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It was not our idea, but the next round of TEA (taxed enough already) parties in Delaware – scheduled for Thursday, July 2, in Wilmington (two locations), Dover, and Georgetown – will protest the Administration’s plan for healthcare reform.

April 15^th marks the day when over 2000 Delawareans added their voices to over 1 million voices in every state in this Country. The cry then was to stop the reckless spending. These voices will once again unite in Delaware stating, not only [stop] the reckless spending, but present a health care reform plan that will actually solve the health care problems facing our Country.

Such a theme has some logic. The Administration’s plan would cost a ton of money (on top of hundreds of billions already being spent on Medicare and Medicaid), the government is running record deficits now, and taxes would inevitably be raised. People who are “taxed enough already” do not want to pay higher taxes. So make a sign, everyone, and let’s go.

Except for one little detail! If we the taxpayers intend to not only protest the Administration’s healthcare plan but also demand an alternative, what do we want? Here are the criteria posted by the Delaware Tea Party (restated in the interest of brevity):

Put patients first -- keep medical decisions between doctors and patients – do not give an advantage to the government, insurance companies, or pharmaceutical companies – ensure that healthcare will no longer be a big business – place healthcare choices in the hands of patients, guided by their physicians, and provide tools to make this happen – do not cause our children to pay for our mistakes.

The foregoing represents a wish list and nothing more. How can one expect that “healthcare will no longer be a big business,” for example, when it represents about 1/6 of the U.S. economy? What specific changes are desired from the status quo, and how would they be brought about? Would the plan save money or cost money? If costs increased, who would pay?

Our ideological opponents might seek to co-opt the demonstrations. “Why, of course you should have all these things, and that is exactly what the Administration’s healthcare reform plan would do!” Whether or not anyone believed them, the impact of the planned rallies would be blunted.

The media would dismiss the second round of tea parties as meaningless. Delaware members of Congress would feel no pressure to reconsider their votes. And taxpayer activists would be discouraged, making it difficult to call on them in the future – as suggested by this posted comment.

April 15 many of us stood in the rain at a tea party in Georgetown. Was anything accomplished besides being criticized by the mainstream news media (and getting wet)? Will anything be accomplished by meeting in Georgetown in July? I don't mind being criticized by the news media (or standing in the rain) as long as it means something. I think the only thing that will cause our President and Congress to pay attention is for millions to rally in front of the Capital Building or White House--probably more than 1 or 2 times. -- Carole Cullen

A Washington, D.C. event is planned on September 12, and the July 4^th round of tea parties around the country will lay the foundation. 6/11/09, Freedom Works Foundation.

But Ms. Cullen’s feelings are understandable, and they underscore our conviction that the upcoming tea parties need to be well handled. Some suggestions follow.

First, emphasize the connection to taxpayer interests rather than healthcare reform as such. For example:

• Experts say the Administration’s healthcare plan would cost some $1.5-2.0 trillion over the next 10 years.

• The government is already on track to run $9 trillion in deficits over the next 10 years, which could lead to a reduced U.S. government credit rating, sharply higher interest rates, and double-digit (or worse) inflation.

• Raising taxes to pay for increased healthcare spending is no answer. Any additional tax revenues should be applied to reduce deficits – not used to pay for additional spending.

Second, he (she) who succeeds in framing the issue will win the debate, according to communication experts. Remember that the fundamental problem with the healthcare system is not the 46 million or so Americans (including illegal aliens) without insurance coverage, it is skyrocketing costs that threaten to make healthcare unaffordable for all concerned. A “ready, aim, fire” approach to healthcare reform, 3/30/09.

Stay on message! Here is what you should say, for instance, if asked about the people without healthcare insurance. “That’s an interesting question, but we need to get healthcare costs under control first.”

Third, why are healthcare costs growing so fast? Government subsidies and controls come to mind, which undermine personal/family responsibility for medical decisions and reward treatment vs. disease prevention. Reining in healthcare costs is complicated, and some of the steps involved would be controversial. SAFE plan for healthcare reform is “government-lite,” 4/6/09. But here are some broad principles on which participants should be able to agree:

• Thoughtfully consider all responsible options; there should be no rush to enact a healthcare bill that has not even been written yet. Biggest Shift in U.S. Healthcare Needs 45-Day Sprint, 6/17/09, Bloomberg.com. “Haste makes waste,” as the saying goes, and in this case the waste could turn out to be colossal.

“I don’t think we’ve ever had anything this large in American history aimed to go this quickly that touches everybody’s lives,” said Robert J. Blendon, a professor of health policy and political analysis at Harvard University in Cambridge, Massachusetts, in a telephone interview. “They’re moving at a pace we’ve never seen before.”

• Do not authorize new government interventions in the healthcare sector. They would increase costs, not reduce them, unless government bureaucrats were empowered to make medical decisions for people. That would represent rationing, and we do not want it.

• Stop nickel and diming family doctors, and protect them from the trial lawyers by capping medical malpractice awards (e.g., no punitive damages).

• Encourage competition in the healthcare sector and empower patients and their families to make informed treatment decisions.

6/15/09 – Whatever happened to the greatest financial crisis of our time?

Released in January of 2009, “The End of Wall Street As We Know It” by Dave Kansas covers the financial turmoil that erupted in 2008 – why a speculative bubble in housing got started a few years back, how big Wall Street firms and Fannie Mae/Freddie Mac made matters worse, and what happened when the bubble burst.

The story is not over of course. Important developments have taken place since January, such as a $787 billion economic stimulus bill and the prepackaged bankruptcies of Chrysler and GM. And it remains unclear how the story will end.

Although Kansas speaks in terms of “the greatest financial crisis of our time,” perhaps to hype the book, he seems more optimistic about the future than we are as of this writing.

Timing – It is suggested (p. 192) that the timing of the crisis was somewhat fortuitous in that the newly elected president and his “top-rate economic team” would have “time to act boldly to solve problems outside the glare of election-year politicking.”

Thus far, the performance of the president’s economic team has been uneven, politics came to the fore from the start, and there is limited evidence of an economic recovery.

Consider the $787 billion economic stimulus bill, which was enacted in February on an essentially party line vote. Members of the opposition party complained that (a) they were not consulted about the details, and (b) the bill was pushed through without much opportunity for debate or even time to read the final text.

The stimulus bill did not meet the “timely, targeted and temporary” criteria that most of the participants supposedly subscribed to, and it might more properly have been labeled a spending bill. Economic stimulus package: what’s the rush? 2/2/09.

At an evening press conference on February 9, the president urged speedy passage of the bill as a means to “save or create up to 4 million jobs, because that's what America needs most right now.”

The stimulus bill was enacted, but the U.S. jobless rate has continued to climb: 7.6% for January, 8.1% February, 8.5% March, 8.9% April, 9.4% May, stay tuned for the June number in early July.

Critics point to continuing job losses as evidence that the stimulus bill was not properly designed to achieve its ostensible purpose. The president and his advisers say the bill is “working,” and has “saved or created 150,000 jobs” to date, but the support for this claim is primarily anecdotal. Obama’s plan stimulates the deficit, not the economy, Washington Examiner, 5/19/09.

On June 8, after the jobless rate for May was reported, the president pronounced himself “not satisfied” with the results of the stimulus program so far. Although reiterating that “at least 150,000 jobs” had been saved or created, he promised to push for faster spending and said another 600,000 jobs would be saved or created in the next 100 days. Obama to hurry recovery effort amid rising doubt, Jon Ward, Washington Times, 6/9/09.

Maybe, but overall joblessness is expected to go higher. According to the Congressional Budget Office, economic growth is likely to resume in the second half of 2009, but the jobless rate (a lagging indicator) will be on the rise for another year and peak at over 10%. Reuters, 5/21/09.

Opportunity for reform – New regulations of the financial sector are inevitable; they will be proposed (naively in our view) as a means of ensuring that no crisis of this nature ever happens again. Kansas suggests (p. 120), however, that the Administration may take advantage of this opportunity to redo the regulatory system from the ground up.

Traditionally, regulatory reform has simply meant more regulations and regulators. It would be shrewd to start over and discuss what exactly is the right kind of regulation and remake the system in the cleanest, most technologically sophisticated way possible. Grafting onto the old system, which creaking under the seventy-five years of legacy, would simply create a regulatory behemoth without actually addressing the issues of the 21^st century in an intelligent manner.

As expected, the president and Treasury Secretary Tim Geithner have proposed new federal oversight over financial derivatives and financial institutions considered “too big to fail” (including hedge funds and traditionally state-regulated insurance companies). See, e.g., Geithner Unveils Massive Regulatory Agenda, CBN News, 3/26/09.

But there may be a lot of resistance to reining in the regulatory functions already being exercised by various federal and state agencies. Lobbyists and agency rivals fight to shape the new Wall Street, Stephen Foley, The Independent (UK), 6/7/09.

The Commodities Futures Trading Commission and the Securities and Exchange Commission seem to have fought off the Treasury's plan to merge them, keeping the regulation of securities separate from derivatives. Regulation of the commercial banks, too, is likely to remain partly fragmented after turf wars between the Federal Deposit Insurance Corp, which protects depositors, and two other organisations which examine banks.

On the whole, we would be inclined to bet on a “more regulations and regulators” outcome.

Duration – What about the possibility that the current recession will turn into a long, drawn-out affair? Unlikely, says Kansas (p. 196):

. . . don’t expect long soup lines and tattered men selling apples from a bucket. The references to the Great Depression are hyperbolic and the product more of reduced memories [of what actually happened in the 1930s] than of reality.

We are not so sure. There is an eerie similarity between the present situation and the Great Depression, which boils down to the government’s capability to make a bad economic situation worse by responding inappropriately.

The stock market crash of 1929 marked the onset of the Depression. A nasty shock, no doubt, but it took three government blunders to create an economic disaster – tight monetary policy, the infamous Smoot-Hawley tariff bill, and a major tax increase to balance the budget. The U.S. economy sank into a deep trough as a result, and despite the New Deal programs of the Roosevelt Administration it remained weak until World War II. Big Spending and Easy Money Will Produce a Recovery: The question is whether policy errors will cause another dip, Michael Darda, Wall Street Journal, 5/6/09.

Today, the government could again make blunders that would prolong the current recession or cause another downturn in the near future.

#The monetary policy of the Federal Reserve under Chairman Ben Bernanke, formerly a professor at Princeton University who spent years studying policy errors during the Depression, has been aggressively expansionary – a vast departure from the policies of the 1930s.

The Fed may have gone overboard, however, and it will soon be forced to either (a) rapidly drain the financial system of excess liquidity in order to avert double-digit inflation, or (b) maintain course and allow such inflation to happen. Either way, the economic consequences will be ugly. Get Ready for Inflation and Higher Interest Rates, Arthur Laffer, Wall Street Journal, 6/11/09.

Now the Fed can, and I believe should, do what it must to mitigate the inevitable consequences of its unwarranted increase in the monetary base. It should contract the monetary base back to where it otherwise would have been, plus a slight increase geared toward economic expansion. Absent this major contraction in the monetary base, the Fed should increase reserve requirements on member banks to absorb the excess reserves. Given that banks are now paid interest on their reserves and short-term rates are very low, raising reserve requirements should not exact too much of a penalty on the banking system, and the long-term gains of the lessened inflation would many times over warrant whatever short-term costs there might be.

Alas, I doubt very much that the Fed will do what is necessary to guard against future inflation and higher interest rates. If the Fed were to reduce the monetary base by $1 trillion, it would need to sell a net $1 trillion in bonds. This would put the Fed in direct competition with Treasury's planned issuance of about $2 trillion worth of bonds over the coming 12 months. Failed auctions would become the norm and bond prices would tumble, reflecting a massive oversupply of government bonds.

# No one is considering a tariff hike, to our knowledge, but the Waxman-Markey bill and other environmental proposals under consideration in the name of combating global warming could inflict just as much damage on the economy. The high cost of “green energy,” 5/25/09.

So not only are these proposals misguided over the long term, but negative results (in the form of another economic downturn) could begin to show up before the next election. Now there is an argument that even politicians with a short attention span should be able to appreciate.

# As for raising taxes, the idea seems to be gaining currency despite the president’s promises to the contrary (95% of Americans were supposed to get a tax cut). Moreover, the driving force is to cover the cost of new spending programs – notably the president’s healthcare plan – rather than to reduce the huge deficits that are projected. We interrupt this program for a special announcement, 6/1/09.

Ultimately, higher taxes may be needed. But rushing the increases through could imperil a much-desired economic recovery, and fiscal visionaries should insist – as a minimum – that the proceeds of any tax increases be used for deficit reduction. 6/8/09 letter

Once again, whatever happened to the “greatest financial crisis of our time”? We fear it is still out there waiting to happen. So let’s press the country’s political leaders to keep their eye on the ball, and in the meantime refrain from risky initiatives that would grow the government and further undermine the private sector.

In three previous entries (5/11/09, 5/18/09, 5/25/09), we reported on plans afoot to restructure the U.S. energy sector in the name of averting a global warming crisis.

On the legislative front, the Waxman-Markey bill, which would institute a “cap and trade” regime and much more, has passed the House Energy and Commerce Committee.

On the regulatory front, the Environmental Protection Agency (EPA) proposes to classify CO2 and other greenhouse gas emissions as “pollutants,” thereby justifying regulations to force the reduction of such emissions. Furthermore, the president has announced an accelerated phase-in of higher mileage standards for new motor vehicles, to be accomplished by joint action of the EPA and the Department of Transportation.

The need for action is dubious. These initiatives would be costly and disruptive. The effect on global temperatures would be insignificant.

Fine, fiscal visionaries should prevail – if we can make our case effectively. This entry will offer some suggestions for doing that.

STRATEGY – Resistance to proposals for expanding the reach and cost of government is generally not enough; alternatives must be offered as well. How to win: be proactive, not reactive, 10/29/07.

Instead of simply opposing tax increases, for example, SAFE advocates making the tax law simpler and fairer. Let’s stop tinkering with taxes and reboot the system, 11/19/07.

While opposing the president’s healthcare plan, we have offered a plan for real healthcare reform. SAFE plan for healthcare reform is “government-lite,” 4/6/09.

Although not in favor of government-mandated conservation measures (e.g., mileage standards) to achieve “energy independence,” SAFE favors easing government restrictions on domestic drilling in order to reduce the need for oil imports. To drill or not to drill, that is the question, 7/7/08.

But if ever a government plan deserved a “no” response, the forced reduction of CO2 emissions is it! SAFE does not intend to suggest alternative ways to reduce CO2 emissions; we will concentrate on pointing out deficiencies of the “green energy” proposals on offer.

Who are our opponents? Some people sincerely believe that global warming represents a threat to the human race. There are also business executives, lobbyists, attorneys, and political leaders who hope to benefit from the green energy agenda. For convenience, we will collectively refer to all of the above as the Climate Scare Lobby (CSL).

Alas, the alleged threat of manmade global warming has been so uncritically and repeatedly reported by the mainstream media that many people think it must be true. People who are skeptical about global warming, therefore, may be reluctant to expose themselves to possible embarrassment by asking questions.

TACTICS – Multiple audiences need to be addressed, and the message and mode of delivery will vary depending on the situation. Here are some illustrative examples of efforts to sway public opinion.

# One of the CSL’s favorite talking points is the alleged consensus of scientific opinion about manmade global warming. The implication: “resistance is futile, come out with your hands up.”

In this vein, the president (then president-elect) said the following on 11/19/08:

Few challenges facing America and the world are more urgent than combating climate change. The science is beyond dispute and the facts are clear.

Really? Over 100 scientists (including David Legates of the University of Delaware) signed an answering statement, which the Cato Institute ran as a full-page ad in the New York Times, Washington Post, Chicago Tribune, Washington Times, and Los Angles Times on 3/30/09.

We, the undersigned scientists, maintain that the case for alarm regarding climate change is grossly overstated. Surface temperature changes over the past century have been episodic and modest and there has been no net global warming for over a decade now. After controlling for population growth and property values, there has been no increase in damages from severe weather-related events. The computer models forecasting rapid temperature change abjectly fail to explain recent climate behavior.

Mr. President, your characterization of the scientific facts regarding climate change and the degree of certainty informing the scientific debate is simply incorrect.

#The EPA’s proposed finding that CO2 and other manmade greenhouse gas emissions represent “pollutants” for purposes of the Clean Air Act was published in the Federal Register (25-pages of three-column text) on 4/24/09. The verbiage is dense and hard to follow. We doubt that many people will download and read this document, even though it is posted on the Internet.

Further, the EPA finding references “a technical support document (TSD) which synthesizes major findings from the best available scientific assessments that have gone through rigorous and transparent peer review.” Anyone with the time to locate and read the TSD must be truly dedicated, good luck to them!

Comments may be submitted until June 23, but it would be easy to rationalize that doing so is useless. Having expended the time and effort to create this pile of paperwork, how likely is it that the EPA will give any weight to critical comments?

Unless critics refute the EPA finding, however, it will be cited repeatedly as showing that manmade global warming poses a grave risk, so we decided to make the effort.

Our 6/4/09 letter makes the following points about the EPA’s proposed finding: (1) the gravity of the alleged global warming threat is exaggerated, (2) the principal sources relied on are hopelessly biased, and (3) the EPA should reverse its previous decision and conduct “a new assessment of the scientific literature.”

We cited some solid sources in the letter, which in sum demonstrate that many scientists are skeptical of the manmade global warming theory – and understandably so because the known facts do not support the theory very well.

By way of follow-up, SAFE sent a 6/8/09 letter to members of Congress from Delaware to advise of the position we have taken. Hopefully, contacts of this nature can start to erode Congressional support for the green energy agenda – and Congress has ample power to tell the EPA to “back off.”

# Short of submitting formal comments on the EPA’s proposed findings, there is an easy way to get your “two cents worth” in. The Friends of the U.S. Chamber of Commerce have created a message board on “The Environmental Protection Agency Runs Amuck,” and comments received will be forwarded to Carol Browner, the Administration’s energy czar. Among the comments posted to date:

"I just wish you and I could be alive to see you all with egg on your faces. This is just a theory and not a very good one. Stop all the madness!!!" Posted By: Joyce Neidlinger (Denver, Co) Posted on June 2 @ 3:04 PM

"Assessment reports of the IPCC and CCSP are hopelessly biased. You should have conducted "a new assessment of the scientific literature." Do it over!" Posted By: William Whipple III (Middletown, DE) Posted on June 1 @ 8:37 PM

"Though I am not an expert I am informed. If you look at the hundreds of solar experts, geologist, and climate scientist you find that this is a bogus tax ploy" Posted By: Shawn T. Chriest (Anchorage Alaska) Posted on May 31 @ 4:02 PM

We urge readers to access the link, type in their comments (up to 160 keystrokes), and click “broadcast to feed.” Your comment will instantly show up as the latest in the series, providing you with the satisfaction of having done your part.

#At a 6/2/09 conference in Washington, D.C, sponsored by the Heartland Institute and attended by SAFE director Bill Morris and many others, an 800+ page report was distributed that reviews the scientific literature on global warming and reaches dramatically different conclusions than did the 2007 assessment report of the UN-sponsored International Panel on Climate Change (IPCC) [one of the EPA’s key sources]. Climate Change Reconsidered: The Report of the Nongovernmental International Panel on Climate Change [NIPCC], Craig Idso and S. Fred Singer, The Heartland Institute, 2009.

On the most important issue, the IPCC’s claim that “most of the observed increase in global average temperatures since the mid-twentieth century is very likely due to the observed increase in anthropogenic greenhouse gas concentrations [emphasis in the original],” NIPCC reaches the opposite conclusion – namely, that natural causes are very likely to be the dominant cause. Note: We do not say anthropogenic greenhouse gases (GHG) cannot produce some warming or has not in the past. Our conclusion is that the evidence shows they are not playing a substantial role.

As for why this project makes sense and the results should be heeded, the following explanation is offered.

When a nation faces an important decision that risks its economic future, or perhaps the fate of the ecology, it should do the same. It is a time-honored tradition in science to set up a “Team B,” which examines the same original evidence but may reach a different conclusion.

#The green energy agenda would entail huge costs, whether manifested in higher taxes, higher prices, or a reduced level of economic output. This is not a favored theme of the CSL, so fiscal visionaries should ensure that the public is informed of the economic realities. See, e.g., Son of Waxman-Markey: More Politics Makes for a More Costly Bill, William Beach et al., Heritage Foundation, 5/18/09.

By 2035, says the Heritage team, the Waxman-Markey bill (as revised) would (a) reduce aggregate gross domestic product (GDP) by $9.6 trillion; (b) destroy 1.1 million jobs on average (2.5 million jobs in peak years); (c) raise inflation-adjusted electricity rates by 90%, inflation adjusted gasoline prices by 74%, and residential natural gas prices by 55%; (d) raise an average family’s annual energy bill by $1,500; and (e) increase inflation-adjusted federal debt by 26% ($29,150 per person).

Hmm, seems that people will need to make up their minds just how worried about global warming they really are.

#As suggested earlier, some people may be supporting green energy for reasons that are not completely altruistic. Bjorn Lomborg, a well-known global warming skeptic, reflects on the activities of firms that stand to benefit, including appearances at international climate change forums and the growing use of high-powered lobbyists to jockey for preferential treatment. The Climate-Industrial Complex, Wall Street Journal, 5/22/09.

U.S. companies and interest groups involved with climate change hired 2,430 lobbyists just last year, up 300% from five years ago. Fifty of the biggest U.S. electric utilities -- including Duke [Energy] -- spent $51 million on lobbyists in just six months.

