The Revenue Limits of Tax and SpendWhether rates are high or low, evidence shows our tax system won’t collect more than 20% of GDP.By DAVID RANSONWall Street Journal – link to originalMay 17, 2020
The Greeks have always been trendsetters for the West. Washington has repudiated two centuries of U.S. fiscal prudence as prescribed by the Founding Fathers in favor of the modern Greek model of debt, dependency, devaluation and default. Prospects for restraining runaway U.S. debt are even poorer than they appear.
U.S. fiscal policy has been going in the wrong direction for a very long time. But this year the U.S. government declined to lay out any plan to balance its budget ever again. Based on President Obama’s fiscal 2011 budget, the Congressional Budget Office (CBO) estimates a deficit that starts at 10.3% of GDP in 2010. It is projected to narrow as the economy recovers but will still be 5.6% in 2020. As a result the net national debt (debt held by the public) will more than double to 90% by 2020 from 40% in 2008. The current Greek deficit is now thought to be 13.6% of a far smaller GDP. Unlike ours, the Greek insolvency is not too large for an international rescue.
As sobering as the U.S. debt estimates are, they are incomplete and optimistic. They do not include deficit spending resulting from the new health-insurance legislation. The revenue numbers rely on increased tax rates beginning next year resulting from the scheduled expiration of the Bush tax cuts. And, as usual, they ignore the unfunded liabilities of social insurance programs, even though these benefits are officially recognized as “mandatory spending” when the time comes to pay them out.
The feds assume a relationship between the economy and tax revenue that is divorced from reality. Six decades of history have established one far-reaching fact that needs to be built into fiscal calculations: Increases in federal tax rates, particularly if targeted at the higher brackets, produce no additional revenue. For politicians this is truly an inconvenient truth.

The nearby chart shows how tax revenue has grown over the past eight decades along with the size of the economy. It illustrates the empirical relationship first introduced on this page 20 years ago by the Hoover Institution’s W. Kurt Hauser—a close proportionality between revenue and GDP since World War II, despite big changes in marginal tax rates in both directions. “Hauser’s Law,” as I call this formula, reveals a kind of capacity ceiling for federal tax receipts at about 19% of GDP.
What’s the origin of this limit beyond which it is impossible to extract any more revenue from tax payers? The tax base is not something that the government can kick around at will. It represents a living economic system that makes its own collective choices. In a tax code of 70,000 pages there are innumerable ways for high-income earners to seek out and use ambiguities and loopholes. The more they are incentivized to make an effort to game the system, the less the federal government will get to collect. That would explain why, as Mr. Hauser has shown, conventional methods of forecasting tax receipts from increases in future tax rates are prone to over-predict revenue.
For budget planning it’s wiser and safer to assume that tax receipts will remain at a historically realistic ratio to GDP no matter how tax rates are manipulated. That leads me to conclude that current projections of federal revenue are, once again, unrealistically high.
Like other empirical “laws,” Hauser’s Law predicts within a range of approximation. Changes in marginal tax rates do not make a perceptible difference to the ratio of revenue to GDP, but recessions do. When GDP falls relative to its potential, tax revenue falls even more. History shows that, in an economy with no “output gap” between GDP and potential GDP, a ratio of federal revenue to GDP of no more than 18.3% would be realistic.
In this form, Hauser’s Law provides a simple basis for testing the validity of any government’s revenue projections. Today, since the economy already suffers from a large output gap that is expected to take many years to close, 18.3% must be a realistic upper limit on the ratio of budget revenues to GDP for years to come. Any major tax increase will reduce GDP and therefore revenues too.
But CBO projections based on the current budget show this ratio reaching 18.3% as early as 2013 and rising to 19.6% in 2020. Such numbers implicitly assume that the U.S. labor market will get back to sustainable “full employment” by 2013 and that GDP will exceed its potential thereafter. Not likely. When the projections are tempered by the constraints of Hauser’s Law, it’s clear that deficit spending will grow faster than the official estimates show.
Mr. Ranson is the head of research at H. C. Wainwright & Co. Economics.
Copyright 2009 Dow Jones & Company, Inc. All Rights Reserved

Wednesday, April 28, 2010

by Tony Blankley

Townhall.com – link to original article

The New Yort Times – link to original

OP-ED CONTRIBUTORS

By MICHAEL LEWIS and DAVID EINHORN

Published: January 3, 2009

AMERICANS enter the New Year in a strange new role: financial lunatics. We’ve been viewed by the wider world with mistrust and suspicion on other matters, but on the subject of money even our harshest critics have been inclined to believe that we knew what we were doing. They watched our investment bankers and emulated them: for a long time now half the planet’s college graduates seemed to want nothing more out of life than a job on Wall Street.

Related

Op-Ed Contributors: How to Repair a Broken Financial World (January 4, 2009)

This is one reason the collapse of our financial system has inspired not merely a national but a global crisis of confidence. Good God, the world seems to be saying, if they don’t know what they are doing with money, who does?

Incredibly, intelligent people the world over remain willing to lend us money and even listen to our advice; they appear not to have realized the full extent of our madness. We have at least a brief chance to cure ourselves. But first we need to ask: of what?

To that end consider the strange story of Harry Markopolos. Mr. Markopolos is the former investment officer with Rampart Investment Management in Boston who, for nine years, tried to explain to the Securities and Exchange Commission that Bernard L. Madoff couldn’t be anything other than a fraud. Mr. Madoff’s investment performance, given his stated strategy, was not merely improbable but mathematically impossible. And so, Mr. Markopolos reasoned, Bernard Madoff must be doing something other than what he said he was doing.

In his devastatingly persuasive 17-page letter to the S.E.C., Mr. Markopolos saw two possible scenarios. In the “Unlikely” scenario: Mr. Madoff, who acted as a broker as well as an investor, was “front-running” his brokerage customers. A customer might submit an order to Madoff Securities to buy shares in I.B.M. at a certain price, for example, and Madoff Securities instantly would buy I.B.M. shares for its own portfolio ahead of the customer order. If I.B.M.’s shares rose, Mr. Madoff kept them; if they fell he fobbed them off onto the poor customer.

In the “Highly Likely” scenario, wrote Mr. Markopolos, “Madoff Securities is the world’s largest Ponzi Scheme.” Which, as we now know, it was.

