War Spending Is Monopoly Money, Apparently

Evan Bayh thinks paying for foreign policy commitments lowers its priority.

In case you haven’t heard, House Appropriations Chair Rep. Dave Obey has proposed that the 30,000 additional troops to be deployed in Afghanistan in 2010 be paid for with a tax. Predictably, soi dissant fiscally responsible deficit hawks absolutely loathe the idea. Ezra Klein has the goods.

David Obey’s effort to fund the expansion of the Afghanistan war with a surtax is running into some opposition. Evan Bayh, who generally presents himself as a paragon of fiscal rectitude, flatly said it’s not going to happen. “National security comes first,” he said, though it’s not clear how paying for a war relegates it to coming second. Ben Nelson wants to sell war bonds, which is to say, he wants us to borrow.

I’m really having difficulty summoning the language to describe how galling this is. These are the same centrists who oppose health care reform on the grounds of fiscal responsibility even though CBO has projected that reform will actually reduce the deficit. So somehow, it’s controversial to think we’d take measures to simultaneously lower the deficit and save some 45,000 preventable American deaths per year, but it’s unthinkable to pay up front for just one year of military commitment in Afghanistan? If the Afghanistan “surge” is such a first order national priority, then why can’t we be expected to pay for it? What’s the logic here? Does a willingness to pay interest on a war signal that it’s really a priority? Like, you don’t really want it if you aren’t overpaying?

Or maybe it’s that if Americans actually had to pay for a hyperactive foreign policy, the public might actually lose appetite for endless commitments with loosely defined objectives? I don’t know, you be the judge.

I’ll also note from a historical perspective that taxes increased significantly during World War II, which whatever your thoughts about Afghanistan, we can all agree was a national security priority.

The Baucus Excise Tax

So apparently Senate HELP Chairman Tom Harkin has been making some noise that there will be modifications to the excise tax on so-called “Cadillac” plans

In a conference call today hosted by Families USA, Harkin said the Democrats were likely to make “modifications” to the excise tax. Harkin said that the starting point for taxing such plans–currently $8,000 for individuals and $21,000 for families—was “too low” and said the minimum levels would rise. In addition, Harkin said that there were going to be exemptions to the tax made for individuals who had expensive plans because they had long-term chronic illnesses that required a lot of care, such as dialysis or certain cancer treatments.

For those of my readers who don’t religiously follow changes in health care legislation, the Senate Finance Committee’s bill removes the tax exemption on employer sponsored benefits at relatively high levels (as noted above, $8,000 for individuals and $21,000 for families). Currently, employer sponsored insurance isn’t taxed at all, which means that each dollar your employer pays in the form of health insurance is more valuable than a dollar paid in wages (these are taxed for Medicare, Social Security, and Federal and State taxes). The upshot is that companies offer increasingly generous benefits as a way of attracting employees, and drive health costs upward in the process by creating incentives for expensive and inefficient care.

The change proposed by the Finance Committee would simply reinstate the tax at the aforementioned levels, which would push employers away from offering these plans, thus serving as an effective cost control. In fact, it’s one of the key reasons — in addition to stingier subsidies and minimum benefits — that the Finance bill continues to control costs past the 10 year CBO window, and the House Tri-Committee bill explodes. What’s more, considering the average family health insurance plan is $13,375, this measure really wouldn’t impact a lot of workers. It would, however, impact union members who have increasingly bargained for generous health benefits, and accordingly, labor has been the most outspoken opponent.

Unfortunately, labor’s opposition is fairly short sighted. While this change could have negative consequences in the short term for certain unionized workers, part of the reason that unions have resorted to bargaining with benefits is because rapidly growing insurance premiums mean businesses can’t afford to increase wages. So by continuing to let health costs grow, the problem of wage stagnation will only continue — something decidedly not in the long term interest of unionized workers.

Back to the point at hand, Tom Harkin has suggested that Congress might “go outside the health care system for some revenues,” as the House has done with it’s tax on millionaires. Don’t get me wrong — I’m all for soaking millionaires — but the only way to make sure revenues stay apace with health care costs is to tack financing mechanisms to cost growth itself. Of course, the political calculus is a bit more difficult with 2010 elections coming up, angering organized labor is not a winning Democratic strategy, and considering health reform legislation won’t be enacted for several more years, the snub will ring with more salience than future savings in the health care system.

I guess I’m a little bit conflicted about all of this. Unquestionably, the Finance Committee is pursuing the right policy here, but on the other hand, going outside the system will only delay getting serious about cost control. That is, at some point, we’re going to need to address this — so if this is the only way to get health reform through in a politically palatable fashion, then so be it. Still, legislators who bleat about budget deficits — I’m looking at you, GOP — ought to consider insisting on this point.

