POLITICAL ECONOMY: After the Speech, The Real Work Begins...

In a masterful speech to a joint session of Congress the president made a forceful call for universal health care. While I would have liked him to be more firm on his commitment to a public option or some other cost-saving and quality-ensuring measure, the speech will very likely change the momentum in the debate. Clearly aimed at shoring up independent voters who had shifted against him over the course of the summer, the speech should make the political points it set out to score. In addition, the president clearly aligned himself with some of the more promising aspects of the various health care bills that have been or are about to be passed in congress.

Having said that, he also embraced a few ideas that take him a step backwards. There remain some very basic problems with the president's approach to universal health care. And in truth the speech was short on specifics. Just what exactly is in the "basic care" package everyone will be entitled to? How much will be too much before the public subsidy kicks in for those cannot afford it? In the end, it is hard to know exactly what "the plan" really looks like, how well it will really work, or what it might actually cost. And the frustrating part is that health care is delivered reliably to millions of people in countries similar to the United States every day.

We know what works. But instead of doing that, because of an irrational fear of the government, we are embarking on an untested experiment in keeping private insurers healthy while gambling with the health of American citizens. The Reagan legacy is still with us, and the president has not taken the opportunity he was given to end it, nor have the Democrats in congress.

So, all hopes of finally putting the Reagan philosophy in its rightful place (the dust bin of history) rest on the success of health care reform. And there are real reasons to be fearful for the chances of success. The problem is primarily economic not political. But it will become political, I fear, and that is where the real problem exists. Without a vehicle to control costs and ensure quality, like a public option could provide, prices are likely to (continue to) sky rocket and quality of care likely to stay at the lowest possible floor companies can get away with.

The problem is complex in the details, but simple in broad outline:

Requiring insurance companies to take all who apply and force everyone to buy coverage will result in profit losses to the insurance companies that they will have to make up somewhere. Now, some of this can be made up from the premiums of young healthy people who are not now insured and presumably would be under the new requirements. But will these new young folks actually enroll and will that cash make up for the losses of the other high risk folks who would otherwise not get insurance? The Congressional Budget Office doesn't seem to think so.

And, as he has hinted at previously, the president once again reiterated his desire for the public option to actually be a "not-for-profit" option that will be funded only by the premiums it collects. This would undermine one of the chief cost control features of a public option: not needing to advertise for healthier and wealthier clients. But if the structure is dependent upon premiums then the option will depend on getting those wealthier, healthier patients on roll and there goes a big chunk (but not all) of your cost saving.

Don't get me wrong, I could care less about the budget deficit. There is simply no evidence that the deficits do any damage to an economy until you get into truly stratospheric numbers--far from where we are right now. Government debt is not paid on the backs of our children as so many often claim and it does not cause interest rates to rise. In fact a deficit can create enormous economic growth. Right now we are probably hurting our economic growth significantly by not running much larger deficits. It could cause inflation and a devaluation of the currency if it gets too out of hand and is spent on non-productive things. But we are not in that territory now. Cost savings matters to me because it matters to everybody else. Politicians of both stripes have bought into this fairy tale and that belief has real consequences.



For instance, a truly troubling part of the speech is when the president added that if the cost reductions he is counting on do not materialize, cuts in spending will be enacted to bring the expenditures into balance. The Congressional Budget Office does not believe his plan will cut costs in the long run and neither does simple logic. So to achieve some mythic balance of the budget, that has never been proven to have any beneficial economic effect, he is going to cut needed government services to pay for a massive tax payer give away to the insurance industry. This is not a good idea.

Let us hope that this is simply an idle threat that is never acted upon. The same logic that is likely with a "public option trigger"--that the trigger would never be pulled no matter how bad things get for the uninsured--might also apply to such cuts. After all they would take place after 2013 and would need to be voted upon.
That might never happen.


In the end, the president's speech was masterful politics, but the economics behind it remain murky and questionable.

But one thing seems likely. The president is back in the game and momentum is on his side. The votes are there in congress. Now it is up to us to put the pressure on.


Check back soon for my secret weapon I will offer the president...

I welcome your comments.