Harry Markopolos sent his report to the S.E.C. on Nov. 7, 2005 — more than three years before Mr. Madoff was finally exposed — but he had been trying to explain the fraud to them since 1999. He had no direct financial interest in exposing Mr. Madoff — he wasn’t an unhappy investor or a disgruntled employee. There was no way to short shares in Madoff Securities, and so Mr. Markopolos could not have made money directly from Mr. Madoff’s failure. To judge from his letter, Harry Markopolos anticipated mainly downsides for himself: he declined to put his name on it for fear of what might happen to him and his family if anyone found out he had written it. And yet the S.E.C.’s cursory investigation of Mr. Madoff pronounced him free of fraud.

What’s interesting about the Madoff scandal, in retrospect, is how little interest anyone inside the financial system had in exposing it. It wasn’t just Harry Markopolos who smelled a rat. As Mr. Markopolos explained in his letter, Goldman Sachs was refusing to do business with Mr. Madoff; many others doubted Mr. Madoff’s profits or assumed he was front-running his customers and steered clear of him. Between the lines, Mr. Markopolos hinted that even some of Mr. Madoff’s investors may have suspected that they were the beneficiaries of a scam. After all, it wasn’t all that hard to see that the profits were too good to be true. Some of Mr. Madoff’s investors may have reasoned that the worst that could happen to them, if the authorities put a stop to the front-running, was that a good thing would come to an end.

The Madoff scandal echoes a deeper absence inside our financial system, which has been undermined not merely by bad behavior but by the lack of checks and balances to discourage it. “Greed” doesn’t cut it as a satisfying explanation for the current financial crisis. Greed was necessary but insufficient; in any case, we are as likely to eliminate greed from our national character as we are lust and envy. The fixable problem isn’t the greed of the few but the misaligned interests of the many.

A lot has been said and written, for instance, about the corrupting effects on Wall Street of gigantic bonuses. What happened inside the major Wall Street firms, though, was more deeply unsettling than greedy people lusting for big checks: leaders of public corporations, especially financial corporations, are as good as required to lead for the short term.

Richard Fuld, the former chief executive of Lehman Brothers, E. Stanley O’Neal, the former chief executive of Merrill Lynch, and Charles O. Prince III, Citigroup’s chief executive, may have paid themselves humongous sums of money at the end of each year, as a result of the bond market bonanza. But if any one of them had set himself up as a whistleblower — had stood up and said “this business is irresponsible and we are not going to participate in it” — he would probably have been fired. Not immediately, perhaps. But a few quarters of earnings that lagged behind those of every other Wall Street firm would invite outrage from subordinates, who would flee for other, less responsible firms, and from shareholders, who would call for his resignation. Eventually he’d be replaced by someone willing to make money from the credit bubble.

OUR financial catastrophe, like Bernard Madoff’s pyramid scheme, required all sorts of important, plugged-in people to sacrifice our collective long-term interests for short-term gain. The pressure to do this in today’s financial markets is immense. Obviously the greater the market pressure to excel in the short term, the greater the need for pressure from outside the market to consider the longer term. But that’s the problem: there is no longer any serious pressure from outside the market. The tyranny of the short term has extended itself with frightening ease into the entities that were meant to, one way or another, discipline Wall Street, and force it to consider its enlightened self-interest.

The credit-rating agencies, for instance.

Everyone now knows that Moody’s and Standard & Poor’s botched their analyses of bonds backed by home mortgages. But their most costly mistake — one that deserves a lot more attention than it has received — lies in their area of putative expertise: measuring corporate risk.

Over the last 20 years American financial institutions have taken on more and more risk, with the blessing of regulators, with hardly a word from the rating agencies, which, incidentally, are paid by the issuers of the bonds they rate. Seldom if ever did Moody’s or Standard & Poor’s say, “If you put one more risky asset on your balance sheet, you will face a serious downgrade.”

The American International Group, Fannie Mae, Freddie Mac, General Electric and the municipal bond guarantors Ambac Financial and MBIA all had triple-A ratings. (G.E. still does!) Large investment banks like Lehman and Merrill Lynch all had solid investment grade ratings. It’s almost as if the higher the rating of a financial institution, the more likely it was to contribute to financial catastrophe. But of course all these big financial companies fueled the creation of the credit products that in turn fueled the revenues of Moody’s and Standard & Poor’s.

These oligopolies, which are actually sanctioned by the S.E.C., didn’t merely do their jobs badly. They didn’t simply miss a few calls here and there. In pursuit of their own short-term earnings, they did exactly the opposite of what they were meant to do: rather than expose financial risk they systematically disguised it.

This is a subject that might be profitably explored in Washington. There are many questions an enterprising United States senator might want to ask the credit-rating agencies. Here is one: Why did you allow MBIA to keep its triple-A rating for so long? In 1990 MBIA was in the relatively simple business of insuring municipal bonds. It had $931 million in equity and only $200 million of debt — and a plausible triple-A rating.

By 2006 MBIA had plunged into the much riskier business of guaranteeing collateralized debt obligations, or C.D.O.’s. But by then it had $7.2 billion in equity against an astounding $26.2 billion in debt. That is, even as it insured ever-greater risks in its business, it also took greater risks on its balance sheet.

Yet the rating agencies didn’t so much as blink. On Wall Street the problem was hardly a secret: many people understood that MBIA didn’t deserve to be rated triple-A. As far back as 2002, a hedge fund called Gotham Partners published a persuasive report, widely circulated, entitled: “Is MBIA Triple A?” (The answer was obviously no.)

At the same time, almost everyone believed that the rating agencies would never downgrade MBIA, because doing so was not in their short-term financial interest. A downgrade of MBIA would force the rating agencies to go through the costly and cumbersome process of re-rating tens of thousands of credits that bore triple-A ratings simply by virtue of MBIA’s guarantee. It would stick a wrench in the machine that enriched them. (In June, finally, the rating agencies downgraded MBIA, after MBIA’s failure became such an open secret that nobody any longer cared about its formal credit rating.)

The S.E.C. now promises modest new measures to contain the damage that the rating agencies can do — measures that fail to address the central problem: that the raters are paid by the issuers.

But this should come as no surprise, for the S.E.C. itself is plagued by similarly wacky incentives. Indeed, one of the great social benefits of the Madoff scandal may be to finally reveal the S.E.C. for what it has become.

Created to protect investors from financial predators, the commission has somehow evolved into a mechanism for protecting financial predators with political clout from investors. (The task it has performed most diligently during this crisis has been to question, intimidate and impose rules on short-sellers — the only market players who have a financial incentive to expose fraud and abuse.)

