What should we do with Confederate Heroes?

If you are a Yankee, the recent steps in New Orleans to remove public statues of Robert E. Lee and other Confederate heroes seem appropriate and obvious. The defeat of Lee and the Southern secessionists fighting the Northern states to preserve slavery represented an important victory for American values. But if we repudiate Lee and his confederate friends how should we approach the slave owning first President, George Washington, or the third President, Thomas Jefferson, who owned slaves as well, or the racist 28th President, Woodrow Wilson, who was quoted defending the KKK. It is a serious and important, but not simple, issue.

You could say that I was the equivalent of a Yankee when I was working in Kazakhstan and Kyrgyzstan in 1992-3. In fact, I was indeed a Yankee (“a person who lives in, or is from, the US”). I visited both newly independent, former Soviet Republics six times during those two years with my IMF team of central banking experts. The excited and somewhat bewildered people of these countries were debating what they should do with the many, and sometimes gigantic, statues of Joseph Stalin and Lenin (Vladimir Ilyich Ulyanov). They knew that they would have to live with the Socialist Realist statues and art of the USSR, not to mention the architecture of public buildings, for a longer time, just as we continue to endure the horrible architecture of the 1960s. But could they, should they, have to continue looking at Stalin, the second most deadly ruler in human history. Stalin was responsible for the deaths of 40 million people (mostly Russians), ahead of the 30 million deaths under Hitler’s leadership of Germany, but behind the 60 million (mostly Chinese) who died from torture or starvation under the rule of Mao Zedong.

Between my first visit to Kazakhstan and Kyrgyzstan (we visited them back to back and were flown in and out in private jets) in April 1992 and my second visit in July-August any remaining portraits of Stalin in public buildings had been removed, as were the smaller public statues. And plans were underway to remove the large ones. The removal of Stalin was a relatively easy call. Lenin was a more difficult issue, rather like George Washington if Washington had gone out of favor. Lenin was the founding leader of the Soviet Union (the Chairman of the Council of Ministers) and of the Russian Soviet Federative Socialist Republic that preceded it. He was the political theorist who transformed Marxism into the government structures and policies that we knew as the Union of Soviet Socialist Republics (USSR). Kazakhstan and Kyrgyzstan were two of those republics. Lenin continued to be respected if not revered in 1992. My personal interpreter, Steve Lang, photographed as many Lenin statues as he could, suspecting that they would not be around long. Virtually every village had at least one.

As you can see in the picture below a huge portrait of Lenin (about 20 feet tall) still hung in the background of the main auditorium in the National Bank of Kyrgyzstan during our first visit there in April 1992. In the picture we were meeting with the staff of the NBK to report on our recommendations and work plan. I am presenting the Governor of the NBK, Kemelbek Nanayev, with my Adam Smith tie (the image of Smith’s head appears throughout the tie) and Governor Nanayev was reciprocating by giving me his own tie. Our Russian interpreter from Moscow was looking on and so was Lenin. When we returned three and a half months later, the Lenin portrait had been removed.


But Lenin did not disappear as quickly in some other places. He remained on the wall of the Chief Accountant of the National Bank of Kazakhstan, Ms. Abdulina, for some time. Ms. Abdulina was, I would guess, in her early 60s and was very bright and forward looking. After explaining to her the new accounting needs as the NBK issued its own currency and undertook its own monetary policy, she moved quickly to set up a team of young accountants (they were all women) to receive her training in producing a daily balance sheet to reflect bank deposits with the NBK and more broadly what we call reserve money (the monetary liabilities of the central bank). She said that it would be a waste of time trying to retrain the older more senior ones. I liked and respected her very much, but she would not remove Lenin from her office wall. In fact, she never did. On my final visit with the IMF in March 1994 (I have been back many times since under other auspices), Ms. Abdulina had been moved into a new, larger office. Lenin was not displayed on her new office wall. She never had to deliberately remove him from her office wall but now her office was free of him—a very clever finesse.

