Ezra Klein's Blog, page 904

Wonkbook: White House throws states a lifeline. But will the GOP let them catch it?

Next week's budget will include a complicated, two-pronged proposal to forgive the states some debt and give them access to more tax revenues after 2014. It's evidence that the White House s pretty worried about both the long and short-term fiscal position of the states. Worried enough to propose a policy that'll be called a "job-destroying" tax hike on a Hill (actually, it's already been called that, as you'll see in a moment). But this won't necessarily be easy on the Republicans, either. Post-election, the GOP controls a lot of governor's mansions and statehouses. And they're looking at budget projection that frankly terrify them. A bit of help from the Feds may be ideologically unwelcome, but it also might be a lifesaver.

Here's how it works: First, the federal government will free the states from $3.6 billion in interest payments to the federal government over the next two years. Second, the Feds the payroll tax that funds the unemployment system only applies to the first $7,000 in income. The Feds will raise that to $14,000, but they'll give up their share of the new revenues. The states can take them or, if they don't want to raise taxes on employers, leave them. "This is the kind of slick fiscal policy that staff stay up nights trying to think up," writes Pete Davis, a former Senate Budget Committee staffer.

Washington's Republicans are not impressed. "Any plan that relies on more than doubling the tax base and then raising payroll taxes in perpetuity isn't going anywhere in the House," said Rep. Dave Camp. "I strongly urge the White House to reconsider this job-destroying proposal," said Sen. Orrin Hatch. That reaction was perhaps to be expected: There is, after all, a tax increase -- albeit an optional one -- in this legislation. But there's also relief for states that desperately need it -- and if you want to see a real job-killing outcome, watch what happens if a state defaults on its debt. The question going forward is whether Republican governors and state legislators begin calling their friends in Washington and asking them to hold enough fire on this. After all, it might be easy for the national GOP to bash it, but in a state like Texas, where the projected 2012 budget shortfall is more than 30 percent, it likely has a bit more appeal.

Top Stories

Obama will propose debt relief for states as part of the budget, report Lori Montgomery and Brady Dennis: "States that have borrowed billions of dollars from the federal government to cover the soaring cost of unemployment benefits would get immediate relief from the Obama administration under a plan to suspend interest payments for the next two years. The proposal, which will be included in the budget request President Obama will send to Congress next week, would allow states to avoid raising taxes on employers to cover the payments - which are projected to total $3.6 billion through 2012, according to independent estimates. Obama also would suspend automatic hikes in the federal unemployment tax scheduled to hit employers in nearly half of the states by the end of next year."

The GOP is not supportive: http://on.wsj.com/fHMmwM

On the bright side, the states are in a better financial position than some have been predicting, reports Michael Corkery: "States find their revenues are on the upswing as the economy grows and as inflation, while modest, helps to buoy the incomes and corporate profits that many states tax. During the 2010 fourth quarter, state tax revenues were up 6.9% from a year earlier, according to preliminary data from the Nelson Rockefeller Institute of Government in Albany, N.Y. This isn't to say that cash-strapped states won't face higher borrowing costs, which could prove excruciating for some governments that rely on debt to fund their operations. Analysts also said that it is possible that the historically low rate of defaults could rise somewhat. What many analysts and investors do doubt is a scenario outlined by one independent analyst, Meredith Whitney, who has publicly predicted '50 to 100 sizable defaults' amounting to 'hundreds of billions of dollars.'"

The administration is proposing greater high-speed rail investment, reports Ashley Halsey: "The Obama administration wants to invest $53 billion in high-speed and intercity rail service in the next six years, expanding a signature transportation initiative it already has targeted with $10.5 billion. The plan to spend billions more on a vast high-speed-rail network was cast by the administration as vital to keeping the United States competitive with world markets that already use the technology. 'Public infrastructure investment raises private-sector productivity,' Vice President Biden said Tuesday, continuing a theme struck by the president in his State of the Union speech last month...Obama's budget for fiscal 2012, which will be sent to Congress next week, includes $8 billion for the plan."

