Posted by David Wessel · July 23, 2012 2:28 PM
· 1 reaction
After 25 years of covering the federal budget, I'm still amazed at the persistence of fiscal misconceptions. The distinction between fact and political opinion has been blurred to the point of invisibility. The choices—what spending to cut, whose taxes to raise—are fundamentally political; the facts are not. But the budget is now so sprawling—the U.S. government spent $400 million an hour last year—that grasping it in its entirety is impossible. The budget, I've concluded, is best understood in digestible morsels.
Nearly two-thirds of annual federal spending goes out the door without any vote by Congress.
About 63% of the budget is on autopilot. Congress passes legislation every year to keep the government operating, the phones answered and the National Parks open, but much of the money the government spends doesn't require any affirmative vote. Social Security benefits get deposited. Health-care bills for Medicare for the elderly and Medicaid for the poor are paid. Food stamps are issued. Farm-subsidy checks are written. Interest payments are dutifully made to holders of Treasury bonds.
Congress can alter these programs, but if it does nothing, the money is spent. As Eugene Steuerle, an economist at the Urban Institute think tank in Washington, puts it: "In 2009, for the first time in the nation's history, every dollar of revenues had been committed before Congress walked in the door." The government's total take was only enough to pay for promises that had been made in the past—interest, Social Security, Medicare, Medicaid and so on. For everything else, the government had to borrow.
The U.S. defense budget is greater than the combined defense budgets of the next 17 largest spenders.
About $1 of every $5 the federal government spent in 2011 went to defense, and about 20 cents of that $1 was spent on the wars in Iraq and Afghanistan. In all, the U.S. spends about $700 billion a year on its military. That's more than the combined military budgets of China, the U.K., France, Russia, Japan, Saudi Arabia, Germany, India, Italy, Brazil, South Korea, Australia, Canada, Turkey, the United Arab Emirates, Spain and Israel. The Pentagon counters that the U.S. also asks its military to do more than all those other countries combined—to keep sea lanes open for international trade, for instance, and to be prepared to deploy almost anywhere.
About $1 of every $4 the federal government spends goes to health care today. That is rising inexorably.
In 1981, spending on Medicare for the elderly and disabled and Medicaid for the poor accounted for 9.5% of federal outlays besides interest. By 2011, the two programs were consuming nearly 25%. In 2021, if current policies remain in place, government spending on health care will consume 33%, according to the Congressional Budget Office, even if the Affordable Care Act survives Republican attacks. The Medicare prescription-drug benefit alone will cost the government more over time than the wars in Afghanistan and Iraq. The war spending will end someday; the drug benefit is permanent.
Firing every federal government employee wouldn't save enough to cut the deficit in half.
The federal government spent $435 billion last year in wages and
benefits for its 4.4 million employees, about 35% of whom are uniformed military personnel and another 29% of whom are civilians working in the departments of Defense, Veterans Affairs and Homeland Security. Eliminating the federal workforce entirely would have saved a lot of money, of course, but it would have pared last year's deficit by only one-third. So where does all the money go? A lot of what government does is siphoning money from some and giving it to others, or occasionally to the same people. About $2.3 trillion, two-thirds of all federal spending last year, went to benefits of some sort for individuals: Social Security, Medicare, Medicaid, food stamps. Another $220 billion went for grants to state and local governments for everything from schools in poor neighborhoods to sewage-treatment plants.
The share of income most American families pay in federal taxes has been falling for more than 30 years.
There are a dozen ways to measure the slice of income that the government takes in taxes, and most point in the same direction. One meaningful metric: The CBO estimates that for families in the very middle of the middle class, the federal government took an average of 19.2% of their income before deductions in 1981 in income, payroll and all other federal taxes. State and local taxes have risen for many, but the federal tax bite has eased. In 2007, just before the recession hit, the CBO estimates that the tax take for Americans was 14.3%—and it has fallen since to 12.4% in 2011, according to the nonpartisan Tax Policy Center. Nearly half of American households—46%—didn't pay any federal income taxes at all in 2011. The vast majority of them didn't make enough money to owe taxes, or they took advantage of tax breaks that Congress has created. About half of those who didn't owe federal income taxes were hit by payroll taxes levied on wages to finance Social Security and Medicare.
The federal government borrowed 36 cents of every dollar it spent last year, but had no trouble raising the money.
Even though the red ink is flowing now at a rate of $1.2 trillion a year, the U.S. Treasury is borrowing at interest rates lower than at any time in at least half a century. But the government still paid $230 billion in interest last year. That's more than triple the $64 billion it spent on all research and development outside of defense, from the National Institutes of Health to the National Aeronautics and Space Administration. When interest rates return to normal, as they surely will someday, each additional $1 trillion in debt will add about $50 billion a year to U.S. annual interest payments, money that won't be available for spending on other things.
This truly is unsustainable. The U.S. today is in the postdenial phase of coping with deficits, the ones that will persist even after the economy regains its health. No one of consequence in Washington argues that deficits don't matter. Deciding what to do about them is contentious because it's about apportioning the pain. Getting the facts straight is a necessary first step.
Posted by Wsj · July 12, 2012 10:01 PM
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After the California city of Stockton declared bankruptcy last month, politicians and credit raters assured investors that municipal bonds were still safe and that the city's insolvency presented no systemic risk. Does that script sound familiar? In reality, expensive labor agreements are threatening municipalities across the U.S., though the people who should be most concerned are taxpayers.
On Tuesday the city council of San Bernardino, a city of about 210,000 in California's Inland Empire, authorized Chapter 9 municipal bankruptcy. The city is running a $45 million deficit on a $130 million budget and didn't have enough cash to pay its vendors or workers. As in Stockton, tax revenues have plummeted in recent years due to high home foreclosure and unemployment rates while labor costs have exploded.
Since its biggest creditors—workers and retirees—have been unwilling to renegotiate contracts and benefits, the city has had to cut its workforce by 20% in the last four years. The unions' idea of a concession is allowing newly hired public safety officers to retire with 90% of their highest salary at age 55 instead of 50. One upside of bankruptcy is that it will enable the city to restructure collective-bargaining agreements, which is critical since labor costs make up three-quarters of the general fund. Debt service is merely 4% of the city budget.