Some observers question whether the opposition party, which generally considers itself as pro business, will stand up to corporate boosters of green energy mandates and subsidies. Cap-and-trade as corporate welfare, Timothy Carney, Washington Examiner, 5/21/09.

Can Congressional Republicans, fond of calling themselves "pro-business," and accustomed to defending corporate America from Ralph Nader-type attacks, convincingly argue against corporate-welfare draped in green?

Well, that is up to the opposition party, but we don’t think they have much choice if they hope to be on the winning side in this debate.

#Science & Public Policy Institute – There is some fascinating information on the SPPI Website, such as:

•A 5/27/09 account by Joseph D’Hippolito of how “Al Gore Rakes in the Green” from crusading against global warming. It is alleged that the former vice-president’s net worth has grown from $2 million to $100 million since he left government service.

•Announcement of the results of a study by Lord Christopher Monckton, which allegedly demonstrated that IPCC computer models overstated CO2’s effect on global temperatures by 500-2000%. Proof: There is no climate crisis, SPPI, 7/15/08.

•Several essays by Lord Monckton, an eminent scientist with a flair for writing and speaking, including 35 Inconvenient Truths: The errors in Al Gore’s movie, 10/18/07.

Some of the foregoing initiatives required enormous time, energy and expertise, notably the NIPCC report and the Heritage economic impact study.

Others were simple, such as posting comments about the proposed EPA findings on a message board.

So if you are not able to take on one of the big jobs, find alternative ways to promote a rational understanding of the manmade global warming theory.

“Many hands make light work,” as the saying goes, and this debate can be won if we all pitch in and make things happen.

We have it on the highest authority that the U.S. government is “out of money,” and everyone knows what that should mean – adjustments on the spending side. Here is an old story, which makes the point.

So we decided to cover the breaking story. Tune in next week for suggestions on combating the climate scare lobby.

Statement – The president’s comment was made during a C-SPAN interview that aired on May 22. He had laid out his ideas for healthcare reform, and host Steve Scully asked a question: “At what point do we run out of money?”

“Well, we are out of money now,” the president said, and “operating in deep deficits.” He attributed the situation to “the crisis that we’ve seen” and to “our failure to make some good decisions on healthcare over the last several decades.”

As for solutions, the president did not speak of deferred initiatives, spending cuts, or even tax increases. Instead, he advocated making healthcare “investments” now “that are going to reduce costs, even if they don’t reduce them this year or next year, but 10 years from now or 20 years from now.”

Our view – The statement about being out of money may not be literally true, but things are headed in that direction. And rapid growth in healthcare spending has been a major factor in the deterioration of the government’s fiscal situation.

Thus, Medicare + Medicaid outlays rose from 4% of federal spending in 1968 to 20% in 2008, with no end in sight. Citizen’s Guide, The Peterson Foundation, March 2009.

As for the president’s healthcare plan helping to solve the government’s fiscal woes, however, forget it. Providing healthcare insurance for an additional 46 million Americans would not come cheap, and the president’s 10-year budget projection identifies precious little in the way of offsetting cost savings. Healthcare plan will not pay for itself, 3/23/09.

Furthermore, action is needed now to avert the “fiscal meltdown” SAFE has been warning about. Not the current recession, which is hopefully waning, but a crisis due to a loss of confidence in the financial soundness of the U.S. government, which would lead to curtailment of credit, send interest rates soaring, and create a well nigh irresistible temptation to resort to printing money.

Such situations have developed elsewhere (from Argentina to Zimbabwe), with disastrous results. Avoiding a similar fate for the United States is far more important, in our opinion, than reducing the number of Americans without healthcare insurance.

No one can say when the U.S. government’s turn might come, but there has been fiscal irresponsibility aplenty and international investors have clearly taken notice.

#Federal deficits for FY 2009 and FY 2010 are now estimated to total $3.1 trillion, $176 billion higher than the corresponding estimates in February. Deficits soar even with rosy Obama budget assumptions, David Lightman, McClatchy, 5/11/09.

#Edmund Conway of the UK Telegraph suggests in a 5/26/09 blog post that the next stage of economic/financial turmoil will be “a sovereign debt crisis.” Spain and Ireland have been downgraded already, the UK and other European countries may follow, and “even the US’s AAA status is under question.”

#Dallas Federal Reserve Bank President Richard Fisher says a “perception of risk” has been created by the Fed’s purchases of Treasury bonds, etc. This practice is weighing on the minds of financial officials in China, Japan, Singapore and Korea. Don’t Monetize the Debt, Mary O’Grady, Wall Street Journal, 5/23/09.

He has just returned from a trip to China, where "senior officials of the Chinese government grill[ed] me about whether or not we are going to monetize the actions of our legislature." He adds, "I must have been asked about that a hundred times in China."

#Despite Fed purchases of U.S. Treasury bonds, the rates on these securities and other debt obligations are trending up – which market observers attribute to fears of renewed inflation. Bond Vigilantes Confront Obama as Housing Falters, Liz McCormick and Daniel Kruger, Bloomberg.com, 5/29/05.

“The bond-market vigilantes are up in arms over the outlook for the federal deficit,” said Edward Yardeni, who coined the term in 1984 to describe investors who protest monetary or fiscal policies they consider inflationary by selling bonds. He now heads Yardeni Research Inc. in Great Neck, New York. “Ten trillion dollars over the next 10 years is just an indication that Washington is really out of control and that there is no fiscal discipline whatsoever.”

Other skeptics – We are not the only ones who think the president’s healthcare plan would boost government spending, and question assertions to the contrary.

#Star Parker, president of the Coalition on Urban Renewal & Education, says “we already have massive government involvement in healthcare,” which led to a big expansion in healthcare spending. Why add fuel to the fire?

In 1960, 60 percent of Americans' healthcare expenditures were out of their own pocket. Today it is 12 percent. So massive growth in healthcare spending and cost escalation correlates directly with increasing government involvement in this marketplace and decreasing consumer control over their own expenditures. Does this tell you something?

#Michael Tanner of the Cato Institute supports the idea of healthcare reform, but he says the president’s plan would result in de facto rationing, the demise of most private insurance plans, and at least $1.5 trillion in higher federal outlays over the next 10 years. The Obamacare to Come, National Review, 5/21/09.

#Financial commentator Larry Kudlow dismisses the cost-cutting claim out of hand. Obama’s Public Health[care] Plan Will Bankrupt the Nation, Townhall.com, 5/14/09.

Does anybody really believe that adding 50 million people to the public health-care rolls will not cost the government more money? About $1.5 trillion to $2 trillion more? At least. So let’s be serious when evaluating President Obama’s goal of universal health care, and the idea that it’s a cost-cutter. Can’t happen. Won’t happen. Costs are going to explode.

Supporters – Business Week says “covering the uninsured could add anywhere from $1 trillion to $2 trillion to the federal budget over 10 years.” Three payment options are identified: raise taxes, cut payments to medical providers, or ration care. Healthcare Reform: Who Pays Is So Taboo, Catherine Arnst, 5/20/09.

Omission of cost savings from the list, plus discussions of three politically unpalatable alternatives, shows that no one really believes the president’s plan would pay for itself.

RAISE TAXES - An increase in the Federal excise tax on tobacco was included in the SCHIP expansion bill enacted in early February to pay for the additional spending.

Tax increases ($318 billion over 10 years, by tinkering with income tax deductions for upper income taxpayers) were proposed in the Fiscal Year 2010 budget proposal, with the proceeds to be earmarked for the cost of the president’s healthcare plan. “A New Era of Responsibility,” Office of Management and Budget, 2/26/09, pp. 29-30.

On May 20, the Senate Finance Committee (chaired by Senator Max Baucus, D-Montana) issued a 39-page report on “Financing Comprehensive Healthcare Reform.” The prime focus is on ways to raise taxes, e.g., (a) restrict tax exclusion for employer-provided healthcare benefits, (b) repeal itemized deductions for medical expenses, (c) raise excise tax on alcoholic beverages, and (d) impose an excise tax on sugary drinks.

Finally, there is said to be growing interest in a national sales tax or “value added” tax (VAT) – not to replace the income tax (FairTax proposal) but on top of it. Once Considered Unthinkable, U.S. Sales Tax Gets Fresh Look, Lori Montgomery, Washington Post, 5/27/09.

A White House official said a VAT is "unlikely to be in the mix" as a means to pay for health-care reform. "While we do not want to rule any credible idea in or out as we discuss the way forward with Congress, the VAT tax, in particular, is popular with academics but highly controversial with policymakers," said Kenneth Baer, a spokesman for White House Budget Director Peter Orszag.

Still, Orszag has hired a prominent VAT advocate to advise him on health care: Ezekiel Emanuel, brother of White House chief of staff Rahm Emanuel and author of the 2008 book "Health Care, Guaranteed." Meanwhile, former Federal Reserve chairman Paul A. Volcker, chairman of a task force Obama assigned to study the tax system, has expressed at least tentative support for a VAT.

"Everybody who understands our long-term budget problems understands we're going to need a new source of revenue, and a VAT is an obvious candidate," said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. "It's common to the rest of the world, and we don't have it."

The idea seems to be that the government can spend more money on healthcare so long as taxes are raised by a like amount. Ideally the burden would fall on people with more money than they need, or those who are running up healthcare costs with unhealthy habits, but a sales tax on everyone would do in a pinch.

The fiscal problem is huge, however, and there is just so much the public is willing to pay in additional taxes. Even if taxes were to be raised, the proceeds should be allocated to reducing deficits – not funding new spending programs.

Also, this could be a very bad time for a big U.S. tax increase. [Dr. Nouriel] Roubini says U.S. economy may dip again next year. Reuters.com, 5/28/09

So we are not about to buy into a tax fix to keep the spending spree going, and “Mainstream America” may not be on board either. 77% See Politicians Unwillingness to Cut Government Spending as Bigger Problem Than Voter Resistance to Tax Hikes, Rasmussen Reports, 5/22/09.

As is frequently the case, the gap between Mainstream America and the Political Class [government employees and lobbyists?] on the question is wider than that between political parties. While 90% of Mainstream Americans see the bigger problem as a failure to cut government spending, the Political Class is evenly divided over whether voters or politicians are more to blame.

On May 11, representatives of the healthcare industry pledged to shave increases in healthcare spending (their revenues) by $2 trillion over the next 10 years. Not all the savings would go into the federal government’s coffers, but still this would represent a big step (if the industry delivered) in financing the president’s healthcare plan. Health savings first step in long fight, Washington Times, 5/12/09.

There is an open question as to what is going on, however, and the real question may be who is getting fooled.

#The Wall Street Journal characterizes this “vague, probably illusory promise” as a Faustian bargain, which in time would “result in price controls and restrictions on care.” Signing on to an Obama Dream, 5/13/09.

The implicit assumption in the providers' deal announced [Monday] seems to be that the private companies will do the price controlling so the government won't have to do it for them. But when the savings prove illusory, as in the past, the feds will step in and order them to do so.

#Columnist Timothy Carney says healthcare insurers and other players may hope to get more out of the deal than they committed to put into it, i.e., the real loser might be the general public. Washington Examiner, 5/11/09.

1) Some of the proposals include a federal mandate that individuals maintain health insurance. Yes, Ted Kennedy wants to require you to buy Blue Cross's product, and Paul Krugman is wondering why Blue Cross is supporting Ted Kennedy.

2) All regulation creates a barrier to entry. Adding costly regulations and new mazes of government bureaucracy, while making top-shelf lobbyists a must keeps out new competitors.

#Michael Cannon of Cato Institute sees the industry pledge as a gambit to pacify the Congressional Budget Office. Healthcare Reform? Maybe Next Year, NPR.org, 5/11/09.

Senate Finance Committee chairman Max Baucus (D-MT) has spoken openly about getting the CBO to change its mind. If reformers can say that even the industry is committed to achieving savings with these reforms, that might make it easier to get the CBO to relent, and allow health care reform to pass without the necessary payment cuts or tax increases — even if there's still no evidence that the assumed savings will appear. Don't call it cooking the books. Call it the new math of universal coverage.

Don’t expect supporters of the president’s healthcare plan to talk about “rationing,” but Larry Summers, the president’s chief economic adviser, came close in an April 19 appearance on Meet the Press. Rationing healthcare, Washington Times, 4/21/09.

"Whether it's tonsillectomies or hysterectomies ... procedures are done three times as frequently [in some parts of the country than others] and there's no benefit in terms of the health of the population. And by doing the right kind of cost-effectiveness, by making the right kinds of investments and protection, some experts ... estimate that we could take as much as $700 billion a year out of our healthcare system."

“Let’s be clear,” the newspaper’s editorial continues, U.S. healthcare expenditures could not conceivably be cut by 30% per year under a government-managed plan without rationing.

There is plenty of waste in healthcare spending, which needs to be eliminated somehow. We see the solution (basically) as patient empowerment, but rationing could work. If that’s the game plan, however, this should be acknowledged up front so the public can make an informed decision.

As of this writing, efforts to put the president’s healthcare plan over the top appear to be gearing up – while leaving the government’s dire fiscal situation to be dealt with down the road. Obama says healthcare changes must come this year, Phillip Elliott, Breitbart.com, 5/28/09.

The president said the costs of the nation's $2.5 trillion health care system are crushing families and businesses and pose the largest threat to the economy.

The White House is leaving it to lawmakers to work out the details of a health care plan, but Obama has said it should ensure choice and lower costs, while extending coverage to the 50 million Americans now uninsured. The [10-year] cost of accomplishing that has been estimated around $1.5 trillion, and figuring out how to pay is emerging as a major challenge for Congress and the White House.

Last week’s entry presented three arguments against the proposed cap and trade system: (a) the necessity of curbing greenhouse gas (GHG) emissions is dubious, (b) a cap and trade system would be a nightmare to administer, and (c) a carbon tax would be simpler and more effective, but has little support because the cost is readily apparent.

If it can be shown that the cap and trade system would be costly as well, a disguised carbon tax if you will, that should clinch our case. But making this claim is not enough; specifics must be provided. That is what we will attempt to do in this entry.

Context: Cap and trade is one of several energy policies that have been adopted or proposed in the name of reducing oil imports, conserving energy resources, and/or combating global warming. Here are some others:

• The December 2007 energy bill mandated higher mileage standards for new motor vehicles (35 miles per gallon on average for automobiles and light trucks), to be achieved by 2020. The bill also mandated growing use of biofuels and a switch to compact fluorescent (CFL) light bulbs. Bush signs energy bill, CNN Money, 12/19/07.

• On the negative side of the ledger, federal and state restrictions on domestic drilling for oil and gas in unexploited areas (principally offshore and in Alaska), reinforced by nonstop environmental lawsuits, have contributed to rising oil imports. 7/7/08 entry. Removal of these obstacles is not being pushed by the Administration.

• Similarly, an expansion of the nuclear power industry cannot be expected unless and until an understanding is reached about the disposal or reprocessing of nuclear waste. (8/4/08, 8/11/08, 8/18/08 entries). Moving in the other direction, the Administration recently pulled the plug on the proposed nuclear waste depository at Yucca Mountain, Nevada, after two decades of study and expenditures of $11 billion, without identifying an alternative. Nuclear chief says Obama shuns science, Washington Times, 4/23/09.

• In addition to establishing a cap and trade system, the Waxman-Markey bill would mandate and/or subsidize production of electricity from renewable energy sources (Sec. 101); plug-in electric drive vehicles (Sec. 122); “smart grid” distribution of electricity (Sec. 144); energy-efficient buildings (Sec. 201), lighting fixtures (Sec. 211), and household appliances (Sec. 212); energy-efficient industrial plants (Sec. 241); etc.

• On May 19, the president announced that a reduction of GHG emissions for new motor vehicles will be achieved by moving up the already established 35 miles per gallon mileage standard (average for cars and light trucks) from 2020 to 2016. The Department of Transportation (DOT) and Environmental Protection Agency (EPA), which apparently have the requisite regulatory authority under existing law, would jointly take this action.

De facto tax: With a carbon tax, it would be relatively easy to track the revenues being collected by the government and therefore taken from the private sector. Divide the total tax revenues by the population or number of households for a figure people can relate to.

The opposition party attacked the cap and trade proposal in this fashion, saying it would cost American households an average of $3,100 per year. Cap and Trade, a “Declaration of War,” Say Republicans, CBSNews.com, 5/1/09.

According to [House Minority Leader John] Boehner's office, the $3,100 number is based on a Massachusetts Institute of Technology (MIT) study released earlier this year that examined cap-and-trade legislation from 2007. Republicans believe the new legislation for 2009, in its final form, will be similar to the 2007 bill.

The $3,100 per household annual cost figure was disputed from the start, and it is no longer operative because 85% of GHG permits will initially be given away. Proposed Allowance Allocation, Congressmen Waxman and Markey, 5/14/09.

Assuming that $465 ($3,100 x 15%) per household would be a ballpark estimate of the residual tax effect, the figure would be too small to impress anyone. Opponents of the cap and trade proposal should make other arguments.

Energy costs: For the foreseeable future, fossil fuels will represent the low cost sources of energy for running motor vehicles and generating electricity. Biofuels are not about to beat oil on a cost basis for powering cars, nor will wind and solar power be as cheap as coal-fired power. Nuclear power might be cost competitive, but it is not on the “green” agenda.

A forced transition to alternative energy sources would inflate energy prices – whether the price increases were passed on to consumers or subsidized by U.S. taxpayers. Either way, overall economic activity would be depressed, with net job losses (more regular jobs lost than “green” jobs created) and less tax revenue for the government.

By 2035, the Heritage team reported on 5/18/09, the Waxman-Markey bill (as revised) would (a) reduce aggregate gross domestic product (GDP) by $9.6 trillion; (b) destroy 1.1 million jobs on average (2.5 million jobs in peak years); (c) raise inflation-adjusted electricity rates by 90%, inflation adjusted gasoline prices by 74%, and residential natural gas prices by 55%; (d) raise an average family’s annual energy bill by $1,500; and (e) increase inflation-adjusted federal debt by 26% ($29,150 per person).

These costs are for the cap and trade program, without regard to other provisions of the Waxman-Markey bill. The “economic cost of cap and trade hobbled further by mandates” would likely be higher.

The Washington Examiner cited the Heritage findings in a 5/18/09 editorial, calling the Waxman-Markey bill “a prescription for wrecking American prosperity for decades to come.”

Thinking along somewhat similar lines, perhaps, the Congressional Budget Office is expected to “score” the Waxman-Markey bill as either a major tax increase or a massive expansion of the federal government (no kidding!). Climate-bill foes likely to seize on CBO’s scoring, Washington Times, 5/19/09.

We also appreciated an off the cuff reaction from Charlie Munger, the long-time business partner of Warren Buffet who normally lets the “Sage of Omaha” do the talking. CNBC interview, 5/1/09.

Well, I think it would be monstrously stupid to do [cap and trade] right now. It would be a huge shock to the economy, and it wouldn't accomplish very much. Given the fact that the vast majority of the [pollution], or, rather, the CO2 is coming from a place like China. It would almost be demented if we would rush into cap and trade right now in the middle of this economic crisis.

Who’s in charge: Another drawback of cap and trade and the “green” agenda in general, hard to quantify but important nevertheless, is the shift of decision-making power from business leaders who are (or should be) focused on serving customers, running their businesses efficiently, and making money for their shareholders, to government leaders who, being in the reelection business, are more interested in favorable headlines (e.g., Senator X supports bold new plan).

Business firms face competition, they must comply with government regulations (actual or at times prospective), and they work with their own money. There is little to keep government agencies on their toes except public scrutiny, and the public has a short attention span. No wonder the track record of government in managing business operations is poor, dating back to examples like the nationalization of the phone system during World War I (it was turned over to the post office or “postalized”). Why Government Can’t Run a Business, John Gordon, Wall Street Journal, 5/20/09.

We do not mean to suggest the private sector is above reproach. As former Federal Reserve Chairman Paul Volcker observed in October 2008, this country could probably do with “more civil engineers and electrical engineers and fewer financial engineers.” After all, civil and electrical engineers design and build needed structures and facilities. By creating derivatives and leveraging balance sheets to the max, financial engineers may have done more harm than good.

But it might equally well be suggested that there is a surplus of lawyers and bureaucrats in this country. The work they spawn is time-consuming, expensive, and largely non-productive. Far from allowing the number of people engaged in such activities to keep increasing, it might be beneficial to reverse the trend.

Moreover, government intervention in the workings of the economy is a distraction. Before you know it, corporate executives will be spending more time in Washington, D.C. seeking favors and handouts than they do working with customers, suppliers, and people within their own companies to achieve business results in the traditional way.

A number of big companies (e.g., BP America, Conoco Phillips, Dow, DuPont, Ford, GE, and GM) have joined the U.S. Climate Action Partnership. Perhaps this reflects genuine concern about global warming, but these companies may also envision government-supported business opportunities. Thus, the USCAP consensus report is described as

. . . a direct response to federal policymakers who recognize, as we do, that well-crafted legislation can spur innovation in new technologies, help create jobs and provide a foundation for a vibrant, low-carbon economy.

The Climate Exchange that has been established in Chicago would grow like Topsy if the U.S. established a cap and trade system. No doubt many financial firms would love to participate in or facilitate the trading of carbon emission permits; this could be the biggest thing since subprime mortgages and credit default swaps.