The administration could unveil its plan for Fannie and Freddie as soon as Friday, reports Binyamin Appelbaum: "The Obama administration and House Republicans are settling into a game of chicken over Fannie Mae and Freddie Mac, with each side daring the other to advance a plan for replacing the two housing finance companies. The White House missed a deadline at the end of January for telling Congress what it wants to do. That report will be released as early as Friday, people with knowledge of its contents said, but it will present a range of options without stating a preference. One possibility favored by some of President Obama's economic advisers, and by many Republicans, would not create any federal replacement for Fannie and Freddie, leaving the private markets to provide mortgages for most Americans."

Movie geek indie pop interlude: First Rate People's "Charlie Kaufman".

Got tips, additions, or comments? E-mail me.

Still to come: The financial industry is constructing far fewer securities than it did pre-crisis; the House GOP is working on defunding health care reform; the recession is hurting access to community colleges; the Senate GOP is fighting to save oil and gas subsidies; and a hamster in an armored mecha suit.

Economy

Securitization has still not recovered from the crash, reports Zachary Goldfarb: "In total, there was $145.3 billion in securitizations in 2010, compared with $875.5 billion in 2005, and far below the number even a decade ago, according to industry newsletter Asset-Backed Alert. During the crisis, the federal government unveiled numerous programs to support securitization, but the longer-term decline of this market has not fazed officials...Several factors are reducing the interest in securitization. For starters, before the crisis there was an insatiable global appetite for securities backed by U.S. loans. But today, banks hold trillions of dollars in cash...Other factors include the still sluggish economy - in which banks are wary of loaning to borrowers who might not pay them back - and the many new regulations facing securitization."

The Fed has settled on an expansive definition of "systemically important" financial institutions: http://nyti.ms/ggiGWE

Some Republicans are voting against budget cuts they view as too modest, reports David Rogers: "Facing a two-front war on the left and right, the House Appropriations Committee voted, 27-22, Tuesday evening to move ahead with Republican plans for cutting close to $40 billion from domestic and foreign aid spending over the last seven months of this fiscal year. Democrats were united in their opposition, but more important for Republicans was the loss of two of their own Western-state conservatives - Arizona Rep. Jeff Flake and Rep. Cynthia Lummis of Wyoming -- who voted 'no' to protest the cuts being too small...In a striking display of defiance, Flake exercised his right to file alternative views in the committee report -- something rarely done in Appropriations by a member of the majority party."

"Social impact bonds" allow low-cost government investment, writes David Leonhardt: "David Cameron's Conservative government in Britain is already , at a prison 75 miles north of London. The Bloomberg administration in New York is also considering the idea, as is the State of Massachusetts. Perhaps most notably, President Obama next week will propose setting aside $100 million for seven such pilot programs, according to an administration official. The idea goes by one of two names: pay for success bonds or social impact bonds. Either way, nonprofit groups like foundations pay the initial money for a new program and also oversee it, with government approval. The government will reimburse them several years later, possibly with a bonus -- but only if agreed-upon benchmarks show that the program is working."

Media companies will only keep consolidating, writes Steven Pearlstein: http://wapo.st/hoO2lE

The US' corporate taxes are very low when one takes a broader view, writes Howard Gleckman: "Americans are hardly overtaxed, at least compared to the rest of the developed world. One reason is that the U.S.is about the only major industrialized nation that does not also have a Value-Added Tax or national sales tax. For instance, advocates for low corporate taxes love to talk about Ireland's 12.5 percent combined corporate rate. But they usually don't say much about Ireland's VAT, which has a top rate of 21 percent. Indeed, those countries with the lowest corporate rates, such as the Slovak Republic and Poland, raise a big chunk of their tax revenue though a VAT, where their rates tend to be among the world's highest."

Adorable animals with mechanical support interlude: A hamster armored mecha suit.

Health Care

The House GOP will conduct a vote on defunding health care reform, reports Janet Hook: "House Republicans will use a stopgap spending bill coming to the floor next week as a vehicle to block money for the new health-care law, a top lawmaker said Tuesday...The spending bill, needed to fund the government through the end of the fiscal year on Sept. 30, is being drafted by the House Appropriations Committee, which is seeking deep spending cuts. The current stopgap bill expires March 4. While the initial version isn't expected to include the health-law funding ban, Republicans plan to introduce it as an amendment to the bill, Mr. Cantor said. It is expected to block the use of money in the bill to carry out the law, for example by preventing the Department of Health and Human Services from hiring more workers to oversee the new benefits."