Unfortunately, the city probably won't be able to use bankruptcy to modify retirement benefits. When the Bay Area city of Vallejo declared bankruptcy in 2008, the California Public Employees' Retirement System threatened litigation if city leaders attempted to restructure pensions. San Bernardino bondholders may therefore have to take a larger haircut. The bankruptcy should underscore to investors that tax-exempt municipal bonds aren't without risk.
Ultimately, however, the biggest victims of the city's fiscal crisis are taxpayers. Despite paring public services, the city projects $45 million annual deficits for the next five years. Since further service reductions could endanger public safety and cause an exodus of residents, the city manager and its director of finance suggest that the city explore raising revenues. Their recent budget analysis recommends increasing the property transfer tax by nearly 500%.
San Bernardino's problems aren't much different from those of Stockton or even Detroit and Los Angeles. Most municipalities have postponed necessary labor reforms in hopes that a robust economic recovery would avert insolvency. That recovery has never arrived. Their hands have also been tied by collective-bargaining agreements, which are the real systemic risk to municipal finance—and to investors who think they're a tax-free lunch.
Posted by Wsj Arthur C. Brooks · July 09, 2012 8:46 PM
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I'm often asked if I think America is trending toward becoming a European-style social democracy. My answer is: "No, because we already are a European-style social democracy." From the progressivity of our tax code, to the percentage of GDP devoted to government, to the extent of the regulatory burden on business, most of Europe's got nothing on us.
In 1938—the year my organization, the American Enterprise Institute, was founded—total government spending at all levels was about 15% of GDP. By 2010 it was 36%. The political right can crow all it wants about how America is a "conservative country," unlike, say, Spain—a country governed by the Spanish Socialist Workers Party for most of the past 30 years. But at 36%, U.S. government spending relative to GDP is very close to Spain's. And our debt-to-GDP ratio is 103%; Spain's is 68%.
At first blush, these facts seem astounding. After all, Spanish political attitudes differ dramatically from our own. How can we be slouching down the same debt-potholed, social-democratic road as Spain? There are three explanations, all of which point to a worrying future for America.
First, the American left is every bit as focused on growing government and equalizing incomes as the Spanish left. Despite arguments from liberals that tax increases on "millionaires and billionaires" are necessary for fiscal prudence, they are little more than a way to meet the single-minded objective of greater income equality.
President Obama's proposal to eliminate the Bush-era tax cuts for households making over $250,000 a year would, on a static basis, reduce the deficit by only 5% annually. That still leaves 95% of the deficit to be paid by the middle class.
Similarly, the so-called Buffett Rule, which would apply a minimum income tax rate of 30% on individuals making more than $1 million a year, is supposed to help bring our budget into line but would raise annually about $4 billion—about as much as Americans spend on Halloween and Easter candy.
The second force leading us down the social-democratic road is cronyism. America possesses a full-time bipartisan political apparatus dedicated to government growth and special deals for favored individuals and sectors. For example, the farm bill that just passed the Senate contains around $100 billion in subsidies, mostly for large, corporate farms that do nothing to improve nutrition or food security. Or witness the recently reauthorized Export-Import Bank, which doles out about $20 billion annually in corporate welfare.
Third, and most importantly, while a majority of Americans are neither leftists nor corporate cronies, they aren't paying much attention to the political system. We often hear that more than 85% of Americans disapprove of the job Congress is doing. But, according to the 2000 Social Capital Community Benchmark Survey, only 25% of American adults can correctly name both of their U.S. senators, and 51% can name neither. If I don't know who my senator is, I am unlikely to know much about his bridge to nowhere.
In a way, separation from politics is a charming part of the American DNA. There is a story (probably apocryphal) that when Thomas Jefferson was asked to describe a typical American, he thought for a moment and said, "A man who moves west the first day he hears the sound of his neighbor's ax."
We're not literally moving west any more, but in the Tocquevillian tradition our lives are directed less by Washington politics and more by everyday jobs, church socials and soccer practices. As the leader of a think tank dedicated to public policy, I would love it if Americans were as obsessed with policy as I am. But let's be realistic: Most people don't have the time or inclination to contemplate the potential damage each government-spending predation—each tiny political sellout of our values—could cause.
Still, according to a recent Gallup survey, 81% of Americans are dissatisfied with the way the nation is being governed. Since Gallup started asking that question in the early 1970s, dissatisfaction has never been higher.
And Rasmussen polls find that consistently two-thirds to three-quarters of Americans say our country is on the "wrong track." They may not know exactly why, but most Americans believe their government is changing our nation for the worse.
What is the answer? We caught a glimpse of it in 2010, when a movement of ethical populism—the tea party—mobilized millions of Americans to read the United States Constitution and demand politics that reflect the majority's values. And while woefully misguided in its diagnoses and policy solutions, the Occupy Wall Street movement was at least right to protest the malignant cronyism in our economy. That energy must re-emerge in 2012 and become a permanent part of our political landscape.
In 1787, Benjamin Franklin was asked what sort of government our new nation would have. His famous answer was, "A Republic, if you can keep it." When he said this he was envisioning a monarchist alternative, not today's noxious brew of leftism, cronyism and general inattention to public policy. But Franklin's maxim is still valid today.
Posted by Al Checchi · July 05, 2012 1:12 PM
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Through accident or design Chief Justice John Roberts and Associate Justice Anthony Kennedy have done the American people a great service. While the two American political parties become more partisan, the Roberts and Kennedy opinions rendered on the constitutionality of the Affordable Care Act have drawn a bright line between what seem to be two opposing visions for America's future. It is no small thing that Kennedy, the so-called "swing vote" felt the Act such an abomination that in his dissent joined by the three conservative justices, he called for striking the entire law down as an egregious overreach by the federal government. Chief Justice Roberts, on the other hand, upheld the law on the basis of the argument that although the Congress and the president specifically said that the mandate funding the legislation was not a tax, it could be "construed" as one. Roberts pointedly said that this was not an opinion on the quality or advisability of the law merely on the taxing authority of Congress (even when they don't intend to pass a tax).
