View From Down Under

As part of their health care rebuttal, Republicans have focused on tort reform as a way to dramatically reduce costs.  As Senator Jon Kyl (R-AZ) said “Everybody knows that there is a huge amount of money that could be saved in health care delivery if we did something to reform this jackpot justice system.”  President Obama seems to agree, and has added some tort reform to his health care proposal – although stopping far short of what Republicans want.

The argument for tort reform is that  frequent malpractice claims and high awards have forced doctors into prescribing extra, and unnecessary, tests and procedures in order to reduce their potential exposure in a lawsuit.  Therefore reforming the malpractice system should reduce those unnecessary activities and reduce costs.

This assumes that these extra procedures are, in fact, unnecessary and add nothing to the value of health care received.  It also assumes that many malpractice claims are based on the desire of plaintiffs to ‘hit the jackpot’ and not on genuine malpractice.

Some on the left wing argue that this is far from proven.  Ezra Klein notes that Texas, which enacted tort reform in 2003, also has the city with the highest medicare costs per enrollee (McAllen).  Indeed Texas as a whole has one of the highest medicare reimbursement rates per enrollee, even adjusting for age, sex, and race.  (As a Texan who enjoys my vegetables battered and fried, I wonder if there is a bit of cultural self selection there).  So the link between tort reform and cost reduction looks tenuous.

In order for tort reform to have an impact on medical costs, it must either reduce the number (or type) of tests and procedures being prescribed, or reduce malpractice premiums (which would then be passed on to consumers).

This sounds like a theory that can be tested, and this afternoon I was wondering if there is any data which could tell us if tort reform has a meaningful impact on health care costs.

Turns out there is.  A recent study looked at the differences in tort reform enacted by various states and correlated that against the costs of employer sponsored health insurance plans over an eight year period.  They looked at four different kinds of tort reform:

• caps on pain and suffering awards;
• collateral source reforms (reducing payouts if plaintiffs have already received insurance or other payments);
• joint and several reforms (limiting ability of plaintiffs to sue a deep pocket for the full amount even if they are only partly at fault); and
• caps on punitive damages.

The authors concluded that the first three types of reform lowered insurance premiums of self insured plans by 1-2% (caps on punitive damages had no impact).  That sounds like a good outcome and should provide encouragement for further tort reform by the states.

However, for fully insured plans (HMOs) there was no decrease in premiums as a result of tort reform.  The authors conclude that HMOs are already doing a good job of monitoring care and avoiding unnecessary activities.

The Congressional Budget Office looked at this study as well as a number of other studies done in the last decade, and have concluded that enacting the four reforms above would likely reduce the total health care costs of the government by 0.5%.

It is not a silver bullet for solving the problems in the US health care system, but is definitely worth pursuing as part of any comprehensive reform.

Popularity: 6% [?]

As I have written before, the outcome of the health care summit was never in doubt.  The President staked out his position, and he apparently believes he has enough votes to get it through via reconciliation.  Republicans had a chance to state some alternatives and score some political points (with their supporters).  I’d be interested to see the ratings, but I would guess the Olympics drew more viewers.

The view from down under is that this kind of theatre is necessary to govern in the US, which is kind of sad in a way, and kind of scary in another.

One thing is clear, it is not about policy – only politics.  As Ezra Klein pointed out, if McCain had been elected, and a similar plan were in front of Congress (like the one McCain championed in his campaign), would Democrats support it?  Would Republicans?

Popularity: 14% [?]

I like data.  Data is powerful.  Data can be misused or misinterpreted, but it doesn’t lie.  It has no agenda.  It is what it is.

When I test rhetoric against data, I find some interesting dichotomies, and over the years this process has driven me from right of center to somewhat left of center.

Here’s a case in point.  The right wing has long painted the Democrats as big spenders, eager to take the hard earned money from the honest, small business owning, risk taking entrepreneurs and give it to the lazy, shiftless, leeches of society through major handout programs and massive pork barrel programs of little benefit to the nation as a whole.

This continues even today, with a recent editorial by Peggy Noonan painting the GOP as the party of fiscal restraint.

“The GOP itself should be going forward with its philosophy, with the things it’s long stood for and, in some cases, newly rediscovered, and painting the broader picture of the implications of endless, compulsive high spending.”

Here’s the data.  Taking the federal deficit as a % of GDP, and adding up the numbers for each President’s budget terms, the cumulative deficit numbers look like this*:

Admittedly, this is a somewhat blunt analysis, but however the analysis is done, the picture is clear: Democratic Presidents, on the whole, have been remarkably responsible (fiscally). Republican Presidents have been the “compulsive high spenders”.