A Constitutional challenge to health care reform in Ohio is being fast-tracked: http://nyti.ms/dUfvK7

Vermont has unveiled its single-payer proposal, reports Aimee Miles: "Vermont Gov. Peter Shumlin, who was elected last November after promising to reform health care in the state, unveiled a bill today that would abolish most forms of private health insurance and move state residents into a publicly funded insurance pool. His much anticipated proposal lays out a strategy that leaves a number of key details--including how to pay for the system--open for debate. Under Shumlin's 'single-payer' system, Vermont residents would receive health benefits paid for by the state, regardless of their employment status or income... Shumlin's strategy seeks to take advantage of federal resources that will kick in under the new health law in 2014."

Cost control requires more than insurance reform, writes Austin Frakt: http://bit.ly/hJk4Hq

Domestic Policy

The recession is hurting access to community colleges, reports Kevin Helliker: "Community colleges, long regarded as the most accessible realm of higher education, are becoming more difficult to access thanks to record enrollments combined with belt-tightening by state legislatures...In a survey to be released Wednesday by the Pearson Foundation, a nonprofit educational think tank in Mill Valley, Calif., about 20% of 1,434 community college students interviewed in November reported difficulty enrolling in required courses for the fall semester. About one in three had trouble winning a spot in desired classes...Budget cuts in California could force its community-college system--the biggest collegiate system in the U.S., serving about 2.76 million students--to turn away about 350,000 applicants next year."

Democrats can do more to push along judicial nominees, writes Jonathan Bernstein: "Democrats share a large part of the blame as well. For one thing, the president has named only nine judges for the 17 appeals court vacancies and only 41 judges for the 85 open district court seats. That's significantly fewer nominations than Presidents George W. Bush or Bill Clinton had sent to Congress by this time in their first terms. Moreover, unlike President Bush, President Obama has not used his bully pulpit to push for Senate confirmation of his nominations...Senate Democrats have also refused to respond to the Republicans' obstructionism with their own aggressive use of the rules. Though almost all of President Obama's nominees have had enough support to overcome a filibuster, the Republicans have managed to slow the process to a crawl by deploying an array of delaying tactics."

Great moments in Japanese cuisine interlude: Sushi made out of powder and water.

Energy

The Senate GOP is fighting to preserve oil and gas subsidies, reports Siobhan Hughes: "U.S. Senate Democrats took an opening shot by pushing an effort to take away $20 billion of tax breaks for oil and gas companies, portraying the move as a way to reduce the widening federal deficit. Republicans responded that raising taxes would hurt economic growth. 'We don't really believe you cut spending by raising taxes,' Senate Minority Leader Mitch McConnell (R., Ky.) told reporters. In his State of the Union address, President Barack Obama said he wanted to eliminate $4 billion of oil and gas incentives to help pay for clean-energy initiatives. Such proposals are expected to be included in the White House's fiscal-year 2012 budget later this month. Oil and gas companies, represented by the American Petroleum Institute, are trying to preserve the tax incentives."

House energy chair Fred Upton won't hold hearings on climate science: http://politi.co/e0ebvk

The Bush EPA had its own climate change plan, reports Darren Samuelsohn: "The Environmental Protection Agency administrator under George W. Bush mapped out aggressive rulemaking plans for greenhouse gases before the White House ultimately shut him down. Stephen Johnson outlined in a January 2008 letter to Bush a three-phase plan for tackling climate change that included strict new restrictions on power plants and transportation fuels. Johnson's ideas - spelled out in a document classified as 'privileged: communication the president' - were released Tuesday by House Energy and Commerce Committee ranking member Henry Waxman. The California Democrat said the materials put a new spin on the GOP-led legislative hearing planned for Wednesday that's aimed at undoing the Obama administration EPA's authority to address the pollution that scientists have linked to climate change."