Power companies are potential supporters too, provided they get enough emission permits for free. The same goes for companies interested in selling alternative energy equipment, “green” investment firms, and hired lobbyists.

Thus, as global warming skeptic Bjorn Lomborg puts it, an “unholy alliance” is emerging of “self-interested businesses, grandstanding politicians and alarmist campaigners.” The Climate-Industrial Complex, Wall Street Journal, 5/22/09.

The decline and fall of the Big Three represents a cautionary tale. While the U.S. auto companies made plenty of mistakes over the years, government policies hurt too – notably the mileage standards for new motor vehicles that began during the Carter Administration. Don’t bail out the Big Three, but an apology would be nice, 11/17/08.

Against our advice, the last Administration advanced bailout funds to Chrysler and General Motors (Ford managed to do without). Additional funds were provided by the current Administration, but Chrysler had to declare bankruptcy anyway and General Motors is expected to follow suit around the end of May.

Chrysler will probably have been acquired by Fiat, when the dust settles, and the government will control General Motors. The UAW will own big blocks of stock in both companies. Although nominally remaining independent, Ford will have little interest in rocking the boat. So the government will be in a position to dictate strategic decisions of the “Big Three,” including the kind of cars they will be making. Many observers fear the consequences. See, e.g., Federal control of General Motors is game changer, Daniel Howes, Detroit News, 4/29/09.

Government Motors could be a bulwark of infinitely patient capital married to major stakeholders whose goals aren't shareholder return, operational efficiency and market penetration but the social goals of maximized employment, environmental trend-setting and political (damage) control.

The new pecking order was apparent on May 19, when the president announced the accelerated phase-in of the new mileage standards. Among those present, and apparently all in favor, were Secretary of Transportation Ray LaHood, EPA Administrator Lisa Jackson, several state governors including Arnold Schwarzenegger of California, UAW President Ron Getelsfinger, and unnamed representatives of ten auto companies (U.S. and foreign).

Why did the auto companies accept this announcement so meekly? First, there was a silver lining, namely the threat of three conflicting sets of regulations (by the DOT, the EPA, and a group of states led by California) was being replaced by a single set. Second, although the president did not mention it, there was an understood quid pro quo – sizable tax subsidies for purchasers of fuel-efficient cars. Obama at the Auto Buffet, Holman Jenkins, Wall Street Journal, 5/21/09.

So far, the Obama administration has yet to lay out its magical thinking on how the homegrown auto makers are to become "viable" when required to subordinate every auto attribute that consumers find desirable in favor of achieving a passenger-car average of 39 miles per gallon [35.5 miles per gallons is the average for cars and light trucks] by 2016. Nonetheless the answer has quietly seeped out: Taxpayers will write $5,000 or $7,000 rebate checks to other taxpayers to bribe them to buy hybrids and plug-ins at a price that lets Detroit claim it's earning a "profit" on its Obamamobiles.

Fuel-efficient vehicles are not necessarily bad. (The author likes his Volkswagen Jetta diesel, which averages 50 miles per gallon.) But this is America, and buyers should be able to choose the type of vehicles they want. Moreover, the Big Three can hardly be faulted for tailoring their product lines to meet market demand.

Whether legal or not, the proposed regulations would be unwise. And the U.S. auto companies would continue to struggle, probably resulting in a continuing drain on the U.S. Treasury.

To meet the mileage requirements, motor vehicles would be made smaller, lighter and less powerful. The resulting cars would be more dangerous to drive than big cars, so there would be more traffic deaths. Fuel efficient cars can kill you, Washington Examiner, 5/20/09.

And consumers dissatisfied with the new cars would tend to keep their old cars on the road longer, thereby slowing the reduction of real pollutants such as ground level ozone, particulate matter, carbon monoxide, and sulfur dioxide. Light Cars Are Dangerous Cars: And other unintended consequences of strict fuel-economy standards, Robert Grady, Wall Street Journal, 5/22/09.

Whether we like it or not, the Waxman-Markey bill has strong support in the majority party. The House Energy and Commerce Committee approved it on May 21, by a 33-25 vote. Panel OKs cap-and-trade proposal, Washington Times, 5/22/09.

As for tightening the mileage standards for motor vehicles, the only safeguard are the notice and hearing requirements to which the DOT and EPA are subject.

So how can SAFE and those who agree with us fight back? We’ll present some ideas in next week’s entry, and in the meantime we would welcome your suggestions.

Last week, we characterized EPA regulation of CO2, etc. as “a bad idea from any angle.”

Global warming threat exaggerated – not proven that manmade greenhouse gases are the main cause – economic tradeoffs would be ignored – regulatory process is ponderous and political – lack of Congressional accountability.

With a legislative approach, members of Congress would presumably consider the economic interests of their constituents. They would also, at least in theory (the time lag might provide cover in practice), be accountable for the results.

So would a forced cutback in greenhouse gas (GHG) emissions go better if Congress handled matters? Don’t count on it!

1. It remains debatable whether a reduction in GHG emissions should be forced instead of allowing energy sources (fossil fuels, solar, wind, or nuclear) to be chosen based on availability, cost and performance.

Congress has heard plenty of testimony about the gravity of the manmade global warming threat, which will supposedly necessitate a switch from fossil fuels to renewable energy sources. Consider these extracts from testimony before the House Energy and Commerce Committee (HECC) during the week of April 24.

#EPA Administrator Lisa Jackson: Legislation is needed “to tackle greenhouse-gas pollution, which threatens to leave to our children and grandchildren a diminished, less prosperous, less secure world.”

#Secretary of Energy Steven Chu: “There are two dangers, either one of which could dramatically weaken America’s future. The first is that the world will fail to take action on climate change in time to prevent its worst potential effects. The second is that the United States will fail to seize this opportunity to lead, and the new clean energy jobs will be created overseas rather than in America.”

#Former Vice-President Al Gore: “I am here today to lend my support to one of the most important pieces of legislation ever introduced in the Congress. I believe this legislation has the moral significance equivalent to that of the civil rights legislation of the 1960’s and the Marshall Plan of the late 1940’s.”

Among the ills that Gore attributed to global warming: melting of the Greenland ice sheet, increased frequency of glacial earthquakes, CO2 pollution changing the chemistry of the oceans, Canadian forests “contributing CO2 to the atmosphere rather than absorbing it,” and more intense hurricanes.

Not everyone agrees there is a climate crisis, and efforts were made to have a well-known global warming skeptic (who challenged Gore to a televised debate in 2007 and is still awaiting a response) testify before the HECC. However, these efforts were rebuffed. “The House Democrats don't want Gore humiliated,” suggested Lord Christopher Monckton of the UK, “so they slammed the door of the Capitol in my face.” Climate Depot.com, 4/23/09.

Nevertheless, there has been a fair amount of testimony questioning the gravity of the manmade global warming threat and/or suggesting less disruptive ways to address it.

# Lord Monckton assured a subcommittee of the House Ways and Means Committee on March 12 that “any restriction on the emission of carbon dioxide is unnecessary.”

It is simple to establish theoretically, and has been so established, that the UN’s climate panel has exaggerated the true effect of carbon dioxide enrichment on global temperature sevenfold. To confirm that theoretical result it is simple to verify empirically, and has been so verified by direct and repeated satellite observation, that the diminution over time in the outgoing long-wave radiation from the Earth is one-seventh of that which the UN’s computer games had been instructed to predict. Carbon dioxide is accumulating in the air at less than half the rate the UN had imagined. Not one of its games had predicted the rapid global cooling of the past seven years. Sea surface temperatures have fallen for five years. Sea level has not risen for three years, and is predicted to rise by little more than a foot this century. Worldwide hurricane intensity in October 2008 was at its least for 30 years. Global sea ice shows little trend in 30 years. The ice sheets of Greenland and Antarctica are thickening. The Sahara is greening. There is no “climate crisis”. The correct policy response to the non-problem of “global warming” is not to cap or tax carbon dioxide emissions. It is to have the courage to do nothing.

#William Happer of Princeton University offered another useful viewpoint in his testimony before the Senate Energy Committee on 2/25/09. Professor Happer agrees that (a) global warming has been occurring (albeit with intermittent reversals, such as the last 10 years during which “warming has ceased”), and (b) manmade CO2 emissions have contributed. In his opinion, however, the warnings of catastrophic consequences are “wildly exaggerated” (much as Prohibition advocates once exaggerated the evils of alcohol) and more CO2 in the atmosphere may on balance “be good for mankind.”

#Former Speaker of the House Newt Gingrich delivered the primary response to Al Gore’s testimony before the HECC. While not challenging the desirability of importing less oil or reducing GHG emissions, Gingrich panned the Administration’s plans for addressing these issues.

Wrong for national security - - - wrong for the economy - - - would “inevitably lead to fraud and corruption.” The right answers, said Gingrich, would include domestic drilling for oil and gas, more nuclear power plants (the Administration is pushing wind and solar energy), and aggressive support for the new energy technologies that would be required to effect the reductions in GHG emissions that are contemplated.

2. A cap and trade system might or might not be effective to reduce GHG emissions. In any case, it would be a nightmare to administer.

As a starting point, here are the basic elements of the cap and trade concept – which represents a variation on the theme of setting and enforcing limits on GHG emissions.

• Issue GHG emission permits to participants in the system (households and small businesses would be exempted), which they can either use or sell.

• Participants that can reduce GHG emissions inexpensively will presumably do so, while selling their permits to firms with higher reduction costs.

• Gradually cut the number of permits, thus forcing attainment of the reduction targets.

There are some difficult design issues. Where would the line be drawn between big and small business? How many emission permits would be issued? Would recipients be charged for permits or get them for free? Would the system provide a windfall for firms that have never tried to reduce their GHG emissions, and therefore can reduce them cheaply now (while selling their permits for more)?

Set the bar too high and a cap and trade system would tank the economy. Set it too low and nothing would happen, as was reportedly the result of initial stabs at cap and trade by the European Economic Community. Cap and Trade Woes in Europe, Don Irvine (citing a New York Times report), 6/20/08.

This week, the European Environment Agency reported that emissions from factories and plants that trade pollution permits rose 0.4 percent in 2006 over the previous year, and 0.7 percent in 2007, the first two years of the system’s operations.

The European program has been beset by friction between countries, lobbying by energy-intensive industries, and reluctance of firms to invest in cleaner technologies until it becomes clearer how the rules of the game will evolve.

Would similar issues arise with a cap and trade system in this country? You bet, as has been amply demonstrated by the discussions going on in Washington.

In late March, Congressmen Henry Waxman (D-CA) and Edward Markey (D-MA), who respectively chair the HECC and a subcommittee thereof, released a draft bill to launch a cap and trade system and accomplish related purposes. A target was proposed of eliminating 83% of GHG emissions by 2050, with interim targets as shown in the table below. Highlights of draft bill to curb global warming, Washington Times, 3/31/09.

Strong opposition to the Waxman-Markey bill surfaced, notably from states that produce coal, are heavily reliant on coal-produced electric power, or have major manufacturing plants or oil refineries. Much of the opposition came from members of the majority party. Global Warming Overreach, Kimberly Strassel, Wall Street Journal, 4/24/09.

During opening statements, [Congressman Jim Matheson from Utah] detailed 14 big problems he had with the bill, and told me later that if he hadn't been limited to five minutes, "I might have had more." Mr. Matheson is one of about 10 moderate committee Democrats who are less than thrilled with the Waxman climate extravaganza . . .

Messrs. Waxman and Markey scrambled to win over the holdouts. Although Waxman denied that he was offering special deals, others saw things differently. To get votes, Waxman offers cap-and-trade breaks, Susan Ferrechio, Washington Examiner, 4/23/09.

On May 5, with the bill apparently stalled, a delegation of HECC members from the majority party went to the White House for a 90-minute meeting. There the president reportedly told them “to put together an energy bill that does not hurt low-income consumers or the ability of U.S. industries to compete internationally.” Dems hint energy compromise could be near, Susan Ferrechio, National Examiner, 5/6/09.

A revised version of the Waxman-Markey bill (900+ pages) was released on May 15. The reduction targets for GHG emissions remain intact, but it is now reported that the “revised plan would give away 85 percent of the plan’s carbon permits for free.” Energy deal clubs Obama tax hopes, Washington Times, 5/16/09.

Mr. Obama had campaigned for a plan to auction all of the carbon permits under the system to avoid problems encountered in the European Union after regulators gave away all of their permits to affected industries without charge.

Mr. Obama was banking on projected revenues of some $646 billion from the cap-and-trade auctions to cover his promised tax cuts over seven years, but the House proposal looks as if it will pull in significantly fewer dollars for the federal government.

Are all the controversies about the mechanics of the cap and trade system now resolved, paving the way for quick Congressional passage? We doubt it, because this proposal still has some glaring weaknesses.

#Households and small businesses emit a lot of GHGs in the aggregate, yet they are effectively exempted from the proposed cap.

#No matter how artfully the system was adjusted, there would still be winners and losers between the regions/industries/plants affected – not to mention that well-connected insiders could and would game the system. Talk about Enron on steroids!

#If manmade global warming is a real problem, it applies on a global basis. There would be little point in making a big push to cut back on the use of “dirty” fossil fuels in this country if China, India, et al. continued to build coal-fired power plants.

And if the United States levied import duties on goods from countries that were not curbing their GHG emissions, as Energy Secretary Steven Chu suggested in March Congressional testimony, the fallout could be severe. Cap and trade war, Wall Street Journal, 3/30/09.

The Chinese certainly heard Mr. Chu, with Xie Zhenhua, a top economic minister, immediately responding that such a policy would be a "disaster" and "an excuse to impose trade restrictions." Beijing's reaction shows that as a means of coercing international cooperation, climate tariffs are worse than pointless. China and India are never going to endanger their own economic growth -- and the chance to lift hundreds of millions out of poverty -- merely to placate the climate neuroses of affluent Americans in Silicon Valley or Cambridge, Massachusetts. And they certainly won't do it under the threat of a tariff ultimatum.

3. A tax on fossil fuels (aka “carbon tax”) would be simpler and more effective than a cap and trade system, but a “hard sell” politically.

Some environmentalists favor a carbon tax because it would operate more predictably than cap and trade, require far less regulatory oversight, and cover all energy consumers. Putting a Price on Carbon: An Emissions Cap or a Tax, Yale environment 360, 5/7/09.

Jeffrey D. Sachs, director of the Earth Institute at Columbia University. – A straightforward carbon tax has vast advantages. It can be levied upstream at a few dozen places — at the wellhead, the mine face, and the liquid natural gas depot — rather than at thousands or tens of thousands of businesses. A carbon tax covers the entire economy, including automobiles, household use, and other units impossible to reach in cap-and-trade. A carbon tax puts a clear price on carbon emissions for many years ahead, while a cap-and-trade system gives a highly fluctuating spot price.

Other environmentalists counter that cap and trade provides a clear goal for GHG emissions reduction, against which results can be monitored.

Frances Beinecke, president of the Natural Resource Defense Council. – A carbon cap is a more effective approach to solving global warming than a tax. First and most importantly, it sets a clear goal for emissions reductions. With a tax, we are guessing about how much it will reduce carbon emissions, and it may not be sufficient to change the course of global warming. A declining cap gives you firm reduction targets and a system for measuring when you hit them.

Policy considerations aside, polls have consistently shown that the public does not want to pay higher taxes on motor fuel. 81% Oppose Gas Tax Hike to Encourage Sales of More Efficient Cars, Rasmussen Reports, 5/11/09. We doubt that stiff taxes on heating oil, coal-generated electric power, etc. would be any better received – so do not expect a carbon tax to be proposed any time soon.

4. The proposed cap and trade system would have substantial economic costs, which should be weighed against the perceived benefits in order to make a rational decision.

How much cost and who would bear it? These are not easy questions, and we are out of space. Tune in next week for further discussion.

The Environmental Protection Agency (EPA) has issued a proposed finding, a decade in the making, that carbon dioxide (C02) is a pollutant that endangers public health and welfare. Based on the finding, it is proposed to regulate CO2 emissions under the Clean Air Act, starting with the beleaguered automotive industry.

But wait, C02 is a natural component of the atmosphere, essential to life on this planet. Animals exhale it; plants consume it to make food. How can CO2 be called a pollutant?

In an attempt to make sense of all this, we reviewed (and recap below) the 26-page EPA document that was published in the Federal Register on April 24, 2009.

Background - In October 1999, the International Center for Technology Assessment and 18 like-minded organizations petitioned the EPA to regulate greenhouse gas emissions (CO2, methane, nitrous oxide, and hydrofluorocarbons) from new motor vehicles under the Clean Air Act. It was claimed that said emissions contribute to global warming.

In August 2003, the EPA declined to act on grounds that (1) it lacked statutory authority to regulate greenhouse gas emissions, and (2) in any case, such regulation would have been unwise at the time.

The petitioners went to court; they were ultimately vindicated by the U.S. Supreme Court in Massachusetts, et al. v. EPA, 549 U.S. 497 (2007). The majority (5-4) decision held that the EPA’s grounds for denying the petition were inconsistent with its responsibilities under the Clean Air Act, wherefore the case was remanded for further consideration.

In short, EPA has offered no reasoned explanation for its refusal to decide whether greenhouse gases cause or contribute to climate change. Its action was therefore “arbitrary, capricious, . . . or otherwise not in accordance with law.” 42 U. S. C. §7607(d)(9)(A). We need not and do not reach the question whether on remand EPA must make an endangerment finding, or whether policy concerns can inform EPA’s actions in the event that it makes such a finding.

On 7/30/08, in an Advance Notice of Proposed Rulemaking, the EPA announced that it was preparing to decide whether CO2, etc. were pollutants under the statute.

On 4/24/09, after considering comments on the advance notice, the agency issued a proposed finding that (a) concentrations of CO2 and five other greenhouse gases, in combination, are endangering public health and welfare under the Clean Air Act, and (b) emissions of these substances (excluding perfluorocarbons, and sulfur hexafluoride) from new motor vehicles/engines are contributing to the problem. Ergo, the enumerated greenhouse gases are subject to regulation as pollutants.

No limits on emissions of greenhouse gases by new motor vehicles/engines have been proposed as of now, but standards are being developed that the EPA “will be ready to propose for public comment several months from now.”

Basis for finding – The EPA presents a sobering assessment of the global warming threat, which it attributes primarily to manmade greenhouse gas (GHG) emissions.

#The effects of climate change observed to date and projected to occur in the future – including but not limited to the increased likelihood of more frequent and intense heat waves, more wildfires, degraded air quality, more heavy downpours and flooding, increased drought, greater sea level rise, more intense storms, harm to water resources, harm to agriculture, and harm to wildlife and ecosystems – are effects on public health and welfare within the meaning of the Clear Air Act.

#Because atmospheric greenhouse gas concentrations are expected to climb for the foreseeable future, temperatures will continue to rise and the overall rate and magnitude of human-induced climate change will likely increase, such that risks to public health and welfare will likewise grow over time so that future generations will be especially vulnerable; their vulnerability will include potentially catastrophic harms.

#The heating effect caused by the human-induced buildup of greenhouse gases in the atmosphere is very likely the cause of most of the observed global warming over the past 50 years.

U.S. motor vehicles/engines are identified as a significant source of manmade GHG, albeit not the only source. Note that while the six types of greenhouse gases enumerated earlier (CO2, methane, etc.) are included in the GHG data, water vapor (about 95% of greenhouse gases in the atmosphere) is excluded.

On the EPA wavelength, the source categories (motor vehicles in the U.S.) accounted for 24% of U.S. GHG emissions (vs. 34% from electrical generation)/ 4.3% of global GHG emissions. And as James Benefiel of Dunedin, Florida, suggested in a letter to the Wall Street Journal published on 5/4/09, the percentages would be much smaller if water vapor was taken into account. However, we are dubious about Benefiel’s statement that only 3.2% of the CO2 in the atmosphere is manmade.

The EPA concedes that a major reduction in GHG emissions from U.S. vehicles would have only a minor effect on the global situation, but it says everyone must “do their part.”

If the U.S. and the rest of the world are to combat the risks associated with global climate change, contributors must do their part even if their contributions to the global problem, measured in terms of percentages, are smaller than typically encountered when tackling solely regional or local environmental issues.

As for the propriety of proposing to regulate CO2, etc. emissions by new motor vehicles/engines while not (at least for now) addressing CO2, etc. emissions of other sectors (e.g., the power industry), the EPA apparently relies on the step-by-step rationale articulated by the U.S. Supreme Court in Massachusetts, et al. v. EPA:

Agencies, like legislatures, do not generally resolve massive problems in one fell regulatory swoop. They instead whittle away at them over time, refining their preferred approach as circumstances change and as they develop a more-nuanced understanding of how best to proceed. That a first step might be tentative does not by itself support the notion that federal courts lack jurisdiction to determine whether that step conforms to law. [Citations omitted.]

Sources – In support of its view of global warming, the EPA has prepared a technical support document (TSD) that “synthesizes major findings from the best available scientific assessments that have gone through rigorous and transparent peer review.” The TSD “relies most heavily on the major assessment reports of both the Intergovernmental Panel on Climate Change (IPCC) and the U.S. Climate Change Science Program (CCSP),” rather than “conducting a new assessment of the scientific literature.”

As we understand it, both the IPCC and CCSP are institutionally invested in proving that manmade global warming is a huge problem. Using their assessment reports as the primary sources ensures a one-sided view of the issue. Consider these comments by Patrick J. Michaels, a climatologist with links to the University of Virginia, Marshall Institute, and Cato Institute, and also a contributing author and reviewer for the IPCC.

