If healthcare reform passes, conservatives are planning to mount a constitutional challenge to the individual mandate on the grounds that the federal government doesn't have the right to force you to buy a product from a private corporation. This is doomed to failure, and Ezra Klein argues that that's a good thing for conservatives themselves:

Long-term, conservatism could suffer no greater disaster than the death of the individual mandate. This country will have a national health-care system, and sooner than later. The cost pressures make that inevitable. If you want that national system to be private, as most conservatives do, then your only hope is the individual mandate. That's been true in countries such as the Netherlands and Switzerland, and in Singapore, which is often upheld as a conservative model, contributions to health savings accounts are compulsory. Eliminate those options from the U.S. menu, and you're ensuring that Medicare, Medicaid or some sort of public option will eventually take over the market, as there's no constitutional issue with taxation in return for public services.

Exactly right. The Swiss model is basically about as conservative as you can get among national healthcare systems, and if that option were taken away we'd inevitably end up with something more like France or Sweden or Canada. Which would be fine with me, but not so great for conservatives. In fact, it might be even worse than Ezra says: if the individual mandate were killed but the rest of the current healthcare bill stayed intact, the private insurance industry wouldn't last out the decade. We'd have Medicare for All by the end of Obama's second term.1

Of course, movement conservatives don't believe any of this. They don't believe in things like "adverse selection" because language like that comes from pointy headed liberal healthcare professors. (Though they might want to ask a few insurance company executives whether they believe in it.) And they don't believe that national healthcare is inevitable because they're convinced that our current Rube Goldberg system really does provide the best healthcare in the world and can continue forever without bankrupting us. Or something. I'm not really sure what they believe. I'm not sure they do either. But they sure know what they're against.

1Hell, maybe we liberals should join in the challenge. Go ahead and pass healthcare reform with the individual mandate, get the mandate tossed out in court, and then wait for private health insurers to collapse. Sounds like a pretty good plan. Too bad the court challenge would never work.

More on the Bank Tax

My first post this morning was a reflexive reaction to the paltriness of the proposed bank tax. But a bit of early-morning pissiness probably isn't very convincing. So here's James Kwak with a more considered reaction:

From Q4 2008 through Q2 2009, large banks had a funding cost that was 78 basis points1 lower than that of small banks....[So] the tax isn’t nearly big enough! It’s being calculated as 15 basis points of uninsured liabilities, calculated as assets minus Tier 1 capital minus insured deposits. 15 basis points is a lot less than 78 basis points. And if the FDIC cost of funds data are based on all liabilities (not just uninsured liabilities), then charging 15 basis points on uninsured liabilities only increases the overall cost of funds by about 7 basis points (at least in the administration’s example). This doesn’t come close to compensating for the TBTF subsidy.

The point of the tax shouldn't simply be to pay back the cost of TARP, which is just a small part of what the government did to help out the banking sector in 2007-08. It should also be used to level the playing field. Big banks get funding at lower cost because they are, supposedly, safer than small banks. But guess what? That's a mirage. They fail just like small banks, but they do so less often and get bailed out when it happens. So why give them an advantage that serves mainly to let them grow ever more gigantic? A properly designed tax — one that's both bigger and more graduated, so that it goes up as banks get larger — would be a much better one. More here from Simon Johnson and Peter Boone.

1A basis point is a hundredth of a percent. So 78 basis points is 0.78%, which is quite a bit when you're talking about loan books that amount to trillions of dollars.

The first session of the FCIC bank hearings yesterday — the one where Phil Angelides got to grill bank CEOs — is the one that got all the attention, but Mike Konczal says the second session was actually more interesting. That was the one where a group of three financial industry experts were able to talk plainly and simply about what needs to happen going forward:

The three panelists gave very specific ideas about where reform needs to take place to get our financial sector back on track. The first key is bank leverage, how much money they lend for how much they keep in pocket. The higher this ratio, the more risky their firm is.

Right now you can qualify as minimally leveraged at 25-to-1, which means you lend out $25 for every $1 you actually own, which is unmanageable according to the participants. These ratios need to come down for the largest firms. Fannie-Freddie are even worse; the participants claimed that they had a 95-to-1 leverage at one point (just 18 basis points of capital), a monstrously risky number for any firm, much less a large one.