Obama's budget request includes a $7,500 rebate for electric car purchasers: http://bit.ly/fPgGZS

Closing credits: Wonkbook is compiled and produced with help from Dylan Matthews and Michelle Williams. Photo credit: White House.

Reconciliation

Recap: Mitch Daniels's health-care proposal (and an update); why Democrats should welcome reform of their reforms; and the Obama administration should stop being so terrified of taxes.

1) This is true, but boy is it a low bar to clear.

2) "Taxes too high? Actually, as a share of the nation's economy, Uncle Sam's take this year will be the lowest since 1950, when the Korean War was just getting under way."

3) The White House's big high-speed rail plan.

4) The State of Working America, with lots of cool graphs.

More on Mitch Daniels's health-care deal

Earlier today, I asked what exactly Indiana Gov. Mitch Daniels meant when he said "all the [Affordable Care Act's] expensive benefit mandates [should be] waived, so that our citizens aren't forced to buy benefits they don't need and have a range of choice that includes more affordable plans."

I just got off the phone with Seema Verma, who is advising Daniels on health-care policy. She emphasized that Daniels is talking about the so-called essential benefits package, not regulations such as the one preventing insurers from discriminating against preexisting conditions. And in her telling, Daniels doesn't want the standards for insurance products waived so much as he wants the responsibility for setting those standards handed over to the states. "We haven't sat around coming up with an essential benefits plan of our own," Verma says. "But the fear is that by defining it on the national level, who knows what they're going to come up with? That decision-making process should happen at the local level."

This essentially preserves the status quo on insurance mandates. Right now, states decide what insurers have to cover. And as this ever-helpful report (PDF) from the Council for Affordable Health Insurance shows, Indiana has its own basket of demands. Where New Mexico names 57 different classes of care that insurers must cover and Idaho names only 13, Indiana holds it to 34, including surgeries for cleft palettes, colorectal cancer screening, treatment for morbid obesity, mastectomies, alcohol and substance abuse treatment, and quite a few more. So perhaps it's not surprising that Daniels wants control of this decision.

What's not so surprising is that a governor such as Daniels is the first major Republican to come out with a concrete set of reforms he'd like to see made to the law. Unless the Affordable Care Act is repealed in Congress or voided by the courts, governors have two choices: Set it up themselves or let the federal government do it for them. They can't ignore it. They can't put it off. They simply have to figure out a way to live with it. That seems to be what Daniels is doing here. But though he addresses his comments to the Obama administration, I suspect that reforms along the lines he's proposing might be a harder sell among congressional Republicans.

The Obama administration has raised some taxes and cut many others. They should admit that.

[image error]"I didn't raise taxes once," Barack Obama told Bill O'Reilly on Sunday. "I lowered taxes over the last two years." That's, well, half true. The Obama administration has raised taxes. The excise tax on high-value health-care insurance, for instance, is a tax. So is the tax on tanning salons, and the increase in cigarette taxes. These taxes -- or at least tax levels -- didn't exist before Obama signed them into law. They will raise taxes on certain people under certain circumstances. They will get bigger as the years tick by. PolitiFact rated this as "false," and rightly so.

On the other hand, Obama has lowered taxes repeatedly. He extended the Bush tax cuts. He passed a payroll tax holiday. He passed the Making Work Pay tax cut. Overall, he's been big on tax cuts and very reluctant to consider higher income or payroll taxes as a way to fund programs or close the deficit. As PolitiFact says, "most Americans have seen lower taxes."

But I'm not surprised to see Obama playing word games with taxes. Since the 2008 campaign, Obama and his team have shown themselves to be terrified of the tax issue. They swore never to raise taxes on anyone making less than $250,000 -- which tied their hands when deficits exploded. They initially fought the individual mandate, in large part because, like most taxes, it polls poorly. After they embraced it, they worked to call it a "penalty" rather than a "tax," which has contributed to the provision's legal difficulties. They argued for letting the Bush tax cuts expire for the rich, but they were never willing to say that the tax rates should reset to Clinton-era levels across the system, which was a tacit admission that most of the tax rates Bush put into place were -- and are -- appropriate.

