The Dangers of Fannie Mae Health Care. By JOHN E. CALFEE
A public plan would have certain advantages. That's precisely the problem.
The Wall Street Journal, Jun 26, 2009, p A15
President Obama and most congressional Democrats say they want to preserve private health insurance. They also want to add a "public plan" to compete with private insurance plans. Their basic argument is that a public plan would offer needed competition, save money through low administrative costs and zero profits, realize greater economies of scale, and be a superior negotiator of the prices of medical services and technology.
The first three arguments are bogus. The fourth argument is only half-bogus -- but the half that isn't reveals a great danger: If a public plan is inserted into private insurance markets, the American health-care system could rapidly evolve into a single-payer system, which would have devastating effects on R&D for new medical technology.
The first argument, that we need a public plan to spur competition, just isn't plausible. Hundreds of health insurance plans already exist, and employer benefit managers can choose among numerous alternatives. There is no lack of firms willing to compete to provide health insurance.
As to the second argument, what is to be saved by avoiding profits? Nonprofit health insurance firms are common, including many of the Blue Cross-Blue Shield plans. Nonprofit status has not proved to be a reliable source of efficiency and cost-saving. The addition of new nonprofit cooperatives and the like -- as a bipartisan group of senators has proposed -- would make little difference, unless the new plans are given the power to set prices and take on extra risk supported by government subsidies.
Would a public plan have lower administrative costs? Well, how often are public enterprises run more efficiently than private ones? Why did practically all economically advanced nations dismantle their public airlines, phone companies, and so on, invariably obtaining lower administrative costs and consumer prices?
As Stanford University health economist Victor Fuchs has pointed out, what "insurance" firms actually sell to large employers -- which account for the single largest segment of the entire health-care market -- is usually administrative services, not actual insurance. (Large companies are not insured; they pay benefits directly.) There is no reason to expect a Medicare-like public plan to match the administrative efficiency of Aetna, Blue Cross-Blue Shield, Cigna, UnitedHealth Group, and WellPoint. Medicare doesn't even try. It outsources most administrative services to the private sector.
Turning to public plans like Medicare and Medicaid for more efficient administration is a fool's errand.
What about economies of scale? Aetna currently serves about 18 million subscribers, UnitedHealth Care serves between 25 million and 30 million, and WellPoint more than 35 million. That is more than is served by the health-care monopoly of Canada (population 33.6 million), and more than the entire health-care systems of most European nations. Once a plan reaches a few million subscribers, there may not be a lot of economies of scale left that can enable public plans to provide lower prices.
Finally, there is the crucial task of negotiating prices for doctors, hospitals, clinics, drugs, devices and thousands of other items essential to modern health care. Here, there are really two arguments for a public plan. The first is about bargaining skill and the firm size, basic ingredients in any negotiating environment.
There is no reason to think the administrators of a public plan will possess skills superior to those honed by private plan personnel during years of negotiations under the pressure of competition. Nor is there any reason to think that mere size would help.
True enough, relatively small European nations routinely obtain better drug prices than are achieved by mammoth American pharmacy benefit managers such as Express Scripts (50 million patients) and Medco (60 million patients), each of whose numbers exceed the entire citizenry of all but the largest European nations. Even sparsely populated New Zealand (population four million) gets better prices than the giant drug-price negotiators in the American private market.
Their success is due to what economists call "monopsony power." Monopsony occurs when a single buyer negotiates prices with several competing sellers (as opposed to monopoly, where there are many buyers but one seller).
Thus, if you want to sell your branded drug in New Zealand, your prices are negotiated with PharMac, a branch of the government. Much the same is true when selling to Canada, Germany, the Netherlands, and essentially the entire developed world save the United States. The negotiating power of these government entities results from monopsony, not superior skill.
For example, the various sellers of cholesterol drugs (Lipitor, Crestor, and so on) have to compete with one another while they all face a single government negotiator. If one seller balks at government prices, it leaves competitors to pick up more sales. The same is true for most other drug classes and most medical devices. This uneven battle ensures that negotiated prices will be well below those in a competitive market.
But here is where the huge risks of creating a "public plan" to compete with private insurance firms come into focus. Foremost among these risks are the effects of monopsony power in the purchase of medical technology.
The U.S. is unique because it alone is the source of half of world-wide profits that provide the payoff for the complex, lengthy, and expensive process of developing new treatments. When other nations construct their health-care systems, they ignore the impact of their pricing policies on R&D incentives. As the dominant R&D funding wellhead, we do not have that option.
Competitive markets have generated the prices and the profits necessary to induce a steady flow of medical innovation in this country. A public plan option would tend to dismantle that system. The people in charge will not know how to set reimbursement levels to motivate reasonable R&D efforts, and there is no reason to expect them to try. In public plans, the tried-and-true method is to push the prices of suppliers down until something gives -- too few doctors willing to take on Medicare patients, for example -- and then to ease up. That is a destructive approach to medical technology R&D.