What about Glass-Steagall, the New Deal law that split up investment banking from commerical banking? There was disagreement among the participants, with a general agreement that it should be updated for the capital markets of the 21st century. Banks that are diversified with both commercial and investment wings survived better than normal investment banks, an argument that the deregulation was successful. However this leaves a situation where the Federal Discount window, the safety net the Federal Reserve provides banks to avoid disastrous bank runs, is being used to fund high-risk hedge fund like proprietary trading operations. So the suggestion is to update Glass-Steagall for the 21st century where risky operations are silo’ed away from normal operations.

....While discussing the over the counter derivatives market with Brooksley Born, it was clear that derivatives reform was one of the most necessary items. Derivatives need to clear on a central exchange, with a data repository. Solomon predicted the price of derivatives would fall quickly, in the same way that stock commissions fell back when regulation was brought to that market on the so-called “May Day.” This is why banks, who keep this money from bespoke derivatives, want to derail this without getting too many fingerprints on it.

Regular readers know that I think this is basically right. Leverage is far and away the key issue: put in place a set of simple rules that regulate leverage to sensible levels; regulate it everywhere, not just within banks themselves; and regulate it in all its various forms. If we did that and accomplished nothing else, I'd consider regulatory reform a qualified success.

Beyond that, regulating derivatives is more important than repealing Glass-Steagall. I like the idea of firewalling risky securities trading away from core banking functions, but I'm basically not convinced that repealing Glass-Steagall was a key cause of the banking crisis. After all, some commercial banks did fine and some failed. Some investment banks did OK and some failed. Some merged superbanks did fine and some failed. It's pretty hard to find a thread there. However, the combination of the repeal with the 2000 passage of the Commodity Futures Trading Act, which kept derivatives unregulated and turned huge Wall Street banks into casinos, was disastrous. So yes: put in place a firewall, and pay particular attention to regulating derivatives. The housing bubble could still have happened without them, but it was the derivatives market that supercharged it.

And that would be the ballgame. Sure, there are other aspects of regulatory reform that I'd like to see enacted, but serious leverage limitations alone would make reform a qualified success, and the addition of serious derivative regulation would make it a historic success. I'd pretty much trade everything else away if I could get just that.

The Bank Tax

The New York Times reports today:

President Obama plans to call on Thursday for taxing about 50 big banks and major financial institutions for at least the next decade to recoup all taxpayer losses from the bailout of Wall Street.

The tax on banks, insurance companies and brokerages with more than $50 billion in assets would start after June 30 and seek to collect $90 billion over 10 years, according to a senior administration official who briefed reporters late Wednesday.

Ouch! That's hitting 'em where they hurt. Why, that comes to....$9 billion per year.  So Morgan Stanley and Goldman Sachs and Citigroup can probably be expected to fork over, oh, maybe $500 million each. I wonder if their accountants will even notice it?

Our Grim Future

The Center on Budget and Policy Priorities — which desperately needs a more user-friendly name, by the way — says that our long-term federal deficits are unsustainable. In order to get them to sustainable levels we need a combination of tax increases and spending cuts equal to about 4.9% of GDP. Here's a start:

If policymakers were to allow all of the 2001 and 2003 tax cuts to expire as scheduled at the end of 2010 — or fully offset the cost of extending those tax cuts they choose to extend — this alone would shrink the fiscal gap by almost two-fifths, from 4.9 percent of GDP to 3.0 percent.

Sounds good. Except that this would take us back to the fiscal hellscape of the late Clinton era, and who wants that?

The CBPP report is pretty discouraging, but the really discouraging thing about it is this: "Policymakers should also expect to return to long-term deficit reduction multiple times over coming decades; the problem is far too large to address in a single legislative package." Strictly speaking, this is true: you wouldn't want to literally do this in a single piece of legislation. But if we were even close to having a sane political class in this country, it wouldn't be that hard to hit this target: (1) Let the Bush tax cuts expire. Nobody was overtaxed in the 90s. (2) Do a conventional fix for Social Security. This would be good for another 1% or so. (3) Get serious about reining in Medicare costs. Squeezing another 1% via Medicare changes wouldn't be that difficult if both parties were willing to treat it as a real problem instead of a chance for demagoguery. (4) Add in a modest assortment of spending cuts (smaller military, unprivatized student loan, reduced ag subsidies) and revenue increases (estate taxes, carbon taxes, financial transaction taxes) and you'd get the rest of the way there. If you don't like these suggestions, feel free to sub in your own ideas here.