In general, they've just not been willing to try to push the national conversation over taxes to a more rational place. Rather than disputing the GOP's contention that cutting taxes is almost always and everywhere a good thing, they've quietly agreed and attempted to defuse the issue by grabbing the mantle of tax cuts for themselves. That might be good politics, but in the long run, we're going to need to raise taxes in this country, and that's going to require some leader or group of leaders to talk about taxes with a bit more courage and honesty. So far, the Obama administration has left that job to someone else.

Photo credit: PolitiFact

Democrats should welcome reform of the reform

Responding to the moderate Democrats who are proposing alternatives to the individual mandate, Greg Sargent says "all they're succeeding in doing is undermining one of the Democratic Party's signature domestic accomplishments." I disagree. I think they're separating politicians engaged in good-faith discussions about how best to reform the health-care system from those involved in a bad-faith discussion that attempts to claim the mantle of reform while being interested primarily in a return to the status quo. This somewhat dovetails with my column today, which argues:

Replacing the individual mandate wouldn't be particularly hard. All we need is another policy that does the same thing -- specifically, discourages free-riders who don't want to buy insurance until after they get sick and thus leave the rest of us paying for them.

In fact, I can give you four credible alternatives in four sentences:

l We could limit enrollment changes to once every two years, so people who decide to go without insurance can't buy coverage the moment they get a bad report from their doctor.

l We could penalize those who wait to buy coverage with higher premiums, which is what we do in the Medicare Prescription Drug Benefit.

l We could have a five-year lockout, in which people who decide to go without coverage wouldn't be able to access the subsidies or insurance protections for five years, even if they decided they wanted to buy insurance.

l We could raise taxes by the same amount as the individual mandate penalty and give everyone who showed proof of insurance on their tax forms a "personal responsibility tax credit" of the same amount.

The danger, as I say at the end, is not that the law does get changed, but that it doesn't. That the GOP won't let it thrive and the Democrats won't let it die and so it just limps along.

Crucially, however, that's not a popular position, Poll after poll shows reform -- or, if you prefer, some sort of "replace" -- to be more popular than repeal. What the moderate Democrats are doing is making it harder for Republicans to hold the line on straight repeal. You don't usually see Ben Nelson spitting fire, but his messaging on this is exactly right. "What's their plan?" He asked. "Is their plan, 'hope you don't get sick?'"

And you're already seeing some cracks in the Republican ranks. Mitch Daniels has a plan to reform the bill. Scott Brown has partnered with Ron Wyden on a waiver allowing states to go their own way. Rep. Sean Duffy said his preference was "reform the reform or repeal and replace," and he almost voted against the GOP's repeal effort. Eventually, Republicans are either going to have to actually bring out a plan of their own -- and that hasn't worked very well for them any of the other times they've tried it -- or they're slowly going to lose ground in this debate, and as we get closer to the next election, more and more Republicans will begin looking for an out.

Democrats should be willing to give it to them. Will they love the policy? Probably not. But policy isn't the only ingredient in the law's success. Buy-in matters, too. If Republicans make peace with the law and become more willing to participate constructively in its implementation and perfection, that's worth a lot in terms of how well it ultimately works. More, I think, than will be given up by doing something like switching the individual mandate out for an open enrollment system.

Photo credit: Melina Mara/The Washington Post.

Lunch Break

The rise of personal robots:

What happens if governors ignore health-care reform?

It's worth noting that the threat in Indiana Gov. Mitch Daniels's op-ed is that governors such as he won't lift a finger to implement the health-insurance exchanges. But it's important to note, as Sam Stein does, that if governors walk away from implementation, the bill empowers the feds to simply implement the law themselves:

"For a lot of things there is a federal backstop," explained one administration official. "States have the first crack at it, for the lack of a better phrase, and states are empowered to take the lead on things, that's what we wanted. . . . But at the same time we aren't going to allow someone not to get important consumer protections just because he has the misfortune of living in a state that doesn't like the law."