That the law was passed on a purely partisan vote, that few who voted for it read it or were fully briefed on the contents of its 2,700 pages, that its first 10 years of operation are now projected to cost nearly $3 trillion, twice their initial estimate, and that it is now evident that many employers will opt to pay the penalty and cancel their existing health plans leaving millions of Americans unable to continue their present coverage as advertized -- none of these are constitutional issues. Congress does not have to read or understand what it passes and advocates are free to distort financial projections and demagogue, even in the words of Abraham Lincoln "to fool some of the people some of the time and all of the people some of the time." This is American government at the dawn of the 21st century. It's all perfectly constitutional.
Now, also in keeping with our constitution, on Nov. 6, 2012, the American people will have their say. They will go to the polls and decide whether to support the president and the party that single-handedly drafted, passed, and defended this "big __ing deal" in the words of Vice President Joe Biden or replace them with presidential and congressional candidates sworn to repeal it. They will decide if they want to continue the transformational direction advocated by this president, perhaps enact the promised cap and trade legislation that would in the president's words massively increase the cost of energy, pass card check to increase unionization of the private sector, expand the welfare state maybe extending unemployment compensation beyond the already extended two years, and cede to the executive the unilateral right to enforce constitutionally passed laws at his discretion.
Contrary to what many would have us believe, the next election is not about race, religion, who we would want to have a beer with, gay marriage, abortion, or God forbid, "fairness." It is about the future role of the federal government and the role of the individual in America. Chief Justice Roberts ruled that a tax is a tax even when it's not supposed to be a tax. The American people may now proceed to render a more consequential judgment.
Posted by Andrew Tisch · June 27, 2012 7:49 PM
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U.S. national debt is $15,800,000,000,000. Our lingo shouldn't obscure how dangerous that is.
Pop quiz: What's bigger—$15.8 trillion, or $15,772,177,351,447?
Of course, rounding off, they're about the same. But don't we all think that the first number seems so much smaller and more manageable than the second?
The first number incorporates a tidy unit of measurement called a "trillion." We can get our heads around the word "trillion," and so we think we understand what we're looking at. In this case, it is the size of our national debt.
The thing is, it should be really hard to ever get our heads around a "trillion." Very few of us have ever seen a trillion of anything with our own eyes. Maybe a trillion grains of sand, but not a trillion trees or a trillion stars.
When you look at the nighttime sky, think about this: We used to know of a few million stars. Then we moved up to billions of stars. Now we're up to billions of galaxies. But we haven't gotten to trillions of many things uniquely identifiable yet.
As a nation, we spent $3.6 trillion last year on federal government services, and about one out of every three of those dollars was borrowed. That's a lot of money.
Just how much is a trillion dollars? Consider this: If you have a briefcase full of $100 bills, you'd have roughly $1 million. Few of us have ever seen that much money in one place, but we can at least imagine what it looks like. But a trillion dollars in $100 bills would weigh 22 million pounds!
Things get more interesting if you stack the $100 bills on top of each other, rather than pack them tight in a briefcase. You'd have only $10 billion by the time you got as high as a commercial jetliner cruises. Think about that next time you're up in the air.
If you want to see a trillion dollars of those Benjamin Franklins, you need to penetrate the Earth's atmosphere and keep on going—678 miles high. Our national debt, at 15.8 times that amount, would form a stack of $100 bills 10,712 miles high.
That's why this enormous number is trivialized by shortening it to a word that has only one more letter than its much more benign cousins, "million" or "billion."
So let's ban the word "trillion." It's a unit of measurement neither understood nor appreciated. If we must use the number, we should give it its proper due. Write it out with all its zeros—all 12 of them. So $15.8 trillion would be $15,800,000,000,000.
Or, from now on, if you want to say "trillion," say "one thousand billion" or "one million million," or "one thousand thousand thousand thousand." Our national debt, then, would go from $15.8 trillion to $15,800 billion. Doing this would show, among other things, that even cutting $100 billion from our debt would bring us down only to $15,700 billion.
Still, "billions" doesn't quite cut it. One billion dollars used to be a lot of money. Today no self-respecting dictator siphons less than that amount into his or her Swiss bank account. It simply wouldn't look good among peer dictators.
So what about expressing a trillion as "a million million"? By that standard, our deficit is now $15.8 million millions.
We can't keep piling more debt onto our children or our children's children or our children's children's children. Otherwise, the million million millions in debt will make their future worthless, worthless, worthless.
Posted by Al Checchi on the Huffington Post · June 19, 2012 12:16 PM
· 1 reaction
Since assuming office three and a half years ago, President Barack Obama has recited a constant mantra: He inherited a mess and it is all George Bush's fault. That he inherited a mess is indisputable, but so memorably did presidents Franklin Roosevelt and Ronald Reagan. Neither Roosevelt nor Reagan, however, expended political capital blaming their predecessors; neither did they seek to dramatize the difficulties facing the country. Instead they assured their fellow citizens that we "have nothing to fear but fear itself," and "our best days are ahead." Each developed and implemented contrasting programs -- one "Keynesian" favoring expanding government, the other "supply side" stimulating the private sector. Both were rewarded with landslide reelection victories.
Since President Obama seems to justify his reelection based on comparison with George Bush's "failed policies," inquiring minds might want to know exactly where George Bush went wrong and how President Obama has instead paved the way to prosperity.
The so called "great recession" resulted from a liquidity crisis centered in the housing sector that threatened the solvency of our largest financial institutions. Cheered on by investment and commercial banks, and federally sponsored NGOs like Fannie Mae and Freddie Mac, the country and indeed the world abandoned all pretense of fiscal prudence and inflated a bubble of housing speculation that burst in late 2008 pushing the country into a sharp but relatively short recession, followed by an historically long and shallow recovery.
Exactly how did the policies of George Bush cause such financial carnage? Did he create the regulatory regime or institutional structures that led to this orgy of speculation? The repeal of the Glass-Steagall Act that deregulated commercial and investment banks allowing them to act as principals and make and sponsor speculative investments like mortgage backed securities, was instituted by Bush's predecessor, President Clinton (with strong bi-partisan support). Did Bush perhaps institute the disastrous federal policies to abandon traditional underwriting standards and encourage and expand home ownership through promotion of Fannie Mae and Freddie Mac? Those policies had been established decades before Bush's presidency and were most notably championed by two powerful congressional committee chairmen -- Democratic Representative Barney Frank and Senator Chris Dodd. Bush did not succeed in reigning in these institutions to be sure, but it is evident that neither he nor anyone else had the political power to do so (until of course the house of cards collapsed). If anyone had the power and responsibility to exercise control over the commercial banks and thereby limit the carnage, it was the Federal Reserve that by statute operates independent of both the president and Congress irrespective of party.