Who knows what drugs will not be developed if reimbursement levels for a new multiple-sclerosis treatment are too measly? In virtually every advanced economy but our own, pricing authorities simply make sure prices are high enough so that existing drugs continue to be made available. We can expect a public plan here to do the same. The inevitable result is to drastically under-incentivize R&D.
This problem would not matter if a public plan remained small -- but it would likely grow into a monster. Monopsony negotiating power will generate lower prices, so many consumers will switch to a public plan. Employers eager to offload health-care costs will also dump unwilling employees into the public plan. That is the basis for the Lewin Group's much-cited prediction that a public plan would come to dominate any market in which it is allowed to compete.
Bargaining power, however, is far from the only potential source of below-market prices for public plans. In the home mortgage market, the public plans -- known as Fannie Mae and Freddie Mac -- were for years viewed by investors as less risky because they would be bailed out by the federal government if they took on too much risk. That translated into lower prices (the interest rates paid by borrowers), which eventually translated into extraordinary and unseemly growth, culminating in bankruptcy and a federal bailout.
The lesson for health insurance is clear. All insurance plans -- especially in health-care markets -- have to take on risk. Prudent planning, including the maintenance of reasonable financial reserves, is necessary. That increases costs. It would be all too easy for a public plan to gain a competitive advantage by taking on extra risk while keeping prices low because everyone would expect the federal government to take care of financial surprises down the road.
In sum, a public plan would possess formidable and perhaps overwhelming competitive advantages -- generated not by efficiency but by the artificial advantages of "public" status. This would have two disastrous consequences. The first will be to cause most Americans now covered by private insurance to move to public insurance -- one step away from single-payer health care. The second will be to undermine incentives to develop more of the immensely valuable medical technology that is central to all of health care.
Mr. Calfee is a resident scholar at the American Enterprise Institute.
Thursday, June 25, 2009
The Albany-Trenton-Sacramento Disease
The Albany-Trenton-Sacramento Disease. WSJ Editorial
How three liberal states got into deep trouble with 'progressive' ideas.
The Wall Street Journal, Jun 2009, p A14
President Obama has bet the economy on his program to grow the government and finance it with a more progressive tax system. It's hard to miss the irony that he's pitching this change in Washington even as the same governance model is imploding in three of the largest American states where it has been dominant for years -- California, New Jersey and New York.
A decade ago all three states were among America's most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.
These states have been models of "progressive" policies that are supposed to create wealth: high tax rates on the rich, lots of government "investments," heavy unionization and a large government role in health care.
Here's a rundown on the results:
Government spending as economic stimulus. State-local spending per capita is $12,505 in New York (second highest after Alaska), $10,136 per person in California (fourth) and $9,574 in New Jersey (seventh).
Has all this public sector "investment" translated into jobs? Not quite. California had the nation's third highest jobless rate in May (11.5%). New Jersey and New York had below average unemployment rates in May compared to the national average of 9.4%, but one reason is that so many discouraged workers have left those states. From 1998-2007, which included two booms on Wall Street, New York and New Jersey ranked 36th and 31st in job creation. From 2000 to 2007, the New Jersey Business & Industry Association calculates that nine out of 10 new Garden State jobs were in the government.
Soak the rich. Mr. Obama plans to pay for his government investments through higher tax rates on the top 1% and 2% of taxpayers. Our troika of liberal states are champions at soaking the rich. The state-local income tax burden, according to the Tax Foundation, is the highest in the nation in New York, second highest in California and sixth in New Jersey. New York City boasts the highest business tax rate, 17.6%, according to a study by the American Legislative Exchange Council. Seven of the 10 highest property tax counties in America are located in New Jersey.
Instead of balanced budgets, these high taxes have produced record red ink. California's deficit for 2010 is projected at $33.9 billion, New Jersey's $7 billion and New York's $17.9 billion, despite multiple tax increases this decade. The Manhattan Institute finds that three-quarters of the loss in revenues this year in Albany is a result of reduced income tax payments by rich people even though the state keeps raising taxes on high earners.
California's debt burden has multiplied so fast that it now has the worst bond rating of any state, and Governor Arnold Schwarzenegger and state legislators are pleading with Washington to command the other 49 states to pay off its IOUs. The interest rates on Golden State bonds have nearly tripled in the last two years.
Powerful unions. Mr. Obama believes union power is a ticket to the middle class. The middle class is getting creamed in all three of these "progressive" states, where organized labor is king. The unionized share of the workforce is 20% in California, 19% in New Jersey and 27% in New York compared to 13% across the country. All three are non-right-to-work states, have super-minimum wage requirements and provide among the nation's most generous public-employee pensions.
Workers in these paradises are indeed uniting -- by leaving. New York ranks first, California second and New Jersey third in moving vans leaving the state. A study by the National Institute for Labor Relations Research found that over the past decade these and other high-union states (mostly in the Northeast) had one-third the job growth of states with low union penetration.