The instinct to avoid short-term political heat is part of the problem; anything the S.E.C. does to roil the markets, or reduce the share price of any given company, also roils the careers of the people who run the S.E.C. Thus it seldom penalizes serious corporate and management malfeasance — out of some misguided notion that to do so would cause stock prices to fall, shareholders to suffer and confidence to be undermined. Preserving confidence, even when that confidence is false, has been near the top of the S.E.C.’s agenda.

IT’S not hard to see why the S.E.C. behaves as it does. If you work for the enforcement division of the S.E.C. you probably know in the back of your mind, and in the front too, that if you maintain good relations with Wall Street you might soon be paid huge sums of money to be employed by it.

The commission’s most recent director of enforcement is the general counsel at JPMorgan Chase; the enforcement chief before him became general counsel at Deutsche Bank; and one of his predecessors became a managing director for Credit Suisse before moving on to Morgan Stanley. A casual observer could be forgiven for thinking that the whole point of landing the job as the S.E.C.’s director of enforcement is to position oneself for the better paying one on Wall Street.

At the back of the version of Harry Markopolos’s brave paper currently making the rounds is a copy of an e-mail message, dated April 2, 2008, from Mr. Markopolos to Jonathan S. Sokobin. Mr. Sokobin was then the new head of the commission’s office of risk assessment, a job that had been vacant for more than a year after its previous occupant had left to — you guessed it — take a higher-paying job on Wall Street.

At any rate, Mr. Markopolos clearly hoped that a new face might mean a new ear — one that might be receptive to the truth. He phoned Mr. Sokobin and then sent him his paper. “Attached is a submission I’ve made to the S.E.C. three times in Boston,” he wrote. “Each time Boston sent this to New York. Meagan Cheung, branch chief, in New York actually investigated this but with no result that I am aware of. In my conversations with her, I did not believe that she had the derivatives or mathematical background to understand the violations.”

How does this happen? How can the person in charge of assessing Wall Street firms not have the tools to understand them? Is the S.E.C. that inept? Perhaps, but the problem inside the commission is far worse — because inept people can be replaced. The problem is systemic. The new director of risk assessment was no more likely to grasp the risk of Bernard Madoff than the old director of risk assessment because the new guy’s thoughts and beliefs were guided by the same incentives: the need to curry favor with the politically influential and the desire to keep sweet the Wall Street elite.

And here’s the most incredible thing of all: 18 months into the most spectacular man-made financial calamity in modern experience, nothing has been done to change that, or any of the other bad incentives that led us here in the first place.

SAY what you will about our government’s approach to the financial crisis, you cannot accuse it of wasting its energy being consistent or trying to win over the masses. In the past year there have been at least seven different bailouts, and six different strategies. And none of them seem to have pleased anyone except a handful of financiers.

When Bear Stearns failed, the government induced JPMorgan Chase to buy it by offering a knockdown price and guaranteeing Bear Stearns’s shakiest assets. Bear Stearns bondholders were made whole and its stockholders lost most of their money.

Then came the collapse of the government-sponsored entities, Fannie Mae and Freddie Mac, both promptly nationalized. Management was replaced, shareholders badly diluted, creditors left intact but with some uncertainty. Next came Lehman Brothers, which was, of course, allowed to go bankrupt. At first, the Treasury and the Federal Reserve claimed they had allowed Lehman to fail in order to signal that recklessly managed Wall Street firms did not all come with government guarantees; but then, when chaos ensued, and people started saying that letting Lehman fail was a dumb thing to have done, they changed their story and claimed they lacked the legal authority to rescue the firm.

But then a few days later A.I.G. failed, or tried to, yet was given the gift of life with enormous government loans. Washington Mutual and Wachovia promptly followed: the first was unceremoniously seized by the Treasury, wiping out both its creditors and shareholders; the second was batted around for a bit. Initially, the Treasury tried to persuade Citigroup to buy it — again at a knockdown price and with a guarantee of the bad assets. (The Bear Stearns model.) Eventually, Wachovia went to Wells Fargo, after the Internal Revenue Service jumped in and sweetened the pot with a tax subsidy.

In the middle of all this, Treasury Secretary Henry M. Paulson Jr. persuaded Congress that he needed $700 billion to buy distressed assets from banks — telling the senators and representatives that if they didn’t give him the money the stock market would collapse. Once handed the money, he abandoned his promised strategy, and instead of buying assets at market prices, began to overpay for preferred stocks in the banks themselves. Which is to say that he essentially began giving away billions of dollars to Citigroup, Morgan Stanley, Goldman Sachs and a few others unnaturally selected for survival. The stock market fell anyway.

It’s hard to know what Mr. Paulson was thinking as he never really had to explain himself, at least not in public. But the general idea appears to be that if you give the banks capital they will in turn use it to make loans in order to stimulate the economy. Never mind that if you want banks to make smart, prudent loans, you probably shouldn’t give money to bankers who sunk themselves by making a lot of stupid, imprudent ones. If you want banks to re-lend the money, you need to provide them not with preferred stock, which is essentially a loan, but with tangible common equity — so that they might write off their losses, resolve their troubled assets and then begin to make new loans, something they won’t be able to do until they’re confident in their own balance sheets. But as it happened, the banks took the taxpayer money and just sat on it.

Continued at “How to Repair a Broken Financial World.”

Michael Lewis, a contributing editor at Vanity Fair and the author of “Liar’s Poker,” is writing a book about the collapse of Wall Street. David Einhorn is the president of Greenlight Capital, a hedge fund, and the author of “Fooling Some of the People All of the Time.” Investment accounts managed by Greenlight may have a position (long or short) in the securities discussed in this article

Hernando de Soto RAUL RUBIERA / RAUL RUBIERA

BY GLENN GARVIN

GGARVIN@MIAMIHERALD.COM

• The Power of the Poor with Hernando de Soto, 10-11 p.m. Thursday, WPBT-PBS 2

Posted on Thursday, 10.08.09

Third World governments come and go, trading monarchy for populism for military autocracy and even for the trappings, at least, of democracy. Yet the poor remain poor: from one to four billion of them, depending on whose estimate you accept. And, as everybody from ACORN to Hugo Chavez will tell you, the movement toward economic globalization doesn’t seem to be cutting their numbers.

In this provocative new PBS documentary, Peruvian economist Hernando de Soto argues that globalization has been irrelevant to the world’s poor because they’ve been systematically locked out by legal systems that force them into a shadow economy where their rights aren’t recognized and their resources don’t benefit them.

In fact, he says in The Power of the Poor with Hernando de Soto, the world’s poor are potentially anything but — they control as much as $1 trillion in unregistered property and unlicensed businesses. But the law prevents them from building their assets into anything beyond a subsistence existence.

