in this country?  How can we prevent the mentally deranged from obtaining such lethal weapons?  No one law, no one ban, is by itself going to make everyone safe, but that cannot be an excuse to do nothing.

Here are a couple of facts[ii] about guns:

  1. More guns tend to mean more homicide.[iii]
  2. States with stricter gun control laws have fewer deaths from gun-related violence.[iv]

Issue 1 — Federal ban on sale of assault-style weapons,

Senator Diane Feinstein has proposed an updated version of the law written by her staff, banning the sale of assault weapons, which was enacted and in effect from 1994 to 2004.  Hopefully, the new statute will have no expiration date and will be worded so it is more difficult for gun manufacturers to get around it.  However, the earlier ban did not make a statistically significant difference in the gun death rate in the U.S. while it was law. Furthermore, unless effectively worded, this would not prevent Glock-22 massacres, nor would it apply to weapons purchased before enactment.

Issue 2 – Limiting the capacity of ammunition magazines for both handguns and long guns.

No hunter needs a magazine with more than ten bullets for his gun.  No homeowner needs a clip with more than ten bullets for his handgun that was intended for personal protection.  Thirty-round magazines were originally developed for soldiers to use in combat, and they should be restricted to that.

Issue 3 – Federal regulation of ammunition sales for handguns, long guns and assault weapons, including a national database of all ammunition sales.

Monitoring of ammunition sales is crucial. The legislation should specifically allow the ATF to analyze the database to determine who is engaged in suspicious activity in the purchase of ammunition.  Anyone can figure out how to buy ten bullets at a time over the internet until he has accumulated 100 rounds of ammunition. Computer software should be able to track ammunition sales, given the advertising industry ability to track web users and determine what they have been buying for everything from socks to automobiles.

Issue 4 – Improved background checks and registration of gun sales, both at licensed dealers and at gun shows

Background checks have a dubious record in keeping guns away from those who should not have them.  The law requiring background checks only applies to licensed dealers, not to the sale of a gun by a private owner.  We also know that gun shows do not always do background checks before proceeding with a gun sale.  But that is not the only problem.

The database used for background checks is full of holes.  Psychiatrists are reluctant to disclose what they consider to be confidential information about patients.  According to the New York Times, “the background check system still looks like Swiss cheese,” said Mark Glaze. The gaps exist because the system is voluntary; the Supreme Court ruled in 1997 that the federal government cannot force state officials to participate in the federal background check system. As a result, “when a gun dealer asks the F.B.I. to check a buyer’s history, the bureau sometimes allows the sale to proceed, even though the purchaser should have been prohibited from acquiring a weapon, because its database is missing the relevant records.”[v]

The weapons used in the Sandy Hook massacre were acquired legally by Nancy Lanza, the mother of Adam Lanza, the murderer.  She apparently passed the background check.  However, the 2007 Virginia Tech massacre resulted from the holes in the background database.  “A Virginia state judge had declared the gunman mentally ill, but the record of that proceeding was not submitted to the F.B.I. He was able to pass a background check and buy the weapons he used to kill 32 people and wound 17 others.”

After the Virginia Tech massacre, the Congress passed only a feeble amendment to the law requiring background checks, still relying mostly on voluntary compliance of the states in using the background check database.

“Since then, Virginia has increased its submissions to the F.B.I. But other states have not taken similar steps because of lack of political will, technical obstacles and state privacy laws, according to Mayors Against Illegal Guns, which conducted a survey of states last year about their compliance.”[vi]

Background checks are further hampered by the requirement that the check be completed within three days. The buyer may have a common name, and the background check cannot distinguish between many people with the same name.  The arrest record may not say whether the accused was convicted.  These questions may not be resolved before the maximum three day waiting period has ended.

“Since 2005, 22,162 firearms — including nearly 3,000 this year — have been bought after the waiting period by people later determined to have been disqualified because of their criminal and mental histories, according to an examination of F.B.I. data. [vii]

Perhaps the most shocking fact from a policy perspective is that Congress passed a rider (to another law) forbidding the tracking the people who should have been disqualified to determine how many were subsequently convicted of violent crimes using those weapons that that they bought.

Issue 5 – Mental health

The responsibility of town and state government does not end when parents withdraw a disturbed child from school. Think about it. People could not find a picture of Adam Lanza in school year books, but no-one thought anything of it at the time. The Aurora shooter, James Eagan Holmes, was being treated by the school psychiatrist, but when he withdrew from grad school, the school administration considered that, except to ban Holmes from non-public parts of its campus, its responsibilities had ended. I suspect a more thorough study would reveal many cases where deaths could have been prevented if mental health treatment were not so scattered, fragmented and incomplete.