Cato Scholar Comments on IPCC Synthesis Report, 11/19/07 - Unlike the sober scientific assessment that the IPCC published last May – which the Synthesis Report was supposed to summarize – the new document is, to say the least, novel. The May document actually reduced median estimates of sea-level rise from previous reports, and projected temperature increases in coming decades that are quite similar to what has been observed in the last three decades, about one degree (F). The new report, instead, projects up to 6 degrees. Also, it conveniently ignores the fact that there has been very little net warming in the last ten years.

Record Low For Climate Science, Cato Institute, 8/31/08 - I found two changes in the thousands of pages of the last (2007) IPCC report - after I sent in a 30,000-word point-by-point review. I'll be lucky to get even that much attention after my equally long critique of a new CCSP report, Global Climate Change Impacts in the United States. The sum of my analysis: This is the worst document in this genre I have ever seen.

Process – Notably lacking from the EPA’s proposed finding is any discussion of the economic implications of regulating CO2 emissions for the automotive industry or its stakeholders (e.g., consumers, suppliers, and workers). Indeed, the word “cost” appears only twice in the 26-page document and the word “expense” not at all.

We do not mean this as a criticism of the EPA, because the provisions of the Clean Air Act probably do not require (may not even allow) the consideration of compliance costs. But, in our opinion, no sensible decisions can be reaching concerning the advisability of measures intended to combat global warming without considering the costs involved as well as the benefit (or avoidance of harm) expected.

If Congress were to consider imposing limits on CO2 emissions, it would presumably consider evidence as to the economic tradeoffs – and hopefully conclude that such limits are unjustified. Five Reasons the EPA Should Not Attempt to Deal with Global Warming, Ben Lieberman and Nicholas Loris, Heritage Foundation, 4/23/09.

The extraordinary perils of CO2 regulation for the American economy come with little, if any, environmental benefit. In fact, analysis by the architects of the endangerment finding, the EPA, strongly suggests that a 60 percent reduction in carbon-dioxide emissions by 2050 will reduce global temperature by 0.1 to 0.2 degrees Celsius by 2095.

Many environmentalists are equally unenthusiastic about EPA regulation, being well aware of how cumbersome and political the regulatory process can be. Thus, Congress initially established the EPA in order to demonstrate “action” on leaded gasoline (a far more logical target than CO2) without taking responsibility for banning it. The EPA did not step up to the problem, and leaded gasoline remained on the market for another 15 years. The EPA’s Faustian Bargain, David Schoenbrod (professor at New York Law School, senior fellow at Cato Institute), Regulation, Fall 2006.

Why have federal lawmakers mandated a system that is so bad for their constituents? Because it is good for the lawmakers. Congress outsources the rulemaking to the EPA so that the legislators can claim credit for protecting health while the agency bears the inevitable blame for delays, disappointments, and costs.

Politically, the calculation is that the threat of EPA regulation will serve as a prod to force action by Congress on limiting CO2, etc. emissions, e.g., by instituting a “cap and trade” program. EPA’s CO2 Finding: Putting a Gun to Congress’s Head, Bryan Walsh, Time Magazine, 4/18/09.

Feedback – There will be public hearings on the proposed finding, on May 18 (Arlington, VA) and May 21 (Seattle, WA). The deadline for comments is June 23.

We do not know whether comments in opposition to the proposal will be seriously considered, but some of you may want to give it a shot. Contact information is provided in the EPA’s proposed finding (page 18886). Here’s the link again.

Next week we will take up the status of “cap and trade” legislation in Congress, the other prong of the push to restructure the energy infrastructure of the U.S. economy.

Hey, folks, did you know this is entry 100 of SAFE’s blog? Seems like we have covered a lot of ground, hopefully to good effect, since entry one was posted in June 2007 after the National Taxpayer’s Conference.

AYMK, there is also another milestone in the news, the president’s first 100 days in office. Much has already been written about it, e.g., by eight Townhall.com columnists on April 29 (Day 100) alone, Time Magazine, the Wall Street Journal, and Fox News.

But perhaps we can sum things up and offer some useful insights. Our review will cover the build-up, the victory lap, the stakes, and the outlook.

BUILD-UP – Opinions about the first 100 days vary, as will be related, but most observers agree on one point: the president has been extraordinarily visible during this period. Thus, as columnist David Broder put it (Washington Post, 4/23/09):

Hardly a day has gone by in the first three months that Americans have not seen Obama on their TV screens in a variety of roles -- chiefly as economic salvage director for seriously shattered housing, credit and employment systems. But they've also seen him as commander in chief of armed forces fighting two wars, diplomatic traveler engaged with world leaders, and agenda-setter for Congress -- to say nothing of first father, first fan, first consort of Michelle and first master of Bo.

The president’s high visibility is part of the strategies for selling his policies. According to Jim Vandelei and John Harris (Politico.com, 4/23/09), senior advisers angled to implant the following themes in the 100 days coverage: The president is (1) a promise-keeper, (2) a game-changer, (3) the decider, (4) not in the bubble (cut off from real life), (5) not FDR (will need more time), (6) FDR (and Bush is Hoover), and (7) one cool cucumber.

Most of the mainstream media coverage has been favorable – one might even say fawning. A Hundred Days of Media Love, Brent Bozell, Townhall.com, 4/29/09.

There was even an unauthorized (but no complaints from the White House) picture of the president in a red (color altered) swimsuit on the May cover of Washingtonian magazine.

Surveys indicate the public is favorably impressed. Most give Obama thumbs up on first 100 days, polls say, CNN Politics, 4/29/09.

According to a CNN poll of polls compiled Wednesday, 63 percent said they approve of how Obama is handling his duties. Twenty-nine percent disapprove.

As most presidents start with favorable ratings, however, these results may be less impressive than they seem. Barrack’s in the basement, Washington Times, 4/28/09.

President Obama's media cheerleaders are hailing how loved he is. But at the 100-day mark of his presidency, Mr. Obama is the second-least-popular president [after Clinton] in 40 years.

VICTORY LAP – On April 29 (Day 100), the president flew to Arnold, Missouri for a town hall meeting with “ordinary people.” In touting his economic policies at this event, the president took a swipe at the tax day tea parties. According to the president, “certain news channels on which I’m not very popular” had covered “folks waving tea bags around” – while he was prepared to have “a serious conversation” about cutting down healthcare costs in the long run, stabilizing Social Security, and achieving greater discipline in federal spending.

The president then flew back to Washington for an evening press conference at the White House. Hmm, when does he find time to run the country?

The television networks were asked to cover the evening news conference in lieu of their normal commercial programming. After three evening news conferences in as many months, however, the characterization of these events as “news” is starting to wear thin.

Fox Network (as distinguished from Fox News) declined to cover the third news conference, although the other major networks did not follow suit, and the Washington Times complained the president was getting what amounted to an “unpaid political ad.”

The morning after media coverage was curiously muted, e.g., there was no story about the news conference on the front page of the [Wilmington] News Journal. Also, ratings for the event were down. The Live Feed, TWR.com, 4/30/09.

The telecast to mark Obama’s 100th day in office was viewed by 28.8 million people, according to Nielsen. That's a 29% drop from the president's last press conference, on March 24, and a 42% fall since his first, on Feb. 9.

As for what was said, the president kicked off the news conference with an update on the H1N1 [swine] flu virus. He is requesting Congress for $1.5 billion in emergency funding; rest assured that the government is “prepared to do whatever it takes” to deal with this situation. The president also offered some advice for the general public.

And, finally, I've asked every American to take the same steps you would take to prevent any other flu: Keep your hands washed; cover your mouth when you cough; stay home from work if you're sick; and keep your children home from school if they're sick.

The president praised the House and Senate for passing “a budget resolution today that will serve as an economic blueprint for this nation’s future.”

Glowing economic accomplishments were claimed: Recovery Act [Economic Stimulus Bill] – housing plan – “new investments” in education, renewable energy and healthcare – “new savings that will bring down our deficit.”

The president also said his Administration was beginning to end the war in Iraq, had forged a strategy with NATO to root out al-Qaida in Afghanistan and Pakistan, and was closing the Guantanamo detention center, banning torture without exception, and renewing diplomatic efforts to deal with a host of global challenges.

But some things remain to be done. The president cited high unemployment, credit still not flowing freely enough, tough times for families and communities touched by the auto industry, foreign threats, and pandemic flu. Also, “our projected deficits are still too high, and government is still not as efficient as it needs to be.”

The pace would continue in the second 100 days and beyond. “We will rebuild a stronger nation, and we will endure as a beacon for all of those weary travelers beyond our shores who still dream that there's a place where all of this is possible.”

Two questions touched on the prospect of the government becoming a major stockholder in General Motors and Chrysler. “I would love to get the U.S. government out of the auto industry as quickly as possible,” said the president.

Some observers believe otherwise, however, based on how his Administration has been steering the situation. See, e.g., Gettelfinger Motors: The mauling of GM bondholders reveals Treasury’s political hand, Wall Street Journal, 4/30/09. We plan to say more about this situation in a future entry.

The reporters called on by the president failed to ask some obvious questions in the economic realm: Just what are those “savings that will bring down our deficit?” How do you propose to reduce healthcare outlays by spending more money? Why should the U.S. economy be saddled with immensely costly new energy restrictions during a recession?

STAKES – Critics say the president is trying to steer the country toward the left. The result would be bigger government, more government spending, tighter regulation of business, and huge increases in taxes.

Thus, talk show host Larry Elder writes (Townhall.com, 4/30/09) of a “100-day assault on America.” His favorite weapons appear to be sarcasm and rhetorical questions.

Given the government's vast business expertise, Obama proposes spending gobs of money to "invest" in green jobs. - - - He wants taxpayers to guarantee, presumably to all who request it, a "world-class education" -- whatever that means. - - - Do the President and members of Congress, many of whom never operated so much as a T-shirt concession booth, really believe that they can "modernize" health care, thus "saving" taxpayers buckets of money? Yes. - - - Will the President's budget really double the national debt within a few years and then increase still more beyond that? Yes.

Financial commentator Larry Kudlow condemns the takeover of one industry after another. The current victims are financial firms and auto companies; energy and healthcare will follow. 100 day lurch to the left, Townhall.com, 4/30/09.

Nowhere is the Obama vision of government interference more evident than on the banking front. The White House and Treasury are using TARP as a bullying club to force government control on the country’s financial institutions. There is no exit strategy; no endgame in sight. Quite the opposite: News reports suggest that six major banks could be subjected to government ownership, putting them in the same club as Fannie Mae, Freddie Mac, AIG, GM, and Chrysler.

Kudlow also decries the tax increases contemplated to pay for the spending spree that is in process.

The Obama budget already will raise taxes on overseas corporate earnings and oil-and-gas companies at home. It will elevate taxes on capital gains and dividends for investors and will lift the top tax rate for successful earners. And more is coming.

But this is the wrong direction for economic growth. Instead, business tax rates should be slashed -- which, by the way, would repatriate corporate earnings for domestic investment. We need a capital-gains tax holiday. We should be flattening individual tax rates across-the-board. And all manner of loopholes and special-interest deductions should be repealed to broaden the taxable-income base.

But let’s face it; “liberals” feel much the same way in reverse. Indeed, polarization of the body politic has reached an extraordinary level. Partisan Gap in Obama Job Approval Widest in Modern Era, Pew Research Center, 4/2/09.

For all of his [purported] hopes about bipartisanship, Barack Obama has the most polarized early job approval ratings of any president in the past four decades. The 61-point partisan gap in opinions about Obama's job performance is the result of a combination of high Democratic ratings for the president -- 88% job approval among Democrats -- and relatively low approval ratings among Republicans (27%).

OUTLOOK – Perhaps we are whistling in the dark, but it seems to us that the current situation is not as bleak as it appears.

Yes, the president is popular and a force to be reckoned with. As Newt Gingrich stated in a 4/29/09 letter, “President Obama’s first 100 days have been spectacularly successful.”

His control of Washington Democrats has been so masterful, and his policies so successful, that he has officially claimed ownership of the American economy.

But there are flaws in the policies that the president and his party are trying to peddle, and we are not the only ones to have spotted them. The most basic flaw is undisclosed costs – taxes, healthcare rationing, soaring energy prices, etc. – that could easily outweigh the benefits on offer. The Liberal Hour, Wall Street Journal, 4/29/09.

What's striking is that Mr. Obama betrays no sense that maybe all of this isn't achievable, much less affordable, all at once. In contrast to Bill Clinton, he has abandoned any deficit concern, building in red ink of at least 4% of GDP for the next decade. And that's assuming the revival of rapid economic growth, and before counting the real cost of health care.

One of the keys to the president’s success thus far is a gift for expressing himself in a way that makes everyone think he is listening to them – as for example by saying he is serious about tackling the deficit at the same time that he is running it up – but government entails choices and this technique may not keep working. 100 Days: “Harry, I Have a Gift,” Daniel Henninger, Wall Street Journal, 4/30/09.

Already, the polls indicate widespread skepticism about the president’s policies. The Seeds of His Own Destruction, Obama’s Hundred Days, Dick Morris and Eileen McGann, Townhall.com, 4/29/09.

By 42 percent to 8 percent, the Fox News poll (conducted on April 22-23) found that voters felt Obama had expanded government rather than contracted it (42 percent said it was the same size), and by 46 percent to 30 percent they reported believing that big government was more of a danger to the nation than big business. (They said Obama felt big business was more dangerous by 50 percent to 23 percent). By 62 percent to 20 percent, they said government spending, under Obama, was "out of control."

As for why the president’s personal ratings have nevertheless remained high, here is a theory:

[The voters] are like the recently married bride who took her vows 100 days ago. It would be a disaster for her if she decides that she really doesn't like her husband. But she keeps noticing things about him that she can't stand. It will be a while before she walks out the door or even comes to terms with her own doubts, but it is probably inevitable that she will.

We will refrain from joining Morris and McGann in predicting a time when “the Obama administration crashes and burns, with approval ratings that fall through the floor.”

But the words of Abraham Lincoln do come to mind: “It is true that you may fool all the people some of the time; you can even fool some of the people all the time; but you can’t fool all of the people all the time.”

If enough people ask good questions and demand real answers about the economic policies that are being proposed, rather than allowing themselves to be treated like children, then things may go better than many “conservatives” are currently expecting.

SAFE generally focuses on federal taxes and spending because about two-thirds of all the government spending in this country is at the federal level. Also, it is tough to monitor the fiscal management of 50 states and thousands of counties, cities, and school districts.

Although state and local (S&L) governments must balance their budgets every year, this does not preclude fiscal folly. These governments can and do (1) borrow for capital projects, (2) enter into future commitments (e.g., “gold-plated” pension plans) that will be tough to meet, and (3) ratchet up spending during good economic times in ways that cannot readily be reversed during downturns.

And S&L spending has hardly been static. It more than doubled as a share of the U.S. economy over the past century or so, even with federal grants for designated S&L programs (notably education, healthcare, and roads) counted as federal spending.

Some S&L governments are doing OK from a fiscal standpoint, many are just getting by, and a few are on the verge of foundering. So for realistic evaluation, the results must be reviewed case by case. This brings us to this week’s subject, an illustrative review of the fiscal situation in an individual state.

Delaware has done well in holding down taxes. It is one of only a handful of states with no general sales tax; the others are Alaska, Montana, New Hampshire, and Oregon. Property taxes are generally lower than in neighboring states. The state’s income tax rates have been reduced to reasonable levels, as former Governor Pete DuPont recounted in a 3/17/09 Wall Street Journal column.

[After I was elected governor in 1976:] Spending was held nearly flat for eight consecutive years, the budget was balanced every year, and income tax rates were cut almost in half--from 19.8% to 10.3% in the top bracket. The next governor made further cuts, down to the current 5.95% for the top tax bracket. The result was real economic progress. Jobs increased substantially, income tax revenues increased by 200% over the next 20 years, and there were no budget deficits in any of those years.

One key to holding down tax rates has been finding special sources of revenue. Delaware has traditionally succeeded in getting interstate companies to incorporate and/or locate business operations here, thereby reaping corporate income and franchise tax revenues. It also enjoys profits from three casinos operated in conjunction with racetracks.

Delaware has been less successful in containing the growth of its S&L governments, at least in recent years. Thus, as reported in the 2007 Economic Report for Delaware:

#Between 2001 and 2007, Delaware government employees in the Public Administration sector increased by 14% (17% higher real wages) vs. a 5% (7% higher real wages) increase for the U.S. as a whole. (p. 14)

#As of 2007, government entity employees (including some 5,000 federal employees), accounted for 14.8% (this figure is now over 15%) of the state’s nonfarm payroll. (p. 15)

Reflecting recent job losses in the private sector, government employees currently account for over 15% of nonfarm employment in Delaware.

The fiscal outlook for Delaware was dimming before the recession hit, and over the past year, with one cutback after another in projected tax revenues, it has deteriorated sharply. Newly elected Governor Jack Markell and the state legislature face the challenge of closing a projected gap for Fiscal Year 2010 of some $750M (million) – nearly one-quarter of annual expenditures.

#Spending reductions ($331M) – In addition to department-by-department adjustments and general belt tightening, e.g., a moratorium on nonessential travel, there would be an 8% across the board cut in the salaries of all state employees ($91.7M) plus other pay adjustments ($2.2M) to “save the equivalent of 1,500 layoffs.”

#Federal economic stimulus funds ($155M); a sports lottery and up to three new casinos ($55M); reallocation of special funds ($40M); and fines & fees ($12M).

Although “fiscal conservatives” reportedly welcomed the spending cuts, it was clear from the outset that some elements in the plan would face stiff opposition. Markell Urges Drastic Action on Budget, Ginger Gibson, [Wilmington] News Journal, 3/20/09.

SAFE director Jerry Martin, our resident expert on Delaware fiscal matters, thinks the Markell budget needs some adjustments.

An across the board 8% pay cut for state employees is “dead on arrival.” It would really hurt many state employees at the low end of the pay scale ($20K to $30K).

I agree with the increase in payroll deduction for health care, but the Administration needs to dig into the state pension system and revamp it. For example, all overtime counts towards average annual earnings for calculating pensions. Some workers are milking this system - big time!

Expanding slots from 3 to 6 sites would not accomplish much. That’s like a guy ordering a pizza and the vendor asks, "Do you want me to slice it in quarters?" The guy says, "No, I'm hungry today, cut it in eight slices."

Raising the tax rate on taxable income over $60,000 by one percentage point may sound innocuous, but this would represent an increase of almost 17% (6.95/5.95).

Higher taxes on out-of-state companies incorporated in Delaware could backfire. I'm sure the federal government plus other states are looking at this stream of revenue very carefully – and "enviously."

The increased tax on cigarettes is a highly regressive levy, which would come on top of a big increase at the federal level. If taxes on cigarettes are raised too high, they will promote bootlegging and bring in far less revenue than is being counted on.

During the campaign, Jack promised to do a top to bottom review of state functions and drop those functions that are not serving the general public very well. He has now requested every state department head to submit a review of ways to reduce spending and increase efficiency, but a more top-down process may be needed to get real results.

For example, a consolidation of Delaware’s school districts (from 19 into 4, one for each of the 3 counties plus a state-wide vo-tech district) could achieve savings for Delaware taxpayers on the order of $45M per year.

Now I realize that it would take time to smoothly consolidate the school districts, but with the push to shore up the government’s finances right now this would be a great time to get started.

The envisioned savings would be achieved by reducing the number of school district administrators, support personnel and headquarters facilities. Greater responsibility would be placed on principals, school staffs, and, yes, even parents.

The potential savings were verified by a study sponsored by the LEAD Committee (Leadership for Education Achievement in Delaware), and conducted by the Boston Consulting Group. Among the study findings was a suggestion that a start be made by consolidating functions now, leading to consolidating districts later.

Reportedly, some functional consolidations may be in the works, but “there are not yet any estimates of actual cost savings or decreases in salaried positions.” Consolidated school district services could go even further, [Wilmington] News Journal, 4/21/09.

School district consolidation has been successfully implemented elsewhere. North Carolina’s Charlotte-Mecklenburg School District now has over 124,000 students, who are achieving excellent test scores (Wall Street Journal, 12/2/05). Several states have county-wide districts, including Florida and Maryland.

Others have characterized the budget proposal as a short-term fix for a longer-term problem because the Delaware economy (and tax revenues) will take several years to snap back. “Cinderella provision” complicates recovery, [Wilmington] News Journal, 4/11/09.

Delaware faces a $750 million shortfall for the next fiscal year. The federal stimulus will help in certain budget categories. - - - So what happens when the stimulus money disappears? - - - If Delaware can't cover its shortfall this year, how will it be covered in 2012?

Accordingly, we would favor taking a hard look at the franchise and cigarette tax increases and tempering the pay cut for lower level employees.

To make ends meet, a general increase in Delaware income tax rates (but not a “temporary” sales tax) should be considered – in harmony with the principle of “shared sacrifice” – rather than simply raising the tax rate on income above $60,000.

Finally, now is the time to get started on structural changes to government spending programs. The consolidation of school districts is one worthy idea, but there are others – notably finding ways to rationalize Delaware’s Medicaid program.

Medicaid enrollment rose from 137 thousand in FY 2005 to an estimated 157 thousand (over 17% of the total population) in FY 2009. See page 11 in the following presentation.