George Bush did not remotely cause nor even materially contribute to the policies and structures producing the housing crisis. He is, however, responsible for three consequential actions that had significant fiscal impact: sponsoring the 2001 tax cuts, prosecuting the wars in Afghanistan and Iraq, and continuing unabated the growth rate of federal spending. While anyone can take issue with the wisdom of any of these, none were proximate causes of recession. The tax cuts were expansionary. Indeed President Obama ultimately extended Bush's cuts as an "anti-recession" measure. Although he now proposes to eliminate the cuts for those with incomes over $250,000 in the name of "fairness" (and arguably to gain partisan advantage in an election year), even Obama could not argue that repealing these cuts would be stimulative. The two wars may not have been wise foreign policy but inarguably they were also fiscally stimulative -- much like World War II which is largely credited with moving the U.S. out of the Great Depression. Similarly Bush's failure to reign in government spending also was stimulative policy. President Obama in turn instituted an unprecedented $800 billion special expansion of government and is proposing even more spending to counter a possible future lapse into recession. President Obama and much quoted economist/political partisan Paul Krugman tell us increased government spending is absolutely necessary to grow the economy. If it would do this for Obama, why would it lead to economic contraction under President Bush?
Neither President Roosevelt nor President Reagan needed do much to convince the American people to grant them four more years. Whether Keynesian or Supply Sider, they were leaders who succeeded in changing the economic psychology of the country infusing investors and consumers with confidence and a sense of optimism.
Continuing to use George Bush as a scapegoat while largely continuing his policies doesn't seem a particularly prudent strategy for President Obama. Having failed to change public perception that we are on the wrong track, if the best President Obama can do is blame his predecessor and make excuses, he is in far greater trouble than the U.S. economy.
Posted by Al Checchi on the Huffington Post · June 14, 2012 6:04 PM
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"If you can't drink their booze, take their money, sleep with their women, and then vote against them, you don't belong in politics." Former Speaker of the California Assembly Jesse "Big Daddy" Unruh
The Democratic Party, the beneficiary of 40 years of unionized public employee support, will reassess its relationship with public service unions. Maximizing public employee wages and benefits has little to do with the founding and sustaining principles of the Party -- promoting equality of opportunity, combating discrimination and assuring a safety net for those in need. Public sector workers are neither victims of discrimination; unfairly exploited, nor easily classified as disadvantaged. The relationship between the Party and the unions is utilitarian not philosophical. The unions provide campaign funds, ground troops and voters to advance the interests of Democratic political candidates. In exchange, the Party sponsors and promotes union wages, benefits, work rules and job security. While highly effective electoral strategy for Democratic office seekers in the past, it does not appear the voting public is willing to continue to foot the bills. Campaign contributions are only a means to an end; when the contributors become a liability, politicians reboot and go where the votes are.
Public opinion regarding public service employees is reaching a tipping point. The recent economic downturn placed an uncomfortable spotlight on the disparity between their income, benefits and protections, and those available to the average working American. At a time of increased national austerity, the unions have not helped their cause by actively fighting programs to increase government efficiency, championing opportunities further to expand government (and union membership), and funding public initiatives to promote increases in state and local taxes. From a political standpoint, continuing to champion increases in the income of public employees or defending their accumulated legacy costs will be increasingly problematic for new office seekers.
If all politics is local, given the abject state of municipal finances across America, what politician wants to defend the premise that local public service providers should continue to receive salaries and benefits and job security higher and in many cases significantly higher than their clients? What political party will undertake to convince voters that it is in their interest to honor the legacy commitments of past alliances between union leaders and self-interested office holders? How much longer will lower income and middle class parents tolerate the active subordination of their children's interests to those of teachers unions? Faced with the prospect of further cutting services or cutting public servant benefits, or eliminating the obstacles to public education reform in favor of better education opportunities for their children, is it easy to predict what people will choose?
As voter sentiments against public employee unions intensifies, is there any doubt that the politicians of both parties will soon follow? Last week in heavily Democratic California, against strong union opposition, voters by two to one margins approved initiatives lowering pensions for public service employees in the cities of San Diego and San Jose. In Chicago and New York, the Democratic mayor and governor respectively are pushing ahead with reforms vigorously opposed by public sector unions. In last week's high profile election, Republican Governor Scott Walker of Wisconsin became the first governor in history to beat a recall vote -- one initiated directly by public service unions to overturn limits on their benefits and bargaining rights.
Analysts miss the point when they argue that Walker succeeded because his supporters significantly outspent the opposition. Both political parties have demonstrated an equal capacity to raise campaign money for individuals and causes to which they are fully committed. In Wisconsin, one of the country's most progressive states, the local and national financial support for the interests of public employees simply wasn't forthcoming. Neither the Democratic president nor national party was willing to put themselves on the line to support the public sector unions in Wisconsin, San Diego or San Jose. Neither will they oppose the measures advanced in Chicago and New York State.
To survive and thrive, political parties change and adapt. The public service unions and the Democratic Party had a very good run together, but the burden of the legacy costs resulting from that collaboration has become too great, exceeding the potential future political benefits for office seekers. The Democratic Party will adjust to changed circumstances, forming new alliances while public service unions will be politically orphaned, declining measurably like their private sector counterparts. As the late, great Democratic House Speaker Tip O'Neill used to say, "Politics ain't beanbag."
Posted by Wsj · June 12, 2012 11:12 AM
· 1 reaction
On Friday House Republicans released more documents that expose the collusion between the health-care industry and the White House that produced ObamaCare, and what a story of crony capitalism it is. If the trove of emails proves anything, it's that the Tea Party isn't angry enough.