Lenin was not as directly responsible for the death of millions as was Stalin, but is hardly a lovable character to those of us who grew up in the west. According to George Orwell, Charles Dickens’ “A Christmas Carol… was read to Lenin on his deathbed and according to his wife, he found its ‘bourgeois sentimentality’ completely intolerable.” Why Socialists Don’t Believe In Fun Dec. 1943. Nonetheless Soviet citizens had grown up seeing him as the great founder of their country and many could not let go of that easily.

The United States and especially, but not exclusively, its Southern States are now facing the same issue. Should earlier heroes, whose actions or values are now condemned, be removed from the public square?

New Orleans Mayor Mitch Landrieu defended his plan to remove Confederate monuments across the city in a speech earlier this month:

“These statues are not just stone and metal. They’re not just innocent remembrances of a benign history. These monuments celebrate a fictional, sanitized Confederacy — ignoring the death, ignoring the enslavement, ignoring the terror that it actually stood for….

“There is a difference between remembrance of history and reverence of it.  For America and New Orleans, it has been a long, winding road, marked by great tragedy and great triumph. But we cannot be afraid of our truth….

“Last year, President Barack Obama echoed these sentiments about the need to contextualize and remember all of our history…. Remember President Bush’s words, “A great nation does not hide its history. It faces its flaws and corrects them….”

We are removing these statues, “Because we are one nation, not two; indivisible with liberty and justice for all, not some.”

I was blown away by the Mayor’s wonderful speech and urge you to read all of it: New Orleans mayor Landrieu’s address on confederate monuments

Among the statues removed were those of Robert E. Lee and Jefferson Davis about which Mayor Landrieu said: “It is self-evident that these men did not fight for the United States of America, They fought against it. They may have been warriors, but in this cause they were not patriots.”

What should we and other countries do when past heroes cease to deserve or have our respect? They are, after all, part of our history. The first principle, as articulated by Obama, Bush W, and Mayor Landrieu, is that that history should be told and understood honestly. The second principle is that historical actors should be understood and judged in the context in which they acted.

George Washington and Thomas Jefferson were slave owners in a time in which that was accepted and common as horrible and unacceptable as we see it and know it today. They were otherwise men of great wisdom and courage who deserve our respect. Robert E. Lee inherited slaves but freed them before the Civil War was over. However, he led a war against his country and fought to preserve the institution of slavery. Many former Soviet Republics moved their statues of Lenin and Stalin to historical parks outside of the towns they had occupied where their history could be told honestly and in the context of their time. The statues of Robert E Lee, Jefferson Davis, and P.G.T. Beauregard will also be relocated away from the heart of New Orleans. I find this to be an appropriate resolution to the pain their presence brought to many of today’s residence of this fascinating city.


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Net Neutrality

The issue of net neutrality is almost as complicated as the Internet (the network of networks) itself. As with so many topics, the debate over how best to maximize the development of and benefits from the Internet (email, World Wide Web, and all of the rest) broadly divides between those who support prescriptive rules to guide and govern its operations and those who support a more permissive role for the government stepping in only to correct actual problems. To overstate it a bit, it divides the statists from the free marketers.

The history of what we now call the Internet is quite amazing. History of the Internet. Though governments provided the seed money that got it going (in the U.S. it was the Department of Defense’s ARPANET and later the National Science Foundation’s CSNET and in the U.K. it was the National Physical Laboratory), the U.S. gradually stepped back and allowed the unregulated development of commercial and private uses of the connectivity that was developing and allowed private Internet Service Providers (ISPs) to develop the gateways (access) for almost all users (both content providers and consumers) to the Internet. This policy was imbedded in the Telecommunications Act of 1996 signed by President Clinton. That legislation, affirmed that the policy of the United States was: “to preserve the vibrant and competitive free market that presently exists for the Internet . . . unfettered by Federal or State regulation.”