Of course, this is not new, or news worthy, but it continues to amaze me that the right wing still genuinely believe that Democrats are fiscally irresponsible.

* I have not included Obama because these numbers are actual (not budget) and Obama has no actual numbers.  He has proposed only one budget (although the expected deficit of nearly 10% of GDP would put him in the big spending category).

Popularity: 13% [?]

Former Secretary of State Colin Powell, on Face the Nation last Sunday, showed once again why he commands respect.  In response to criticism by former VP Dick Cheney that the US is ‘less safe’ under President Obama, Powell said:

“The point is made, ‘We don’t waterboard anymore or use extreme interrogation techniques.’ Most of those extreme interrogation techniques and waterboarding were done away with in the Bush administration. They’ve been made officially done away with in this current administration.”

“The Transportation Security Administration created by George Bush is still in action working in our airports; they take care of me every day that I go to an airport.  The Office of the Director of National Intelligence was also created under President Bush, and it is still under President Obama working hard. Our counterterrorism authorities and forces are hard at work. Our law enforcement officials are hard at work. We have gone after the enemy in Afghanistan with 50,000 more troops, more predators are striking al Qaeda and Taliban leaders in Pakistan. We have continued the policies that President Bush put in place with respect to Iraq.

“The bottom line answer is the nation is still at risk. Terrorists are out there. They’re trying to get through. But to suggest that somehow we have become much less safer because of the actions of the administration, I don’t think that’s borne out by the facts.”

Despite Mr Cheney’s rhetoric, Colin Powell recognizes that the US is actually much closer to being safe from Al-Qaeda than it was during Mr Cheney’s administration.

Popularity: 15% [?]

According to the New York Times, the Senate and the White House are close to announcing a council of regulators whose focus is to identify systemic risk in the financial system.

This is a good idea.  After previous financial crises, Congress enacted knee jerk, Sarbanes Oxley kind of legislation that added layers of compliance costs without adding any value to society.  They seem to be learning, and there are apparently enough Congressmen with the sense to recognize that they cannot legislate away the next crisis by trying to legislate away the last one.

Senator Mark R. Warner (D-VA) showed some rare economic sense when he said:  “You need a vigorous, focused group. You don’t need to create some massive new bureaucracy, but a place to share information and do some level of analysis.”

Admittedly an oversimplification, but the last financial crisis was mainly fuelled by asset inflation driven by financial innovation – financial products created in the last few years, sold by people with no economic interest in anything beyond the sale, and bought by investors who could not understand the risk.  These products were not so much outside the existing regulatory system as they were above it, with different agencies responsible for regulating different parts but no regulator looking at the whole.

The Senate/White House plan will give the President and Congress the ability to say they have acted as a result of the financial meltdown, and may even help prevent another similar crisis, but shouldn’t add costly layers of additional regulation.

Regardless of what form the legislation takes, it is a certainty that there will be another financial crisis at some point in the next decade or so.  The next financial crisis will be both similar and different to the last one.  It will be similar in that some assets will be overpriced, with lenders willing to lend far more than is prudent.  It will be different in that the overpriced assets will not be collateralised mortgage obligations.  After the asset inflation, there will be a liquidity crunch precipitated by an unsuspected event.  That event could be anything from a slowdown of growth in China, to a sovereign wealth default, to the realisation that some assets are fundamentally overvalued (a la dotcoms, tulip bulbs, or CMOs).

Therefore it is a certainty that no legislation will prevent every future financial crisis.  However, a council involving several regulatory agencies whose brief is to look for systemic risk is far more likely to be effective than creating a Consumer Financial Protection Agency, or any other proposal I’ve seen so far.

Popularity: 21% [?]

President Obama is finally starting to show some much needed leadership on health care reform, inviting Democratic and Republican leaders to a health care summit, and promising to publish its own version of health care legislation in advance.  Obama challenged Republicans to do the same.

Despite the rhetoric from the White House, there is little hope that a bipartisan health care reform package will emerge from the process.

The last time the Republicans put forth their health care plan it was weak, marginal, and provided little other than tort reform.  It appeared to be a hasty answer to the charge that they were just being obstructive, and fortunately the plan sank into oblivion quite quickly.

Nonetheless, Republicans have deep differences with Democrats on what health reform means.  The Republican position on health care appears to be something like this:  we should let the ‘free market’ provide health care; but don’t cut Medicare (even though several Republican proposals do exactly that); and don’t remove the tax break for employee funded insurance (which would at least attempt to create a free market); and do allow interstate insurance programs (while continuing to allow wildly different state based standards); and ‘enhance’ the free market with a combination of vouchers, savings incentives, and tax credits.