Over the last year, the Energy and Commerce Committee has taken Nancy Pelosi's advice to see what's in the Affordable Care Act and how it passed. The White House refused to cooperate beyond printing out old press releases, but a dozen trade groups turned over thousands of emails and other files. A particular focus is the drug lobby, President Obama's most loyal corporate ally in 2009 and 2010.
The business refrain in those days was that if you're not at the table, you're on the menu. But it turns out Big Pharma was also serving as head chef, maître d'hotel and dishwasher. Though some parts of the story have been reported before, the emails make clear that ObamaCare might never have passed without the drug companies. Thank you, Pfizer.
The joint venture was forged in secret in spring 2009 amid an uneasy mix of menace and opportunism. The drug makers worried that health-care reform would revert to the liberal default of price controls and drug re-importation that Mr. Obama campaigned on, but they also understood that a new entitlement could be a windfall as taxpayers bought more of their products. The White House wanted industry financial help and knew that determined business opposition could tank the bill.
Initially, the Obamateers and Senate Finance Chairman Max Baucus asked for $100 billion, 90% of it from mandatory "rebates" through the Medicare prescription drug benefit like those that are imposed in Medicaid. The drug makers wheedled them down to $80 billion by offsetting cost-sharing for seniors on Medicare, in an explicit quid pro quo for protection against such rebates and re-importation. As Pfizer's then-CEO Jeff Kindler put it, "our key deal points . . . are, to some extent, as important as the total dollars." Mr. Kindler played a more influential role than we understood before, as the emails show.
Thus began a close if sometimes dysfunctional relationship with the Pharmaceutical Research and Manufacturers of America, or PhRMA, as led by Billy Tauzin, the Louisiana Democrat turned Republican turned lobbyist. As a White House staffer put it in May 2009, "Rahm's calling Nancy-Ann and knows Billy is going to talk to Nancy-Ann tonight. Rahm will make it clear that PhRMA needs a direct line of communication, separate and apart from any coalition." Nancy-Ann is Nancy-Ann DeParle, the White House health reform director, and Rahm is, of course, Rahm.
Terms were reached in June. Mr. Kindler's chief of staff wrote a memo to her industry colleagues explaining that "Jeff would object to me telling you that his communication skills and breadth of knowledge on the issues was very helpful in keeping the meeting productive." Soon the White House leaked the details to show that reform was making health-care progress, and lead PhRMA negotiator Bryant Hall wrote on June 12 that Mr. Obama "knows personally about our deal and is pushing no agenda."
But Energy and Commerce Chairman Henry Waxman then announced that he was pocketing PhRMA's concessions and demanding more, including re-importation. We wrote about the double-cross in a July 16, 2009 editorial called "Big Pharma Gets Played," noting that Mr. Tauzin's "corporate clients and their shareholders may soon pay for his attempt to get cozy with ObamaCare."
Mr. Hall forwarded the piece to Ms. DeParle with the subject line, "This sucks." The duo commiserated about how unreasonable House Democrats are, unlike Mr. Baucus and the Senators. The full exchange is among the excerpts from the emails printed nearby.
Then New York Times reporter Duff Wilson wrote to a PhRMA spokesman, "Tony, you see the WSJ editorial, 'Big Pharma Gets Played"? I'm doing a story along that line for Monday." The drug dealers had a problem.
The White House rode to the rescue. In September Mr. Hall informed Mr. Kindler that deputy White House chief of staff Jim Messina "is working on some very explicit language on importation to kill it in health care reform. This has to stay quiet."
PhRMA more than repaid the favor, with a $150 million advertising campaign coordinated with the White House political shop. As one of Mr. Hall's deputies put it earlier in the minutes of a meeting when the deal was being negotiated, "The WH-designated folks . . . would like us to start to define what 'consensus health care reform' means, and what it might include. . . . They definitely want us in the game and on the same side."
In particular, the drug lobby would spend $70 million on two 501(c)(4) front groups called Healthy Economy Now and Americans for Stable Quality Care. In July, Mr. Hall wrote that "Rahm asked for Harry and Louise ads thru third party. We've already contacted the agent."
Mr. Messina—known as "the fixer" in the West Wing—asked on December 15, 2009, "Can we get immediate robo calls in Nebraska urging nelson to vote for cloture?" Ben Nelson was the last Democratic holdout toward the Senate's 60-vote threshold, and, as Mr. Messina wrote, "We are at 59, we have to have him." They got him.
At least PhRMA deserves backhanded credit for the competence of its political operatives—unlike, say, the American Medical Association. A thread running through the emails is a hapless AMA lobbyist importuning Ms. DeParle and Mr. Messina for face-to-face meetings to discuss reforming the Medicare physician payment formula. The AMA supported ObamaCare in return for this "doc fix," which it never got.
"We are running out of time," this lobbyist, Richard Deem, writes in October 2009. How can he "tell my colleagues at AMA headquarters to proceed with $2m TV buy" without a permanent fix? The question answers itself: It was only $2 million.
Mr. Waxman recently put out a rebuttal memo dismissing these email revelations as routine, "exactly what Presidents have always done to enact major legislation." Which is precisely the point—the normality is the scandal. In 2003 PhRMA took a similar road trip with the Bush Republicans to create the Medicare drug benefit. That effort included building public support by heavily funding a shell outfit called Citizens for a Better Medicare.
Of course Democrats claim to be above this kind of merger of private profits and political power, as Mr. Obama did as a candidate. "The pharmaceutical industry wrote into the prescription drug plan that Medicare could not negotiate with drug companies," he said in 2008. "And you know what? The chairman of the committee who pushed the law through"—that would be Mr. Tauzin— "went to work for the pharmaceutical industry making $2 million a year."
Outrage over this kind of cronyism is what animates the Tea Party and Occupy Wall Street, whose members aren't powerful enough to get special dispensations from the government—or even a fair hearing from their putative representatives.
In one email, an AARP lobbyist writes the White House to say "We really need to talk," noting that calls from seniors are running 14 to one against ObamaCare. But she isn't calling to say that AARP is withdrawing support—only that the White House needs to adjust its messaging. This is how a bill passes over the objections of most Americans.