Government health care. New York, New Jersey and California are among the leading states in government spending on and intervention into the medical market. A 2008 study by the Pacific Research Institute ranked the states on the basis of government regulation of health care and found that New York is most regulated, while New Jersey ranks sixth and California seventh. "New York," the report declares, "suffers from government health programs that are out of control, a grossly overregulated private insurance market and almost completely uncompetitive provider markets."
Have government controls and Medicaid expansions ("the public option") lowered costs? Here is what the American Health Insurance Plans found. For family coverage annual premiums in 2006-07, the national median cost was roughly $5,300; in California it was $5,884, in New Jersey $10,398, and in New York $12,254. New York's coverage mandates cause families to pay more than twice what they do in other states for insurance.
As a result, California and New York have more than one-third of their residents uninsured or in Medicaid -- much higher than the national average of 25%. More government involvement in health care in California, New Jersey and New York has raised costs and often reduced private coverage. That's hardly a model for the nation.
* * *
So goes the real-life experience of progressive governance, with heavy tax burdens financing huge welfare states, and state capitals dominated by public-employee unions. Formerly rich states, they are now known for job losses, booming deficits and debt, wage stagnation, out-migration and laughing-stock legislatures. At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.
How three liberal states got into deep trouble with 'progressive' ideas.
The Wall Street Journal, Jun 2009, p A14
President Obama has bet the economy on his program to grow the government and finance it with a more progressive tax system. It's hard to miss the irony that he's pitching this change in Washington even as the same governance model is imploding in three of the largest American states where it has been dominant for years -- California, New Jersey and New York.
A decade ago all three states were among America's most prosperous. California was the unrivaled technology center of the globe. New York was its financial capital. New Jersey is the third wealthiest state in the nation after Connecticut and Massachusetts. All three are now suffering from devastating budget deficits as the bills for years of tax-and-spend governance come due.
These states have been models of "progressive" policies that are supposed to create wealth: high tax rates on the rich, lots of government "investments," heavy unionization and a large government role in health care.
Here's a rundown on the results:
Government spending as economic stimulus. State-local spending per capita is $12,505 in New York (second highest after Alaska), $10,136 per person in California (fourth) and $9,574 in New Jersey (seventh).
Has all this public sector "investment" translated into jobs? Not quite. California had the nation's third highest jobless rate in May (11.5%). New Jersey and New York had below average unemployment rates in May compared to the national average of 9.4%, but one reason is that so many discouraged workers have left those states. From 1998-2007, which included two booms on Wall Street, New York and New Jersey ranked 36th and 31st in job creation. From 2000 to 2007, the New Jersey Business & Industry Association calculates that nine out of 10 new Garden State jobs were in the government.
Soak the rich. Mr. Obama plans to pay for his government investments through higher tax rates on the top 1% and 2% of taxpayers. Our troika of liberal states are champions at soaking the rich. The state-local income tax burden, according to the Tax Foundation, is the highest in the nation in New York, second highest in California and sixth in New Jersey. New York City boasts the highest business tax rate, 17.6%, according to a study by the American Legislative Exchange Council. Seven of the 10 highest property tax counties in America are located in New Jersey.
Instead of balanced budgets, these high taxes have produced record red ink. California's deficit for 2010 is projected at $33.9 billion, New Jersey's $7 billion and New York's $17.9 billion, despite multiple tax increases this decade. The Manhattan Institute finds that three-quarters of the loss in revenues this year in Albany is a result of reduced income tax payments by rich people even though the state keeps raising taxes on high earners.
California's debt burden has multiplied so fast that it now has the worst bond rating of any state, and Governor Arnold Schwarzenegger and state legislators are pleading with Washington to command the other 49 states to pay off its IOUs. The interest rates on Golden State bonds have nearly tripled in the last two years.
Powerful unions. Mr. Obama believes union power is a ticket to the middle class. The middle class is getting creamed in all three of these "progressive" states, where organized labor is king. The unionized share of the workforce is 20% in California, 19% in New Jersey and 27% in New York compared to 13% across the country. All three are non-right-to-work states, have super-minimum wage requirements and provide among the nation's most generous public-employee pensions.
Workers in these paradises are indeed uniting -- by leaving. New York ranks first, California second and New Jersey third in moving vans leaving the state. A study by the National Institute for Labor Relations Research found that over the past decade these and other high-union states (mostly in the Northeast) had one-third the job growth of states with low union penetration.
Government health care. New York, New Jersey and California are among the leading states in government spending on and intervention into the medical market. A 2008 study by the Pacific Research Institute ranked the states on the basis of government regulation of health care and found that New York is most regulated, while New Jersey ranks sixth and California seventh. "New York," the report declares, "suffers from government health programs that are out of control, a grossly overregulated private insurance market and almost completely uncompetitive provider markets."