In K-12, home schooling should not be the right of any family. We have laws requiring that children should be educated, and home schooling should only be allowed when the tutor (parent or other) can prove that he/she is properly qualified to teach all of the required subjects. When Ms. Lanza withdrew her son from high school, presumably because he had no friends and could not relate to others, that should have been a red flag that he needed help, not a simple “goodbye”.

Mental health services are severely underfunded in this country, and there is a stigma involved in using them. Who is responsible for the identification and treatment of school children with mental health problems? Do we rely only on classroom teachers? I suspect in many school districts, that is the case, but it is the wrong approach. Children with mental health problems should receive appropriate counseling and treatment from mental health professionals. And we are not talking about ADD.

Tight school budgets have been mentioned as a reason for cutting psychological counseling, as well as anti-bullying campaigns and student sensitivity training. There is acknowledged failure to identify and help extremely shy students like Adam Lanza who don’t have friends. People shrug their shoulders and mention tight school budgets. And yet, after the Sandy Hook tragedy, the elementary school survivors were offered an unoccupied school in nearby Monroe. Here in Weston, we also have unoccupied classroom space because of unrealistic school population projections ten years ago.

Does the emphasis on reducing class size, and offering advanced placement classes, contribute to cutting positions for specialists such as school psychologists? Is it reasonable to expect a classroom teacher to be able to identify and provide appropriate counseling in the absence of a school psychologist?  How do we destigmatize mental health treatment and provide the funding to make a difference in troubled lives, as well as protect young children?

These are important questions, but we must be cautious.  Brain scientists have found it difficult to explain the behavior of mass murderers, and it is almost impossible to predict in advance that any particular individual is prone to violence.

The National Council on Disability has counseled against trying to predict that people with certain disabilities are more likely than others to commit violent acts.  Its letter to President Obama follows.

Dear Mr. President:

On behalf of the National Council on Disability (NCD), an independent federal agency, and in response to your recent national call to action, I write to offer the commitment of our Presidentially-appointed Council Members and professional staff as a trusted advisor to the Administration and the newly announced interagency task force in the wake of the tragedy in Newtown, Connecticut. As a national voice within the federal government for the nation’s 56 million people with disabilities, including people with psychiatric disabilities (people with mental illness), we are eager and willing to provide advice and counsel to the efforts of the task force and the actions of leaders within the Administration and Congress.

We agree with you wholeheartedly that something needs to change. As you identified in your recent public addresses in the wake of the tragedy, NCD further agrees that finding solutions to stemming such tragic violence requires thoughtful examination of multiple policies and systems. While a disability diagnosis of the perpetrator of the violence in Newtown remains unconfirmed, media coverage and national dialogue has increasingly focused on issues related to mental health, often portraying, intentionally or not, a correlation between certain mental or developmental disabilities and violence. On the contrary, research consistently documents that people with disabilities are much more likely to be victims of violence than the perpetrators of it.

Accordingly, in addition to offering our wealth of policy knowledge from over three decades of engaging in discussion and advancing recommendations regarding community-based health services, supportive housing, and peer supports for people with diverse disabilities, NCD is particularly interested in ensuring that fears, myths, and stereotypes about people with disabilities are not perpetuated. It is important that the policy proposals considered and advanced by the task force do not, even inadvertently, reinforce stigma and confound existing and future efforts to encourage utilization of mental health services. We encourage you to charge the task force with considering strategies to combat such misinformation in the course of its work and within the Administration’s messaging on the Newtown tragedy more generally.

NCD is ready to assist the interagency task force, the rest of your Administration, and leaders of Congress as we move forward in a spirit of unity to address this latest tragedy and bring healing that can only come from our collective sober resolve.

Very Respectfully,

Jonathan M. Young, Ph.D., J.D.
Chairman, National Council on Disability

A subsequent blog post will discuss Second Amendment issues.

[vi] Ibid.

Fiscal Cliff Solution November 2012

November 17, 2012 by

Paul Krugman, in his “Let’s Not Make A Deal” column of the November 8, 2012 New York Times, implored the President to hang tough and not agree to an extension of the Bush era tax cuts for the “wealthy”, which the President defines as married couples making more than $250,000 a year.  On principle, I agree with Prof. Krugman.  However, there is room to compromise without selling out the voters.