“Because they are not legally recognized, because they have no legal identity, because they can’t make contact with the outside world, they are not part of globalization,” de Soto says.

The Power of the Poor is essentially a video version of his 1986 book, The Other Path, well known among economists if not ordinary readers. In the book, de Soto documented the vast so-called informal economy of his native Peru, where millions of poor people live as squatters on unowned land to which they cannot get title and operate businesses without legal licenses or permits.

Without a property title, poor Peruvians can’t use their land as collateral for loans to buy equipment for small businesses or seed for their farms. And no lender will put up money for a business operating without legal permits. Without property rights, the taxi drivers and fruit-stall vendors and the rest of the mini-entrepreneurs of Peru’s informal sector can’t execute contracts, employ other workers or use virtually any tools of a modern economy.

Their twilight existence is not a consequence of capitalism, as Peru’s Marxists argued (the title of de Soto’s book was a jibe at Shining Path, the country’s cold-blooded communist insurgency), but of stifling government rules and bureaucracy. De Soto’s researchers (four law students working under the direction of a veteran attorney) discovered it took them nine months to legitimately open a simple sewing business. And though Peruvian law supposedly allowed squatters to claim unowned land on which they lived, it took de Soto’s team six years and 207 separate legal procedures to obtain a deed.

The bureaucratic tangle that chokes property rights is not unique to Peru, de Soto argues in The Power of the Poor, but a common problem across the developing world. And by preventing as much as two-thirds of the world’s population from either creating wealth or spending it, they victimize the rest of us as well.

“They’re also the world largest market,” de Soto says of the poor. “We need them as much as they need us.”

In 1992, Congress intervened in corporate compensation and messed things up. Now it’s the White House’s turn.

By JONATHAN MACEY

Wall Street Journal – link to original

Oct 23, 2009

Executive pay has emerged, once again, as a major issue in Washington. This week Treasury and the Federal Reserve announced new regulations designed to oversee and limit executive pay at thousands of financial institutions. This is deeply ironic, because today’s pay woes are the direct result of prior government intervention.

In 1992, Congress decided it would use the tax code to “improve” (i.e., reduce) executive compensation in publicly traded companies. Its vehicle was the Budget Reconciliation Act, a key provision of which became Section 162(m) of the Internal Revenue Code.

Noting that executive compensation levels had received negative “scrutiny and criticism” from the public, the new law targeted what it called “excessive employee remuneration.” It did so by limiting the ability of public companies to deduct executive compensation for its top employees unless the compensation was paid out in a form that Congress found acceptable. Salary was bad. Stock options were tax favored.

Specifically, corporations were barred by law from deducting as a normal business expense any salary payments of over $1 million. Stock options, however, qualified for the corporate tax deduction without limitation. Much maligned today, stock options then were said to be “performance based” and therefore exempt from the new tax rules.

The new tax law immediately led to a tectonic shift in the way CEOs and other top U.S. executives were paid. Stock and stock options became the dominant feature of executive compensation packages.

The impetus for changing the executive compensation laws back then was exactly the same as it is today. Politicians wanted pay lower and wanted to change the executive compensation model to “fix” the risk-taking proclivities of top managers.

In 1992, the government thought that managers were too risk averse. Stock options were seen as the magic bullet for making managers act more aggressively in the shareholders’ interests. Today, many in Congress are blaming U.S. executives for causing the financial crisis precisely by engaging in “excessive” risk-taking. What they fail to mention is that it was Congress’s own tinkering with the tax code that led to the very compensation packages that incentivized the risk-taking.

Fed Chairman Ben Bernanke asserted this week that “compensation practices at some banking organizations have led to misaligned incentives and excessive risk-taking, contributing to bank losses and financial instability.” Mr. Bernanke promised that the government “is working to ensure that compensation packages appropriately tie rewards to longer-term performance and do not create undue risk for the firm or the financial system.”

Other government interference has made the executive compensation problem even worse. A provision in the 1992 tax law required that executives meet certain “objective” performance measures in order to qualify for incentive-based (tax deductible) pay. In the scramble to come up with objective metrics on which to base executive pay, cottage industry “executive compensation consultants” emerged as the most important architects of executive compensation plans.

The compensation consultants promised to design pay programs that did things like “drive the right behaviors” by corporate management, which meant assuming more risk to maximize shareholder value. Public companies hired droves of consultants to analyze pay schemes and design pay packages that created incentives to maximize share prices. Consultants came to be viewed as essential to boards of directors that wanted to implement appropriate—and tax qualified—performance measures.

The most successful consultants are those who can justify the biggest salary increases for the top executives of the companies that hired them. Researchers at the University of Southern California recently found that the median CEO compensation is $1.5 million in companies not using executive compensation consultants, $3 million in companies that purchase general survey data from such consultants but do not directly retain them, and $4.2 million in companies that retain consultants.

Some companies use multiple consultants. The USC study found that the more consultants a company hires, the more it pays its top executives. About one-quarter of Fortune 250 companies hire multiple compensation consultants.

Activist investor Carl Icahn summed the situation up well when he recently observed on his Web site that “the use of these compensation consultants, gives both boards and CEOs the appearance of legitimacy for their decisions to award massive pay packages to lackluster CEOs, making it appear that these decisions are objective and scientific, which they absolutely are not.”

The government also has tried to regulate executive compensation by requiring greater disclosure of the details of compensation plans. Perversely, this too has contributed to an increase in executive pay.

How so? No self-respecting board of directors is willing to admit that their company’s CEO is below average. So anytime the new disclosures indicate that an executive’s pay is below average in any way, a pay increase is ordered.

Since the early 1990s, government regulation of executive compensation has encouraged greater share-price volatility and risk-taking by U.S. corporate executives and led directly to higher, rather than lower, levels of executive compensation. Nevertheless, the Obama administration is now seeking an even greater role in overseeing and regulating executive pay.

In June, Gene Sperling, a top aid to Treasury Secretary Tim Geithner, told the House Committee on Financial Services that “our goal is to help ensure that there is a much closer alignment between compensation, sound risk management and long-term value creation for firms and the economy as a whole.”

This is just what the regulators told us back in 1992. Current proposals will no doubt result in even higher percentages of executive compensation coming from stock and option schemes rather than from salaries. History teaches that the most profound consequences of new compensation regulation will be unintended. It also teaches that as bad as private ordering may have worked in getting executive compensation right, the results of central planning have been even worse.