Have government controls and Medicaid expansions ("the public option") lowered costs? Here is what the American Health Insurance Plans found. For family coverage annual premiums in 2006-07, the national median cost was roughly $5,300; in California it was $5,884, in New Jersey $10,398, and in New York $12,254. New York's coverage mandates cause families to pay more than twice what they do in other states for insurance.
As a result, California and New York have more than one-third of their residents uninsured or in Medicaid -- much higher than the national average of 25%. More government involvement in health care in California, New Jersey and New York has raised costs and often reduced private coverage. That's hardly a model for the nation.
* * *
So goes the real-life experience of progressive governance, with heavy tax burdens financing huge welfare states, and state capitals dominated by public-employee unions. Formerly rich states, they are now known for job losses, booming deficits and debt, wage stagnation, out-migration and laughing-stock legislatures. At least Americans have the ability to flee these ill-governed states for places that still welcome wealth creators. The debate in Washington now is whether to spread this antigrowth model across the entire country.
Tax Credits, Not Vouchers, Are Keeping School Choice a Viable Option
Tax Credits, Not Vouchers, Are Keeping School Choice a Viable Option. By Adam B. Schaeffer Culpeper Star-Exponent on June 25, 2009.
Many school choice supporters are discouraged after having suffered a series of setbacks on the voucher front, ranging from the loss of Utah's nascent voucher program last year to the recent death sentence handed to the D.C. Opportunity Scholarship program. A rambling and inaccurate article in the normally supportive City Journal got the chorus of naysayers rolling more than a year ago with the cry "school choice isn't enough."
The bright spot for vouchers in recent years has been the success of special-needs programs. Yet the Arizona Supreme Court ruled recently that school vouchers for disabled and foster children violate the state constitution, which forbids public money from aiding private schools.
Naturally, the pessimists and opponents of choice are forecasting the death of the voucher movement. They're wrong, because there never was a voucher movement to begin with. It has always been movement for educational freedom, and it is still going strong.
Over the past several years, there has been a gradual shift in focus from vouchers to an alternative mechanism: education tax credits. Illinois, Minnesota and Iowa already provide families with tax credits to offset the cost of independent schooling for their own kids. Florida, Pennsylvania, Arizona and three other states provide tax credits for donations to nonprofit scholarship organizations that subsidize tuition for lower-income families.
The fundamental difference between these programs and vouchers is that while vouchers use public money, credits do not. Credits are targeted tax cuts, and no public dollars are spent with them. That single distinction is the reason Arizona's Supreme Court struck down two voucher programs in March, but upheld the state's scholarship donation tax credit program in 1999.
In fact, tax credit programs have withstood every lawsuit raised against them. Since 1995, seven tax credit programs have been passed and all are still in operation. Four voucher programs (in Florida, Colorado and now two in Arizona) have been struck down by the courts in that same time.
This does not mean that credits are invulnerable. Arizona credits just received a temporary setback from the 9th Circuit Court of Appeals that is sure to be reversed by the U.S. Supreme Court, as is the case with so many other 9th Circuit Court decisions. Vouchers have certainly enjoyed some important legal victories, but vouchers' use of government funds opens them up for attacks to which credits are far less susceptible.
Credit programs have not simply survived, they have thrived. Scholarship donation programs now support more than three times as many low-income children as do voucher programs, though they are generally of more recent vintage. Direct K-12 education tax credits are benefiting hundreds of thousands of families, albeit in more modest dollar amounts.
However, these are not the only reasons that supporters of educational freedom have increasingly begun to favor credits over vouchers. Credits better preserve the autonomy of independent schools, and they extend choice and accountability to taxpayers as well as parents. Taxpayers get to choose to participate in credit programs as well as pick the recipient organization for their funds if they do. In addition, credits command increasingly bipartisan political support.
So while advocates of educational freedom regret that vouchers have been under heavy fire in many states, tax credit programs can be created or expanded to accommodate the children formerly served by vouchers.
Adam B. Schaeffer is a policy analyst at the Cato Institute's Center for Educational Freedom and an adjunct senior fellow with the Education Reform Initiative at the Virginia Institute for Public Policy.
Many school choice supporters are discouraged after having suffered a series of setbacks on the voucher front, ranging from the loss of Utah's nascent voucher program last year to the recent death sentence handed to the D.C. Opportunity Scholarship program. A rambling and inaccurate article in the normally supportive City Journal got the chorus of naysayers rolling more than a year ago with the cry "school choice isn't enough."
The bright spot for vouchers in recent years has been the success of special-needs programs. Yet the Arizona Supreme Court ruled recently that school vouchers for disabled and foster children violate the state constitution, which forbids public money from aiding private schools.
Naturally, the pessimists and opponents of choice are forecasting the death of the voucher movement. They're wrong, because there never was a voucher movement to begin with. It has always been movement for educational freedom, and it is still going strong.
Over the past several years, there has been a gradual shift in focus from vouchers to an alternative mechanism: education tax credits. Illinois, Minnesota and Iowa already provide families with tax credits to offset the cost of independent schooling for their own kids. Florida, Pennsylvania, Arizona and three other states provide tax credits for donations to nonprofit scholarship organizations that subsidize tuition for lower-income families.