Deficits and Chinese Finance

A favorite argument of deficit hawks is that concerns over US financial integrity will drive away the foreign investment that finances part of the budget. I’ve argued before that though I agree running large deficits in perpetuity will have negative consequences, this is not a concern for the near-term, and what’s more, is overblown. Anyway, with that as context, I’m really glad Ezra Klein posted this today, along with two charts. I don’t want to steal his entire post, so definitely check it out, but these graphs are enlightening. First, Treasury debt holders:

As you can see, only 27.9 percent of US debt is financed by foreign investors. Hardly inconsequential, but definitely more of a garden hose than a fire hose. Now, as for the Chinese:

So, of that 27.9 percent of Treasury bonds held by foreign investors, only 24.07 percent of that is held by the Chinese, for a grand total of 6.71 percent of total debt. Again, not inconsequential, but a lot smaller than I think people realize. More directly to the point though, the issue isn’t so much the size of the debt, as much as it is that the strength of the US import economy is an integral feature of Chinese development strategy. Ok, now I’ve pretty much stolen Ezra’s entire post. Sorry.

About That Deficit

While I previously stated a desire to avoid cherry picking Henry’s posts, I really couldn’t disagree more with this in Henry’s post on the budget deficit:

I am highly skeptical of the Obama team’s insistence that financing health care reform first is the best way forward. While lowering health costs in America—an enormous issue best left to its own post—is critical for our long term economic strength, I think making drastic eliminations to our government entitlements ought to be the immediate priority.

As commenter jackofspades83 says, millions of Americans rely on so-called entitlement programs, and cutting them in the midst of a recession would have dire consequences. Further reduction in the spending gap would result in an even worse economic outlook as those who already spend a high share of their income would be forced to spend even less. Of course, this doesn’t even address the cruelty of imposing drastic cuts to social security benefits, from which a full two-thirds of elderly households (65 and up) receive more than half of their income and a full third of elderly households receive over 90 percent of their income.

As for health care, let’s just look at this graph that was put together by the Center for Economic Policy and Research. It plots out how various levels of health care spending in other countries would look if applied to the United States. The skyrocketing blue line is a world where we fail to enact any health care reform at all.

As you can plainly see, the easiest way to lower the deficit would be to lower health care expenditures so they matched per capita spending in other countries. As you can also plainly see, failing to do so will exponentially increase the share of health care spending as part of GDP. Now, it’s quite possible health care legislation currently being considered won’t have that sort of impact, but to illustrate what even modest savings do to spending, the Council of Economic Advisers put together this report.

Even if we assume only .5 percent cost containment, the results are pretty sizable as we move forward. If we select the very realistic 1.5 percent, we begin to see enormous savings as we extrapolate outwards. From the report’s executive summary:

[P]roperly measured GDP could be more than 2 percent higher in 2020 than it would have been without reform and almost 8 percent higher in 2030. The real income of the typical family of four could be $2,600 higher in 2020 than it otherwise would have been and $10,000 higher in 2030. And, the government budget deficit could be reduced by 3 percent of GDP relative to the no-reform baseline in 2030.

Those are serious numbers. Given that the article Henry himself cites reports that only 3 percent of the deficit would come from Obama’s agenda on health care, it’s really difficult to see how now is not the time to reform the health care system. It would be like refusing to use a credit card to have a plumber fix a pipe that’s threatening to flood your entire basement.

Now, as for concern over Treasury yields, let’s look at another graph, this time of the historical rates of 30 Year Treasury bonds.

You’ll note that the interest rates on Treasury bonds are still very low by a historical average, but more to the point, as Martin Fox argues here, this is a healthy balancing of priorities as investors decide there are more worthwhile investments than the least risky proposition around. Consider as evidence the ability of many banks to repay TARP funds with capital they have raised privately. And with respect to China — whatever their misgivings — there’s simply no avoiding the fact that as owners of such large quantities of US debt, it’s in China’s best interest for the US economy to prosper. As Gao Xiqing, president of the China Investment Corporation argued about the bailout in December:

With so much of China’s money at stake, did U.S. officials consult the Chinese about the rescue plan?

Not directly. We were talking to people there, and they were hoping that we would be supportive by not pulling out our money. We know that by pulling out money, we’re not serving anyone’s good. Including ourselves. So we’re trying to help, at least by not aggravating the problem.

Finally, I’m not sure why Henry elided the possibility of raising taxes. The fact is, after 30 years of Republican electoral domination, taxes have been reduced to an unsustainably low level, and they’re going to have to come up.

800 Pound Gorilla

Well, at least a 400 pound gorilla: why will AP writers ask “how” Obama plans to lower taxes on 95 percent of Americans, but nobody will ask John McCain how he plans to balance the budget by 2013 while cutting taxes across the board?

Surely it’s not by proposing the largest budget deficit in 25 years?