Mr. Macey is a law professor at Yale and a member of the Task Force on Property Rights at Stanford University’s Hoover Institution.

by Joseph Y. Calhoun, III -

Sep 13th, 2009 - Alhambra Investment – link to original article

From the NY Times, June 28: “At a time when the economy worldwide is still deep in recession and we’ve seen a significant drop in global trade,” Mr. Obama said, “I think we have to be very careful about sending any protectionist signals out there.”

WASHINGTON, Sept 9 (Reuters) - The U.S. Commerce Department said on Wednesday it had imposed preliminary duties ranging from 10.90 percent to 30.69 percent on $2.6 billion of steel pipe from China used to transport oil.

WASHINGTON, Sept. 11 – The Obama administration will put steep import duties of 35% in the first year on Chinese passenger and light truck tires, responding to what the U.S. International Trade Commission determined to be a surge of Chinese tire exports that has rocked the domestic U.S. tire industry and displaced thousands of jobs, U.S. Trade Representative Ron Kirk announced Friday night.

So how should we interpret this? Does this mean the recession is over? Or does it mean that imposing two new tariffs in one week is not a giant, flashing neon protectionist signal? Or does it mean that we should be careful about sending protectionist signals but actually taking protectionist actions is okay? Does it mean that President Obama has decided to emulate the Bush administration he spent an entire campaign railing against and manages to blame for every ill facing the country? Does it mean, that unlike other Democrats, President Obama has a secret admiration for Herbert Hoover?

There are a lot of contentious subjects in economics, but one area of near unanimous agreement is free trade. Even partisan political hack economists who disparage their former colleagues from the pages of the New York Times favor free trade:

If economists ruled the world, there would be no need for a World Trade Organization. The economist’s case for free trade is essentially a unilateral case – that is, it says that a country serves its own interests by pursuing free trade regardless of what other countries may do. Or as Frederic Bastiat put it, it makes no more sense to be protectionist because other countries have tariffs than it would to block up our harbors because other countries have rocky coasts. So if our theories really held sway, there would be no need for trade treaties: global free trade would emerge spontaneously from the unrestricted pursuit of national interest.  Paul Krugman

President Bush flirted with protectionism in his first term when he imposed steel tariffs. The move was intended to save a few steel jobs – and garner a few votes – but the overall economic effect was negative due to the loss of jobs in steel consuming industries. The tariffs were ultimately declared illegal by the WTO so the net result of the policy was a loss of jobs, no political gain, higher steel prices and a violation of world trading rules. Why President Obama would expect different results this time is a mystery.

President Hoover, of course, signed the infamous Smoot Hawley Act which raised tariffs in 1930 and most economists agree was a major factor in the Great Depression. Economists may disagree about the degree to which the act influenced events, but it is hard - if not impossible - to find an economist who dismisses it as a contributor. Hoover actually initially opposed the bill because he had pledged international cooperation to combat the economic downturn, but in the end he bowed to the political pressure from his party – Republicans were the protectionists back then – and signed the bill. Sound familiar?

Protectionism is not sound economic policy and as Hoover and Bush found out, it isn’t even sound political policy. The steel unions to which Bush deferred didn’t support him in the next election and FDR attacked Smoot Hawley almost from the day it was signed. By the time the 1932 election rolled around, the effects of the tariffs were so obvious even the farmers Hoover sought to protect voted for FDR. President Obama may find the political benefits just as elusive. The Chinese are already considering how to retaliate and they don’t lack for options:

Sept. 13 (Bloomberg) — China announced a probe into the alleged dumping of American auto and chicken products, two days after U.S. President Barack Obama imposed tariffs on imports of tires from the Asian nation.

Chinese industries have complained that they’re being hurt by “unfair trade practices,” the nation’s Ministry of Commerce said on its Web site today. The ministry is also looking into subsidies for the products, it said. It didn’t specify the imports’ value.

So anything we gain in the trade in tires and steel pipes will be lost in autos and chickens or something else. This might be a good time to recall that one of the few places on the planet where GM sales are rising is China. Tariffs are taxes which are borne by the consumer so the big losers in this high stakes game are American consumers and companies who will pay higher prices for tires and steel pipe. There may be a marginal benefit to US steel and tire workers, but higher prices will mean less steel and tires sold so the idea that this will increase employment in those industries is debatable at best. The effect on jobs at companies who sell the imported tires is anyone’s guess, but it won’t be a positive number. One also shouldn’t be fooled into believing the tariffs will be beneficial to tire and steel company profits. The tire companies did not support these tariffs – the steelworkers union filed the complaint – because they manufacture tires in China. In other words, the President of the United States just imposed tariffs on US based companies. Are higher prices, lower profits, fewer jobs and reduced exports too high a price to pay for union support for health care reform? Apparently not for President Obama.

President Obama’s economic policies may be sold as a benefit to the working class and the poor, but the overall effect is just the opposite. Cash for clunkers raised the price of used cars that are bought primarily by the working poor and while it was also intended to benefit GM and Chrysler workers, one cannot help but note that both companies reported lower sales during the program period. The tire tariffs are aimed at low priced Chinese tires that are bought primarily by – you guessed it – poorer Americans. The recently enacted higher minimum wages limit the ability of young Americans and especially young, minority Americans to gain entry to the workforce. It is not a coincidence that youth unemployment is at an all time high, over 25%. Higher wage costs also tend to hurt small businesses more than larger ones and therefore limit new job creation. The last administration signed off on the higher minimum wage, but President Obama supported the policy in Congress so I guess he shares the same level of concern for the poor as former President Bush. Poor Americans cannot be helped by punishing poor Chinese or by making it more expensive to hire them.

The policies of the Federal Reserve and the Treasury since the last recession have also been conducted  – allegedly – with the average American in mind, but again it hasn’t worked out that way. The weak dollar policy of the Bush administration – continued by the Obama administration – was intended to correct a persistent trade deficit which many viewed – wrongly – as costing American jobs. The Fed’s maintenance of low interest rates was intended to keep the credit spigot open wide for all Americans during the last recession. The weak dollar policy pushed up the price of commodities and while all Americans pay the price at the pump and grocery store, the poor are hurt the most since a higher proportion of their earnings are dedicated to the purchase of these necessities. The low interest rate policy induced many Americans to take on debt they couldn’t afford, but again the hardest hit were the poor who took on loans they didn’t understand and never had a prayer of repaying for houses inflated in value, at least partially, by the weak dollar. The end result of these policies has cost more jobs than could ever be plausibly – or even implausibly - blamed on free trade or a lack of credit.