The fundamental difference between these programs and vouchers is that while vouchers use public money, credits do not. Credits are targeted tax cuts, and no public dollars are spent with them. That single distinction is the reason Arizona's Supreme Court struck down two voucher programs in March, but upheld the state's scholarship donation tax credit program in 1999.
In fact, tax credit programs have withstood every lawsuit raised against them. Since 1995, seven tax credit programs have been passed and all are still in operation. Four voucher programs (in Florida, Colorado and now two in Arizona) have been struck down by the courts in that same time.
This does not mean that credits are invulnerable. Arizona credits just received a temporary setback from the 9th Circuit Court of Appeals that is sure to be reversed by the U.S. Supreme Court, as is the case with so many other 9th Circuit Court decisions. Vouchers have certainly enjoyed some important legal victories, but vouchers' use of government funds opens them up for attacks to which credits are far less susceptible.
Credit programs have not simply survived, they have thrived. Scholarship donation programs now support more than three times as many low-income children as do voucher programs, though they are generally of more recent vintage. Direct K-12 education tax credits are benefiting hundreds of thousands of families, albeit in more modest dollar amounts.
However, these are not the only reasons that supporters of educational freedom have increasingly begun to favor credits over vouchers. Credits better preserve the autonomy of independent schools, and they extend choice and accountability to taxpayers as well as parents. Taxpayers get to choose to participate in credit programs as well as pick the recipient organization for their funds if they do. In addition, credits command increasingly bipartisan political support.
So while advocates of educational freedom regret that vouchers have been under heavy fire in many states, tax credit programs can be created or expanded to accommodate the children formerly served by vouchers.
Adam B. Schaeffer is a policy analyst at the Cato Institute's Center for Educational Freedom and an adjunct senior fellow with the Education Reform Initiative at the Virginia Institute for Public Policy.
WSJ Editorial Page: Democrats off-loading economics to pass climate change bill
The Cap and Tax Fiction. WSJ Editorial
Democrats off-loading economics to pass climate change bill.
The Wall Street Journal, page A14
House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.
Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.
Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.
For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.
To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.
The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."
The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.
When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.
Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.
Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.
The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.
Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.
Democrats off-loading economics to pass climate change bill.
The Wall Street Journal, page A14
House Speaker Nancy Pelosi has put cap-and-trade legislation on a forced march through the House, and the bill may get a full vote as early as Friday. It looks as if the Democrats will have to destroy the discipline of economics to get it done.
Despite House Energy and Commerce Chairman Henry Waxman's many payoffs to Members, rural and Blue Dog Democrats remain wary of voting for a bill that will impose crushing costs on their home-district businesses and consumers. The leadership's solution to this problem is to simply claim the bill defies the laws of economics.
Their gambit got a boost this week, when the Congressional Budget Office did an analysis of what has come to be known as the Waxman-Markey bill. According to the CBO, the climate legislation would cost the average household only $175 a year by 2020. Edward Markey, Mr. Waxman's co-author, instantly set to crowing that the cost of upending the entire energy economy would be no more than a postage stamp a day for the average household. Amazing. A closer look at the CBO analysis finds that it contains so many caveats as to render it useless.
For starters, the CBO estimate is a one-year snapshot of taxes that will extend to infinity. Under a cap-and-trade system, government sets a cap on the total amount of carbon that can be emitted nationally; companies then buy or sell permits to emit CO2. The cap gets cranked down over time to reduce total carbon emissions.
To get support for his bill, Mr. Waxman was forced to water down the cap in early years to please rural Democrats, and then severely ratchet it up in later years to please liberal Democrats. The CBO's analysis looks solely at the year 2020, before most of the tough restrictions kick in. As the cap is tightened and companies are stripped of initial opportunities to "offset" their emissions, the price of permits will skyrocket beyond the CBO estimate of $28 per ton of carbon. The corporate costs of buying these expensive permits will be passed to consumers.
The biggest doozy in the CBO analysis was its extraordinary decision to look only at the day-to-day costs of operating a trading program, rather than the wider consequences energy restriction would have on the economy. The CBO acknowledges this in a footnote: "The resource cost does not indicate the potential decrease in gross domestic product (GDP) that could result from the cap."
The hit to GDP is the real threat in this bill. The whole point of cap and trade is to hike the price of electricity and gas so that Americans will use less. These higher prices will show up not just in electricity bills or at the gas station but in every manufactured good, from food to cars. Consumers will cut back on spending, which in turn will cut back on production, which results in fewer jobs created or higher unemployment. Some companies will instead move their operations overseas, with the same result.
When the Heritage Foundation did its analysis of Waxman-Markey, it broadly compared the economy with and without the carbon tax. Under this more comprehensive scenario, it found Waxman-Markey would cost the economy $161 billion in 2020, which is $1,870 for a family of four. As the bill's restrictions kick in, that number rises to $6,800 for a family of four by 2035.