That they have been allowed to get away with this as a ‘policy’ is bemusing, to say the least.

To Democrats, health care reform means making sure all Americans, or as many as possible, have health insurance.  The rest of the Senate bill is basically trying to pay for this, with a number of pilot programs that will probably reduce costs over time but whose ultimate impact is unknown.

When you consider that most Republican voters are not opposed to expanding insurance cover (in fact it was part of John McCain’s campaign platform) yet Republican leaders passionately oppose the Senate bill, it becomes clear that what the right wing really wants is for the President to fail so they can replace him with Sarah Palin.

Let’s be clear, neither side is really proposing health care reform, and despite the rhetoric that this is an historic ideological battle, the reality is that both sides are talking about fairly minor changes to an insurance based system supplemented by government health care for the elderly and poor.

With his summit, Obama is making one last effort at appearing to be bipartisan before pushing through a health care bill.  He cannot afford to head into the next election with no health care bill passed, but also doesn’t want to be painted as part of an arrogant left wing that can’t negotiate with Republicans.

The view from down under is that it is past time for Obama to stop delegating to Congress, and time to provide clear leadership.  The promise to publish the White House plan, which will undoubtedly have support of Democratic congressional leaders, is a good first step in that it moves the plan from being a Pelosi plan or a Reid plan to being an Obama plan.

If the Republicans offer to negotiate for a better bill, the Democrats will have won the public debate and will have a comprehensive health care bill passed soon.  Of course, Republicans know this, and because of their past rhetoric their logical course of action is to continue to obfuscate, try to scare people (death panels part deux?) and do their best to block all legislation.

Which, ironically, will make the final bill much more of a left wing reform bill and therefore more likely to have real impact on both the cost and availability of health care in America.

Popularity: 25% [?]

The Republicans are painting Obama as being soft on terror, or having a blind spot when it comes to the war on terror.  Once again, the right wing is dismissing facts in favor of surprisingly effective rhetoric.

First, the facts.  The Obama administration has reached out to other countries, particularly Muslim countries, in a way that previous administrations have not.  He has already visited Egypt, Saudi Arabia, and Turkey.  He will be visiting the world’s largest Muslim country, Indonesia, in March.

These trips are part of a concerted effort to change America’s image abroad, and Obama has been extremely successful at this.  He has restored America’s soft power (for which he received the Nobel Peace Prize).  Perceptions of the US around the world have been enormously improved, particularly in Islamic countries.

The policy of the United States living up to its own values by stopping torture and closing Guantanamo, strongly supported by General Petraeus and other high ranking officers, has been instrumental in this change in perceptions.

Iraq is starting to stabilize, largely due to the surge and other strategies implemented by Robert Gates.  The December 09 quarter saw the lowest US casualty rate of any quarter since the war began in 2003.

Pakistan has been aggressive in pursuing the Taliban within its tribal areas.  With Pakistanis viewing the US more favorably, the Pakistani government is able to take these kinds of initiatives.

In 2009, more Al Qaeda fighters and senior leaders have been killed than in 2008. 

Largely as a result of these efforts, Al Qaeda and fellow organizations have increasingly turned to attacking Muslim civilians.  As these attacks continue, and the perception of the US improves, the number of Muslims supporting Al Qaeda continues to plummet.

As Peter Beinart put it recently:  In countries like Pakistan and Jordan, where al Qaeda keeps slaughtering innocent Muslims, its public support has fallen off a cliff. During the Bush years, the only thing that kept al Qaeda from complete ideological collapse was Muslim hatred of America’s wars in Iraq and Afghanistan, our unblinking support for Muslim dictatorships and for Israel, and our use of torture at places like Abu Ghraib and Guantánamo Bay. Now Obama, by pledging to withdraw U.S. troops from Iraq and close Gitmo, and by eschewing torture … is cutting al Qaeda’s throat.

In short, the US is much closer to winning the war against Al Qaeda now than when Obama took office. 

But apparently, the Republicans would rather have tough talk and less progress.

Popularity: 32% [?]

With the President’s budget last week, he seems to have succumbed to the pressure to cut spending now.  This is bad policy.

Unlike Dick Cheney (at least when he was VP) I do understand that deficits matter.  In the long term, the US needs to reign in its spending and try to have at least balanced budgets.

But not now.  The country is barely starting to recover from a debilitating recession.  US unemployment is still staggeringly high.  The President and Congress should be discussing further stimulus focused on job creation, not arguing over what job creating programs to cut. 