The bailouts of various financial institutions over the last two years were also sold as being in the best interests of average Americans. Saving too large to fail banks, brokers and insurance companies was seen as critical to maintaining access to credit for US businesses and consumers. Tried to get a loan recently? One begins to suspect that no matter what party is in power, policy is driven more by concern for campaign contributors than the well being of the nation as a whole. The special interests may change somewhat (although the financial industry seems to be bipartisan in its politician buying), the rhetoric may change, but political corruption is eternal and bipartisan.

There is a lot of debate now about the health of the US economy. Is the recession over? If so, how robust will the recovery be? How long will it last? Will we have a double dip? A triple dip? Over the last few months, I have consistently predicted a more rapid recovery than most commentators and to this point I think I’ve been proven correct. I have also consistently said that the quality of the recovery will leave a lot to be desired. The reason for that is that the improvement in the economic statistics is primarily due to the intentionally inflationary policies of the Federal Reserve. Inflation provides an illusion of economic growth, but it cannot produce real growth. Real growth is encouraged through all the other policies that affect economic performance – tax policy, trade policy, regulatory policy, etc. And on that front, I see little that can be called encouraging.

President Obama’s rhetoric produced an historic political victory, but his smooth delivery cannot substitute for good economic policy. Paying lip service to free trade while enacting policies that are proven beyond any reasonable doubt to be economically damaging will not fool the market. The dollar’s recent descent is a warning about current economic policy that should not be ignored as it was by the Bush administration. The nascent recovery in economic activity is not self sustaining and could be derailed quickly if supportive pro growth policies are not enacted soon. Setting off a trade war would be right at the top of a long list of things we can’t afford right now.

Freeman

By Randall G. Holcombe • September 2009 • Volume: 59 • Issue: 7 – link original article

Randall Holcombe is the DeVoe Moore Professor of Economics at Florida State University.

George W. Bush’s and Barack Obama’s “stimulus” programs will permanently transform the American economy. The market-based system that has produced unprecedented prosperity relies on profit and loss, which rewards individuals and firms that add value to the economy and penalizes those that detract value. The various stimulus programs undermine that system.

My discussion will focus on four distinct components of the 2008–09 stimulus: Federal Reserve policy, the Troubled Asset Relief Program (TARP), the Obama stimulus spending package, and the bailouts of automobile and financial firms. Because there is a temptation to stereotype political parties, labeling the Democrats the party of big government and the Republicans the party of limited government and fiscal conservatism, it is worth emphasizing that these policies were bipartisan. The Federal Reserve policies came during the Bush administration and under Fed Chairman Ben Bernanke, a Bush appointee. TARP was implemented by Bush and his Treasury Secretary Henry Paulson, and the bailouts of automobile and financial firms were initiated in the Bush administration.

My message is one of hope and change. The change is the four stimulus programs. The hope is this: I hope I am wrong about the permanent negative effects these programs will have on America.

Federal Reserve Policy

Two fundamental elements of Federal Reserve policy changed in 2008: The Fed began making loans to nonbank financial institutions and buying financial assets other than securities issued by the U.S. Treasury.

The Fed was established in 1913 primarily to lend money to member banks based on their assets that could be used to pay off the loans. Until 2008 the only firms the Fed would lend to were member commercial banks. Then the Fed began making loans to nonbank financial institutions. It did so to provide those firms with liquidity, but in doing so it broke with precedent in two ways. First, it made loans to firms that were not members of the Federal Reserve System, and second, it made loans based on questionable assets, running the risk that the borrowers might not be able to repay the loans.

The second major change was that the Fed bought financial assets not issued by the Treasury–so-called toxic assets held by private banks and other firms. The true value of the assets was questionable, so the Fed risked losses. The Fed can afford to take those losses, however. The biggest problem with this change in policy is that by buying some assets rather than others, the Fed was supporting some firms over others.

For example, it bought assets from AIG, an insurance company, to keep it from failing and ultimately has taken over ownership of AIG with an 80 percent equity interest. The Fed also purchased assets of questionable value from investment bank Bear Sterns to facilitate its acquisition by JPMorgan Chase. Meanwhile, investment bank Lehman Brothers went into bankruptcy and failed. Why save Bear Sterns but not Lehman Brothers? The Fed also initiated the Term Asset-Backed Securities Loan Facility (TALF) to make loans to holders of various types of securities. TALF borrowers do not have to be banks.

These two new policies are problematic because they constitute an “industrial policy.” I am not questioning the effects of these policies. Hindsight will provide a better answer. Rather, I am questioning the precedent that the policies create for future Fed involvement in the economy.

The Fed has now established the precedent of making loans to firms that, at its discretion, it deems worth supporting, based on assets of questionable value. That puts the Fed in the position of picking winners and losers in the economy. Similarly, by choosing to buy “toxic assets” only from some sellers it is supporting some investors while letting others fend for themselves. Again, the Fed is picking winners and losers.

Its conduct is much like what the Japanese government has done for decades. In the 1980s that government, coupled with Japanese banks, directed assets to the firms they viewed as most important to the economy. This industrial policy was hailed by many observers as giving the Japanese economy a growth advantage. In the early 1990s the booming Japanese real-estate market collapsed, much as the U.S. market did in 2006–08, and many Japanese banks were left holding assets of questionable value, collateralized with mortgages with higher face values than the mortgaged property. Rather than allow insolvent banks to fail, the Japanese propped them up, maintaining their precarious positions, and the Japanese economy has stagnated ever since.

Japanese industrial policy is no longer held in such high regard, but the Federal Reserve’s recent actions have it engaging in the same type of industrial policy. Having set that precedent, the long-run effects are likely to be pernicious. Unless the Fed firmly repudiates its industrial policy, clearly saying it made a mistake that won’t be repeated, financial firms will take the same risks, believing the Fed will step in to help if the market turns against them.

Many think that to avoid a repeat of the 2008 meltdown, the government should more tightly regulate the financial markets. President Obama has proposed a major overhaul of the regulatory apparatus.Yet financial firms are already among the most highly regulated firms in the nation, and it is implausible to think that the problems were the result of too little regulation. If anything, they were the effect of too much government involvement in those markets.

Market discipline is far superior to government regulation because firms that choose losing strategies will and should be allowed to fail. This would give every firm an incentive to choose profitable strategies and would weed out those that do not. The Fed’s industrial policy moves in the opposite direction, so more regulation would change nothing.

TARP

In September 2008 Bush Treasury Secretary Henry Paulson announced that the financial markets had frozen. Lending had ground to a halt, he said, and banks would not even lend to each other because their “toxic assets” called into question their solvency. Paulson asked Congress to pass emergency legislation providing him $700 billion to buy up those assets, creating liquidity in the financial sector so that normal lending activities could resume. TARP, approved on October 3, 2008, provided the money and gave the secretary the discretion to spend it as he saw fit.