From the beginning of its break away from its narrow military and scientific uses, all involved in the Internet’s development were committed to it being free and open. The Federal Communications Commission (FCC) promulgated guidelines to preserve this principle in November 2011. “The FCC’s rules focus on four primary issues:

  • Transparency. Fixed and mobile broadband providers must disclose the network management practices, performance characteristics, and terms and conditions of their broadband services;
  • No blocking. Fixed broadband providers may not block lawful content, applications, services, or non-harmful devices; mobile broadband providers may not block lawful Web sites, or block applications that compete with their voice or video telephony services; and
  • No unreasonable discrimination. Fixed broadband providers may not unreasonably discriminate in transmitting lawful network traffic.
  • Reasonable network management. ISPs may engage in reasonable network management to maintain a high quality of service for broadband Internet access.” FCC Openness Principles

In this permissive environment the Internet flourished, developing in directions and ways no one could have imagined only a few decades earlier. “But two years ago, the federal government’s approach suddenly changed. The FCC, on a party- line vote, decided to impose a set of heavy-handed regulations upon the Internet. It decided to slap an old regulatory framework called “Title II”—originally designed in the 1930s for the Ma Bell telephone monopoly—upon thousands of Internet service providers, big and small. It decided to put the federal government at the center of the Internet.” Ajit Pai’s Newseum Internet Freedom Speech

What happened? Were the principles of an open Internet with fair access to all suddenly being violated or under threat in 2015? Is the proposed return to the status quo before 2015 really a threat to the principles of net neutrality?

Like all other economic activities, every aspect of the Internet costs money that someone has to pay. Those who built and maintain the Internet Backbone (NTT, Cogent, GTT, etc.), the facilities and networks of the ISPs (Verizon, AT&T, Comcast, etc.), and the content providers (Netflix, Facebook, Snapchat, HBO, etc.) did so to make money (or at the very least to cover their costs). We all know about content and service providers who thought first about how to attract users and only later how to get them to pay (e.g., Facebook and Amazon). They gradually developed their business models over time and some worked and others didn’t. What worked best (most cost efficient use of Internet resources, etc.) was not and could not have been foreseen in the beginning of the Internet’s development. Had the regulations imposed in 2015 been imposed two decades earlier, it is very unlikely we would be enjoying the Web we have today. Freezing or constraining the business models of the key players with very prescriptive regulations is neither necessary nor wise. As Mike Montgomery put it in The Hill: “The digital world moves at the speed of light. To slow that growth to the speed of bureaucracy would have serious negative effects on the burgeoning tech industry which is creating jobs faster than almost any other industry out there.” (see the link below)

Markets function best when profits are maximized by providing the best service at the lowest cost. In such cases, which is the general case, incentives are aligned, i.e. what best serves the supplier/producer also best serves the general public/consumers. Two forces operate to insure that the Internet is open to all. The first was a broad public consensus that the Internet should be open to all on fair terms (no discrimination against—filtering out or blocking—any one or any idea or point of view). The second is that discriminating in any way blocks some customers and thus reduced profits. The incentives for ISPs to provide fair access to all aligned with the public’s expectations of and desires to have fair access.

Ideology enters the discussion when people disagree over the meaning of fairness. Some people think that some classes of users (the poor, IT startups, etc.) should have the cost of their use of the Internet paid by someone else (tax payers, cross subsidies from larger, established users/suppliers, etc.). ISPs, the gateways to the Internet, have no profit incentive to provide such subsidies. Fairness for most economists is when each user pays the marginal cost of their use (plus a small profit margin).

The primary legitimate concern with respect to the net neutrality I want to see is that industry consolidation has reduced the number of ISPs to the point that over half of the country has only one (i.e. no) choice. The only competition in some areas comes from your cell phone plan. Thus there is a legitimate concern with the possibility that an ISP might charge different prices for fundamentally the same service and that those ISPs that are beginning to produce their own content might favor it over competitors’ content with faster lanes or worse.

There were indeed a few problems during the long era of light touch regulation prior to 2015. Verizon’s dispute with Netflix over download speeds and AT&T’s blocking Facetime video but not Skype on iPhones (not even an Internet issue), for example. This occurred before and were resolved before the 2015 FCC regulations on the basis of existing legislation. Excessive concentration and abuses of market power can be and have been dealt with via existing anti trust laws and state and individual civil suits.