Cutting government spending now risks derailing the recovery.  Nothing I’ve seen in the data suggests a double dip recession, but a concerted push to reduce government spending could be the game changer.  When FDR reduced the deficit in 1937 and 1938, it sent the economy into another devastating tailspin and prolonged the depression.

Does the deficit matter?  Of course it does.  Should the long term goal be a balanced budget?  Absolutely.  But “for everything there is a season…”

A responsible government should run surpluses in good years, and be prepared to move into deficits when economic cycles turn.  Unfortunately, the US has not been a responsible government for some time.  The last budget surplus was Clinton’s final budget in 2000.  Before Clinton’s four balanced budgets, you have to go back to Johnson’s final budget in 1969 to find surplus.  Kennedy, Nixon, Ford, Carter, Reagan, George HW Bush, and George W Bush never had a balanced budget.  Not one.  Johnson managed one. 

Trying to cut government spending is decidedly hard.  There is no apparent political gain from a balanced budget, and no apparent political pain from deficit spending.  (This, BTW, was what Cheney was referring to when he said deficits don’t matter.)  So getting Congress to reduce spending when there is nothing in it for them is near impossible.  Add to this the fact that most of the budget is untouchable, and it is a terribly difficult task.

Ultimately, the best the US can realistically hope for is some long term concerted efforts to control spending until the economy grows enough to make the debt less relevant.  I am not optimistic about this.

But clearly trying to address the deficit now risks sabotaging the recovery.

Popularity: 44% [?]

The Commerce Department released their latest figures on GDP last week – up 5.7% in the fourth quarter.  Big contributors were inventory additions (3.4%) and personal expenditures (1.4%).

Most economists I’ve read suggest we treat this with caution because of the high contribution from inventory growth, which is clearly not sustainable.  As true as this cautionary note is, the numbers are also full of upbeat results.

Personal expenditures are up.  This is in spite of a drop of 0.57% in motor vehicles (against a strong third quarter boosted by Cash for Clunkers).  Clothing and footwear spending is up for the first time in six quarters.

Overall fixed private investment is up for the first time in ten quarters.  You have to go all way back to June 07 to find the last up quarter in private investment.  This has been driven by growth in equipment and software.

Government spending was down 0.2% during the quarter as the stimulus spending stopped growing.  We should expect this to continue to decline as the stimulus plays out.  Remember the GDP numbers measure change quarter to quarter, not absolute level of spend, so as the stimulus spend starts to slow the impact on GDP growth will be negative.

The last bit of good news is that I think this number is likely to be revised up in the next month.  After getting the last one so wrong (initial announcement of 3.5% growth with a revised number of 2.2%), the BEA analysts have likely taken a very conservative view on their estimates this time.

The economy has not “recovered”, and there is a long way to go before the 7 million people who lost their jobs will be back at work.  But I continue to doubt the double dip thesis, and remain bullish on the prospects for the US economy in 2010.

Popularity: 54% [?]

Back in November, I wrote that the recession was over – though it may not feel like it.

This week, the Conference Board released their data on leading indicators.  The index was up again in December, and has “risen steadily for for nine consecutive months.”  Here’s the chart:

The Coincident index has been rising as well, up for five of the last six months.  Building permits, stock prices, consumer expectations, business capital expenditure, industrial production, manufacturing sales – all up.

Interestingly, consumer confidence is lagging, and consumer assessment of the economy is decidedly bad.

A recent Gallup poll shows how pessimistic consumers are on the economic situation.  Asked the open-ended question “Just your best guess, how long do you think it will be before the US economy starts to recover?”  Remember that, from an economist’s perspective, recovery probably began in July/August last year.  Here’s the results:

Fully 85% of the people surveyed expected it would be one year or more before the economy starts to recover.  About half the survey expect it will be three years or more.  Put another way, half of the population thinks the US will be in recession for at least another two years.

Now, it’s possible (in fact, highly likely) that the average consumer’s definition of recovery is different to economic definitions, and the survey respondents are actually answering a different question.  They may think it will be two years before the economy is back to where it was in 2007 (which is also historically pessimistic).  Psychologically, the last 18-24 months experience is much more relevant to most people than experience prior to that.  Recent experience is still felt emotionally while more distant experience is only a memory.

Clearly, to most Americans, it does not feel like the recession is over.  And there are some highly acclaimed economists who are concerned about a ‘double dip’.  But with leading indicators climbing that dramatically, and the rest of the world pulling out of recession as well, a double dip looks less and less likely.

Popularity: 76% [?]