The lesson for Republicans if they do end up running the country next year is that their job is to restore the free and fair market that creates broad-based economic growth. The temptation will be to return for the sake of power to the methods of Tom DeLay and Jack Abramoff. If they do, voters will return the GOP to private life as surely as they did the Democrats in 2010.
The warning to business is also fundamental. Crony capitalism undermines public trust in capitalism itself and risks blowback that erodes the free market that private companies need to prosper and that underlies the productivity and competitiveness of the U.S. economy. The political benefits of cronyism are inherently temporary, but the damage it does is far more lasting.
As for Big Pharma, the lobby ultimately staved off Mr. Waxman's revolt and avoided some truly harmful drug policies—for now. But over the long term their products are far more vulnerable to the command-and-control central planning that will erode medical innovation, and their $80 billion fillip is merely the teaser rate.
Mr. Kindler resigned from Pfizer in December 2010 under pressure from directors, its stock having lost 35% of its value since he became CEO. Mr. Tauzin left PhRMA in February 2010, with the Affordable Care Act a month from passage.
The truth is that this destructive legislation wasn't inevitable and far better reforms were possible. They still are, though they might have gained more traction in 2009 and 2010 with the right support. The miracle is that, despite this collusion of big government and big business, ObamaCare has received the public scorn that it deserves.
Posted by Terrill Smith · May 29, 2012 12:01 PM
· 1 reaction
The counsel that Reagan received in November 1980 is still relevant today.
Sharp change in present economic policy is an absolute necessity. The problems of inflation and slow growth, of falling standards of living and declining productivity, of high government spending but an inadequate flow of funds for defense, of an almost endless litany of economic ills, large and small, are severe, they are not intractable. Having been produced by government policy, they can be redressed by a change in policy.
The Task Force reports that you commissioned during the campaign are now available. They contain an impressive array of concrete recommendations for action. More than that, the able people who served on the Task Forces are available to provide further detail and backup information to you or your designees. We all want to help and you can count on enthusiastic and conscientious effort.
Your Coordinating Committee has reviewed the Task Force reports. With due allowance for some differences in view about particulars and relative importance, we have found that they offer a substantial base for action by you and the team you assemble. We focus here on guiding principles, on priorities and linkages among policy areas, and on the problem of getting action.
You have identified in the campaign the key issues and lines of policy necessary to restore hope and confidence in a better economic future:
• Reestablish stability in the purchasing power of the dollar.
• Achieve a widely-shared prosperity through real growth in jobs, investment, and productivity.
• Devote the resources needed for a strong defense, and accomplish the goal of releasing the creative forces of entrepreneurship, management, and labor by:
• Restraining government spending.
• Reducing the burden of taxation and regulation.
• Conducting monetary policy in a steady manner, directed toward eliminating inflation.
This amounts to emphasis on fundamentals for the full four years, as the key to a flourishing economy.
The essence of good policy is good strategy. Some strategic principles can guide your new administration as it charts its course.
• Timing and preparation are critical aspects of strategy. The fertile moment may come suddenly and evaporate as quickly. The administration that is well prepared is ready to act when the time is ripe. The transition period and the early months of the new administration are a particularly fertile period. The opportunity to set the tone for your Administration must be seized by putting the fundamental policies into place immediately and decisively.The need for a long-term point of view is essential to allow for the time, the coherence, and the predictability so necessary for success. This long-term view is as important for day-to-day problem solving as for the making of large policy decisions. Most decisions in government are made in the process of responding to problems of the moment. The danger is that this daily fire fighting can lead the policy-maker farther and farther from his goals. A clear sense of guiding strategy makes it possible to move in the desired direction in the unending process of contending with issues of the day. Many failures of government can be traced to an attempt to solve problems piecemeal. The resulting patchwork of ad hocsolutions often makes such fundamental goals as military strength, price stability, and economic growth more difficult to achieve.
• Central problems that your Administration must face are linked by their substance and their root causes. Measures adopted to deal with one problem will inevitably have effects on others. It is as important to recognize these interrelationships as it is to recognize the individual problems themselves.
• Consistency in policy is critical to effectiveness. Individuals and business enterprises plan on a long-range basis. They need to have an environment in which they can conduct their affairs with confidence.
• Specific policies as well as long-term strategy should be announced publicly. The Administration should commit itself to their achievement, and should seek Congressional commitment to them as well. Then the public, as well as the government, knows what to expect.
• The administration should be candid with the public. It should not over-promise, especially with respect to the speed with which the policies adopted can achieve the desired results.
Seizing the Initiative
The fundamental areas of economic strategy concern the budget, taxation, regulation, and monetary policy. Prompt action in each of these areas is essential to establish both your resolve and your capacity to achieve your goals.
Your most immediate concern upon assuming the duties of the President will be to convince the financial markets and the public at large that your anti-inflation policy is more than rhetoric. The public, and especially the financial community, is skeptical and needs a startling demonstration of resolve. Many question whether you are serious about a sizeable cut in budget outlays. Credible FY 1981 and 1982 budgets which do that clearly and unambiguously would evoke an extraordinary response in the financial markets, and set the stage for a successful assault on inflation and a decline in mortgage and other interest rates.
The FY 1981 Budget will be almost four months along by the time you take office and a FY 1982 Budget will have been submitted for consideration by the Congress. There are now estimates of alarming increases in these swollen budgets. Prompt and strong action is necessary if these budgets are to be brought under control, as they must be. The nation can no longer afford governmental business as usual.
The formal budget alone is far from the whole story, though it is visible and Important. Off-budget financing and government guarantees mount and expand programs through the use of the government's borrowing capacity, draining the nation's resources without being adequately recorded in the formal spending totals. In addition, the mandating of private expenditures for government purposes has gained momentum as the spotlight has Illuminated direct spending. These mandates are also a clear call by government on the nation's resources. Efforts to control spending should be comprehensive; otherwise, good work in one area will be negated in another. And these efforts should be part of the Administration's development of a long-term strategy for the detailed shape of the budget, four or more years into the future.
The Weinberger Task Force has identified an extensive and promising array of areas for potential savings, but it will be up to your Administration and the Congress to do the job. It takes top-notch people to do it. We recommend that:
• A Budget Director, permanent or pro tem, be chosen and set to work now.