For a country as big and rich as the United States, this stuff isn't even very painful. We could do it in a single legislative session and 99% of the country would barely notice the effects. And yet it's the next best thing to impossible. It doesn't speak well for our future.

From Harold Ford, who recently moved from Tennessee to New York and is running for the Senate:

Q. Have you been to Staten Island?

A. I landed there in the helicopter, so I can say yes.

And from Harry Reid, on whether it was a good idea to negotiate over healthcare reform with Olympia Snowe:

As I look back it was a waste of time dealing with her, because she had no intention of ever working anything out.

For the record, I once stepped off the Staten Island Ferry and walked around for a few minutes before taking the next ferry back, and a couple of years ago I spent several hours crossing Interstate 278 in a massive traffic jam on my way to JFK. So I've been to Staten Island too. And I don't think Olympia Snowe was ever very serious about healthcare reform either — at least, not based on the lame excuse she gave for not supporting the final Senate bill even after it was redrafted to her liking.

Yesterday I wrote a post arguing that stagnating middle class wages were a partial reason for the increase in borrowing that helped fuel the housing bubble of the aughts. Scott Winship says that can't be right because, in fact, middle class wages haven't stagnated. Among other things, Scott suggests that household incomes have actually risen considerably; that CPI is a poor measure of inflation; that fringe benefits like healthcare need to be part of the wage calculation; and that government benefits should also be counted.

This deserves a detailed response someday, but in the meantime allow me to revise and extend my remarks a bit with the help of Mike Konczal. Briefly, I think that CPI is still the most reliable measure of inflation we have, that fringe benefits change the picture only modestly (though they certainly ought to be included in any calculation of total earnings), and that government benefits shouldn't be counted because we should primarily be interested in how the private economy is treating workers, not on what the government is doing to make up for its massive imbalances. My strong preference is for an economy that treats workers decently in the first place, not one in which workers get screwed and we make up for it with lots of forced income redistribution.

These are all debatable issues. But for now I want to focus on using household income as a proxy for middle class income. It's true that median household income has increased since 1973, but a big part of that growth was driven by the entrance of women into the workplace, which itself was (partially) a response to stagnating wages. However, this dynamic was largely played out by the late 90s, while wages continued to stagnate. So what happened then? Mike Konczal provides the chart on the right, which shows us. Household income did rise through the late 90s, but it peaked around 1999.1 And when it flattened out, consumer borrowing started to skyrocket.

So the story is revised like this: incomes began stagnating in the early 70s, and the first response was for women to enter the workforce in order to contribute more to household income. After that dynamic had mostly run its course, the only way to keep incomes rising was to start borrowing more. And that's what happened. The rich, whose earnings have skyrocketed during this entire period, basically loaned money to the middle class to buy bigger houses and better TV sets, and eventually it all came crashing down.

To be absolutely clear here, I'm offering this mainly as a provocation, not as an idea I'm completely wedded to. Nor is it anything like a complete explanation. It's just one piece of the puzzle — and if you're interested in this stuff you should be sure to read both Scott's and Mike's entire posts. But I suspect there's something real going on here, and I'd sure like to see some serious economists do some real work on it.

In any case, per capita GDP in the United States has increased by about 90% since 1973. I prefer to focus on individual incomes since household incomes are distorted by things like composition and hours worked, but even if you disagree, a 30-40% increase in household income looks pretty anemic compared to the magnitude of overall economic growth. Bottom line: When the rich get too much money too fast, they do dumb things with it, and in the recent past those dumb things were even dumber than usual. We'd all be better off if economic prosperity were more widely shared and the middle class could fund lifestyle improvements out of wages instead of borrowing ever more from wealthy classes with massively growing pools of idle cash. It's better economics, better policy, and just plain better for the country.