In FY 2007, the latest year for which we could find data posted, the total expense of Delaware’s Medicaid program was $976M (50.2% covered by federal funding), an average of about $6,800 per person enrolled.

“In less than a decade,” according to one study, “the combined spending on Medicaid in the State of Delaware will exceed the amount spent on Education [currently the area with the most state spending] by $600 million.”

Although 4/5 of Medicaid participants in Delaware are working age adults or children, the per-enrollee costs for the aged ($17,419) and the blind/disabled ($17,108) are substantially higher than average and expenditures for the aged can be expected to soar as the baby boomers retire. Medicaid in Delaware, Charlie Copeland [Republican candidate for Lieutenant Governor in the 2008 election], circa 2007.

The predictable consequence of allowing selected programs, e.g., Medicaid, to grow uncontrollably is to starve other programs of merited support and/or necessitate unwise tax increases. For a sobering case in point, consider how the New York City subway system (subsidized by government) is teetering on the brink of disaster due to soaring spending for education and Medicaid coupled with lax management of union contracts. New York’s Subway Woes Could Have Been Avoided, Nicole Gelinas, Wall Street Journal, 4/25/09.

A rate hike in some form is certain (and inflation-linked hikes are appropriate). But the real fix will only come if the state prioritizes the MTA in its budget by cutting spending elsewhere to free up transportation funding. City and state officials should stand together to demand labor reforms, including raising the retirement age and increasing pension contributions for new workers, and requiring all city and state employees to pay more for their health benefits.

What can be done about Medicaid here, before it bankrupts the state government? Without claiming to have the answers, we think the time has come for a fresh look at eligibility requirements, services covered, and options for providing needed services more cost effectively.

Some may envision the federal government providing a rising share of the funding for Medicaid, but this seems unlikely. Indeed, having grave fiscal problems of its own, the federal government may be forced to cut back in this area.

What about some form of mandated healthcare coverage, which Governor Markell advocated during the last election? Based on the experience elsewhere, e.g., in Massachusetts, a plan of this nature would compound Delaware’s budgetary problems rather than solving them. The Price of Romney Care, Wall Street Journal, 7/29/08.

As [the] public option [for subsidized healthcare coverage] gets overwhelmed, budget gaskets are blowing everywhere. Mr. Patrick had already bumped up this year's spending to $869 million, $144 million over its original estimate.

If there is a solution for Medicaid, we believe it will be found by dialing back the government role in healthcare and relying to a greater degree on free market mechanisms. SAFE plan for healthcare reform is government-lite, 4/6/09.

In short, Delaware has done a generally good job of managing its taxes and spending over the years – but some problems have accumulated and they need to be dealt with. This is no time for band-aid solutions and wishful thinking.

And although we have focused on the state budget in this entry, painful decisions will also be needed for New Castle County, the City of Wilmington, and other local governments. It would be unfair to expect taxpayers to shoulder the entire burden of projected deficits. Cost cuts will be necessary, probably including pay cuts (5% proposed) and/or layoffs. NCCounty, Wilmington must cut costs somehow, [Wilmington] News Journal, 4/24/09.

Let’s all challenge state and local leaders to come up with better solutions, both here in Delaware and around the country.

Tax day tea parties took place around the country on April 15, as previewed in last week’s entry, and from what we can gather they were a success. But were the nation’s political leaders listening, and what will all those protestors do for an encore?

Action: It is unclear how many tea parties took place; we have seen figures ranging from “more than 300, perhaps even 500” (Washington Times) to 2,000 (Karl Rove, who generally has his facts straight, in the Wall Street Journal).

Based on an incomplete recap of estimated attendance at individual events, nationwide participation was at least 250,000 and possibly several times higher. Furthermore, the people who turned out were not there just for fun. Million Taxpayer March, Michelle Malkin, Townhall.com, 4/17/09.

. . . the Tax Day Tea Party demonstrations featured small-business owners, working taxpayers and families. This wasn't a weekend or holiday, mind you. A quarter-million people took time off in the middle of the workweek to raise their voices against reckless taxing and bipartisan spending.

Planning for the tea parties was a bit haphazard, and in some cases amateurish. Thus, several demonstrations in Washington, D.C. (epicenter of the big government follies) were stymied by failures to obtain the prerequisite clearances.

One million tea bags delivered to Lafayette Park were reloaded and sent away because tea party organizers did not have the proper permit, protest organizer Rebecca Wales told FOX News.

And a D.C. rally scheduled to take place outside the Treasury Department was cancelled when the U.S. Secret Service prevented protesters from gathering outside for lacking a permit.

Overall, the attendance figures were not high enough to seriously worry the nation’s political leaders. But many were taken aback by the manner in which these events sprang up, like mushrooms after a rain, without the benefit of any central organizing or funding.

Also, regrettably, somebody did toss a tea bag over the White House fence. Not quite the terrorist attack depicted in a recent episode of “24,” but you can bet the Secret Service did not take the matter lightly. Hail the tea bag, weapon of terror, Washington Times, 4/17/09.

Some readers probably saw the Glenn Beck show coverage leading up to the tea party in San Antonio, Texas. The façade of the Alamo in the background underscored that participants intended to draw “a line in the sand” about reckless government spending. Beck presided in an avuncular fashion, and everyone seemed to be up for the occasion.

As for the tea party in Wilmington, Delaware, it went off smoothly despite a rainstorm that drove the event inside (an abandoned section of the Riverfront shops). Attendance estimates range from 700 to 1,000, with the lower figure probably being about right.

From start to finish, the Wilmington event was coherent, orderly, and peaceful – whoever put it together (Founders Values, Delaware Tea Party, etc.) deserves a lot of credit.

Bearing in mind that “a picture is worth a thousand words,” click on the following link for a 3-minute video clip. Note the reasonable tone of the petition, the earnest faces of the speakers, including Bill Morris (holding up a “s-a-f-e.org” sign), and the gusto with which the “tea bags” were tossed in the Christina River.

Also, here is a video clip (3+ minutes) of the talk by Bill Rivers, a 20-year-old student at the University of Delaware. His remarks suggest that the younger generation is aware that reckless spending is threatening their financial futures. “Government needs to leave the kids alone!”

Reaction: Critics painted the tea parties as special interest protests, mean-spirited (or worse) attacks, or annoying distractions – in short, anything but authentic expressions of concern about the magnitude and trend of government spending. Here are some examples of the Empire striking back.

#Is there any chance that the president may be having second thoughts about the government actions, past and proposed, that are driving up spending and debt by leaps and bounds? Absolutely not, if his “new foundation” speech at Georgetown University on April 14 is any indication.

This is not to say the president ignored the need to rein in spending and get the deficit under control, but his fiscal responsibility game plan is a charade. “The Sting in Four Parts,” Charles Krauthammer, Townhall.com, 4/17/09.

•The whopper – claiming that $2 trillion in fiscal savings have already been identified, when the primary saving that can be pointed to is the declining level of military expenditures in Iraq.

•The puzzler – boasting of the declining share of discretional spending in the overall budget, which is primarily due to soaring entitlements and debt service.

•The non sequitir – presenting his healthcare, energy, and education proposals as the key to ensuring that nothing like the current recession ever happens again, although the policies these initiatives would change did not cause the recession in the first place.

•The swindle – equating his healthcare plan with getting Medicare/Medicaid spending under control when it would substantially increase the government’s healthcare tab.

#At the White House on April 15, the president obliquely acknowledged the tea parties by citing plans to simplify the “monstrous” tax code. He also implied that the demonstrators were being manipulated into acting against their own interests.

For too long, we've seen taxes used as a wedge to scare people into supporting policies that increased the burden on working people, instead of helping them live their dreams. That has to change, and that's the work that we've begun.

With all due respect, Mr. President, the tea parties were not about the need for tax simplification – as worthy an idea as that might be – and we will be the judges of our own motivations.

#Representative Jan Schakowsky (D-Ill.) blasted the tea parties. According to her, the participants were right-wing activists, fueled by Fox News coverage, seeking to mislead the public about the Administration’s economic plan. Schakowsky: Tea parties “despicable,” Thehill.com, 4/16/09.

It's despicable that right-wing Republicans would attempt to cheapen a significant, honorable moment of American history with a shameful political stunt," she added. "Not a single American household or business will be taxed at a higher rate this year. Made to look like a grassroots uprising, this is an Obama bashing party promoted by corporate interests, as well as Republican lobbyists and politicians.

#Speaker of the House Nancy Pelosi (D-Calif.) painted the tea party protestors as diehard members of a clueless minority party. Pelosi talks tea parties, partisan politics, abclocal.com, 4/15/09.

They are the people who are funding what is supposed to look like a grass roots operation but is really an Astroturf initiative on the part of those who liked the status quo under George Bush, the failed economic policies that got us where we got today.

#Economist [and dilettante columnist] Paul Krugman, who wrote about the tea parties before most of them took place, offered lines like “it doesn’t feel right to make fun of crazy people.”

His column went on to level charges that not only prefigured some of Nancy Pelosi’s lines on April 15, but say a good deal about his own mindset. Tea Parties Forever, Paul Krugman, New York Times, 4/13/09.

Last but not least: it turns out that the tea parties don’t represent a spontaneous outpouring of public sentiment. They’re AstroTurf (fake grass roots) events, manufactured by the usual suspects. In particular, a key role is being played by FreedomWorks, an organization run by Richard Armey, the former House majority leader, and supported by the usual group of right-wing billionaires. And the parties are, of course, being promoted heavily by Fox News.

But that’s nothing new, and AstroTurf has worked well for Republicans in the past. The most notable example was the “spontaneous” riot back in 2000 — actually orchestrated by G.O.P. strategists — that shut down the presidential vote recount in Florida’s Miami-Dade County.

#Much of the media coverage was slanted to minimize the importance of the tea parties. Twisted Media Misuses Poll in Attempt to Downplay Tea Parties, Matt Towery, Townhall.com, 4/17/09.

Thus, attendance figures were grossly underestimated and tea party sponsorship was characterized in dismissive terms.

Many reports referenced “hundreds of people,” when the turnout at a given protest might actually have been in the thousands. Additionally, many said the tea parties were sponsored or fueled by “right-wing activist groups” or “conservative talk show hosts and Fox News.” Wow! Did they ever identify the groups that supplied huge numbers for rallies for Obama during his campaign, or attribute special coverage to a more “left-of-center” TV news organization?

Even worse, in Towery’s opinion (and he is a professional pollster), was the misuse of a Gallup Poll finding to characterize tax protestors as out of touch when they are actually ahead of the pack. In the survey, 48% of respondents said the “amount of income tax they pay is about right.” This is unsurprising under present circumstances (there has not been a federal tax rate increase since 1993 and 50% of the public pays nearly zero income taxes), but it ignores perceptions about what lies ahead.

[The tea parties] were protests over massive spending that will result in an unsupportable tax burden on future generations. They were protests over the growth of government and its intrusion into every aspect of the private sector. They were protests designed to start a movement that will be primed when the Democrats’ new tax policies go into effect. And we aren’t talking just about income tax. Even those who are promised a tax cut under the Democrats’ plan run the risk of seeing hidden taxes -- such as the proposed fees on energy -- lead to a net loss of money in their pockets.

#To be complete, there was some favorable coverage of the tea parties – emanating primarily from the minority party. Republicans and the Tea Parties, Karl Rove, Wall Street Journal, 4/16/09.

According to political strategist Rove, “the concerns driving people to tea parties are real, growing and powerful. Politicians ignore them at their peril.”

And he obviously hopes that his party will step up to the plate, while seeing little chance that the opposition will do so.

Some liberals believe that the recession has made tax-and-spend issues passé. But political movements are often a reaction against aggressive overreach by those in power. Mr. Obama's response to the financial crisis -- a government power grab and budget explosion -- has put spending and taxes back on the front burner. The tea parties are an early manifestation of that. More is sure to follow.

The path forward: The idealism and inclusiveness of the tea parties was markedly at odds with the critics’ invective about rightwing extremism, misguided efforts to preserve tax cuts for the rich, and alleged shortcomings of the minority party.

For the most part, they were organized and run as nonpartisan events, and rightly so. Fiscal responsibility and holding down taxes are not red issues or blue ones, everyone has a stake. Let’s by all means keep the spirit of transcending party loyalties alive.

Ultimately, however, debates about fiscal responsibility versus social needs will come down to cases. What are the facts and theories? Of the plans being offered, which make the most sense. Are current political leaders helping or hurting, and is there anyone out there who would be likely to do better and has a realistic chance of getting elected?

There is much to be done besides organizing demonstrations, notably asking tough questions and demanding real answers. That is something SAFE has been trying to do, hopefully with some success. See, e.g., the 2/11/08 entry – “If you want good answers on healthcare, ask good questions!”

But let’s face it folks, we need help. When is the last time that you wrote a letter to the editor, or contacted a member of Congress to ask about all the spending, debt, etc., or spoke your mind when someone started spouting off about how big government is the answer to all of the country’s problems?

If everyone started pulling together, building on the energy that was displayed at the tea parties, no telling what we could accomplish.

Talk show host Glenn Beck will promote an April 15 “tea party” in San Antonio, Texas. Similar events are planned in Atlanta (Sean Hannity); New York City (Newt Gingrich); Sacramento, California (Neil Cavuto); and Washington, D.C. (Greta Van Susteren).

In addition to these headliner events, many other tea parties are scheduled around the country on tax day. This map is illustrative, although it does not show tea parties organized since April 1.

We began warning about “the big pork, big government express” that is barreling down the tracks several months ago (see 12/15/08 entry). SAFE was a bit ahead of the pack, but more and more people are recognizing that – whether the country’s political leaders say so or not – reckless government spending will result in major tax increases and/or soaring government debt. Note the Website url (“theythinkyouare stupid”) for the San Antonio tea party; it was not chosen by accident.

There is plenty of emotion involved in organizing tea parties, as shown by the energetic but somewhat haphazard planning for the San Antonio event. Check out the videos posted (scroll down), especially the “Glenn plays it” clip (106 seconds).

Beck’s show will be on the scene from 4 to 5 p.m. on April 15, followed by a local radio personality (5 to 6) and the “tea party” proper (from 6 to 8). There is limited indication of what will be said and done, except that the demonstration will be conducted in a peaceable, lawful, and polite manner. READ THE RULES!!!

Tea parties around the country are loosely linked with Beck’s 912 project, this name signifying the state of national unity that existed on the day after 9/11. It is visualized that such unity can be recaptured (we are not so sure of this) by honoring the 9 principles and 12 values (honesty, reverence, hope, etc.) posted on the Website.

The 912 principles do not directly refer to taxes, but, like the Constitution itself, they harmonize with the idea of a federal government that does not spend the taxpayers’ money in an effort to cure every ill of society. For example:

6. I have a right to life, liberty and pursuit of happiness, but there is no guarantee of equal results.

7. I work hard for what I have and I will share it with [whom] I want to. Government cannot force me to be charitable.

8. It is not un-American for me to disagree with authority or to share my personal opinion.

In contrast to the tea party in 1773, at which demonstrators dumped tea into the Boston Harbor rather than pay taxes on it to the British crown, this year’s events lack a clear-cut focus. Federal taxes have not been raised yet (except for a big tax hike on cigarettes), and – as we noted in a prescient statement nearly a year ago – it is tough to get people excited about government spending per se. A line in the sand on taxes (5/26/08 entry).

People only fret about wasteful government spending, but they get excited about taxes. Witness the Boston Tea Party and the French Revolution.

The points being made at tea parties are all over the lot, as illustrated by some of the slogans. Stop punishing success and rewarding failure – no taxation without deliberation – why work, government will take it all – keep the change, we’ll keep our freedom – don’t mortgage my future (sign carried by a young girl). In sum, “We the People” seem to be in a feisty mood.

The first wave of tea parties in February was a big success, and it led to more. “The Taxpayer Tea Party Movement Is Growing,” FreedomWorks, 2/23/09.

The volunteer, grass roots flavor of these events is apparent from the pictures. Check out the Charlotte, NC slideshow for some fine examples. Tea Party Update, Brendan Steinhauser, FreedomWorks, 4/6/09.

In our neck of the woods, a tea party is scheduled on Wednesday, April 15 (4-6:30 p.m.) at the Wilmington riverfront. SAFE founder Bill Morris will be giving one of the speeches. We urge you to contact the event organizers (Founders Values) for further details and attend if possible.

There is also plenty of tea party activity in nearby Pennsylvania, as reported in this 4/6/09 entry from the Lehigh Valley political blog.

Ideally, tea parties should not be a one-time event. Those disposed to show ongoing support might consider displaying Taxed Enough Already (T.E.A.) bumper stickers on their vehicles. These stickers are currently available for “free,” although there is a modest shipping and handling charge.

But be careful, because if the company making the bumper stickers has borrowed money from a bank that got TARP funds from the federal government, you might wind up being charged as an accessory to a crime.

Really? Just kidding, the 1^st Amendment has not been interpreted out of existence yet, but it is true that opposition to tax and spend government is not universally appreciated. Attacking the Tea Party Movement, Lorie Byrd, Townhall.com, 4/7/09.

When I recently wrote a blog post letting readers know how to find the April 15 tea party in their area, liberal commenters posted attacks on the movement ranging from those disputing my statement that thousands were turning out at the tea parties, to those saying the tea party protesters didn’t know what they were doing because they didn’t bring a PA system to one of the tea parties.

And there may be some reverse or anti tea party events. Thus, protestors in faux colonial attire recently poured bottled water (because it comes in plastic bottles and private companies earn a profit from it) into the Boston Harbor. Activists say plastic bottles don’t “hold water,” Boston Herald, 3/26/09.

Public officials may not welcome input on policy issues either. Consider what happened after Ed Failor Jr., president of Iowans for Tax Relief, was overheard speaking with the media (gasp!) at a hearing on proposed state tax increases. (To be complete, there had been some booing earlier.) Hundreds of Iowans thrown out of public hearing, Des Moines Register, 3/31/09.

Inevitably, some of the tea party fervor will be directed against state and local tax increases that are being implemented right now rather than, as in the case of federal taxes, coming in a year or two.

The lust to raise taxes in California and New York is well known, and a number of other states (including Delaware) are also considering broad-based tax increases. More States Look to Raise Taxes, Leslie Eaton, Wall Street Journal, 4/9/09

In all fairness, however, state and local governments have an obligation to balance their budgets and their budgetary excesses generally pale in comparison to the spending spree being cranked up at the federal level.

Instead of knee jerk opposition to any tax increases at the state and local level, we would urge that proposed increases be considered on a case-by-case basis. By way of example, Delaware’s budgetary equation will be reviewed in next week’s entry.

We close this entry with a question: Will the tea parties have a lasting impact, or are they simply a vehicle for folks to blow off steam?

Demonstrations alone cannot prevent spending and tax increases. To succeed, fiscal visionaries must acknowledge concerns of the general public and make a convincing case that there are better solutions than throwing money at them. That is why SAFE is advocating an alternative approach to healthcare reform, offering information about “global warming,” and the like.

It is all too easy, however, for political leaders to ignore quiet and reasoned feedback on their ideas. A large, vocal, grassroots outpouring – as exemplified by the tea parties – may receive more respect (at least in the short run).

Hopefully there will be a huge turnout at the Wilmington riverfront tea party on April 15. Charlie Copeland is scheduled to speak. I don't know if there's just one or there are more organizations involved [we gave the credit to Founders Values, but there may have been others involved]. Charlie has an ancestor who was the youngest member of THE Boston Tea Party. He was 15 and held the lantern so the others could see what they were doing. SAFE director

Our last entry identified the leading problem with healthcare (soaring costs) and its root causes (government policies, consumer behavior, and ossified industry structure). Now, here is how to make the healthcare system more affordable without sacrificing quality, rationing services, or excluding the poor or disadvantaged from access.

1. Scrap the president’s plan (3/17/09 entry), which would use the government’s clout (and our money) to mandate near universal healthcare.

In addition to being unaffordable (3/23/09 entry), this plan would block restructuring of the healthcare industry. The Innovator’s Prescription: A Disruptive Solution for Health Care, Christensen, Grossman and Hwang, Harper-Collins (2008), p. 408.

. . . we urge our readers, our lawmakers, and our fellow American citizens not to look to a government-controlled single-payer system as a solution to our healthcare crisis. It is a route that is relatively easy to get onto, but it is in fact a one-way street heading in the wrong direction. And there is no exit.

By the way, healthcare will be at the top of the legislative agenda when Congress reconvenes in mid-April. The first issue will be whether the majority party will seek to invoke the “reconciliation” process, thereby enabling its version of healthcare reform to be rammed through the Senate on a party line vote. Healthcare reform battle begins, Sean Lengell and Kara Rowland, Washington Times, 4/4/09.

This tax exemption represents an unjustifiable subsidy. First, the cost involved is deductible by employers (just as additional salary would be), so there should be corresponding income to employees. Second, employees of companies offering healthcare benefits come out ahead of other taxpayers, who can only buy healthcare insurance (or cover healthcare expenses) from their after-tax income.

The existence and operation of employer healthcare plans, in conjunction with government plans, fosters wasteful consumption of healthcare. So long as a third party pays most of the bills, consumers tend to ignore cost in making their healthcare decisions. The Cure: How Capitalism Can Save American Health Care, Dr. David Gratzer, Encounter Books (2006), p. 43.

Walk into a grocery store, and every item has a sticker indicating its price; but have you ever walked into a doctor’s office and seen a list of prices? Has it even occurred to you to ask what a procedure or test will cost?