Speaker Boehner said after the election that he does not want to raise tax rates because he does not want to hurt small businesses.  But we know that many unincorporated businesses are not really small, including giant construction companies (such as Bechtel) and hedge funds.   The President has proposed to reduce the corporate tax rate while also eliminating loopholes in the tax code that allow many corporations to pay a much lower effective tax rate that the top nominal corporate tax rate.  Companies like Bechtel should incorporate and pay that reduced corporate tax rate.  Hedge fund managers should no longer be shielded from taxes by the “carried interest” provision.

In our town, there are many people running small businesses, and many of those small businesses are incorporated.  There must be a way to protect small businesses that are not incorporated, while at the same time raising the rates for households making more than $250,000.  For example, the tax code could define a new category of small business that allows a lower tax rate (equal to the corporate tax rate) for businesses that employ fewer than 20 people. Perhaps only retained earnings would be eligible for the lower tax rate.  Or perhaps the proprietor would be allowed to declare that a certain amount of earning per employee (say $5,000 or $10,000 per employee) would be taxed at the lower tax rate.

When combined with a reduction in tax expenditures (“loopholes”), a small increase in tax rates on high-income households, but not small businesses filing under this new category, might generate enough additional revenue to satisfy the president as part of a grand bargain to gradually bring down the federal deficit.

Debt Ceiling-Deficit Reduction Talks

July 10, 2011 by

President Obama needs to start explaining to the American people what is at stake in the current negotiations between the Administration and the Congress on raising the debt ceiling.  Unless Congress raises the federal debt ceiling, the U.S. federal government will soon run out of money to pay its operating expenses and service its debt.  August 2 is the date, according to Treasury Secretary Timothy Geithner.  Republicans have been demanding drastic reductions in federal spending, with no increase in taxes of any kind, before they will approve an increase in the debt ceiling.

Last week, Congressional Republicans walked out of deficit reduction talks hosted by Vice President Biden.  Now President Obama has increased his participation by inviting Congressional leaders to discuss how to break the impasse.  During a Thursday meeting at the White House, the President proposed three options for reducing the deficit over a ten year period – a $2 trillion option, a $3 trillion option, and a $4 trillion option.  The Wall Street Journal gave a general idea of what was included in the $4 trillion option, but we do not have any specifics.  Initially, both President Obama and Speaker John Boehner were described as being in favor of a $4 trillion deal.  However, on Saturday night, Speaker Boehner issued a statement saying that he no longer favored a $4 trillion deal because that would have included “tax increases”, as Republicans call elimination of tax loopholes that favor the rich.

Recent polls indicate that a majority of Americans oppose raising the debt ceiling, but they also oppose any cuts to Social Security or Medicare.  In response to the intransigence of the Congressional Republicans, President Obama needs to explain to the American people that maintaining the full faith and credit of the U.S. government is paramount.  He needs to explain the impact that Republican demands will have on the lives of ordinary Americans. The President also needs to report to his own supporters what options he laid out for the Congressional leaders, and what the impact of those options would be.

The following four options are illustrative of what is at stake for positions of the Obama Administration, the Bowles-Simpson Deficit Reduction Commission, the Congressional Republicans, and the TEA party.  (Since we do not have the advantage of a large staff of economists like OMB or the Congressional Budget Office to score the options, I cannot give precise numbers for the size of the budget savings.)

Debt Ceiling/Deficit Reduction Options

Option I outlines the main features of a proposal that the President laid out in a speech on  April 13, 2011.  President Obama has emphasized some of the points in this list at various times during the first six months of 2011.

I. Increase Debt Ceiling, Invest in Infrastructure and Jobs

  • Must pay interest on debt.
  • Fund Infrastructure Investments
    • Roads, bridges, ports;
    • Maintain sewers and sewage treatment plants;
    • National electrical power grid.
  • Green energy technology development
  • Manufacturing innovation laboratories
  • Cap defense spending.
  • Implement the Affordable Care Act, including support for Medicaid.
  • Support states in school improvement projects.
  • Eliminate farm subsidies and ethanol production subsidies.
  • Eliminate tax breaks for oil companies.
  • Eliminate tax loopholes while cutting top corporate tax rate.
  • Let Bush-era tax cuts expire as scheduled.
  • Tax hedge fund manager fees as ordinary income.
  • Tax dividends as ordinary income.