Note also that the CBO analysis is an average for the country as a whole. It doesn't take into account the fact that certain regions and populations will be more severely hit than others -- manufacturing states more than service states; coal producing states more than states that rely on hydro or natural gas. Low-income Americans, who devote more of their disposable income to energy, have more to lose than high-income families.
Even as Democrats have promised that this cap-and-trade legislation won't pinch wallets, behind the scenes they've acknowledged the energy price tsunami that is coming. During the brief few days in which the bill was debated in the House Energy Committee, Republicans offered three amendments: one to suspend the program if gas hit $5 a gallon; one to suspend the program if electricity prices rose 10% over 2009; and one to suspend the program if unemployment rates hit 15%. Democrats defeated all of them.
The reality is that cost estimates for climate legislation are as unreliable as the models predicting climate change. What comes out of the computer is a function of what politicians type in. A better indicator might be what other countries are already experiencing. Britain's Taxpayer Alliance estimates the average family there is paying nearly $1,300 a year in green taxes for carbon-cutting programs in effect only a few years.
Americans should know that those Members who vote for this climate bill are voting for what is likely to be the biggest tax in American history. Even Democrats can't repeal that reality.
About the Settlements: The U.S. and Israel reached a clear understanding about natural growth
Hillary Is Wrong About the Settlements. By ELLIOTT ABRAMS
The U.S. and Israel reached a clear understanding about natural growth.
The Wall Street Journal, June 25, 2009, p A15
Despite fervent denials by Obama administration officials, there were indeed agreements between Israel and the United States regarding the growth of Israeli settlements on the West Bank. As the Obama administration has made the settlements issue a major bone of contention between Israel and the U.S., it is necessary that we review the recent history.
In the spring of 2003, U.S. officials (including me) held wide-ranging discussions with then Prime Minister Ariel Sharon in Jerusalem. The "Roadmap for Peace" between Israel and the Palestinians had been written. President George W. Bush had endorsed Palestinian statehood, but only if the Palestinians eliminated terror. He had broken with Yasser Arafat, but Arafat still ruled in the Palestinian territories. Israel had defeated the intifada, so what was next?
We asked Mr. Sharon about freezing the West Bank settlements. I recall him asking, by way of reply, what did that mean for the settlers? They live there, he said, they serve in elite army units, and they marry. Should he tell them to have no more children, or move?
We discussed some approaches: Could he agree there would be no additional settlements? New construction only inside settlements, without expanding them physically? Could he agree there would be no additional land taken for settlements?
As we talked several principles emerged. The father of the settlements now agreed that limits must be placed on the settlements; more fundamentally, the old foe of the Palestinians could -- under certain conditions -- now agree to Palestinian statehood.
In June 2003, Mr. Sharon stood alongside Mr. Bush, King Abdullah II of Jordan, and Palestinian Prime Minister Mahmoud Abbas at Aqaba, Jordan, and endorsed Palestinian statehood publicly: "It is in Israel's interest not to govern the Palestinians but for the Palestinians to govern themselves in their own state. A democratic Palestinian state fully at peace with Israel will promote the long-term security and well-being of Israel as a Jewish state." At the end of that year he announced his intention to pull out of the Gaza Strip.
The U.S. government supported all this, but asked Mr. Sharon for two more things. First, that he remove some West Bank settlements; we wanted Israel to show that removing them was not impossible. Second, we wanted him to pull out of Gaza totally -- including every single settlement and the "Philadelphi Strip" separating Gaza from Egypt, even though holding on to this strip would have prevented the smuggling of weapons to Hamas that was feared and has now come to pass. Mr. Sharon agreed on both counts.
These decisions were political dynamite, as Mr. Sharon had long predicted to us. In May 2004, his Likud Party rejected his plan in a referendum, handing him a resounding political defeat. In June, the Cabinet approved the withdrawal from Gaza, but only after Mr. Sharon fired two ministers and allowed two others to resign. His majority in the Knesset was now shaky.
After completing the Gaza withdrawal in August 2005, he called in November for a dissolution of the Knesset and for early elections. He also said he would leave Likud to form a new centrist party. The political and personal strain was very great. Four weeks later he suffered the first of two strokes that have left him in a coma.
Throughout, the Bush administration gave Mr. Sharon full support for his actions against terror and on final status issues. On April 14, 2004, Mr. Bush handed Mr. Sharon a letter saying that there would be no "right of return" for Palestinian refugees. Instead, the president said, "a solution to the Palestinian refugee issue as part of any final status agreement will need to be found through the establishment of a Palestinian state, and the settling of Palestinian refugees there, rather than in Israel."