The annual loss of revenue to the federal government from the healthcare benefit exemption is some $250 billion. Add that amount to direct government spending for healthcare, and it will be seen that the federal, state and local governments are covering nearly 60% of U.S. healthcare costs. Congressional Budget Office study, December 2008, p. 18.

Taxing employer-provided healthcare benefits is not proposed as a revenue raiser; the object would be to impose taxes in a more equitable manner. We would expect offsetting tax cuts in other areas, e.g., through elimination of the Alternative Minimum Tax.

Some employers might drop their healthcare plans if the cost was taxable to employees, while others would not – fielder’s choice. Such plans are fine if employees prefer healthcare benefits to an equivalent amount of cash, just so long as the government does not use the tax law to subsidize them.

However, we do support favorable tax treatment for one form of healthcare insurance coverage, which, as discussed under the next heading, offers unique advantages in combating soaring healthcare costs.

3. Encourage catastrophic coverage insurance combined with health saving accounts to cover outlays for routine healthcare services.

The predominant form of healthcare insurance today is not really insurance, at least in the classic sense of covering large and relatively infrequent losses (as with car insurance), but rather a healthcare service contract. Gratzer pp. 31-32.

Car insurance premiums aren’t particularly heavy, especially when people purchase high-deductible plans; but the average family’s health premium tops $9,000 a year. What would car insurance cost if people insisted on plans that had limited deductibles? Or policies that included not just major bodywork, but also oil changes and gas and a paint job every time you spouse got tired of the car’s color?

Healthcare service contracts generate lots of costly paperwork; they also insulate consumers from the payment process with the adverse results already noted. These disadvantages do not apply with catastrophic coverage (high deductible) insurance.

As for Healthcare Savings Accounts (HSAs), they are rather like Individual Retirement Accounts (IRAs) in which contributions can either be made from pretax income or deducted on one’s tax return. Disbursements from an HSA for healthcare expenses are not taxable; unspent amounts can be carried forward for future healthcare needs.

With an HSA + catastrophic coverage, the individual manages routine healthcare expenditures, thereby minimizing administrative overhead. He or she can choose the services desired without obtaining referrals, etc. And the individual has a financial incentive to stay well.

Do people really need a financial incentive to stay well? Evidently they do, for some 70% of total healthcare expenditures are for the treatment of chronic diseases (treatable but not curable). The aggregate cost would be far lower if the subjects made lifestyle changes when their conditions were first diagnosed, began taking preventive medication, and/or joined a network (e.g., Alcoholics Anonymous) in which people suffering from the condition exchanged information and supported each other.

Many people intend to do these things – starting next week – but fail to get around to it if there is a substantial time lapse between failure to act and unfavorable consequences from the condition in question. In such cases, a financial incentive may be more compelling than one’s physical well-being. The Innovator’s Prescription, pp. 172-173.

It turns out that for most people who have chronic diseases with deferred consequences, “improve my financial health” is a much more pervasively experienced job than “maintain my physical health.”

For example, recent research findings demonstrate that “smokers who are paid to quit succeed far more often than those who get no cash award” – never mind the well-known health hazards from smoking. Wall Street Journal, 2/16/09.

4. Have the states assume full responsibility for Medicaid and SCHIP programs, with the federal government providing block grant funding and not attempting to dictate what coverage should be provided.

Like most people, we believe the poor and disadvantaged should be afforded decent healthcare because it is the right thing to do. Ideally, such support would come through private charity, but government programs will probably be needed as well.

That said, there are major problems with the Medicaid and SCHIP programs as presently constituted, not the least of which is that joint funding by the federal and state governments creates an incentive for states to keep expanding their programs in order to qualify for more and more federal funding. The Cure, p. 104.

Consider that the average federal contribution is 57 cents on every Medicaid dollar, meaning that an enterprising governor can offer his citizens new services without spending much from his state treasury. Historically, expanding Medicaid has been a good deal for the states. In fact, for every dollar of new state spending required for, say, a children’s health program in West Virginia, Washington will pony up three “free” dollars.

On finding that they have underestimated costs, states often attempt to rein in their Medicaid (and probably SCHIP) expenditures by cutting reimbursement rates to the bone, thereby jeopardizing the delivery of adequate healthcare services for participants. The Cure, pp. 107-108.

Compared with private insurance and even Medicare, state governments’ reimbursement is modest. In fact, for every dollar a physician collects for a service from Medicare, he or she will probably get 30 to 50 percent less from Medicaid for the same service. With so little pay, many physicians opt out, choosing not to treat Medicaid patients.

For example, consider what happened after the Massachusetts Medicaid plan – under pressure to save money – slashed its already low reimbursement rates for basic dental services. The Innovator’s Prescription, p. 377.

Additional free care was still available in community health centers funded by the state through a different pool of funds, but those were much less convenient to access for many of the poor. Within three years of the reimbursement cuts, 100,000 fewer MassHealth patients received dental services that were reimbursed by MassHealth.

Meanwhile, a lot of Medicaid funding has been diverted into providing long-term care in nursing homes for older members of families that could quite possibly pay the bill. The Cure, pp. 116.

A Rhode Island man with, say, three Mercedes Benz cars and a large Newport mansion can still qualify for Medicaid. That may sound ridiculous and morally dubious – but it is completely legal. (When it was revealed that Carol Moseley-Braun, a Democrat from Illinois, had done “asset-shifting” to get her mother qualified for Medicaid, she still managed to win her Senate race in 1992.)

Once the aggregate level of Medicaid block grants to the states has been set, the commitment should be indexed for inflation – not permitted to continue growing in real economic terms. The states would be compelled to run their Medicaid programs in a businesslike manner, with the details to be determined at their discretion. Federal budget savings over time would be substantial.

If block grants are a good idea, why did no one ever think of them before? Turns out the idea was unsuccessfully proposed in the early 1980s. The Cure, p. 103.

President’s Reagan’s idea – which passed the Senate in 1982 with bipartisan support but was dropped from budget negotiations – would have left states with a fixed amount of money to spend as they saw fit. With such a move, the administration hoped that state governments would rethink the program, reining in costs along the way.

Critics might question whether the states are qualified to run their Medicaid programs. Look at the results of state efforts under federal supervision: soaring enrollment (crowding out private insurance) and cost, coupled with cut-rate reimbursement schedules that defeat the purpose of providing basic healthcare services to those least able to afford them.

As joint federal/state responsibility has worked so poorly, however, why not try something else?

Also, state management of Medicaid programs would provide flexibility for experimentation. Some approaches would work and presumably spread. Others would fall by the wayside.

As an example of upside potential, consider the innovative Medicaid program for which Governor Bobby Jindal of Louisiana recently requested a federal waiver. The idea is to steer Medicaid recipients into private managed-care plans, with the state to pay a fixed per patient amount (risk adjusted) for coverage, instead of continuing to reimburse healthcare providers on a fee for service basis. This is not a new idea, but it sounds like a good one – particularly for a state where the healthcare system is in a mess (half of the population is on Medicaid or uninsured). Jindal’s medicine: Louisiana’s governor pushes a creative Medicaid reform, Wall Street Journal, 11/24/08.

In addition to adopting a block grant system for Medicaid funding, the federal government must eliminate obstacles to serving the healthcare needs of the indigent more effectively. One needed step is discussed under the next heading.

5. Repeal the federal statute requiring hospital emergency rooms to admit all comers.

Although enacted with the best of motives, this statute has proven costly. Moreover, it impedes the kind of restructuring of the healthcare industry that is needed to provide lower cost, more convenient healthcare services – not just for the general public but also for the very people that guaranteed emergency room access was meant to help.

U.S. hospitals have a tradition of trying to do everything for everyone, which generates enormous overhead costs that cannot be allocated logically to any given service and drive up the cost of all hospital services. The Innovator’s Prescription, pp. 73-105.

The requirement to accept all comers in emergency rooms is far from the only thing that needs to change, but it contributes to the broken business model problem.

Also, it is irrational to guarantee hospital access to the indigent – for any medical complaint – while failing to provide walk-in clinics that could serve their needs more effectively in most cases. The Innovator’s Prescription, p. 255.

The medical expenses foremost on the minds of most of the uninsured are not those resulting from catastrophic hospitalization. Rather, they are the costs of day-to-day care for acute infectious diseases and routine medications. When we . . . allow physicians’ groups to block the licensing of affordable retail clinics in poor neighborhoods, those we are hoping to help have little access to the non-catastrophic care so essential to their daily well-being.

Finally, the emergency room access requirement is much abused. According to a recent report from Texas, for example, nine patients logged 2,678 visits to hospital emergency rooms over six years at an average cost of about $1,000 per visit. Comcast News, 4/1/09.

Eight of the nine patients have drug abuse problems, seven were diagnosed with mental health issues and three were homeless. Five are women whose average age is 40, and four are men whose average age is 50 . . .

6. Phase out traditional Medicare coverage, providing capped funding for private insurance coverage of future retirees.

It may sound radical to recommend the end of traditional Medicare, but we have no doubt the country would be better off if this program had never been established.

#Medicare’s cost reimbursement schedules amount to a price control regime for the healthcare industry. The schedules make some diagnostic and treatment procedures very profitable (creating a strong incentive to promote them), while failing to provide adequate compensation for other procedures (notably preventive medicine to keep people well). The Innovator’s Prescription, p. 235.

#Medicare regulations impede the type of restructuring that is needed in the healthcare industry. For example, licensing requirements for reimbursement typically lag “many years behind changes in technology.” The Innovator’s Prescription, p. 385.

#And, of course, the rapidly growing cost of Medicare is a big contributor to the overall fiscal challenge facing the federal government – as we and other fiscal visionaries have pointed out so often. The Cure, p. 126.

Given the millions of people looking to Medicare for coverage of their post-retirement healthcare needs and the difficult transition issues that would be involved in outright termination, a compromise seems necessary. The Innovator’s Prescription, p. 398.

We believe that Medicare can be transformed into a neutral force in the industry – still able to fulfill its mission of providing care to the elderly, yet not inhibiting innovation that can help everyone. * * * We need to initiate change in portions of the industry that are beyond Medicare’s reach [note the importance of not extending the reach of government within the healthcare sector], rather than trying to change Medicare directly. And we need to control the ballooning costs of Medicare through regulatory change that enables or facilitates disruptive business models.

In one way or another, Medicare reform proposals generally replace traditional Medicare with private insurance or managed care coverage. Thus, per the House Republican Budget Alternative, April 2009, p. 28.

To make [Medicare] sustainable and dependable, those 54 and younger will enroll in a new Medicare Program with health coverage similar to what is now available to Members of Congress and Federal employees; and they will receive a premium support payment equal to 100 percent of the Medicare benefit.

Such an approach would give Medicare participants more choices about their healthcare coverage, but we would be surprised if it proved effective in curbing the rapid growth in Medicare spending – as must be done.

Accordingly, we propose an alternative arrangement – which would be somewhat analogous to the current procedures for Medicare Part C (Medicare Advantage plans) and Part D (prescription drugs) coverage.

#Traditional Medicare coverage for Part A (Hospital insurance) and Part B (Medical Insurance) would not be offered for Medicare participants retiring after a given date, e.g., January 1, 2012.

#Private insurance companies would be empowered to offer Senior Healthcare plans with specified terms (insurance coverage, deductibles, etc.) to subsequent retirees. Medicare would pay the insurance companies a fixed amount per senior insured, hereinafter referred to as the Medicare Contribution, thereby enabling the insurance companies to quote lower premiums.

#The Medicare Contribution would be adjusted for age and individual health problems (as identified at time of retirement) to avoid creating a disincentive for insuring high-risk seniors.

#The average Medicare Contribution would be indexed for inflation, thereby stabilizing Medicare’s outlays per senior in real economic terms. Over time, major savings in Medicare outlays could be expected versus the current system.

#Medicare’s role in directly paying healthcare providers, which has impeded innovation in the industry, would fade away. As explained in The Innovator’s Prescription, the results should be beneficial for all concerned.

Our list of cost saving ideas is not meant to be exhaustive, but we cannot resist one more. Punitive damage awards in medical malpractice cases represent a windfall to recipients and the attorneys who represent them, at the expense of everyone else involved with the healthcare system.

Malpractice insurance premiums for doctors are raised, which in turn leads doctors to raise their billing rates, move to another state, or retire. Also, doctors and hospitals order every medical test to man, whether needed or not, in hopes of avoiding potential legal liabilities.

Likewise, drug companies are motivated to expand the size of their clinical trials for new pharmaceuticals, and to spend inordinate effort identifying and listing potential adverse effects on product inserts that most people never read. Prescription drug prices are set higher in an effort to recover the resulting costs.

Surely doctors and other healthcare providers should be liable for actual damages if they blunder. Beyond that let’s put a cap on it!

We hope that these ideas will strike a responsive chord with readers. Feedback please, this subject is far too important to “leave it to the experts.”

And next week, we promise – after four straight entries on healthcare – to introduce a new topic.

The last two entries posed a dilemma: no one is happy with the U.S. healthcare system, but the Administration’s plan for fixing it appears unaffordable.

3/16/09: The president is pushing hard for near universal healthcare coverage, with government mandates and/or subsidies visualized to achieve it. The impetus for change is widespread dissatisfaction with the soaring cost of and perceived lack of access to healthcare.

3/23/09: Despite claims that the healthcare plan would “pay for itself,” most of the cost involved (perhaps $1.5 trillion over the next 10 years) would apparently be covered by tax increases. With the economy in recession and the government facing a dangerous and growing fiscal gap, such a use of resources seems questionable at best.

Some skeptics may decide to hold their fire. Well, the healthcare plan sounds expensive, but it might save money in the long run. Perhaps the best idea is to go along, asking just enough questions so I can claim to have opposed the plan if it does not work out.

As though to invite such a reaction, the president continues to glibly talk about cutting healthcare costs. Consider this comment at his March 24 evening press conference:

[Let’s] invest in health information technologies. Let's invest in preventive care. Let's invest in mechanisms that look at who's doing a better job controlling costs while producing good quality outcomes in various states and let's reimburse on the basis of improved quality, as opposed to simply how many procedures you're doing. Let's do a whole host of things, some of which cost money on the front end, but offer the prospect of reducing costs on the back end.

“If you’re making all these long-term cuts,” asked Chip Reid of CBS News, “why does [the deficit] continue to go up in the out-years [of the 10-year budget projection]?”

Patience, responded the president, “a budget is a snapshot of what we can get done right now.” He relegated Medicare and Medicaid “reforms” to future talks, as though the subject was separate and distinct from healthcare reform – and considerably less urgent.

There's been a lot of talk about entitlements in Medicare and Medicaid. The biggest problem we have long-term is Medicare and Medicaid. But whatever reforms we initiate on that front -- and we're very serious about working on a bipartisan basis to reduce those deficits or reduce those costs -- you're not going to see those savings reflected until much later.

Why all the fancy footwork? Cynics might see the healthcare plan as a “bait and switch” scheme, likely to have much the same results as Romney care in Massachusetts. National Health Preview, Wall Street Journal, 3/27/09.

First create vast new entitlements that can never be repealed, then later take the less popular step of rationing care when it's [the] last hope to save the federal fisc.

For those who disapprove of the healthcare plan – or think entitlement outlays should be reined in before committing to spend another $1.5 trillion over the next 10 years – or want some alternatives considered as a matter of due diligence – we would like to suggest a healthcare plan that would accomplish more and cost less.

Our presentation will (1) identify the key problem with the healthcare system (READY), (2) discuss its root causes (AIM), and (3) offer a proposed solution (FIRE).

The basic problem – Spending on healthcare has risen rapidly over the past half century, not just in dollars but also in real economic terms. Indeed, healthcare expenditures as a percentage of Gross Domestic Product (GDP) have tripled since 1960.

There is no sign that the growth of healthcare spending is abating. It could consume nearly half of the U.S. economy by 2082 (see graph from the PGPF blog) based on the current growth trend, although we suspect the trend line will level off before then.

As healthcare spending rises, the issue of who pays for it becomes increasingly important. Individuals, private employers, and state & local governments are all finding it difficult to keep up. Even the federal government is not “too big to fail,” and healthcare outlays will be a big part of the reason if a fiscal meltdown does take place.

Proponents of healthcare reform acknowledge that rising costs are a problem, but most of them place more weight on the number of Americans (currently said to be about 46 million) without healthcare insurance (HCI).

We would recommend caution in making major decision based on this statistic. For one thing, lack of HCI is not synonymous with lack of access to healthcare. Uninsured? So What? John Goodman, National Center for Policy Analysis, 9/6/06.

It is far more important to make medical care easily accessible than it is to make health insurance easily accessible. Beyond that, health care reformers are simply using the uninsured as a excuse to hawk reforms they want enacted anyway.

Take the oft-repeated proposal to make health insurance mandatory, just like automobile liability insurance. Health policy expert Greg Scandlen points out that although 47 states make auto insurance mandatory, the national uninsured rate for drivers is almost the same as the health uninsurance rate (13.2 percent vs. 15.7 percent in 2004).

Millions of people counted as uninsured have ready access to healthcare. What Do We Really Know About the Uninsured? William Snyder, Wall Street Journal, 11/21/08.

Many Americans believe that the uninsured are too poor to purchase coverage and that government programs aren't available to them. But a study published in Health Affairs in November 2006 estimated that 25% of the uninsured were in fact eligible for public coverage, and another 20% probably could afford coverage on their own.

On the other hand, millions of people enrolled in government healthcare programs (and therefore considered insured) are not receiving adequate care. What Medicaid Tells Us About Government Healthcare, Dr. Scott Gottlieb (American Enterprise Institute), Wall Street Journal, 1/8/09.

Reimbursement rates [for Medicaid] are so low, and billing the program so complicated, that it is hard for internists like me to get beneficiaries access to specialized care or timely interventions. For my patients as well, many of whom are uneducated or don't speak English, Medicaid is replete with paperwork, regulations and rejections that make the program hard to navigate.

In sum, mandating HCI for everyone would not necessarily produce better healthcare for the poor and disadvantaged, let alone better healthcare at lower cost for everyone. We therefore feel quite comfortable in concluding that the key problem with the healthcare system is rapidly rising spending (aka cost).

Root causes – Several explanations have been offered for the high and rising cost of healthcare, all of which have some validity – and limitations as well.

GOVERNMENT POLICIES: Surging healthcare spending over the past half century has been accompanied by a dramatic expansion (under presidents of both parties) of the federal government’s role. Among the milestones: Medicare and Medicaid enacted in 1965; Medicare eligibility extended to people under 65 with long-term disabilities in 1972; access to hospital emergency rooms provided to all comers in 1985; State Children’s Health Insurance Program (SCHIP) enacted in 1997; prescription drug benefit for Medicare enacted in 2003.

Government programs have (a) increased the aggregate demand for healthcare, (b) imposed substantial costs and restrictions on service providers, and (c) reduced the incentive for consumers to take cost into account in making healthcare decisions.

Meanwhile, advances in medical technology have created a profusion of treatment options that did not formerly exist. For example, the prime treatment for a heart attack used to be bed rest. Now the options include bypass surgery, angioplasty and pacemakers.

Given the foregoing, the surge in healthcare spending has been inevitable and can be expected to continue until some of the underlying causes change. The Cure: How Capitalism Can Save American Health Care, Dr. David Gratzer, Encounter Books (2006).

Gratzer’s confidence in Capitalism is appealing, especially given our predilection for smaller, more-focused, less costly government. After all, the U.S. Constitution says nothing about doctors or hospitals, and the 10^th Amendment must be there for some reason.

But we recognize that healthcare is run by the government in many countries, which spend considerably less per capita on healthcare than the United States does and may well get more for their money. For example, life expectancies in some of these countries are longer than here. See our 8/14/07 entry, “Healthcare by the numbers.”

Longevity is a function of many things besides the quality of healthcare available, of course, and for people in need of heavy-duty medical treatment, the U.S. system is first rate. Thus, according to Gratzer’s book:

The World Health Organization, in partnership with the International Union Against Cancer, compiles five-year survival rates for various types of cancers. The United States consistently beats Europe. The reasons include access to physicians and specialists, aggressiveness of treatment, and use of new technology and pharmaceuticals.

In the healthcare systems held up as a model for the United States, moreover, costs are typically held in check by restricting access to (aka rationing) healthcare. “Too Old” for Hip Surgery, Nadeem Esmail, Wall Street Journal, 2/9/09, relates several “horror stories” from Canada, including this one.

In Ontario, Lindsay McCreith was suffering from headaches and seizures yet faced a four and a half month wait for an MRI scan in January of 2006. Deciding that the wait was untenable, Mr. McCreith did what a lot of Canadians do: He went south, and paid for an MRI scan across the border in Buffalo. The MRI revealed a malignant brain tumor. Ontario's government system still refused to provide timely treatment, offering instead a months-long wait for surgery. In the end, Mr. McCreith returned to Buffalo and paid for surgery that may have saved his life. He's [now] challenging Ontario's government-run monopoly health-insurance system [in court].

Similarly, a 2007 report of the Healthcare Commission noted numerous failings in the UK, from hospital patients left unwashed in soiled bedding to two-year waits for psychological therapies and hearing aids. NHS patients face humiliating treatment, UK Telegraph, 12/6/07.

Opposition MPs said the report provided a "damning indictment" of the NHS after more than a decade of Labour government, which has seen huge increases in investment.

Funding has increased from £55 billion in 2002-3 to almost £90 billion in 2007-8, and the workforce has increased by 29 per cent.