II. Increase the Debt Ceiling, Gradually Reduce Spending, Increase Revenues

Option II outlines the main implications of adopting the recommendations of the President’s Deficit Commission, co-chaired by Erskine Bowles and Alan Simpson.[i] See

  • Pay interest on debt.
  • Gradually reduce defense and discretionary spending.
  • Maintain current levels of green energy development.
  • Maintain social security payments at current levels.
  • Maintain Medicare benefits at current levels, but aggressively seek ways to reduce health care cost increases.
  • Eliminate farm subsidies, ethanol subsidies, and tax breaks for oil companies.
  • Eliminate corporate tax loopholes while cutting top corporate tax rate.
  • Tax hedge fund manager fees as ordinary income.
  • Adopt the Bowles-Simpson Zero Plan to reduce the federal deficit to zero:
  1. Eliminate all tax expenditures—for both income and payroll taxes—except for the child credit, the earned income tax credit, foreign tax credits, and a few less common preferences.
  2. Eliminate the alternative minimum tax (AMT).
  3. Retain personal exemptions (no phase-out).
  4. Replace the current six-bracket individual tax rate schedule with a three-bracket schedule of 12, 20, and 27 %.
  5. Tax capital gains and dividends as ordinary income.
  6. Index tax parameters using the chained Consumer Price Index.
  7. Increase the Social Security wage base by 2 percent per year more than the growth in the average wage (making the FICA cap $140,100 in 2015).
  8. Phase in an increase in the federal excise tax on gasoline of 15 cents per gallon (13.5 cents per gallon on average in 2015).
  9. Eliminate corporate tax expenditures and reduce the corporate tax rate to 27 percent.

We do not have enough details from the Thursday White House meeting to know whether all of these Bowles-Simpson proposals were included in the options presented by President Obama.  The Wall Street Journal reported in a separate story[ii] that the President suggested the adoption of the chained Consumer Price Index as the basis for Social Security Cost of Living (COLA) adjustments and federal pension adjustments as well as for indexing tax parameters.  It is not clear why the President suggested this instead of raising the cap on salaries and wages subject to FICA.

Some economists favor the adoption of a chained Consumer Price Index because it takes into account changes in the quantities of goods and services that consumers buy as relative prices change.  For example, if the prices of French wines go up and the prices of smart phones go down, consumers may buy more smart phones but less French wine.  At present, some tax parameters are adjusted by the CPI-U, which does not take into account changes in quantity preferences as relative prices change.  Social Security benefits and federal pensions are adjusted using CPI-W, which is based on the increase in average wages.  However, over the past decade CPI-U and CPI-W have tracked very closely, whereas the chained CPI increased more slowly.

If someone were to retire now at age 62, the future benefits would be less using the chained CPI than using the current formula – 4% less at age 75, 6.5% less at age 85, and 9.2% at age 95.[iii]  The changes would be even worse for younger Americans.  If the chained CPI were really a better formula for showing the cost of living, there might be some justification for adopting it.  However, health care costs are rising faster than general living costs, and seniors are the largest consumers of health care.  None of the proposed CPI formulae take into account the higher costs that seniors incur for health care and long term care.

Increasing the FICA cap is a better way to ensure the solvency of the Social Security System.  There is no reason to stop at $140,000 annual salary.  If FICA applied to wages and salaries up to $200,000 annual income, the Social Security System could remain solvent for the rest of the century.

III. Raise the Debt Ceiling, Reduce Spending, Reduce Taxes on the Wealthy, Eliminate Social Security and Medicare

Option III reflects the mood of Congressional Republicans, including a lot of Republican proposals.   Republicans say repeatedly that the United States does not have a revenue problem, it has a spending problem, and many Republicans in Congress would vote for Option III.

  • Pay interest on debt.
  • Maintain defense budget.
  • Drastically reduce discretionary spending.
  • Eliminate Department of Education and drastically reduce Pell Grants (student aid for college education); states are responsible.
  • Eliminate spending on green energy development; private sector is responsible.
  • Eliminate food stamps and Women, Infants and Children programs.
  • Cut 50% of funding for the Securities and Exchange Commission and the Commodity Futures Trading Commission.
  • Cut 30% from funding for Food and Drug Administration (FDA).
  • Privatize social security for those under 55; individual’s accounts would be invested in the stock market.
  • Repeal the Affordable Care Act.
  • Privatize Medicare, but with a Federal voucher system; current retirees would keep their current benefits.
  • Make Bush-era tax cuts permanent.
  • No tax increases:  maintain farm subsidies, ethanol subsidies, and tax breaks for oil companies; hedge fund managers continue 15% tax on their fees; dividend rates are 0% or 15%.
  • Cut top corporate tax rate to 27%.
  • Eliminate the alternative minimum tax.