The threat of federal intervention is more motivating than any other card the administration has or can play, and it is felt most acutely with respect to the state-based exchanges, which are required to be operational by 2014.

Len Nichols, a health care policy expert with George Mason University, has consulted a number of state governments on implementing reform. And when he looks at how governors are handling the federal grants coming their way, he offers a simple set of questions:

"Are you confident you can beat Barack Obama in 2012? If the answer is no, and you say, 'I don't want to do reform and bet I can beat him,' if you lose, then Kathleen Sebelius will set up your exchange. Who wants that? No one. Not even Massachusetts."

Featured Advertiser

The 111th Congress was the most polarized ever -- in graphs

That's from this post by political scientist Keith Poole. A bit later in the piece, he breaks the numbers down further and finds that the high level of polarization was primarily a result of Republicans being more polarized than ever before. Democrats, as you can see on the dark red line in the following graph, were pretty well within their historical norms:

More on the methodology here.

Mitch Daniels proposes a deal on health care

This op-ed by Gov. Mitch Daniels includes an introductory critique of the Affordable Care Act that's so overstated that it borders on comedy. (I mean, "all claims made for it were false"? Really? Every single one?) But once you get past that, it's exactly what I've been hoping to see from a major member of the Republican Party: It's a list of changes that Congress could make to the Affordable Care Act in order to make it acceptable to Republicans, or at least to Mitch Daniels.

• We are given the flexibility to decide which insurers are permitted to offer their products.

• All the law's expensive benefit mandates are waived, so that our citizens aren't forced to buy benefits they don't need and have a range of choice that includes more affordable plans.

• The law's provisions discriminating against consumer-driven plans, such as health savings accounts, are waived.

• We are given the freedom to move Medicaid beneficiaries into the exchange, or to utilize new approaches to the traditional program, instead of herding hundreds of thousands more people into today's broken Medicaid system.

• Our state is reimbursed the true, full cost of the administrative burden to be imposed upon us, based on the estimate of an auditor independent of HHS.

• A trustworthy projection is commissioned, by a research organization independent of the department, of how many people are likely to wind up in the exchange, given the large incentives for employers to save money by off-loading their workers.

According to Daniels, these changes would transform the program from an "impending disaster" into a system where "customer choice would be dramatically enhanced" and "health care would be much more affordable." I don't agree on the impending disaster part, but the rest of it is true, though with a few big catches: There'd be more choices because there'd be fewer standards, and there'd be cheaper coverage options because insurers would be allowed to offer extremely limited products.

Most of the list is composed of small tweaks. Daniels doesn't think the bill sufficiently reimburses the states for administrative costs, or worries the legislation is insufficiently welcoming to high-deductible plans, or wants another estimate of take-up in the exchanges? Fair enough. Those concerns should be addressed.

The bigger-ticket items are Medicaid and the mandates. I don't see anything wrong with allowing states to move Medicaid-eligible populations into the exchanges -- at least so long as they're committed to giving them access to high-quality insurance once they're in there (remember, Medicaid is much cheaper than equivalent private insurance products). This is actually a compromise I mentioned explicitly in my piece envisioning the health-care system in 2030.

But I wonder what Daniels really means when he calls for "all the law's expensive benefit mandates [to be] waived." Does he mean the categories of care that the bill directs insurers to cover? Does he mean that the bill should throw out protections from preexisting conditions and limits on annual caps? I'm on the side of more, not less, flexibility in this area, but that's not the same as getting rid of standards entirely.

That said, this is a worthwhile debate to be having. Whether the law excludes innovative insurance products that could help bend the cost curve is a much more productive debate to be having than whether we should be making a major move to cover our citizens and bend the cost curve at all. And there's no doubt that the legislation's actual implementation would benefit from the buy-in of conservative governors like Mitch Daniels.

Daniels, of course, doesn't have a vote in Congress, and it's not even clear he has many friends there. But I wouldn't be too quick to dismiss the deals he offers. Back in September, Daniels called for a second stimulus centered around a payroll tax cut and full expensing for business and investment. Both were part of the deal that congressional Republicans struck with the administration a few months later.

Photo credit: AP/Indianapolis Star, Frank Espich.