On the major settlement blocs, Mr. Bush said, "In light of new realities on the ground, including already existing major Israeli populations centers, it is unrealistic to expect that the outcome of final status negotiations will be a full and complete return to the armistice lines of 1949." Several previous administrations had declared all Israeli settlements beyond the "1967 borders" to be illegal. Here Mr. Bush dropped such language, referring to the 1967 borders -- correctly -- as merely the lines where the fighting stopped in 1949, and saying that in any realistic peace agreement Israel would be able to negotiate keeping those major settlements.
On settlements we also agreed on principles that would permit some continuing growth. Mr. Sharon stated these clearly in a major policy speech in December 2003: "Israel will meet all its obligations with regard to construction in the settlements. There will be no construction beyond the existing construction line, no expropriation of land for construction, no special economic incentives and no construction of new settlements."
Ariel Sharon did not invent those four principles. They emerged from discussions with American officials and were discussed by Messrs. Sharon and Bush at their Aqaba meeting in June 2003.
They were not secret, either. Four days after the president's letter, Mr. Sharon's Chief of Staff Dov Weissglas wrote to Secretary of State Condoleezza Rice that "I wish to reconfirm the following understanding, which had been reached between us: 1. Restrictions on settlement growth: within the agreed principles of settlement activities, an effort will be made in the next few days to have a better definition of the construction line of settlements in Judea & Samaria."
Stories in the press also made it clear that there were indeed "agreed principles." On Aug. 21, 2004 the New York Times reported that "the Bush administration . . . now supports construction of new apartments in areas already built up in some settlements, as long as the expansion does not extend outward."
In recent weeks, American officials have denied that any agreement on settlements existed. Secretary of State Hillary Clinton stated on June 17 that "in looking at the history of the Bush administration, there were no informal or oral enforceable agreements. That has been verified by the official record of the administration and by the personnel in the positions of responsibility."
These statements are incorrect. Not only were there agreements, but the prime minister of Israel relied on them in undertaking a wrenching political reorientation -- the dissolution of his government, the removal of every single Israeli citizen, settlement and military position in Gaza, and the removal of four small settlements in the West Bank. This was the first time Israel had ever removed settlements outside the context of a peace treaty, and it was a major step.
It is true that there was no U.S.-Israel "memorandum of understanding," which is presumably what Mrs. Clinton means when she suggests that the "official record of the administration" contains none. But she would do well to consult documents like the Weissglas letter, or the notes of the Aqaba meeting, before suggesting that there was no meeting of the minds.
Mrs. Clinton also said there were no "enforceable" agreements. This is a strange phrase. How exactly would Israel enforce any agreement against an American decision to renege on it? Take it to the International Court in The Hague?
Regardless of what Mrs. Clinton has said, there was a bargained-for exchange. Mr. Sharon was determined to break the deadlock, withdraw from Gaza, remove settlements -- and confront his former allies on Israel's right by abandoning the "Greater Israel" position to endorse Palestinian statehood and limits on settlement growth. He asked for our support and got it, including the agreement that we would not demand a total settlement freeze.
For reasons that remain unclear, the Obama administration has decided to abandon the understandings about settlements reached by the previous administration with the Israeli government. We may be abandoning the deal now, but we cannot rewrite history and make believe it did not exist.
Mr. Abrams, a senior fellow for Middle Eastern Studies at the Council on Foreign Relations, handled Middle East affairs at the National Security Council from 2001 to 2009.
The U.S. and Israel reached a clear understanding about natural growth.
The Wall Street Journal, June 25, 2009, p A15
Despite fervent denials by Obama administration officials, there were indeed agreements between Israel and the United States regarding the growth of Israeli settlements on the West Bank. As the Obama administration has made the settlements issue a major bone of contention between Israel and the U.S., it is necessary that we review the recent history.
In the spring of 2003, U.S. officials (including me) held wide-ranging discussions with then Prime Minister Ariel Sharon in Jerusalem. The "Roadmap for Peace" between Israel and the Palestinians had been written. President George W. Bush had endorsed Palestinian statehood, but only if the Palestinians eliminated terror. He had broken with Yasser Arafat, but Arafat still ruled in the Palestinian territories. Israel had defeated the intifada, so what was next?
We asked Mr. Sharon about freezing the West Bank settlements. I recall him asking, by way of reply, what did that mean for the settlers? They live there, he said, they serve in elite army units, and they marry. Should he tell them to have no more children, or move?
We discussed some approaches: Could he agree there would be no additional settlements? New construction only inside settlements, without expanding them physically? Could he agree there would be no additional land taken for settlements?
As we talked several principles emerged. The father of the settlements now agreed that limits must be placed on the settlements; more fundamentally, the old foe of the Palestinians could -- under certain conditions -- now agree to Palestinian statehood.
In June 2003, Mr. Sharon stood alongside Mr. Bush, King Abdullah II of Jordan, and Palestinian Prime Minister Mahmoud Abbas at Aqaba, Jordan, and endorsed Palestinian statehood publicly: "It is in Israel's interest not to govern the Palestinians but for the Palestinians to govern themselves in their own state. A democratic Palestinian state fully at peace with Israel will promote the long-term security and well-being of Israel as a Jewish state." At the end of that year he announced his intention to pull out of the Gaza Strip.