Paulson claimed the money was needed immediately to prevent a collapse of the financial system. However, none of the TARP money went toward buying toxic assets. Instead the Treasury used the money to purchase equity interest in banks–that is, to partially nationalize many banks.

Paulson also pressured the nine largest banks to take the TARP money whether they needed it or not because if only some took the money, they would be stigmatized as weak, which could further undermine their financial positions. So now the federal government is the owner of a substantial share of the American banking industry.

Some of the strings attached to that money did not appear until after the government already bought into those banks. Obama and Treasury Secretary Timothy Geithner wanted to regulate the pay of bank executives, claiming that the federal government, as part-owner of those banks, should limit excessive pay. As a result, many recipients of TARP money are anxious to repay it and to buy back the stock the federal government now owns. But the federal government has put roadblocks in the way of banks that want to get out from under the burdens that come with TARP. The government likes that control. One fear that Geithner expressed is that if some banks escape the strings attached to TARP, they might raise executive pay, leading the better bank execs to leave the TARP-encumbered institutions for the higher pay at those banks that are free of TARP. (Some banks have started to pay the money back.)

The Obama Stimulus Package

Immediately after his election, Obama pushed hard to get Congress to pass a nearly $800 billion spending bill to stimulate the economy, which some claimed was mired in the worst recession since the Great Depression. While history will judge whether the recession was that severe, the rhetoric served to pass the bill. However, it is difficult to identify the features that make it a stimulus bill rather than just a big spending bill. In fact, the spending is largely for items Obama campaigned on. Much of it will occur after 2009 and so does not qualify as a stimulus for a depressed economy.

A lot of the alleged stimulus money was directed toward sectors that were holding up relatively well during the recession, such as healthcare and state and local governments. Government employment was steadier than private-sector employment when the bill was passed and can be expected to do even better with the money. Directing money toward relatively strong sectors is hardly the best way to stimulate the economy, even though it does further the goals that Obama campaigned on when he was running for president.

Even the economic analysis underlying the stimulus program can be called into question. The Keynesian idea is that by running budget deficits and increasing government spending, aggregate demand will be increased, pushing the economy toward prosperity. Of course, to spend that money, the government must first borrow it from elsewhere in the economy. There’s no free lunch. Moreover, if increasing government spending and running large budget deficits really led to prosperity, the economy would have been in nirvana by 2008. When Bush was elected in 2000 the federal budget was in surplus, and for Bush’s eight years government spending and the budget deficit continually increased, which by Keynesian logic should have produced a robust and maybe overheated economy, not an economy mired in recession. The Obama stimulus package was simply a continuation, on a much grander scale, of the eight years of Bush fiscal policy, a policy of continually increasing government spending and continually increasing budget deficits.

The Obama stimulus package was really just a big spending bill that did not offer much stimulus, but that will saddle the economy with bigger government from now on, hindering economic growth, slowing the recovery, and reducing prosperity

Bailouts

In addition to bailing out many failing banks and other financial firms, Bush and Obama also used taxpayer money to bail out Chrysler and General Motors. Bear in mind that when Obama campaigned for office and gasoline prices spiked above $4 a gallon, he advocated a windfall profits tax on oil companies. That idea fell by the wayside as prices fell in 2009, but these two policies provide a chilling example of how to undermine the very foundation of the market: When companies are successful and profitable–like oil companies in 2008–single them out for extra taxes, and when companies are unsuccessful and unprofitable–like auto companies in 2009–single them out for government subsidies.

One need understand only the most basic of economic principles to see how pernicious these policies are. If firms in an economy can take resources and combine them into products that are more valuable than the resources they started with, they are adding value to the economy and should be rewarded. In a market economy they are–through profits. If firms take resources and combine them into products that are less valuable than the resources they started with, they are harming the economy and they should be penalized. In a market economy they are–through losses. Profit and loss are essential to the operation of a market economy and provide the signals and incentives that have led to the remarkable economic progress that has characterized America (hampered as the economy is by government).

The bailouts began as loans to Chrysler and General Motors, which the firms had no chance of being able to pay back. The administration’s way of addressing this has been to negotiate to convert those loans into an equity interest in the firms, thus nationalizing the automobile companies in a manner similar to how TARP has nationalized banks. The federal government carries a big stick and is in a position to use that stick to its advantage. Under Obama’s bankruptcy plan for General Motors, the government will control 60.8 percent of the company, with 17.5 percent for a United Auto Workers trust fund. Bondholders could wind up with a 10 percent equity interest in the company.

On the surface this appears quite unfair to bond holders, whose bonds had a face value of $27 billion. Some bondholders objected, rightly saying that the claims of holders of secured debt should come before the claims of the firm’s employees in any bankruptcy proceeding. But while some bondholders objected, many did not–because they were recipients of TARP money and therefore effectively under government control. TARP recipients JPMorgan Chase, Citigroup, Morgan Stanley, and Goldman Sachs owned about 70 percent of Chrysler’s debt. The government supported them with bailout money and then bullied them to give up their assets to the UAW.

The pernicious consequences go well beyond these transactions. How will this affect other union-heavy companies when they try to raise money in the bond market? The precedent is set for employees to move ahead of secured-debt holders in bankruptcy proceedings. Debt finance will become much more difficult for firms with unionized labor forces. One critic argued that the favoring of the UAW over bondholders amounted to shaking down lenders for the benefit of Obama’s political supporters, which is corruption and abuse of power. We would have done better to let the market and the bankruptcy court determine the fate of Chrysler and GM.

Fundamental Transformation

When we step back and look at the bipartisan efforts to rescue the economy from recession, those changes represent a fundamental transformation in the nature of the American economy. In the longer run Obama wants to substantially increase government’s role in health care, which is already largely in government’s hands with Medicare, Medicaid, SCHIP (health insurance for children), and the regulations that govern healthcare providers and pharmaceutical companies. Obama has also stated his intention to further regulate the energy industry to limit emissions and to shift production toward renewable energy sources. His cap-and-trade initiative would impose billions in costs on the economy and would effectively dictate the technologies by which energy is produced.

Few commentators are looking at the long-run implications of these changes, focusing instead on how much the proposed Obama deficits will increase the national debt or on how the Federal Reserve’s increases in the monetary base will impact inflation in coming years.