EXCESSIVE CONSUMPTION – In addition to covering the healthcare expenditures of many Americans, the government provides favorable income tax treatment for employer-provided healthcare benefits (cost is deducted by the employer; benefits are not taxable for employees).

Given the prevalence of government and employer-paid healthcare plans, direct payment for services by consumers has been the exception rather than the rule. Payment of the bills by intermediaries fosters the illusion that healthcare is free, and many people make healthcare decisions without much regard to cost.

So what, surely people will not undergo unnecessary medical tests and procedures or take medicine they do not need. Or will they?

It is common experience that drugs tend to be over-prescribed (perhaps by several different doctors, none of whom is aware of all the drugs being taken).

Medical tests or procedures may be recommended by doctors (and accepted by their patients) even if the risk-to-benefit ratio is problematic, especially if the Medicare reimbursement schedules that basically set prices in the U.S. healthcare system provide leeway for an attractive profit. Three “Inconvenient Truths” about Healthcare, Victor Fuchs, New England Journal of Medicine, 10/23/08.

Overutilization of careis another problem that is not easily solved, partly because unnecessary or marginally useful tests, prescriptions, operations, and visits generate income for providers.

Last but not least, treatment is all too often required for illnesses, such as childhood obesity or early onset diabetes, which could have been prevented by sensible lifestyle adjustments.

For an in-depth review of the foregoing, see The Last Well Person, Nortin M. Hadler, M.D., McGill-Queen’s University Press (2004). (Caveat: Dr. Hadler surveys a wide range of medical problems/ treatment options. For a balanced view, we recommend that you also consider the opinions of other medical professionals.)

INDUSTRY STRUCTURE – In many industries, such as computers for instance, advances in technology have led to lower costs and better products. Customers get more and more for their money.

Advances in medical technology, on the other hand, create new uses for healthcare dollars while doing little or nothing to reduce costs. The reason: healthcare providers are organized to provide treatment on a fee for service basis. With limited incentive for efficiency gains, players in the industry continue operating in a dysfunctional manner.

# Hospitals serve wildly disparate functions, from cutting edge diagnosis and treatment to helping whoever shows up in the emergency room, which cannot be intelligently managed under one roof.

# Family doctors have become gatekeepers for referrals to specialists; time and effort spent counseling patients on how to stay well or manage their infirmities is poorly compensated. Young doctors seek to become specialists so they can earn more money providing lucrative tests and procedures.

# Pharmaceutical companies spend hundreds of millions of dollars to test and obtain approval of new drugs of general application. Such drugs benefit only a fraction of the people who take them, and they may result in crushing legal liabilities if all applicable side effects have not been identified and noted in the product inserts (which many people do not read).

# Insurance companies rule on reimbursement requests. They have a built-in incentive to disapprove expenditures (even if merited on a long-term basis).

# Government healthcare regulations, notably Medicare reimbursement schedules, serve to preserve the status quo rather than promoting constructive change.

Enormous cost savings could be achieved by rebooting the healthcare industry, but the changes required would be disruptive for most of the players involved, including consumers (i.e., the general public), and they cannot be implemented on an ad hoc basis. The Innovator’s Prescription: A Disruptive Solution for Healthcare, Christensen, Grossman and Hwang, Harper-Collins (2008).

Christensen et al. visualize a top-down change process in which the needed changes would be driven on a systemic basis by large employers, long-term HMOs organized along the lines of Kaiser Permanente, or if need be the government.

Sorry, we have run out of space. Our proposed plan to fix healthcare will have to wait until next week. Meanwhile, we would welcome reader input about the “right answer” to an undeniably difficult problem.

The president promised more and better healthcare at lower cost during the campaign last fall (10/20/08 entry), and he has continued on message. Thus, at the Forum on Health Reform on March 5, he claimed that his healthcare plan could help rein in the rapidly growing costs of Medicare and Medicaid.

Medicare [and Medicaid?] costs are consuming our federal budget. I don't have to tell members of Congress this. Medicaid is overwhelming our state budgets. I don't need to tell governors and state legislatures that. - - - Making investments in reform now, investments that will dramatically lower costs, won't add to our budget deficits in the long term. Rather, it is one of the best ways, in fact maybe the only way, to reduce those long-term costs.

OK, sounds great, except where are the savings supposed to come from that would more than offset the cost of ensuring coverage for the 46 million or so American residents (including illegal aliens) that do not have healthcare insurance? Here is a possible answer excerpted from the President’s budget proposal (hereinafter “Budget”), page 11.

Costs vary widely across areas of the United States, but evidence suggests that the high-cost areas do not generate better health outcomes than the lower-cost ones. Costs are twice as high at some of our Nation’s leading medical centers than at others – and again the high-cost centers do not generate better outcomes than the lower-cost ones. Academic researchers suggest that costs could be reduced by as much as 30 percent – or roughly $700 billion a year – while protecting the quality of healthcare delivered if the high-cost areas and hospitals adopted the practices of the low-cost ones.

Hmm, what if the low-cost areas and hospitals adopted the practices of the high-cost ones instead? After all, previous expansions of the government role in healthcare (e.g., the launching of Medicare in the 1960s) fueled rising healthcare costs.

But we digress, for the contemplated $700 billion a year savings from adopting best practices nationwide are not claimed in the Budget. Instead, there is a $634 billion “reserve fund” over the 10-year period (see pp. 28-30, 127-128), which purports to represent how the president’s healthcare plan would be funded. The composition of the reserve fund follows, along with our comments:

$318 billion in tax increases, to be achieved by reducing the value of income tax deductions for upper income taxpayers.

There is no apparent connection between tax increases for “the rich” and healthcare benefits for “the poor.” It would seem more logical to allocate the assumed tax increases to government expenditures in general.

$177 billion in savings from eliminating the average 14% “overpayment” (versus traditional Medicare coverage) for Medicare Advantage plans.

This change would (a) reduce benefits for seniors who have chosen Medicare Advantage plans, (b) eliminate competition for traditional Medicare coverage, and (c) increase Medicaid costs. The Success of Medicare Advantage: What Seniors Should Know, Robert Moffit, Heritage Foundation, 6/13/08.

To compare two different insurance systems with different levels of benefits and suggest overpayment because one is covering the benefits that the other is not is a classic apples-to-oranges comparison, and it only highlights the traditional Medicare program's serious gaps in not covering services that many seniors need and for which nine out of 10 must pay extra for supplemental insurance. As noted, Medicare Advantage payments include the payments for the extra benefits and services not included in traditional Medicare . . .

$139 billion in savings that primarily fall under the heading of tightening the screws on drug companies and insurance companies.

After all the claims about cost savings, such cuts (totaling 1.4% of baseline Medicare + Medicaid outlays for the 10-year period, see p. 117) seem underwhelming. Healthcare: Obama’s Budget Skimps on Cost-cutting, Catherine Arnst, Business Week, 3/5/09.

Although the president’s healthcare plan has not been priced out at this point, and perhaps fairly so as the details are to be developed by Congress, it is acknowledged (Budget, p. 27) that the total cost would exceed the amount of the reserve fund.

The President recognizes that while a very large amount of money and a major commitment, [more than] $630 billion is not sufficient to fully fund comprehensive reform. But this is a first crucial step in that effort, and he is committed to working with the Congress to find additional resources to devote to healthcare reform.

According to budget experts outside the government, e.g., John Sheils of the Lewin Group and John Rother of AARP, the cost of the president’s healthcare plan over the next ten years would be on the order of $1.5 trillion. MyWay.com, 3/17/09.

So how can the president’s healthcare plan be squared with the fiscal sustainability principle he espouses?

The [healthcare] plan must pay for itself by reducing the level of cost growth, improving productivity, and dedicating additional sources of revenue. [Budget, p. 28]

Simple, the additional savings and revenue to zero out program costs are TBD (to be determined). Budget, p. 128.

Rumors that the imputed value of employer-provided healthcare benefits would be taxed are already flying. Administration Open to Taxing Health Benefits, Jackie Calmes & Robert Pear, New York Times, 3/14/09.

Proposing to tax healthcare benefits would be a bit awkward for the president, who ripped his opponent on the campaign trail last fall for suggesting the idea (even when packaged with an offsetting tax credit). So the game would be to have Congress propose the tax and “go along with it.” Vindicating McCain, Wall Street Journal, 3/21/09.

In a deeply cynical turnabout, the White House now says a tax on employer benefits is acceptable as long as someone else proposes it.

To sum up: (a) the alleged savings from the president’s healthcare plan have not been explained (let alone quantified), and (b) the costs of his plan would be covered primarily by tax increases. It is far from clear the tax increases would be borne only by “the rich.”

Claiming that this plan would “pay for itself” seems absurd, and we decline to buy into the deception.

The big picture: Our political leaders should concentrate on getting the financial system back and planning how to address the government’s existing fiscal problems before embarking on costly new initiatives.

As though a gold-plated healthcare plan would not be bad enough, the Administration is also pushing costly “clean energy” and education initiatives. “The young and the reckless” are trying to bite off more than they can chew (3/2/09), and the consequences of letting them do so would be disastrous (3/9/09).

Evidence and analysis that support our “put first things first” advice (11/24/08, 12/1/08) continue to accumulate:

Economists say the president’s proposals to raise marginal rates and diminish the value of mortgage interest deductions for upper income taxpayers would work against a recovery in the housing market. Destroying housing market: More taxes, fewer deductions are twin killers, Washington Times, 3/16/09.

AIG bonuses are minor in comparison to the $173 billion in taxpayer funds that have been injected into AIG, but the furor about them – notably House passage of a 90% tax on bonuses paid to firms (including AIG) that received $5 billion or more in TARP funds – could undermine efforts to restore confidence in the financial markets. Obama’s AIG Panic, Wall Street Journal, 3/19/09.

What a time for the Treasury’s proposal for a public-private partnership to buy toxic assets! Treasury readies bank cleanup plan, Washington Times, 3/21/09.

While the toxic loan cleanup program has been much anticipated in financial markets, it debuts amid dark clouds hanging over the Treasury's bank bailout program. The possibility of getting new funding for the program any time soon seems remote, given the public furor and backlash in Congress this week over bonuses paid to the biggest bailout recipient -- American International Group.

Also, banks and private investors have grown wary about participating in the bailout program because of stiff restrictions on pay enacted by Congress, including a move this week to claw back bonuses from employees at AIG and other banks. The hedge funds the government hopes will participate in the toxic loan program cater to some of the highest paid executives and wealthiest investors in the world. Moreover, they are secretive and jealously guard information about their pay, perks and profits.

In addition to being feckless, the 90% tax on bonuses might be deemed unconstitutional if applied retroactively. “Congress Betrays Ideals of America’s Founding,” National Center for Public Policy Research, 3/20/09.

The Federal Reserve announced plans on March 18 to purchase $300 billion of Treasury bonds and an additional $750 billion of mortgage-backed securities. There can no longer be any doubt that the Fed is “printing money,” and you know what that means. Secretary of the Fed, Wall Street Journal, 3/20/09.

With its announced plan to make a mammoth purchase of Treasury securities, the Fed essentially said that the considerable risks of future inflation and permanent damage to the Fed's political independence are details that can be put off, or cleaned up, at a later date. Whatever else people will say about his chairmanship, Ben Bernanke does not want deflation or Depression on his resume.

Barron’s panned the Budget in a March 2 article by Jules Epstein, predicting that “foreigners may eventually grow tired of accumulating our debt” and “may even start liquidating [their holdings], which could unleash a selloff in the dollar that could in turn hammer our capital markets.” And why not, given:

Permanent ratcheting up of federal spending – [unrealistic] assumptions for growth in gross domestic product – boosting taxes on the rich [with at least some] retarding effects on growth – no respite from chronic fiscal deficits

Foreign lenders may be getting restive already. Consider the comments of Chinese Premier Wen Jiabao at a recent press conference.

"We have lent a huge amount of money [roughly $1 trillion] to the U.S., so of course we are concerned about the safety of our assets. Frankly speaking, I do have some worries," Mr. Wen said in response to a question. He did not offer specific suggestions on economic policy to the U.S. government, but called on it to "maintain its credibility, honor its commitments and guarantee the security of Chinese assets."

The immediate response from the Administration (per Press Secretary Robert Gibbs) was don’t worry because the president’s Budget is fiscally responsible.

I think the best thing we can do to assure anybody in Washington, America or throughout the world that we're serious is to pass the President's budget and put ourselves back on the path towards fiscal sustainability and fiscal responsibility. The President's budget will cut the deficit in half in four years, because the President understands that we cannot continue to do what we've been doing for years and years, and spending money that we don't have. Instead, we need to put ourselves back on that path in order to give everybody confidence that we're serious about not only dealing with those challenges but not wasting taxpayer money.

The president is apparently on the same page. At a March 18 rally in California, he defended raising taxes on upper income bracket taxpayers and urged supporters to push for swift approval of the Budget. Obama: Rich can afford tax hike, Washington Times, 3/19/09.

Mr. Obama's main thrust was to sell the budget blueprint he submitted to Congress as a long-term investment in the next generation, and said too often people look at the document as a spreadsheet of numbers instead of realizing "It's about your lives; it's about your future."

Earlier in the day the president released a Web video urging people on his 13-million-strong e-mail list to knock on doors and make phone calls in support of his budget plan.

The CBO further clouded the picture on March 20 by releasing an analysis indicating deficits over the next 10 years will be $2.3 trillion higher than projected by the White House. A Preliminary Analysis of the President’s Budget and an Update of CBO’s Budget and Economic Outlook, Congressional Budget Office, March 2009.

The CBO’s baseline projection (continuation of existing policy) indicates deficits of $4.4 trillion over the next 10 years, which would increase to $9.3 trillion if the Budget were approved.

The president’s Budget (p. 115) shows baseline deficits of $9.0 trillion over the next 10 year being shaved to $7.0 trillion. Quite a different picture! For further detail, see the following table.

Budgets over the next 10 years depend on many assumptions, and it would be unwarranted to consider the CBO data more “correct” than those of the Administration without a detailed comparison. However, the CBO analysis has heightened concerns about projected deficit spending – which is a good thing.

The latest figures, even worse than expected by top Democrats, throw a major monkey wrench into efforts to enact Obama's budget, which promises universal healthcare for all and higher spending for domestic programs like education and research into renewable energy.

The dismal deficit figures, if they prove to be accurate, inevitably raise the prospect that Obama and his allies controlling Congress would have to consider raising taxes [by more than is already planned] after the recession ends or paring back his agenda.

There has been no indication the president is prepared to back away from “a clear, renewable energy future,” however, nor from a “complete and competitive education for every American child.” As for healthcare, he has drawn a line in the sand. Obama: Budget priorities won’t change, Christina Bellatoni, Washington Times, 3/21/09.

To those who say we have to choose between healthcare reform and fiscal discipline, I say that making investments now that will dramatically lower healthcare costs for everyone won't add to our budget deficit in the long-term — it is one of the best ways to reduce it."

If you are dubious about the president’s healthcare plan and would like to hear about alternatives, stay tuned. Our suggestions for real healthcare reform are on the way.

The Fiscal Responsibility Summit (February 23) and the Healthcare Summit (March 5) were both held at the White House, with a similar number of participants, over the course of an afternoon. Otherwise, the two events differed profoundly.

FRS - As previously reported (3/2/09), the Fiscal Responsibility Summit was a “top down” event convened with little advance preparation. All participants were prominent people, the breakout sessions addressed disparate aspects of the fiscal equation, and the only immediate result was the president’s promise to cut the currently huge deficit in half over four years.

A report summarizing the breakout discussions was promised within 30 days, and there was much talk about recognition of fiscal realities and bipartisan cooperation. But the path forward remains murky for now.

In particular, the idea of appointing an independent commission to study the fiscal problem and propose a comprehensive solution was raised without being embraced. Consider the following comments during the closing session (chaired by the president).

I would agree with Kent [Senator Kent Conrad, D-ND, Chairman of the Senate Budget Committee] that we agree we need a special process. We didn't come to final agreement on exactly what that process would be -- would it be a task force or a steering committee within the Congress, or a commission from without Congress? That's still an issue to be resolved. But I don't think it's an issue we can't resolve. And we moved towards discussion of some sort of hybrid of the two.

You mentioned in January about the need to achieve a grand bargain involving budget process, Social Security, taxes, healthcare reform. You are 110 percent right. We need to do that. The question is, how do we do it? Candidly, I think it's going to take some type of an extraordinary process that engages the American people, that provides for fast-track consideration. And with your leadership, that can happen. But that's what it's going to take, Mr. President.

HCS – The euphemistically named “Forum on Health Reform” marked the culmination of a series of healthcare workshops conducted around the country ( see 12/15/08 entry). Seven workshop leaders attended the HCS, and the second of three speakers at the opening session was Travis Ulerick, a firefighter/EMT from Dublin, Indiana.

Mr. Ulerick acknowledged six other HCS attendees and 30,000 Americans nationwide who had participated in healthcare workshops in their communities. He summed up the already prepared report (presented to the president on 3/5) as follows:

. . . Americans agree on the problems with the system, that costs are too high and accessing quality coverage is too difficult. Some groups submitted stories that sound familiar to me, especially, about people who were afraid to go to the hospital for treatment because they didn't know if they could afford it. The most common theme is that Americans don't believe the current healthcare system works for them.

The speaker went on to introduce the president, who spoke forcefully about the need to get started on an overhaul of the healthcare system this year – economic crisis or not – because the system was broken and reform could not be put off any longer.

Even from a fiscal standpoint, the president claimed, healthcare reform can reduce the burden of Medicare and Medicaid on the federal government’s budget (and in the case of Medicaid, state budgets as well).

. . . healthcare reform is no longer just a moral imperative, it's a fiscal imperative. If we want to create jobs and rebuild our economy and get our federal budget under control, then we have to address the crushing costs of healthcare this year in this administration.

Making investments in reform now, investments that will dramatically lower costs, won't add to our budget deficits in the long term. Rather, it is one of the best ways, in fact maybe the only way, to reduce those long-term costs.

The president stated the purpose of the forum as starting to determine how to “lower costs for everyone, improve quality for everyone and expand coverage to all Americans.”

As for how all of these goals could be achieved while reducing government outlays, he pointed to potential cost savings opportunities: “modernize our system and invest in prevention . . . ensure people aren’t overcharged for prescription drugs or discriminated against for preexisting conditions . . . eliminate fraud, waste and abuse in government programs.”

No sacrifices by healthcare consumers were called for: “[If] somebody has insurance they like, they should be able to keep that insurance . . . keep their doctor . . . just pay less.”

The road ahead would involve a search for common ground, without rigid ideas as to what the new healthcare system should look like.

In this effort, every voice has to be heard. Every idea must be considered. Every option must be on the table. There should be no sacred cows. Each of us must accept that none of us will get everything that we want, and that no proposal for reform will be perfect. If that's the measure, we will never get anything done.

The only obstacle was said to be overcoming “entrenched interests” [presumably healthcare providers and insurance companies] so “we will not “arrive back at the same stalemate that we've been stuck in for decades.”

The commitment was “to enact comprehensive healthcare reform by the end of this year.”

Would the president’s healthcare plan truly pay for itself? We have previously scoffed at such a notion. 10/20/08 – Both candidates offer “pie in the sky” healthcare plans.

But it must be conceded that the president’s opening remarks were well crafted and delivered with conviction. Furthermore, we do agree that the healthcare system is seriously flawed; the question is how it should be fixed.

So this entry will focus on the president’s healthcare meeting and agenda, with our own views to be presented in future entries.

As at the FRS, the participants broke into smaller groups after the opening session, but the groups were apparently focused on the overall problem (versus subsets of it) this time and the president’s sendoff was “let’s go to work” versus his oblique reference at the FRS to “the breakout sessions that are starting right now.”

Some of the action in the breakout rooms was covered by “live blogger” Rebecca Adelman of DHHS, although we were unable to access the linked video clips (perhaps you will have more success).

2:07: Now I'm sitting in a breakout session in the Executive Office building. It's quite a group - former HHS Secretary Donna Shalala, Marian Wright Edelman, Senators Rockefeller, Bingaman and Wyden, are among the participants. The group is moderated by Larry Summers and Hz’s Neeta Tanden.

2:20: US Chamber of Commerce President Tom Donohue addresses the panel, saying there is a "vigorous understanding" that improvement is needed and healthcare costs need to be lower. It's an intense discussion, but productive.

2:32: On to the 3rd floor of the Executive Office building to another panel. Moderating this discussion are Valerie Jarrett and OMB's Zeke Emanuel. Majority Leader Steny Hoyer, Senators Chris Dodd, Robert Bennett, Debbie Stabenow, and Bernie Sanders are among the 22 panelists. Chip Kahn of the Federation of American Hospitals and Pfizer's Jeff Kindler are also part of the discussion.

3:05: I just entered another one of the five breakout sessions as Sister Carol Keehan from the Catholic Health Association was passionately addressing her fellow panelists about the need for reform. Budget Director Peter Orszag and Secretary Shinseki are moderating.

3:16: Dan Danner from the National Federation of Independent Businesses urged Orszag's panel to pay special attention to the voices of small business owners in the health reform debate, who are struggling to insure their workers because of skyrocketing costs. Danner told the lawmakers, including Congressmen Patrick Kennedy, Eric Cantor, and Senator Barbara Mikulski that "The status quo is not acceptable."

3:25: Ron Pollack from Families USA just closed Orszag's panel. He stressed to the assembled members of Congress that President Obama's budget was the first important step in helping make health coverage affordable.