IV. No Increase in the Debt Ceiling

The U.S. government reached its statutory debt limit on May 16, 2011.  The Treasury has been using “extraordinary measures” that will allow the government to extend its borrowing authority until August 2.  There is a large amount of debt coming due on August 4, and there will be no way to roll over the debt or pay the interest due unless the debt limit is increased.  Standard & Poors has stated that any U.S. Treasury bond that has a payment due on August 4, 2011 will be downgraded from AAA to D if Congress does not increase the debt limit.  The results of such a debt default would be catastrophic, and many Congressional leaders have stated that it will not happen.

Option IV assumes that Congress fails to come to a long-term deficit reduction deal but enacts a temporary and small increase in the debt ceiling on August 2, 2011.  Clearly, Option IV is not a long-term solution to the problem of balancing the budget, but it would cause so much economic pain that it would quickly get the attention of an apathetic public.

  • Government is allowed to spend only its current revenues.
  • Must pay interest on the debt as well as fund current operations.
  • Drastic reductions in government expenditures until debt ceiling increased
    • Government salaries are cut 50%.
    • Social Security payments are cut 50%.
    • Government retirement pensions are cut 50%.
    • No Medicare payments until debt ceiling is increased
    • All National Parks are closed.
    • FEMA suspends operations.  Reponses to natural disasters, such as hurricanes, earthquakes, floods, fires, and tornadoes, will be the responsibility of the states.
    • Staff positions at foreign embassies are cut 50%.
    • All consular offices are closed.
    • U.S. Passport Office is closed until debt ceiling is increased.
    • Subsidies to the U.S. Postal Service are eliminated.
  • Start to sell stored commodities such as gold in Fort Knox and oil in the Strategic Petroleum Reserve.

It should be clear that Option IV would create quite a stir, and if implemented for very long would result to riots in the streets just like in Athens. People need to see where the TEA party recommendations would lead.  It is unlikely that Republicans in Congress could “hang tough” in the face of the public outcry if Option IV were forced on the President.

We should add what the consequences of Option III would be. If the Republican agenda were adopted quickly, if Option III were implemented within a year, it would lead to a new recession.  IMF studies show that a budget cut of 1% of GDP typically reduces demand by about 1%, and increases the unemployment rate by 0.3%.[iv]

Since the Federal Budget Deficit is about 10% of GDP, an immediate or short-term cut in Federal spending to try to balance the budget with no revenue enhancements (as the Republicans demand) would result in a reduction of 10% in domestic demand and a rise in the unemployment rate of 3% to 12.2% This would be worse than the recent recession that officially ended in 2009. The Federal Budget would not in fact be balanced because ensuing recession would result in lower tax revenues.

President Obama should not cave in to Republican demands.  He should explain in a lengthy televised address to the American people what the three options are that he suggested to the Congressional leadership, and what the consequences would be if the Republicans were to force a solution like Option III above.  Then he should make it clear that unless the Republicans compromise, the outcome will be Option IV, which will be a disaster.

[ii] “How Tweaking Benefits Would Work,” Wall Street Journal, July 8, 2011, p. A4.

[iv] World Economic Outlook, October 2010, Chapter 3, “Will It Hurt? Macroeconomic Effects of Fiscal Consolidation,” p.113.

Medicare Changes in the Ryan Budget

May 5, 2011 by

On April 15, 2011 Republicans in the U.S. House of Representatives passed the Ryan Budget (all Democrats voted no) and sent it to the Senate.  Then they went back to their home districts and faced some criticism from their constituents, especially on the plan to privatize Medicare.  Rep. Paul Ryan and his colleagues explained disingenuously that people over the age of 55 would not be affected by the proposed changes.

While it is true that the voucher-like healthcare system would not start until 2022, the following changes would affect people over 55 immediately on passage:

The proposal would repeal the ACA provision that expanded subsidies for the “coverage gap” in Medicare Part D (a range of spending in which many enrollees have to pay all of their drug costs, sometimes called the doughnut hole).