Déjà Vu All Over Again

I have described the changes. My hope is that I am overestimating their long-run impact. Indeed, the nation has found itself in similar situations before. In the 1970s we faced economic stagnation, rising unemployment, and rising inflation, which soared into the double digits. There were government-mandated price controls and frequent lines at the gas pumps as a result of shortages caused by those price controls. There was every reason to be pessimistic, but in the 1980s the Reagan administration turned many of those things around. Tax rates were slashed; the price controls were abandoned; and a more deregulated  economy led to two decades of growth and prosperity. At least some of the credit for this, as well as much of what happened in Margaret Thatcher’s England, must be attributed to the power of ideas emanating from Milton Friedman and other free-market thinkers.

Similarly, in the 1940s socialism seemed such an attractive alternative to American capitalism that F. A. Hayek wrote The Road to Serfdom, arguing that socialism was that road, and Joseph Schumpeter, in Capitalism, Socialism, and Democracy, lamented that in democracies people could vote away their freedoms and that the people who benefited the most from a free economy were unwilling to defend it. Yet America prospered. When the Berlin Wall collapsed in 1989, followed by the demise of the Soviet Union in 1991, there was every indication that everyone would recognize that market allocation of resources is better for everyone than government planning.

Now we stand, two decades later, on the brink of the most significant erosion of the market economy since the New Deal, with relatively few dissenters. In a few short centuries markets have taken much of the world’s population from subsistence to remarkable prosperity and continuing economic progress. Are we really ready to abandon that system and replace it with something similar to what resulted in the collapse of the Soviet Union?

BY STEPHEN L. CARTER

WWW.WASHPOST.COM

The Miami Herald – link to original

July 3, 2009

A specter is haunting America: the specter of profit. We have become fearful that somewhere, somehow, an evil corporation has found a way to make lots of money.

Flash back three years. In 2006, Exxon Mobil announced the highest profit in the history of American corporate enterprise. Politicians and pundits stumbled over each other to call for an investigation and for some sort of confiscatory tax on the money the company earned. Profit, it seemed, was an evil, but large profit was even worse.

Today, the debate on the overhaul of the health-care system sparks a shiver of deja vu. The leitmotif of the conversation about the coming shape of health insurance is that the villain is the system of private insurance. “For-profit” firms come under constant attack from activists and members of Congress.

Thus, a recent news release from the AFL-CIO began with this evidently alarming fact: “Profits at 10 of the country’s largest publicly traded health insurance companies rose 428 percent from 2000 to 2007.” Even had the figures been correct — they weren’t — we are seeing the same circus. Profit is the enemy. America could be made pure, if only profit could be purged.

This attitude was wrong in 2006. It is wrong now. High profits are excellent news. When corporate earnings reach record levels, we should be celebrating. The only way a firm can make money is to sell people what they want at a price they are willing to pay. If a firm makes lots of money, lots of people are getting what they want.

To the country, profit is a benefit. Record profit means record taxes paid. But put that aside. When profits are high, firms are able to reinvest, expand and hire. And profits accrue to the benefit of those who own stocks: overwhelmingly, pension funds and mutual funds. In other words, high corporate profits today signal better retirements tomorrow.

Another reason to celebrate profit is the incentive it creates. When profits can be made, entrepreneurs provide more of needed goods and services. Consider an example common to the first-year contracts course in every law school: Suppose that the state of Quinnipiac suffers a devastating hurricane. Power is out over thousands of square miles. An entrepreneur from another state, seeing the problem, buys a few dozen portable generators at $500 each, rents a truck and drives them to Quinnipiac, where he posts them for sale at $2,000 each — a 300 percent markup.

Based on recent experience, it is likely the media will respond with fury and the attorney general of Quinnipiac will open an investigation into price-gouging. The result? When the next hurricane arrives, the entrepreneur will stay put, and three dozen homeowners who were willing to pay for power will not have it. There will be fewer portable generators in Quinnipiac than there would have been if the seller were left alone.

When political anger over profit reduces the willingness of investors to take risks, the nation suffers. According to news reports, one reason the Obama administration has had so much trouble finding buyers for the toxic assets it hopes to remove from financial institutions’ balance sheets is a concern by financiers that should they go along with the plan and make rather than lose money, they will be hauled before Congress to explain themselves.

And although it is easy to be dismayed by excess, trying to regulate profit makes things worse. Capital flows to places where returns are highest. The more exercised our political leaders become when profits rise, the more investment capital will remain abroad.

The search for profit has dangers. There are few legal ways to enhance profits other than cost-cutting, improving efficiency or innovating. This can lead to wondrous inventions — the iPod, say — but it can also create serious dislocations, as when companies close plants and lay off workers. Remedying those human costs is part of what most of us want government to do. What we must avoid, however, is making the remedy so severe that profitability becomes impossible.

Consider the bills in Congress that seek to limit the freedom of federally aided automakers to close dealerships or to build the cars that buyers want. Preserving local jobs and building greener cars are admirable objectives, but a firm that is forced to sacrifice profitability to attain them is unlikely to be competitive over the long haul. Indeed, one reason the “public option” health insurance program under debate may turn out to be more expensive than advocates suggest is that here, unlike in Europe, we are unlikely to put up with government restrictions on what sorts of care will be available, especially for seniors. A board of experts might decide to limit access to hip replacements, for instance, but there is little chance Congress will let them get away with it.

Private insurers, by contrast, will cut whatever they can. This puts them at constant war with regulators and patients, but beneath this tension is a certain useful discipline. We want health care to be cheaper, and the for-profit health-care industry has every incentive to make it so. Supporters of the public option tout Medicare’s cost advantages over private insurance, but those are largely obtained by setting below-market reimbursement rates for medical services (meaning that private patients subsidize Medicare patients). Moreover, the costs of compliance with the hundreds of pages of Medicare regulations are also transferred to the providers, and thus, again, to private patients.

I have no problem with a system in which private patients subsidize public patients. I do not even mind calling it a tax. Those who have good jobs should be helping out, and carping about it is uncharitable, especially now. But an expanded public option will be possible only if the for-profit sector remains vibrant and strong — and profitable. Thus, we should all await, with grateful anticipation, the day when American firms again begin to earn the highest profits in history.

Stephen L. Carter, a Yale law professor, is most recently the author of “Jericho’s Fall.”

——————————

Similar Stories:

•

The next battle: cutting Medicare Advantage

•

It’s been hard to tell, but health plan does have supporters

•

Most health industry players would win under overhaul

•

Amid groups that support health care overhaul, disagreement on the details

•

The ghosts of Clinton Care

Is Anyone Minding the Store at the Federal Reserve?