The United States has generally allowed markets to develop fairly freely, only applying regulations to deal with real problems when they occur. I represented the IMF as an observer at a G10 Deputies Working Group on E-money meeting at the BIS in Basel Switzerland in December of 1996. The G10 Deputies are the Finance Ministers and Central Bank Governors of the ten largest economies in the world. The meeting was chaired by a young Tim Geithner, then the Deputy Assistant Secretary for International Monetary and Fiscal Policy in the U.S. Treasury Department. The meeting was to determine the regulatory approach to the prospective emergence of Electronic Money, now referred to as Cyber money. We considered reports on developments to date and took the wise decision to stand back and watch how things developed before formulating regulatory advice.

More recently the Federal Reserve’s Faster Payments Task Force project and the Federal Reserve’s cautious approach to bitcoin and other digital currencies reflects a similar attitude. That attitude, to repeat, is that no one knows for sure the direction that the development of new technologies will take in the search for maximizing their benefits thus profits. Government can at best play a supportive role of providing a flexible legal and regulatory framework within which new products and services can be explored. If problems arise, the government can review with consumers and producers how best to deal with them. The approach to regulating bitcoin and other digital currencies is still evolving.

A counter example to the above enlightened approach is the U.S. approach to Anti Money Laundering and Combating the Financing of Terrorism (AML/CFT), which has imposed enormous regulatory costs on payments of all sorts with no discernable benefits.

Those who believe that private sector behavior and the development and use of technology can be carefully and successfully regulated by government suffer what I have called hubris in other contexts. See, for example: https://works.bepress.com/warren_coats/38/. Nonetheless, in the case of so called net neutrality greater certainty about the legal and regulatory environment in which the Internet must operate would help further its development and evolution, especially if the light touch regulation under which it has developed is restored. Congress should write net neutrality into law.

An excellent discussion of these issues can be heard in this podcast on the Future of Internet regulation with FCC chairman Ajit Pai

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The Individual Health Insurance Mandate

Legislation to replace and/or reform Obamacare (the Patient Protection and Affordable Care Act—ACA) was passed by the U.S. House of Representatives last week. Despite President Trump’s premature celebration the process of fashioning a new health care law is just getting underway as the Senate begins the rewriting of the House bill. One of the important issues dividing Democrats from most Republicans, and Republicans from each other, concerns whether everyone should be required to buy health insurance and if so what that insurance must minimally cover. “Health Care Plan B”

The fundamental purpose of insurance is to provide the broadest possible sharing of unpredictable costs. Thus it was not surprising that the Heritage Foundation published a report by Stuart M Butler recommending mandatory health care insurance on October 1, 1989: “Assuring Affordable Health Care for All Americans”. Dr. Butler elaborated his health care insurance mandate in a March 5, 1992 Heritage Foundation report: “Policy Maker’s Guide to the Health Care Crisis”

Robert E. Moffitt elaborated the public policy case for the insurance mandate as follows: “Absent a specific mandate for at least catastrophic health insurance coverage, some persons, even with the availability of tax credits to offset their costs, will deliberately take advantage of their fellow citizens by not protecting themselves or their families, with the full knowledge that if they do incur a catastrophic illness that financially devastates them, we will, after all is said and done, take care of them and pay all of the bills. They will be correct in this assessment…

“An individual mandate for insurance, then, is not simply to assure other people protection from the ravages of a serious illness, however socially desirable that may be; it is also to protect ourselves. Such self protection is justified within the context of individual freedom; the precedent for this view can be traced to none other than John Stuart Mill.” Health Affairs, January 1994.

Two bills offered in the U.S. Senate in 1994, the Consumer Choice Health Security Act sponsored by 25 Republican Senators and the bipartisan Health Equity and Access Reform Today Act sponsored by 19 Republican and 2 Democratic Senators included health insurance mandates.