The proposal would repeal the Community Living Assistance Services and Supports (CLASS) program for long-term care insurance, as well as a number of mandatory grant programs including funds for so-called high-risk pools, reinsurance for early retirees, and prevention and public health activities.[i]

Republicans also say that after taking effect, the proposed legislation would create a healthcare insurance system for seniors like the current healthcare insurance system for federal employees.  This is not true, either.  Federal employees pay a fixed portion of their healthcare insurance costs, but that would not be true for the new Republican Medicare substitute.

Under the House Republican proposal, starting in 2022 new Medicare beneficiaries would receive coverage through private insurance plans, and Medicare would subsidize the cost.   The federal payment for a typical 65-year-old would be set at $8,000 a year in 2022, about the same as what Medicare is expected to spend under current law.

The eligible age for federal benefits would increase two months per year until the eligible age would reach 67 in the year 2034.  Presumably, Ryan expects people between the ages of 65 and 67 to get healthcare insurance from their employers or in the private market.  The CBO did not analyze the extent to which additional people would apply for disability insurance benefits or Medicaid because of the increased eligibility age for privatized Medicare.

Beneficiary costs under the Ryan plan would be higher than under traditional Medicare.  Administrative costs are higher for private healthcare insurance than for Medicare, but that is only the beginning.  The premium support payment would be adjusted for age, health status, income of the beneficiary, as well as general inflation, measured by the Consumer Price Index.  But healthcare costs and insurance premiums have, for years, been rising faster than consumer prices in general.[ii]  So, under the Republican plan, Medicare would pay a shrinking share of beneficiaries’ total health costs, and seniors would pay a growing share. For a typical 67-year-old, that share would be 68% in 2030 versus 25% under current law, the Congressional Budget Office said.  

There is nothing in the Republican plan to reduce the rate of growth of healthcare costs per enrolled beneficiary (“bend the curve”).  Indeed, the House legislation would repeal the parts of the Affordable Care Act that initiate several proposals to try to reduce that rate of growth.  The net result is that the Ryan Plan increases beneficiary costs more than it reduces government costs.  Part of the reduction in overall healthcare costs to the federal government is particularly insidious.  Since the beneficiary share of the total healthcare insurance costs would be higher under the Ryan budget, participation rates for eligible elderly persons would be lower than under traditional Medicare.

The Ryan plan includes rules that would govern the Medicare exchange—including requiring insurers to issue insurance to all people eligible for Medicare who apply, requiring that each insurer charges the same premium for all enrollees of the same age, and using a risk-adjustment mechanism. However, the Ryan plan would allow insurance companies to increase premiums with beneficiary age.  Ryan says that the support payments would be greater for the poor, but it is not clear that the increase in federal healthcare support payments would be enough to prevent participants from dropping out of the federal plan as they got older.

Healthcare experts agree that the primary problem with healthcare is health care inflation. The secondary problem is the long-term Medicare deficit.  For decades, the United States has relied on a private healthcare insurance for people under 65, and fee-for-service government healthcare insurance for people over 65.   Neither system has helped to rein in healthcare inflation.  Republicans want to scrap Medicare and revert to a private healthcare insurance system for everyone. However, the free market for healthcare insurance has failed to rein in healthcare inflation for people under 65, just as Medicare has failed to control healthcare costs for the elderly.   Despite the lack of supporting evidence, the Ryan plan would repeal all federal pilot programs designed to reduce the rate of growth of healthcare costs, relying on blind faith in free markets to control costs.  It is foolish to suppose that a solution that has failed repeatedly to control healthcare costs will succeed in the future if we solve the secondary problem of the long-term Medicare deficit.

The Ryan Plan would end traditional Medicare to solve the secondary problem of the long-term Medicare deficit, and substitute a system that would increase the burden on the elderly to pay their own healthcare costs and increase the number of uninsured elderly.  James Kwak, who calls the Ryan Plan “ just one bad idea dressed up with the false precision of lots of numbers” has suggested a better and simpler way:  “Index the Medicare payroll tax to actual health care costs. This should automatically solve the Medicare deficit because as Medicare’s costs go up, its funding will go up at the same rate.*

“This may sound like just raising taxes whenever the government wants to spend more. But the key is that the more taxes you pay, the more you get back. To see this, assume for now that Medicare is a pure price taker: it has no impact on health care costs but just has to pay what the market charges. Then, if health care costs go up by 5 percent, your taxes go up by 5 percent, but the expected value of your future Medicare benefits also goes up by 5 percent. You get all the insurance benefits of traditional Medicare, but now that insurance is worth 5 percent more, so you should be willing to pay 5 percent more.**

“Raising taxes can have macroeconomic effects, but anything that solves the Medicare deficit problem will have macroeconomic effects: any solution involves either higher revenues or lower spending. Furthermore, increasing payroll taxes in line with health care costs is no different in substance than increasing premiums for employer-sponsored plans in line with health care costs, which has been going on every year for decades.”[iii]

With that solution in mind, we can reject the Ryan Plan and let healthcare experts discuss various ways to bring healthcare cost inflation under control.