The U.S. government supported all this, but asked Mr. Sharon for two more things. First, that he remove some West Bank settlements; we wanted Israel to show that removing them was not impossible. Second, we wanted him to pull out of Gaza totally -- including every single settlement and the "Philadelphi Strip" separating Gaza from Egypt, even though holding on to this strip would have prevented the smuggling of weapons to Hamas that was feared and has now come to pass. Mr. Sharon agreed on both counts.
These decisions were political dynamite, as Mr. Sharon had long predicted to us. In May 2004, his Likud Party rejected his plan in a referendum, handing him a resounding political defeat. In June, the Cabinet approved the withdrawal from Gaza, but only after Mr. Sharon fired two ministers and allowed two others to resign. His majority in the Knesset was now shaky.
After completing the Gaza withdrawal in August 2005, he called in November for a dissolution of the Knesset and for early elections. He also said he would leave Likud to form a new centrist party. The political and personal strain was very great. Four weeks later he suffered the first of two strokes that have left him in a coma.
Throughout, the Bush administration gave Mr. Sharon full support for his actions against terror and on final status issues. On April 14, 2004, Mr. Bush handed Mr. Sharon a letter saying that there would be no "right of return" for Palestinian refugees. Instead, the president said, "a solution to the Palestinian refugee issue as part of any final status agreement will need to be found through the establishment of a Palestinian state, and the settling of Palestinian refugees there, rather than in Israel."
On the major settlement blocs, Mr. Bush said, "In light of new realities on the ground, including already existing major Israeli populations centers, it is unrealistic to expect that the outcome of final status negotiations will be a full and complete return to the armistice lines of 1949." Several previous administrations had declared all Israeli settlements beyond the "1967 borders" to be illegal. Here Mr. Bush dropped such language, referring to the 1967 borders -- correctly -- as merely the lines where the fighting stopped in 1949, and saying that in any realistic peace agreement Israel would be able to negotiate keeping those major settlements.
On settlements we also agreed on principles that would permit some continuing growth. Mr. Sharon stated these clearly in a major policy speech in December 2003: "Israel will meet all its obligations with regard to construction in the settlements. There will be no construction beyond the existing construction line, no expropriation of land for construction, no special economic incentives and no construction of new settlements."
Ariel Sharon did not invent those four principles. They emerged from discussions with American officials and were discussed by Messrs. Sharon and Bush at their Aqaba meeting in June 2003.
They were not secret, either. Four days after the president's letter, Mr. Sharon's Chief of Staff Dov Weissglas wrote to Secretary of State Condoleezza Rice that "I wish to reconfirm the following understanding, which had been reached between us: 1. Restrictions on settlement growth: within the agreed principles of settlement activities, an effort will be made in the next few days to have a better definition of the construction line of settlements in Judea & Samaria."
Stories in the press also made it clear that there were indeed "agreed principles." On Aug. 21, 2004 the New York Times reported that "the Bush administration . . . now supports construction of new apartments in areas already built up in some settlements, as long as the expansion does not extend outward."
In recent weeks, American officials have denied that any agreement on settlements existed. Secretary of State Hillary Clinton stated on June 17 that "in looking at the history of the Bush administration, there were no informal or oral enforceable agreements. That has been verified by the official record of the administration and by the personnel in the positions of responsibility."
These statements are incorrect. Not only were there agreements, but the prime minister of Israel relied on them in undertaking a wrenching political reorientation -- the dissolution of his government, the removal of every single Israeli citizen, settlement and military position in Gaza, and the removal of four small settlements in the West Bank. This was the first time Israel had ever removed settlements outside the context of a peace treaty, and it was a major step.
It is true that there was no U.S.-Israel "memorandum of understanding," which is presumably what Mrs. Clinton means when she suggests that the "official record of the administration" contains none. But she would do well to consult documents like the Weissglas letter, or the notes of the Aqaba meeting, before suggesting that there was no meeting of the minds.
Mrs. Clinton also said there were no "enforceable" agreements. This is a strange phrase. How exactly would Israel enforce any agreement against an American decision to renege on it? Take it to the International Court in The Hague?
Regardless of what Mrs. Clinton has said, there was a bargained-for exchange. Mr. Sharon was determined to break the deadlock, withdraw from Gaza, remove settlements -- and confront his former allies on Israel's right by abandoning the "Greater Israel" position to endorse Palestinian statehood and limits on settlement growth. He asked for our support and got it, including the agreement that we would not demand a total settlement freeze.
For reasons that remain unclear, the Obama administration has decided to abandon the understandings about settlements reached by the previous administration with the Israeli government. We may be abandoning the deal now, but we cannot rewrite history and make believe it did not exist.
Mr. Abrams, a senior fellow for Middle Eastern Studies at the Council on Foreign Relations, handled Middle East affairs at the National Security Council from 2001 to 2009.
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