When Mitt Romney was the governor of Massachusetts signed that state’s “An Act Providing Access to Affordable, Quality, Accountable Health Care,” adopted in 2006 with broad bipartisan support. It required all Massachusetts residents to buy health insurance. Surprisingly in 2008 presidential candidate Barack Obama opposed an individual mandate (but apparently supported the existing employer health insurance mandate for their employees). But only two years later in 2010 then President Obama signed into law the ACA, which included a weak individual insurance mandate.

Conservatives turned against the individual mandate, I assume, because it seemed to exceed the constitutional authority of the federal government under the enumerated powers of the U.S. constitution (remember them). In a very controversial 5-4 Supreme Court decision written by Chief Justice Roberts, the court ruled on June 28, 2012 in National Federation of Independent Business v. Sebelius that although the individual mandate was not constitutional under the commerce clause (already stretched beyond recognition), it could be construed as a tax and was therefore valid under the constitutional authority for congress to “lay and collect taxes.” While I favor a health insurance mandate, I also favor preserving the constitutional limitations on the powers of the federal government, which leave the establishment of such mandates to the individual states.

States have generally been more successful at addressing the financing of its citizens’ health care needs. They also have the advantage of learning from each others experiences. Consider the issues of catastrophic health care costs and those of preexisting conditions. Preexisting conditions are not appropriate for insurance coverage (insurance is meant to share the cost of “future and unexpected losses”), but they must, nonetheless, be paid for by someone. In the past, the financing of these known and/or unusually large expenses have been provided through risk pools. “Before Obamacare, 35 states had risk pools – available to people in the individual market who had been turned down for private insurance because of a health condition…. These arrangements were not perfect,” but worked better than the approach taken in Obamacare and should be restored and improved. “High risk pools worked just fine before obamacare”

So where are we? Republicans and Democrats want generally the same outcome–cheaper but better healthcare for all.  Democrats want that administered by the government and Republicans want to rely more on the private sector. I favor the latter.  Hopefully as the Senate writes their own health care reform bill they will provide the federal government’s financial support (tax subsidies) for those unable to afford their medical care costs (whether directly or via insurance) in such a way that states are incentivized to require individual mandates for adequate health insurance and that health care providers are not rewarded for unnecessary procedures. This is one important and complex piece of the overall adjustments needed to lower the cost of providing good care to everyone while allocating its cost fairly (a whole other debate).



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Buy American, Hire American

President Trump continues to repeat his populist slogan “Buy American, hire American,” reflecting the way he and Steve Bannon appear to understand what is needed to make America Great Again. Thus, with apologies, I endeavor again to explain why this catchphrase is fundamentally wrong and would actually make America weak. “Trade and Globalization” “Save trade”

If buying an American made product or service (100% American, 90%, 51%?) or hiring an American worker is my best option, I would not need to be compelled to do so by the government. If it is not my best option, being compelled to do so forces me to accept an inferior option. It would make me worse off. The Trump family understands this as their hotels import and purchase foreign made products (from China, Philippines and India, to name a few) and Ivanka sells clothing made in China.

It is obvious that being forced to buy and hire American would make many of us worse off (not to mention diminish our freedom of choice), but are there compensating benefits or gains for others in the American economy that would justify making us worse off? “Teeing up Trump tariffs”

Buy American

If I must buy an American made Corvette rather than a German Porsche, does the American economy benefit? To simplify, leave aside the fact that a substantial part of the components making up a Corvette are imported from various countries. The fact that I had to be forced to buy the American car rather than the German one, i.e. that it was an inferior deal, means that the American workers who make it were reallocated from the production of export products at which the United States had a comparative advantage. Trading less as a result of buying American mean allocating American workers to producing things (Corvette) that they are not as productive at making. They would be moved from producing Boeing aircraft to sell to Germany (to pay for our imports of Porsches) to producing Corvettes. So in addition to my being made worse off as a result of having to buy American, the American economy as a whole would be worse off as a result of a less productive work force and thus lower overall income (lower GDP). This is Econ 101.