Then it was back to the East Room, now set up in a town hall style with the president’s podium in the middle. Travis Ulerick et al. were sitting in the first row behind the podium. The ensuing session featured calls for action by surprise guest Senator Ted Kennedy and the president.

4:20: The President passes the microphone to Senator Kennedy, who [says] "the time for action is now." He said he looked forward to being a foot soldier in the reform effort and firmly stated: "This time we will not fail." The room erupts in applause again.

5:15: The President closed with some marching orders - he asked the groups to stay involved, he promised a summary report describing the views aired today, and stressed it was time to move aggressively to achieve healthcare reform. He then addressed the notion that we are taking on too much in attempting reform this year. He said when times were good - when the economy was better and we were not at war, we failed to get it done. President Obama said there is always a reason not to do it - and he could think of no better time than now. Everyone stood and cheered as the President shook hands with participants and the event concluded.

OK, what exactly would the healthcare reform that everyone cheered for consist of?

Judging from the president’s proposals during the campaign last fall, the end result would approximate universal healthcare, albeit without an immediate government takeover of the entire healthcare system.

We wrote earlier (12/15/08) that the healthcare workshops being organized around the country would “predictably support” the president’s vision, and it is now possible to test [and we believe confirm] this by reviewing the summary report.

The 3/5/09 report is lengthy, detailed, and in all fairness reports a range of opinions about how the healthcare system should be changed. Perhaps the most important section from a policy standpoint is “Roles in a Reformed U.S. Healthcare System,” which goes beyond a lower cost/ fewer problems wish list to the key question: who would sponsor and pay for the changes desired.

There was considerable support for a “single-payer” (i.e., government run) system.

Over one-quarter (27%) of the groups discussed the merits of a single-payer system, and the majority of those groups supported this idea. These groups argued that this radical change was a necessary step for reform.

But some groups favored a hybrid government/employer system due to concerns that a single-payer system “would lower the quality of service and eliminate competition.”

A provider in Maquoketa, Iowa, wrote [that] . . . "some standardization is necessary, but I worry that a single-payer plan would eliminate competition." A small group in Welaka, Florida . . . [was concerned about] inability to get care when needed and rationing of access to tests, medical procedures and qualified doctors."

And there were even suggestions that existing government programs might be at the root of healthcare problems, although “this opinion” was said to be “in the distinct minority.”

A group in Middletown, Virginia, reported [that] "The consensus of the group of 27 neighbors who attended the forum was that most of the problems with the healthcare system is a result of the complex tangle of Federal government regulations already on the books and that any additional interference would only make matters worse."

Also, the section about the cost of healthcare fails to mention skyrocketing fiscal burdens for federal and state governments.

Healthcare Community Discussion participants concluded that the American healthcare system places an extraordinary cost on individual Americans and American business. The cost of insurance, the cost of drugs, and the cost of healthcare services directly affected many participants, forcing them to make difficult choices. Participants also reported that the system's lack of transparency and cumbersome administration raise the cost of services and heighten the stress and frustration associated with healthcare.

Legislation would be necessary to bring about the kind of healthcare change that is advocated, and the word is that the president will proceed by proposing a plan in broad strokes and let Congress fill in the details. This marks a conscious, and probably well-advised change from the Clinton Administration’s failed strategy to implement universal healthcare in 1993. Obama: “No sacred cows” in healthcare summit, Liz Sidoti, D.C. Examiner, 3/5/09.

Also unlike Clinton, Obama is planning to send only broad principles to Congress of what he wants to see in the bill, such as increased coverage and controlled costs. The House and Senate will be left to do the heavy lifting. And, Obama is planning to hold a series of healthcare forums outside of Washington to solicit ideas and drum up support for his plan.

In summary, the prevalent discontent with the healthcare system has been fairly laid out. The president is engaged on this topic as he is on none other, and change is coming.

Everyone should worry about the government’s soaring entitlement outlays and general lack of budgetary discipline. Lenders will balk at some point, the government will default on its debt, and a fiscal meltdown will take place. RX: slash government spending, restructure entitlements, simplify taxes, and rationalize regulations – before it is too late.

When will such a fiscal meltdown occur unless decisive action is taken to avert it? No one knows, but “in about 5 years” might be a reasonable guess.

Focused on the longer-term problem, SAFE has tended to minimize the current economic situation.

1/14/08 – Expressed disappointment “that the experts seem more concerned about the possibility of a recession in 2008 than they are about the continuing lack of action on the government’s long-term fiscal problems.”

9/1/08 – Panned the idea of a second economic stimulus bill (spending on the order of $50-100 billion), characterizing the first one ($160 billion in tax rebates) as “bad enough.”

9/22/08 – Said tumult in the financial markets (demise of Lehman Brothers, buyout of Merrill Lynch, and initial bailout of AIG) “is not the fiscal meltdown we have so often talked about.” However, did not oppose a $700 billion fund (TARP) to shore up the financial system.

11/24/08 – Questioned whether government action would speed an economic recovery; recommended that fixing the fiscal mess take priority.

2/2/09 – Noting that the Federal Reserve had flooded the financial system with liquidity and the government was projected to run record deficits, suggested that a multi-year economic stimulus package (on the order of $1 trillion) would represent overkill.

#U.S. housing is in a prolonged slump, with pending home sales down 7.7% in January (wiping out an improvement in December and then some). Financial Times, 3/3/09.

#U.S. auto sales plummeted in February, e.g., by 53% for GM and 40% for Toyota. Chicago Tribune, 3/4/09.

#On 3/6/09, the Department of Labor reported the February jobless rate, which now stands at 8.1% vs. an average of 6.0% in the 3^rd quarter of 2008.

#The Consumer Confidence Index fell to 25 in February, its lowest level since the index began in 1967. Washington Times, 2/24/09.

#Food stamps were used by 31.5 million Americans in September 2008, surpassing a record set in 11/05 after Hurricane Katrina. Reuters, 12/4/08.

#Stock prices have fallen by over 50% since October 2007, with over 1/3 of the decline in the last four months (since the election).

HAPPENING NOW - Some experts say the current recession is extremely serious and will last several years under the best of circumstances. For example:

#Economist Nouriel Roubini (aka Dr. Doom) warned about the dangers of America’s speculative housing boom as early as 2005. His best-case scenario at this point is “a two-three year recession in advanced economies” with a 1/3 chance of a “near depression.” He advocates “much more aggressive monetary easing” and “much more fiscal stimulus.” Time, Interview by Michael Schuman, 3/3/09.

#Economist Michael Barro expects the current recession to surpass the 1982 recession, with a robust recovery possibly taking until 2012. And that’s “the bright side.” Based on empirical studies of the correlation between stock market crashes (which has already happened in this case) and economic contractions, he assigns a 1/5 probability of a minor depression (10% decline in economic output) or worse. Wall Street Journal, 3/5/09.

#Investor George Soros views the global financial system as “on life support,” with “no sign that we are anywhere near a bottom.” Reuters, 2/21/09.

Others are inclined to be more optimistic. There is nothing fundamentally wrong with the economy, the country has weathered economic setbacks before, this is all the government’s fault, etc.

And the economic assumptions embodied in the president’s FY 2010 budget proposal are relatively upbeat, as was caustically noted by Townhall columnist Jonah Goldberg in a 3/7/09 column.

But there's good news! According to his budget -- which he assures us is an "honest accounting" of our predicament -- the economy will shrink by only a measly 1.2 percent this year (it fell by a 6.2 percent annual rate in the final quarter of 2008) and then take off next year with 3.2 percent growth and soar for years to come.

But let’s cut to the chase. The current economic situation is indeed more serious than we anticipated a year ago, and a quick rebound no longer seems likely.

As a review of the story thus far, check out a 2/17/09 PBS documentary (56 minutes) called “Meltdown.” The story has been well publicized, but watching it unfold from the standpoint of the participants adds a dimension that cannot readily be conveyed in words alone.

COMING SOON: What about the implications of the massive debt and commitments that the government – which was already overcommitted – is taking on to fight the recession?

As of 9/30/08, the government was in a $56 trillion fiscal hole (including the present value of unfunded obligations, principally for entitlements). The national debt is depicted as the “tip of the iceberg” in informational ads of the Peterson Foundation.

Factor in the deficits now contemplated, ostensibly to fight the recession, and the picture will get that much darker.

And remember that the U.S. Treasury could face losses on the massive amounts that the Federal Reserve and FDIC have extended – via loans, guarantees, etc. – to backstop the financial sector. Per one account, which is not up to date, total government commitments of this nature are in the $7 trillion range. CNBC, 11/28/08.

Not only is it an astronomical amount of money, it's a complicated cocktail of budgeted dollars, actual spending, guarantees, loans, swaps and other market mechanisms by the Federal Reserve, the Treasury and other offices of government taken over roughly the last year, based on government data and news releases. Strictly speaking, not every cent is a direct result of what's called the financial crisis, but they're all arguably related to it.

This might be a good time for some historical perspective. See The Ascent of Money: A Financial History of the World, Niall Ferguson, Penguin Press (2008).

As the book relates, governments – like anyone else – can come a cropper by taking on financial commitments they have no reasonable prospect of covering. The U.S. government is not immune.

Ferguson addressed the current outlook in a recent interview with Michael Hogan of Vanity Fair. Here are some of his key points:

Things will get worse before they get better. Unemployment could go to 10% or so by the end of 2009, which will lead to further declines in asset values. “This is worse than the early ‘80s.”

The stimulus bill, etc. are “better than nothing,” but they are merely preventive measures “to prevent a complete implosion of the economy.” The situation might be called a “Great Repression,” as the main result will be to convert excessive private debt into public debt.

To resolve matters, says Ferguson, the debt must be cancelled via either default or inflation. Stiffing China et al. would have many negative consequences. Inflating the debt would also hurt foreign lenders, not to mention decimating the savings and fixed dollar incomes of many far from wealthy Americans. Hmm, sounds like our nightmarish vision of a fiscal meltdown.

A DILEMMA: The current recession arguably justifies massive government intervention, including actions already taken and actions that have been proposed.

But such intervention could speed the onset of another crisis – the fiscal meltdown that SAFE and others have been warning about.

Picture a gymnast on the balance beam, whose right foot comes down partly off the beam. Over compensating, she winds up toppling to the left.

So while it would be unrealistic to expect the government to sit back and let the recession run its course, there is every reason to intervene with surgical precision and a clear recognition of the challenges that lie ahead.

POLICY IMPLICATIONS: The key element in the administration’s plan to fight the recession seems to be massive government spending to “jumpstart the economy.”

We opposed the economic stimulus bill ($787 billion), questioning whether that much stimulus was needed and also pointing out that much of the proposed spending was not “timely, targeted and temporary” and would therefore not achieve the bill’s ostensible purpose.

Several hundred economists had a similar view, as evidenced by their signature of the following statement:

Notwithstanding reports that all economists are now Keynesians and that we all support a big increase in the burden of government, we do not believe that more government spending is a way to improve economic performance. More government spending by Hoover and Roosevelt did not pull the United States economy out of the Great Depression in the 1930s. More government spending did not solve Japan's "lost decade" in the 1990s. As such, it is a triumph of hope over experience to believe that more government spending will help the U.S. today. To improve the economy, policy makers should focus on reforms that remove impediments to work, saving, investment and production. Lower tax rates and a reduction in the burden of government are the best ways of using fiscal policy to boost growth.

The expansive spending reflected in the president’s recently submitted budget proposal, which projects a deficit of roundly $5 trillion for FY 2009-2013, would compound the damage and speed the coming fiscal meltdown. Also, once government spending for a program gets set at a given level, it is very hard to reduce it.

Congress should send the administration back to the drawing board, in our opinion, with the following instructions for balancing the budget over the next four years.

#Take a whack at wasteful government spending programs (agricultural subsidies, corporate welfare, government grant programs) and burdensome laws/regulations (oil and gas drilling restrictions, Sarbanes-Oxley requirements for financial reporting, CAFE requirements for auto manufacturers). There is no shortage of targets.

We recognize, however, that a revamped regulatory regime for the financial system is inevitable (and probably desirable).

Thus, former Federal Reserve Paul Volcker (who led the fight against double digit inflation in the early 1980s) recommends that commercial banks (which the government backstops) be excluded from speculative activities such as trading securities or creating financial derivatives. Other financial entities could be permitted a freer rein, says Volcker, so long as they did not get too big. “But I don’t think we need to have close regulation of every peewee hedge fund in the world.” February talk in Canada.

See also Lost Trust: The Real Cause of the Financial Meltdown, Bruce Yandle, February 2009, for a nuts and bolts (17 pages plus references) explanation of how so many dubious subprime mortgages could be securitized and marketed worldwide to investors who were not put on notice of the underlying risks.

Ultimately, 85 percent of the subprime mortgages issued were folded into structured debt obligations with an AAA rating.

#Stop pushing major initiatives that would worsen the government’s already grave fiscal problems without materially contributing to an economic recovery.

As columnist Charles Krauthammer observes, there is a long list of causes for the near collapse of the financial system and ensuing recession. But the list does not include “the absence of universal health care, let alone of computerized medical records. Nor the absence of an industry-killing cap-and-trade carbon levy. Nor the lack of college graduates.”

Re the administration’s green energy proposals, you may recall a cartoon that SAFE director Bill Morris dreamed up last summer. Look out, that puppy can bite!

#Set the wheels in motion to restructure entitlements (Social Security, Medicare, Medicaid, etc.) and radically simplify the tax system. The Fiscal Responsibility Summit on 2/23/09 was a promising start, but it needs to be followed by the formation of a working group with real clout – such as a SAFE Commission.

For a well-reasoned explanation of the rationale for such a commission (whatever the title), see the following statement by representatives of the American Enterprise Institute, Brookings Institution, Concord Coalition, Heritage Foundation, Peterson Foundation, Progressive Policy Institute, and Urban Institute.

3/2/09 – The young and the reckless

Last week, we related the stimulus bill to other initiatives in play – mortgage foreclosure plan, more financial sector rescue funds, healthcare (SCHIP + proposals on the way), “green” energy, and pressure for tax hikes.

Since then, our concerns about the big government express have been amply vindicated. Indeed, we missed two important points:

• Plans are afoot to involve the federal government in eliminating high school dropouts (“no longer an option” says the president) and raising the percentage of young people who go on to college. Details are sketchy, but a serious increase in federal outlays would doubtless be involved.

• A $410B omnibus spending bill was passed in the House (to replace a continuing resolution for nondefense discretionary spending from last fall). The bill boosted previous spending levels by 8%, and it included thousands of earmarks. (Despite his professed opposition to earmarks, there is no indication the president will fight them in this case.)

In an evening address to Congress on 2/24/09, the president called for action on all fronts. For a flash reaction, see Obama Needs a “Not To Do” List, Holman Jenkins, Wall Street Journal, 2/25/09.

Put away childish things, President Obama said during his inauguration. He couldn't have found a theme more suited to the moment. The preoccupations that he and most politicians are used to running on, and that still characterize too many of his administration's utterances, are being exposed in the global economic disaster as the soppy indulgences they always were.

http://online.wsj.com/article/SB123552068199964531.html

It would be easy to echo such sentiments, but knee jerk rejection seems futile. We intend to study the president’s proposals as details become available and formulate considered responses.

What about the overarching need to balance the budget and stop running up the national debt? The president spoke to this issue at the Fiscal Responsibility Summit (FRS) on 2/23/09.

The FRS took place at the White House, by the way, with roundly 120 attendees drawn from the Administration, Congress, and external groups (AARP, Brookings, Concord, Heritage, Peterson Foundation, etc.) As a point of interest to Delawareans, Vice-President Joe Biden, Senator Tom Carper, and Congressman Mike Castle were all invited.

After some opening remarks, the audience broke into groups to talk about social security, healthcare, tax reform, budget process, and procurement. The participants appeared energized (in the TV footage) as they headed for the breakout sessions, but we do not know what happened after that.

http://voices.washingtonpost.com/44/2009/02/23/fiscal_responsibility_summit_a.html?hpid=topnews

In speaking at the FRS, the president summarized the fiscal challenge:

This administration has inherited a $1.3 trillion deficit -- the largest in our nation's history -- and our investments to rescue our economy will add to that deficit in the short term. We also have long-term challenges -- health care, energy, education and others -- that we can no longer afford to ignore.

and offered the following commitment to get the situation under control:

And that's why today I'm pledging to cut the deficit we inherited in half by the end of my first term in office. This will not be easy. It will require us to make difficult decisions and face challenges we've long neglected. But I refuse to leave our children with a debt that they cannot repay -- and that means taking responsibility right now, in this administration, for getting our spending under control.

http://www.whitehouse.gov/the_press_office/Remarks-by-the-President-and-the-Vice-President-at-Opening-of-Fiscal-Responsibility-Summit-2-23-09/

There were several references to an inherited “trillion dollar deficit” and “massive debt” in the president’s 2/24/09 address to Congress, and he affirmed his commitment to take action.

And yesterday, I -- I held a fiscal summit where I pledged to cut the deficit in half by the end of my first term in office. My administration has also begun to go line by line through the federal budget in order to eliminate wasteful and ineffective programs [including education programs that don’t work, fraud and abuse in Medicare programs, direct payments to large agribusinesses that don’t need them, and tax breaks for corporations that ship jobs overseas and the wealthiest 2% of Americans].

http://www.cqpolitics.com/wmspage.cfm?docID=news-000003059708

Two days later, the administration’s proposed budget for FY 2010 et seq. was released. Entitled “A New Era of Responsibility,” this document makes liberal use of the inherited problems theme.

The president’s message talks of inheriting record budget deficits and the need for a massive stimulus bill to jump-start the economy out of recession. In response, he commits to “begin the process of making the tough choices necessary to restore fiscal discipline, cut the deficit in half by the end of my first term in office, and put our Nation on [a] sound fiscal footing.”

There is also a 12-page jeremiad on “Inheriting a Legacy of Misplaced Priorities,” from which some sample lines follow:

Prudent investments in education, clean energy, healthcare and infrastructure were sacrificed for huge tax cuts for the wealthy and well-connected.

The subprime mortgage crisis is the result of a perfect storm [goes on to enumerate every factor one could possibly imagine except for the flawed government policies that were most fundamentally responsible].

Adding insult to injury, American families have entered this recession weakened by the anemic recovery from the last downturn at the beginning of the decade.

As for budget data, the projected fiscal results for the next several years are as follows – sure enough indicating a halving of the deficit.

	Surplus (Deficit)		National debt (in public hands)
Fiscal Year	Amount	% of GDP	Amount	% of GDP
2009	$(1.75)T	12.3%	$8.4T	58.7%
2010	(1.2)	8.0%	9.5	64.6%
2011	(0.9)	5.9%	10.4	67.3%
2012	(0.6)	3.5%	11.0	66.7%
2013	(0.5)	3.0%	11.5	65.8%

Is the deficit so huge as to justify taking four years to partially eliminate it? (The budget projection continues through FY 2018, showing deficits in each and every year.)

We think not! The deficit for FY 2009 is hardly a logical base point for planning future budgets, nor can the administration logically claim no responsibility for this outpouring of red ink.

	2012	2020	2030	2050
Proposed	.97	.80	.58	.17

Government Spending as % of U.S. Economy (GDP)
	1900	1950	2005
State & Local	5.0%	6.6%	11.0%
Federal - Nondefense	1.8%	9.0%	16.0%
Federal - Defense	1.0%	5.7%	4.0%
Total	7.8%	21.3%	31.0%

DOLLARS IN MILIONS, EXCEPT AS NOTED	FY 2010	FY 2011
Higher corporate franchise taxes	$97	$73
Higher individual tax rate on income over $60 thousand	30	78
45¢ per pack increase in state tax on cigarettes	16	21
Increase in gross receipts tax	7	19
Public utility taxes	7	9
50% increase in alcohol taxes	3.5	6
TOTAL TAX INCREASES	161	206

U.S. Health[care] Expenditures – % of GDP, $ in billions
	1960	1980	2000	2007
Private	3.9%	5.3%	7.7%	8.7%	$1,206
Federal government	0.6%	2.6%	4.3%	5.5%	754
State & local gov’ts	0.7%	1.2%	1.8%	2.0%	281
Total	5.2%	9.1%	13.8%	16.2%	2,241

U.S. Civilian Labor Force – workers in thousands
	3^rd Qtr. 2008	4^th Qtr. 2008	January 2009	February 2009
Total	154,650	154,648	153,716	154,214
Employment	145,299	144,046	142,099	141,748
Unemployment	9,350	10,602	11,616	12,467
*Jobless rate*	*6.0%*	*6.9%*	*7.6%*	*8.1%*

	*Deficits in trillions of dollars, by fiscal years*
	2010	2011	2012	2013	2014	2015-19	2010-19
*White House*
Baseline	1.2	1.0	0.8	0.7	0.8	4.5	9.0
Budget	1.2	0.9	0.6	0.5	0.6	3.2	7.0
*CBO analysis*
Baseline	1.1	0.7	0.3	0.3	0.3	1.7	4.4
Budget	1.4	1.0	0.7	0.7	0.7	4.8	9.3

	Dow Jones Ind.	S&P 500	Nasdaq
3/6/09	.47	.44	.46
12/31/08	.62	.58	.56
11/4/08	.68	.65	.64
6/30/08	.81	.83	.82
12/31/07	.94	.95	.95
10/1/07	14,087	1,547	2,794