• A small team from 0MB be assembled explicitly to work with the newly designated Director.
• The Director's recommendations be a part of your discussion with Cabinet and sub-Cabinet appointees as these appointments are made.
Amendments calling for dramatic reductions in the FY 1981 Budget should be submitted to the Congress within the first week of your Administration. A thoroughly revised FY 1982 Budget provides even greater opportunities for large further reductions, and this budget should be submitted as soon as possible.
Finally, it has become all too evident in recent years that current budget procedures are biased in an expansionary direction. The Congressional budget process defined by the Budget Act of 1974 has failed to achieve its purpose of removing the "runaway" bias. We therefore recommend a presidential task force to develop new techniques which can help to rein in the growth of federal outlays. It should examine the presidential item veto, renewed presidential power to refrain from spending appropriated funds, and other initiatives to hold down spending. This task force should report to you within two months.
Tax policy is properly the province of your Secretary of the Treasury. The making of that appointment should have a high priority so that important work can go forward. The Walker Task Force provides the materials needed to pose the issues to you in concrete form and to translate your decisions into a proposal to the Congress. This proposal should be presented early in the new administration in tandem with other key elements of your economic program. It should embody the main thrust of tax policy for the whole of your first term, not simply for the year 1981. We consider that the key ingredients should be your proposals for the Kemp-Roth cut in personal income tax rates, simplification and liberalization of business depreciation and a cut in effective taxes on capital gains (see Innovation Task Force). Consistent with your proposals earlier this year, the effective date for these reductions should be January 1, 1981.
Other key proposals are tax incentives for the establishment of enterprise zones in the inner cities and such other items as tuition tax credits, reductions in the windfall profits tax, inheritance taxes and the taxation of Americans living abroad, and the restoration of restricted stock options.
The current regulatory overburden must be removed from the economy. Equally important, the flood of new and extremely burdensome regulations that the agencies are now issuing or planning to issue must be drastically curtailed. The Weidenbaum Task Force sets out the needed blueprint for personnel selection, immediate administrative action, and legislation. Again, the key to action is a knowledgeable and forceful individual to develop and coordinate strategy and to form a team to carry it out. Such an appointment should be made promptly, with the expectation that the effort would carry forward through the transition for at least a year into your Administration. Your appointee and his team should be located within the Executive Office of the President. Achieving regulatory reform will take informed, strong, and skillful work with the Congress, as well as with those in charge of departmental and agency regulatory efforts. The person heading up this effort will require your continued, wholehearted support.
Many of our economic problems today stem from the large and increasing proportion of economic decisions being made through the political process rather than the market process. An important step to demonstrate your determination to rely on markets would be the prompt end of wage and price guidelines and elimination of the Council on Wage and Price Stability.
To advance the entire regulatory effort—both to galvanize public support and to strengthen the positions of Administration appointees—we urge you to issue a message on regulatory reform in tandem with the budget and tax messages. The message should call upon state and local governments to launch similar regulatory reform efforts—as a few have already done.
The battle between government regulation and the private market is nowhere more apparent than in energy, where the market has a decisive comparative advantage. Governmental intrusion into energy production and use provides a glaring example of how regulation costs us all dearly. Alternatives to imported oil exist here in the United States. As the Halbouty Task Force emphasizes, market pricing and market incentives will accelerate the development of these alternatives, just as surely as present regulations and the politicization of this field inhibit them. Its recommendations and the issues it poses for careful review cover the energy field in a comprehensive manner and deserve immediate attention.
We recommend, also, that you promptly exercise the discretion granted to the President to remove the price controls on crude oil and petroleum products, rather than continue with the present calendar, which postpones complete decontrol until October 1981. This decisive action will eliminate at once the regulatory apparatus administering the entitlements program, and discourage continued efforts by special interests, to prevent or slow down decontrol and deregulation. Also, the Natural Gas Policy Act of 1978 should be repealed so that all natural gas prices are decontrolled. These measures are particularly urgent because the uncertainty of our critical Middle East oil supplies, dramatized by the Iran-Iraq war, makes it all the more necessary to get the earliest possible incentive effect of free market pricing.
The Synthetic Fuels Corporation is incompatible with the free market pricing of energy and should be promptly eliminated.
The Department of Energy has become a large and unmanageable institution with a variety of programs ranging from essential to useless. The essential functions should be transferred and the Department eliminated. This should be the main task of your Secretary of Energy.
A steady and moderate rate of monetary growth is an essential requirement both to control inflation and to provide a healthy environment for economic growth. We have not had such a policy. The rate of monetary growth declined sharply in the early months of 1980, and rose rapidly in recent months. These wide fluctuations are adversely affecting economic conditions and may continue to do so into 1981.
The McCracken Task Force emphasizes that the attainment of a proper monetary policy deserves the very highest priority and that such a monetary policy can be achieved through effective use by the Fed of its existing powers. The Task Force also brings out the relationship of monetary policy to budgetary and other economic policies.
The Federal Reserve is an independent agency. However, independence should not mean lack of accountability for what it does. In practice, independence has not meant that the Federal Reserve is immune to Presidential and Congressional influence. The problem is how to assume accountability while preserving independence. We suggest that you:
• Request the Fed to state targets for monetary growth year by year for the next five years that in its opinion will end inflation. Influential members of relevant committees of Congress have already urged the Fed to specify such long-term targets.
• Assure the Fed that you will propose and fight for fiscal and other policies compatible with the elimination of inflation.
• Improve the procedures for coordinating Federal Reserve monetary policy with the economic policies of the Administration and the Congress and support Congressional efforts to monitor the Fed's performance and to recommend changes in the procedures that could improve performance.
With these fundamentals in place, the American people will respond. As the conviction grows that the policies will be sustained in a consistent manner over an extended period, the response will quicken. And a healthy U. S. economy, as the Burns Task Force states, will restore the credibility of our dollar on world markets, contribute significantly to smoother operation of the international economy, and enhance America's strength in the world.
Organizing for Action
The activities of a wide variety of departments, agencies, and other units of government within the Executive Branch impinge on economic policy. But the flow of economic events does not recognize organizational lines. The economy itself operates as a system in which constituent parts are linked, sometimes tightly. The combination of interwoven problems and disparate organizations means that, in the process of policy formulation and implementation, some people high in your administration must identify the central ideas and problems and devise a strategy and tactics for dealing with them. Your leadership is essential to this effort.