In addition, as noted by the Financial Times, “Attempts to restrict procurement to domestic companies tend to backfire. They induce retaliation from trading partners, harming US businesses trying to sell abroad. They raise input costs, ensuring less infrastructure is built and fewer construction workers are hired for each dollar of public spending.” “The Pitfalls of having to buy and hire American”

Hire American

The meaning and impact of a requirement to hire Americans is a bit more complex. If the terms to American companies of employing the workers needed, whether they are citizens, permanent residents, or temporary or permanent immigrants from abroad, are not competitive with importing the product or service, American companies will in effect hire foreigners abroad (i.e. they will import the goods and services produced abroad). Thus it is a bit unclear what “hire American” means. “The long, rough ride ahead for ‘Made in America'”

Presumably, “hire American” refers to our immigration policies. Indeed our immigration laws need fixing. This includes providing a solution to the status of the 10 or 11 million people living here illegally, and adjusting immigration quotas to better match the needs of American firms for workers without undercutting the status of existing American workers. “Illegal-aliens”

The decline in American manufacturing jobs is largely the result of automation, not foreign trade. Manufacturing employment has fallen almost everywhere in the world as manufacturing output has increased. Automation enables the work force to produce more and thus enjoy a higher living standard. It need not cause unemployment.

The wonderful film “Hidden Figures” tells the true story of the large number of human “computers” employed by NASA (the National Air and Space Administration) who cranked out the numbers needed to put Americans in space and bring them home again. The stars of the film are three black women whose mathematical skills were indispensible to NASA. At the end of the day and in time for the first American to orbit the earth in 1961, new IBM’s mainframe computers proved essential to crunch the critical data fast enough. Overnight the human computers were no longer needed. But rather than becoming unemployed, most of them retrained to program and run the IBM computers with an unbelievable boost in productivity. While other things also affected NASA’s workload, the employment data are interesting. In 1960 NASA had 13,500 in house employees, which increased to 41,100 by 1965 and gradually drifted down to 18,618 in 2010. The numbers for contract workers on the same dates were 33,200 in 1960, 369,900 in 1965 and zero in 2010.

The President’s appeal to Buy American and Hire American, in addition to restricting our freedom of choice, flies in the face of what made America Great in the first place. As proclaimed by the Financial Times: “The principle should remain to keep the US economy as open as possible to the inflow of good products and good workers from abroad. Slamming down the drawbridge is only likely to impoverish the residents of the citadel.”


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Health Care: Plan B

“Our goal is to give every American access to quality, affordable health care,” Paul Ryan “Health care Obamacare replacement-Paul Ryan”

The above statement by Paul Ryan is the goal of both Republicans and Democrats, so surely there is enough common ground that with a few compromises on each side congress can adopt reforms with broad support. Such fundamental, broad based legislation should always have broad bipartisan support. Failure to fulfill that requirement was one of Obamacare’s flaws.

America’s universal health care costs twice as much as does health care in Europe. Healthcare costs per capital in the United State in 2014 where $9,024, while in Canada they were $4,506 and in Italy $3,207. Our system provides universal care through company group insurance plans, individual insurance plans, government plans (Veterans Administration, Medicaid or Medicare), out of pocket payments for the uninsured who can afford it or charitable clinics and services, or free emergency room medical treatment for those who can’t afford it. “Health-care expenditures rose as a percentage of GDP from 5 percent in 1960 to 17.8 percent in 2015.” “A radical idea for health care reform-listen to the doctors.” While Canadians, Italians and others from around the world who can afford it come to the U.S. for top of the line care, the average result in terms of general health under America’s system is worse than in Europe. Clearly the American system is seriously flawed.

President Trump has promised that everyone would have health insurance and pay less for it. On January 15 he said: ““We’re going to have insurance for everybody. There was a philosophy in some circles that if you can’t pay for it, you don’t get it. That’s not going to happen with us.” “Trump-vows-insurance-for-everybody-in-obamacare-replacement-plan”. It is possible to achieve this ambitious promise.