1If you add healthcare benefits to Mike's chart, it changes a bit. But the basic structure remains about the same.

Guess what? It turns out that health insurance companies oppose healthcare reform and are spending millions of dollars to defeat it. That wouldn't be a big surprise except for the fact that healthcare reform is supposed to be a boon to the insurance industry, providing them with millions of new customers (courtesy of an individual mandate that forces everyone to buy insurance). So why are they fighting it? Matt Yglesias takes a stab at explaining:

The fact of the matter is that even though the new mandate/subsidy structure will give at least some insurers a bunch of new customers, the medium-run trajectory of reform is bad for private insurers. Right now, insurers are largely shielded from competition and are almost 100 percent immune to needing to please their actual customers, getting to deal with HR bureaucracies instead. In an Exchange-based world, individuals will be choosing from among several plans and insurers will be accountable to customers. What’s more, the principle that it’s the government’s job to make health care work will lead to pressure for further regulations and further squeezing of industry profit margins.

I think that's pretty much right, and I'd add that community rating (which requires insurers to charge everyone the same price) will add to this pressure. With risk adjustment taken away from insurance companies, they become purely administrative middlemen, and that's a dangerous thing to be. Pure paper shufflers are a lot easier to compare to Medicare's administrative bureaucracy, and they won't benefit from that comparison. The political pressure for them to continually cut costs and profits will just keep growing.

On the other hand, this has always been the case, so why did the insurance industry play nice at first and only turn on the attack ads recently? Hypothesis 1: It took them a while to figure this out. I'm skeptical of this. Hypothesis 2: They feared this all along, but figured the alternatives were even worse. Now, however, they're starting to believe that they might be able to defeat healthcare reform completely, so they're throwing caution to the wind.

All the more reason for Democrats to get their act together and hammer out a compromise that can pass the House and the Senate. Unfortunately, Josh Marshall rounds up some evidence here that Dems are stuck in their usual circular firing squad and aren't making much progress, even though the differences between the House and Senate bills are, frankly, fairly minor. But as a friend of mine likes to say, "Republicans are evil and Democrats are idiots." I sure hope they prove him wrong for once.

Will healthcare reform help to cut the growth of Medicare costs? Skeptics are....skeptical, but Austin Frakt has a guest post by Randall Brown, Vice President and Director of Health Research at Mathematica Policy Research, that provides some real-world evidence about proven ways to make Medicare more efficient:

Mary Naylor and Eric Coleman provide clear, rigorous evidence on how to reduce the appallingly high readmission rate (20 percent within 30 days) for Medicare patients discharged from a hospital. Their “transitional care” programs reduce the need for re-admissions by providing much closer attention to patients and their families as patients move from hospital to home. Randomized trials, the most rigorous and credible type of evidence, showed these programs reduced readmission rates by 18 to 35 percent, resulting in reductions in costs that substantially exceed the intervention costs.

....Following the evidence also means establishing a care coordination benefit for a well-defined high risk population of beneficiaries....Randomized trial studies of programs serving beneficiaries with chronic illnesses have found that targeting is critical. For a subgroup of beneficiaries at high risk of near-term hospitalization — which comprises 18 percent of Medicare beneficiaries and 38 percent of Medicare expenditures (those with congestive heart failure, coronary artery disease, or chronic obstructive pulmonary disease and a hospitalization in the past year) — 4 of the programs in the Medicare Coordinated Care Demonstration had significant and sizable reductions in hospitalizations over the 6-year life of the study.

These two ideas are nowhere near enough to solve Medicare's funding problems on their own. However, unlike other "curve bending" proposals, which are admittedly speculative, these are proven to work. And in the end, that's why funding pilot programs and research studies is such an important part of healthcare reform. Not all of the ideas will pan out, but a billion dollars on research will identify which ones work and which ones don't. Sometimes this means hard choices, but like the programs Brown cites, sometimes it doesn't. Sometimes cutting costs actually means providing better care.

From Jamie Dimon, chairman of JPMorgan Chase, on JPM's risk management practices before the housing crash:

"We didn't do a stress test where housing prices fell."

Wow. By 2006, housing prices were nearly double their trend growth levels and JPM never even considered a scenario in which they might fall. Just wow.