S&P: Negative Outlook for U.S. Treasury Bonds

April 19, 2011 by

Typical comment on S&P outlook change for U.S. Treasury Bonds:

“Why are we paying attention to Standard and Poor’s opinion, a firm that gave favorable [AAA] ratings to junk mortgage funds at the behest of their investment-banker clients? I don’t think the firm has any credibility left.”

Mark Gordon, Tucson

Are Our Taxes Too High?

April 18, 2011 by

On Wednesday, April 13, 2011, President Obama gave a speech outlining his proposal to reduce the federal deficit by $4 Trillion over 12 years, with more than $2 Trillion in spending cuts including $480 Billion in Medicare savings, $1 Trillion in revenue increases by not extending the Bush tax cuts for upper income taxpayers, and $1 Trillion in savings on interest payments on the federal debt.  The President also proposed a bipartisan panel to simplify the tax code and to reduce or eliminate special tax breaks for individuals and corporations.[i]  He said he would not raise the eligibility age for Medicare.  Even before the president gave his speech at George Washington University, Republicans were blasting the proposal as an unacceptable plan to raise taxes.

House Speaker John Boehner (R-Ohio) said

“I think the president heard us loud and clear. We’re willing to resolve our differences and do something meaningful but raising taxes will not be part of it.”

“We don’t believe that raising taxes is the answer here,” added House Majority Leader Eric Cantor (R-Va.), who also attended the meeting morning meeting at the White House.[ii]

Rep. Paul Ryan, Chairman of the House Budget Committee, said “We don’t have a problem with our budget because Americans don’t pay enough taxes. We have problems with our budget because we spend too much money.”[iii]

Later in the week, the House approved the Ryan Budget, which proposes to cut the top income tax rate to 25% and reduce, but not eliminate the projected budget deficit, by making drastic cuts in many federal programs and replacing Medicare with a voucher-like system for anyone who is now less than 55 years old.

Do we Americans pay too much in taxes?

In 2009, federal, state and local income taxes consumed 9.2% of all personal income, the lowest level since 1950.[iv]  The OECD Center for Tax Policy and Administration studied the ratio of all taxes to national GDP.   In 2007, the United States was 27th in the ranking of the 30 OECD member countries.[v]  Due to the Great Recession and the Obama tax cuts of 2009, the U.S. fell to 28th, with only Turkey and Mexico having lower ratios of taxes to GDP.  Do we really want to be like Turkey or Mexico?  If our tax ratio were at the same level as Germany, in the middle of the OECD ranking, we would not have such a difficult problem balancing the federal budget.  And note that Germany now has a lower unemployment rate than the U.S.

Here are a few more numbers to consider: The last time the U.S. federal government was in the black was during the second term of the Clinton Administration.   Even excluding the Social Security surplus, the surplus of federal revenues over federal expenditures was $1.9 billion in fiscal 1999 and $86.4 billion in fiscal 2000. Alan Greenspan (Federal Reserve Chairman) as well as the Congressional Budget Office worried that the federal government was on a path to pay off the entire federal debt.  Instead, the Bush-era tax cuts coupled with major off-budget spending for two wars and a Medicare drug benefit, added $3.2 trillion to the debt.  Then Republican-managed deregulation led to the greatest financial crisis in a century, followed by the Great Recession, which resulted in a sharp drop in tax revenues.  The Republicans try to blame the current deficit on President Obama, but the fact is that stimulus spending since Mr. Obama took office — including large tax cuts — accounts for about $600 billion of the current $14.2 trillion in accumulated debt.[vi]

One of the major factors in grim budget projections is the rising cost of health care.  Representative Ryan says the U.S. cannot afford Medicare, so he proposes to replace Medicare with a voucher-like system that relies on the private insurance industry.  There is nothing in the Republican budget proposal to lower health care costs.  Indeed, the Ryan plan might contribute to increased health insurance costs, since administrative costs of private insurance (12% to 20% of premiums) are higher than the administrative costs of Medicare (2% to 6%).[vii]

The Republican response the President’s deficit reduction proposal is a disappointing reiteration of the tax-cuts-above-all ideology that has gotten this country deeply into debt.   Republican politicians may think this is good politics.  I am not a politician.  I care deeply about this country’s future.  The current federal deficit is unsustainable, and national fiscal salvation will require shared sacrifice.  I am ready to pay taxes at the rates in effect from 1995-2000 during the Clinton Administration.