This note reviews the options for reducing the cost of health care and insuring that everyone gets the care they need whether they can afford it or not.

Costs can be reduced by better aligning incentives of providers and patients for choosing the most cost effective care, by removing government and professional (i.e. union) restrictions on how care is delivered, by increasing competition to reduce the huge price range for the same service in the same market (e.g., stronger incentives for customers to seek out the best deal and the price/quality information needed for them to do so), and by Tort reform that reduces doctor’s risks of being sued that has resulted in wasteful, defensive prescriptions of unnecessary lab tests, etc.

Two broad measures supported by Republicans to reduce the cost of medical services are to free up the regulatory restrictions on how medical service are delivered (computerized diagnoses, telephone consultations, greater use of nurse practitioners, etc.) and stronger incentives for patients to shop for lower prices for the same service. Modern technology is on the threshold of dramatically improving the quality of health services while lowering its cost, if given the chance. Many Democrats would accept these reforms as well in exchange for better protection of the poor.

Health care services are paid for by various mixes of out of pocket payments, insurance, and government assistance. The design of this mix influences the incentives of service providers and patients to make better choices, and the fairness and efficiency of service financing.

Insurance by its nature is a plan for sharing health care costs so that those who are unlucky and have large health costs are helped by those who are lucky and don’t. The cost of insurance is lowest when the insurance pool is largest, mixing the healthy with the sick. Prior to the Affordable Care Act of 2010 (Obamacare), the private medical insurance market suffered from two serious problems. Most people acquire health insurance through their employer. Employers, especially companies with many employees, can negotiate better terms with insurance companies because insurers can be confident that the insured pool of workers has a normal mix of healthy and sick people over which to average the cost of insurance claims. However, they have another, unfair advantage over individually purchased insurance because that part of insurance premiums paid by employers (usually half) are not taxed as they would have been if paid out directly as wages then spent by the employee on health insurance. Furthermore, when an employee leaves the company for whatever reason, she losses the company provided policy and must pay the higher unsubsidized cost of insurance in the private market, plus a still higher premium if she has an existing medical condition and risks being uninsurable all together.

Republicans and Democrats both agree that people should be able to keep their insurance policy if they change employers, retire, or become unemployed and that the private and the company markets should enjoy the same tax treatment (both should have the same tax exemption or both should have no tax exemption for insurance premiums). Both also endorse some form or other of supporting the cost to insurance companies of patients with chronic or catastrophic medical costs. Different states have adopted and are experimenting with different approaches to financing such costs and should be encouraged to continue doing so by converting Federal financial assistance into block grants to the states. Agreement in both parties on the approach to these situations should not be that difficult to reach if the effort is made.

For given health service costs, the lowest possible insurance premiums for insurance policies that cover them would be achieved when everyone is required to pay them. Thus everyone should be required to have health insurance. Many issues arise about the coverage of such insurance (any uncovered health care services would have to be paid for out of the patient’s pocket, by charities, or by tax payers). One issue is whether there should be one insurance pool sharing the costs (healthier young paying for the sicker elderly, men paying for women’s child birth and women paying for uniquely male afflictions, etc.) or several. For example, should premiums reflect age differences as they do now (the more costly elderly pay higher premiums than the less costly young but not enough higher to cover their higher costs)? If insurance pools should be segregated by age, should the segregation be total (no health care financing transferred on average from young to old) or should the higher health costs of the elderly be financed to some extent by the young, and if so to what extent? Keep in mind that the very purpose of insurance is to share costs. As anyone could opt out of the insurance mandate under Obamacare with only a modest penalty, fewer younger people acquired insurance than was expected, leaving an older, sicker, and thus more costly pool to share the costs. This has been one of the factors increasing insurance premiums under Obamacare.