One arrangement that has worked well in the past is for the Secretary of Treasury to be the chief coordinator and spokesman on economic policy, domestic and international. To carry out this mandate effectively, the Secretary should be one of your key staff members as well as a departmental head with a White House title and office. Since economic developments are often closely related to security, the Secretary should be a member of the National Security Council. For this coordinating role, an Economic Policy Board, with comprehensive membership, should be established; it should meet regularly and be the avenue through which economic issues come to your Executive of the Cabinet and to your desk. The Council of Economic Advisers might suitably provide the secretariat for this group.
Maintaining a Steady Course
Our final point is our most important one. The success of your economic policy will be a direct reflection of your ability to maintain a steady course over your full first term. Rough times will come and crises of one kind or another, some small, some of great moment, will arise. Sustained effort through these testing times means that public understanding and support are essential. Of equal and related importance is the understanding and support of the Congress.
This last task—gaining understanding and support of the Congress—is of crucial importance. As a result of the voting on November 4, the 97th Congress, we are convinced, will be more cooperative on economic and financial issues. That cooperation will be fostered if, during the transition, the Secretary of the Treasury (designate) consults intensively with key members of Congress on the design and implementation of your economic policies.
You have emphasized in your successful campaign precisely the strategy set forth in this document. In moving to implement it, you will be doing what the people voted for. Every effort must be made to maintain and broaden your base of support by improving public understanding and by close cooperation with the Congress. Cabinet officers and others in your administration can help in these tasks. Their ability to do so should be one important criterion in their selection.
At the end of the day, however, the burden of leadership falls on you: leadership to chart the course ahead; leadership to persuade that your course is the one to take; leadership to stay on course, whatever way political winds may blow. Through effective advocacy of the sharp changes so sorely needed, your leadership has brought us to this long-hoped-for opportunity at a critical moment for the nation. Your leadership can maintain this advocacy in the convincing manner necessary for a successful outcome.
Posted by Tom Manion · May 25, 2012 4:19 PM
· 1 reaction
I served in the military for 30 years. But it was impossible to fully understand the sacrifices of our troops and their families until April 29, 2007, the day my son, First Lt. Travis Manion, was killed in Iraq.
Travis was just 26 years old when an enemy sniper's bullet pierced his heart after he had just helped save two wounded comrades. Even though our family knew the risks of Travis fighting on the violent streets of Fallujah, being notified of his death on a warm Sunday afternoon in Doylestown, Pa., was the worst moment of our lives.
While my son's life was relatively short, I spend every day marveling at his courage and wisdom. Before his second and final combat deployment, Travis said he wanted to go back to Iraq in order to spare a less-experienced Marine from going in his place. His words—"If not me, then who . . . "—continue to inspire me.
My son is one of thousands to die in combat since the terrorist attacks of September 11, 2001. Because of their sacrifices, as well as the heroism of previous generations, Memorial Day 2012 should have tremendous importance to our entire nation, with an impact stretching far beyond one day on the calendar.
In Afghanistan, tens of thousands of American troops continue to sweat, fight and bleed. In April alone, 35 U.S. troops were killed there, including Army Capt. Nick Rozanski, 36, who made the difficult decision to leave his wife and children to serve our country overseas.
"My brother didn't necessarily have to go to Afghanistan," Spc. Alex Rozanski, Nick's younger brother and fellow Ohio National Guard soldier, said. "He chose to because he felt an obligation."
Sgt. Devin Snyder "loved being a girly-girl, wearing her heels and carrying her purses," according to her mother, Dineen Snyder. But Sgt. Snyder, 20, also took it upon herself to put on an Army uniform and serve in the mountains of northeastern Afghanistan as a military police officer. She was killed by an enemy roadside bomb, alongside three fellow soldiers and a civilian contractor, on June 4, 2011.
Air Force Tech. Sgt. Daniel Douville was an explosive ordnance disposal technician, doing an incredibly dangerous job depicted in "The Hurt Locker." He was a loving husband and father of three children. "He was my best friend," his wife, LaShana Douville, said. "He was a good person."
Douville, 33, was killed in a June 26, 2011, explosion in Afghanistan's Helmand province, where some of the fiercest fighting of the decade-long conflict continues to this day.
When my son died in Iraq, his U.S. Naval Academy roommate, Brendan Looney, was in the middle of BUD/S (basic underwater demolition) training to become a Navy SEAL. Devastated by his good friend's death, Brendan called us in anguish, telling my wife and me that losing Travis was too much for him to handle during the grueling training regimen.
Lt. Brendan Looney overcame his grief to become "Honor Man" of his SEAL class, and he served in Iraq before later deploying to Afghanistan. On Sept. 21, 2010, after completing 58 combat missions, Brendan died with eight fellow warriors when their helicopter crashed in Zabul province. He was 29. Brendan and Travis now rest side-by-side in Section 60 of Arlington National Cemetery.
"The friendship between First Lt. Travis Manion and Lt. Brendan Looney reflects the meaning of Memorial Day: brotherhood, sacrifice, love of country," President Obama said at Arlington on Memorial Day 2011. "And it is my fervent prayer that we may honor the memory of the fallen by living out those ideals every day of our lives, in the military and beyond."
But the essence of our country, which makes me even prouder than the president's speech, is the way our nation's military families continue to serve. Even after more than a decade of war, these remarkable men and women are still stepping forward.
As the father of a fallen Marine, I hope Americans will treat this Memorial Day as more than a time for pools to open, for barbecues or for a holiday from work. It should be a solemn day to remember heroes who made the ultimate sacrifice, and also a stark reminder that our country is still at war.
For the Rozanskis, Snyders, Douvilles, Looneys and thousands more like us, every day is Memorial Day. If the rest of the nation joins us to renew the spirit of patriotism, service and sacrifice, perhaps America can reunite, on this day of reverence, around the men and women who risk their lives to defend it.
Col. Manion, USMCR (Ret.), is on the board of the Travis Manion Foundation, which assists veterans and the families of the fallen.