There will be a long debate on how to eliminate the budget deficit.  We will have more comments in coming posts.

Temporary Payroll Tax Reduction Must Not Drain Social Security Trust Fund

December 9, 2010 by

There is a need to improve the tax compromise that the President reached with Congressional Republicans. Any temporary reduction in payroll taxes must be offset by future tax increases to ensure the continued solvency of Social Security.  We cannot wait for some future Congressional action to save Social Security.  The bill being drafted this week needs to include language to raise in future the revenues lost in the coming year because of the temporary payroll tax reduction.

There are several ways to do this.  One way is to raise the cap on annual earnings to which the payroll tax applies.

Another way would be to have a doughnut hole of earnings that would be exempt from payroll taxes, and then any earnings above the upper limit would be subject to payroll taxes.

A third way would be to make dividends subject to the same tax rate as payroll taxes, and specify that those taxes would go to the Social Security Trust Fund.  This would recover taxes from owners of closely held companies, like Linda McMahon, who pay themselves in dividends instead of salary.

Erskine Bowles and Alan Simpson, co-chairs of the National commission on Fiscal Responsibility and Reform (Deficit Reduction Commission), have acknowledged the need to restore the Social Security Trust Fund after a temporary payroll tax reduction.  Your Senator or Congressman can use that as the basis for including an amendment to the current tax bill that ensures that the Social Security Trust Fund is not depleted by this bill.

Obama’s Tax Plan and Small Business

November 17, 2010 by

Hello from Weston, CT, where we are proud to have elected or reelected a fine slate of Democratic candidates to Congress and major state offices:

There is a major misunderstanding of the proposal to end (not extend) the Bush tax cuts for top earners.  Media articles are not explaining what “$200,000 per individual or $250,000 per couple” means.  Republicans are exploiting the vagueness to scare small business owners.  The confusion is over the difference between AGI and taxable income.

We know that Michelle Bachmann is one of the most shameless liars to be elected to Congress.  However, some people listen to her.  Yesterday morning, Bachmann said to George Stephanopoulos that President Obama proposed to raise taxes on any small business with gross income of more than $250,000, including a carpet layer with two or three assistants. She says that would be a big job killer.

My understanding is that President Obama proposes to raise taxes on annual taxable income of more than $200,000 for an individual or $250,000 for a couple.  That’s not gross income.  For a business partnership or other unincorporated small business, salaries and other legitimate business expenses would be deducted before computing the taxable income.

There are very few small businesses with annual taxable income of more than $250,000, and the tax increase would be only 3% of the amount above $250,000.

Why China Undervalues Its Currency

October 26, 2010 by

Yesterday, Brad DeLong described what he believes to be the primary Chinese rationale for its weak renminbi policy:

China has 900 million rural dwellers who are still living at a standard of living not that far above subsistence. The pressure to migrate from the countryside to the coastal cities is enormous. China needs to grow at more than 8% per year in order to avoid mass unemployment in the coastal cities. And mass unemployment in the coastal cities is likely to be followed by political collapse and turmoil on a gigantic scale.

Part of growing at 8% per year is to continue to rapidly expand exports to the North Atlantic core of the world economy. But in order to expand exports Chinese-produced goods must look like good values. And if demand for dollar-denominated assets falls and the value of the dollar falls, Chinese-produced goods will no longer look like good values.[i]

The U.S. policy problem is that the undervalued renminbi is leading to weak demand for U.S. goods and services in China.  The U.S. needs to reduce its trade deficit with China.

To reiterate, the five causes of high unemployment in the United States are:

  1. Inadequate aggregate demand.
  2. Migration of jobs to other countries, especially China.
  3. Increased productivity of employed workers.
  4. Inadequate credit for small businesses.
  5. Uncertainty about future taxes and regulations.