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.

Quotes of the Day: Senate Edition

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.

Revisiting Wage Stagnation

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.

Health Insurers on the Attack

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.

Healthcare Reform and Cost Control

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.

Quote of the Day: Risk Management

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.

Question of the Day

Why is AIG stock still selling for a price greater than zero? Felix Salmon:

I understand that there's some tiny possibility that AIG will be able to pay the government back in full, and that therefore AIG stock has a small amount of option value.

Well, OK. But basically, it's worthless. And yet, AIG executives, who once fought the idea like rabid dogs, now want to be paid their bonuses in common stock. What do they know that the rest of us don't? Felix and Paul Smalera are perplexed. So am I.

Healthcare in the Abstract

Greg Sargent highlights a piece of a recent CBS poll which suggests that Americans are pretty happy with doing at least as much on the healthcare front as we're currently doing. That's good news.

Unfortunately, the numbers aren't as good as they look at first glance. 57% think we should cover as many or more Americans than the current bills, but how many of those people would you lose if you added "even if it meant paying higher taxes"? 60% want to control costs better, but how many would you lose if you added "even if that means your healthcare choices might be restricted"? Support for more stuff is usually pretty high in the abstract, but on healthcare these days it's not all that high even in the abstract. That's not such good news at all.

Stewart and Yoo

"There is an unexpected silence in the liberal blogosphere," says Adam Serwer, "after last night's highly anticipated Daily Show episode, in which Jon Stewart hosted John Yoo, the author of many of the Bush adminstration's torture memos and one of the people most responsible for giving legal sanction to the practice of torture. That's probably because Stewart found himself completely outmatched by a charming, tactful Yoo."

I think Stewart's problem was twofold. (Video here.) First, he was woefully unprepared. Yoo's argument was, plainly, about what counts as torture. Stewart didn't get that — or pretended not to get that, I'm not sure which — and that led him to continually act surprised by perfectly ordinary statements from Yoo. "You're saying we'd never before considered whether torture was OK?" Stewart would ask, and Yoo would respond, "No, we were trying to figure out for the first time which interrogation techniques were torture and which ones weren't." That's really not hard to understand, but Stewart continually misunderstood it and wasted the entire first segment of the interview.

But I'm not sure it mattered much anyway. The real problem with interviewing Yoo is this: once you start arguing about the legal basis of the president's wartime powers you've pretty much lost the game. That's a subject that's genuinely complex, and a guy like Stewart will never win an argument about that with a guy like Yoo. He'll just toss out yet another precedent and plow on.

The debate really needed to be about the fundamentals: Stewart needed to graphically describe all the things that were done — multiple waterboardings, sleep deprivation, head slamming, stress positions, etc. — and get Yoo to defend those as permissible. And when he retreated into legalisms, he should have asked Yoo whether he, personally, agreed with his own legal position. That's a fair question for an author on a book tour.

That likely wouldn't have worked either, but at least it would have pushed Yoo a little bit harder than Stewart's tactic of relying on spluttering and facial tics. He needed his A game, not just a weak brushback pitch.