If the government makes purchasing health insurance mandatory, as it should, it will have to set the minimum standards of coverage required to satisfy that mandate. It is really contrary to the whole purpose and philosophy of insurance that each person would choose to insure only those health needs they think they might need (car accident, heart attack, diabetes, broken arm, etc). However, the coverage of all such possibilities can come with a higher or lower deductible and copay or a wider or narrower network of participating medical practitioners etc. Republicans and Democrats can surely come to an agreement over these minimum features. The required features should be carefully designed to maximize the incentives for providers and recipients to make efficient choices. Anyone wishing to and willing to pay for broader services (a doctor outside the network, recovery in the Swiss Alps, etc.) would be, as always, free to do so. The United States already has a government run insurance policy for the elderly called Medicare. Medicare can be purchased in addition to other health insurance policies or in place of them and thus is not a so-called “single payer” system.

With such a minimum coverage policy established by the government, each of us would be free to sign up for an employer offered policy of our choice or buy one from the private market with no difference in price with the policy offered by the employer (incorporating the above recommended elimination of tax discrimination between company and private market policies and allowing policy portability). The bigger challenge is how to cover the cost of insurance for those who cannot afford it. Democrats generally prefer to achieve universal insurance coverage via the government as the single payer and health service provider (our VA system or the British public health service) leaving the better off free to pay more for services outside that system if they wish to. Republicans generally prefer to maximize the choices of the public and to encourage competition among insurance providers.

Health insurance for the poor must be paid for by the government one way or another. Our existing system—Medicaid—is administered by states, which determine eligibility, but is financially supported by the Federal Government if its considerable regulations are adopted by the state. Only American citizens and legal permanent residents are eligible for Medicaid. Obamacare subsidizes up to 90% of state costs for Medicaid. One criticism of Medicaid financing is that when its recipients start working they can loose coverage. This is the so-called financial cliff and can be a deterrent to accepting a job or increasing the number of hours worked. Obamacare has addressed this problem by phasing out the withdrawal of Medicaid financing, ending it at incomes well above the poverty line

Republicans have proposed a refundable tax credit, in effect a guaranteed minimum income, for the poor that must be applied to the purchase of health insurance. This opens the door to competition among multiple insurance providers and would make it easier for low-income families to purchase more expensive policies, if they wanted to, by adding a small amount of their own money to the government’s tax credit. This is close to the minimum guaranteed income proposals I support. “US federal tax policy”. A gradual phasing out of the tax credit as one’s income increased above the poverty level would also reduce the work disincentive of the financial cliff.

The state run insurance exchanges are a useful aid to those looking for an insurance policy and should be retained. Either the Republican tax credit or the Democrat direct subsidy would be applied via the exchanges.

There are many important details to sort out that I have only hinted at. But as Republicans and Democrats both want the more efficient delivery of health care, which would reduce its costs, and humane and effective provision of the financing of such services to everyone, including the poor, it should be possible with only modest give and take to agree on a package that would enjoy broad bipartisan support.

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Next up: Tax Reform

Hopefully the tax reform law to be adopted by Congress in the coming months will closely resemble The Better Way Tax proposed outline by Congressmen Paul Ryan and Kevin Brady on June 24, 2016. Their plan would be revenue neutral (i.e., would raise the same revenue as existing income tax laws by a combination of a broadened tax base and lower marginal tax rates), and would dramatically simplify returns for both individuals and companies. It would remove many distortions in investment and resource allocation decisions and thus promote growth and fairness. It would include an incentive to repatriate the U.S. corporate profits held abroad, estimated in 2015 to be $2.6 trillion, and by basing taxes on income earned in the U.S., it would eliminate the tax minimization strategy of shifting production abroad.

Unlike tax systems in most other countries, both U.S. individual and corporate income taxes are currently source based, meaning broadly speaking that an American’s income is taxed on his or her income wherever it is earned. Even Americans living and earning income abroad pay U.S. income taxes on it. Similarly companies operating in the U.S. pay U.S. taxes on their income no matter where it is earned. However, it is not taxed until they bring it home. This unusual approach to taxation for companies operating globally has given rise to all kinds of strategies for reducing U.S. taxes by earning income in (or attributing it to) low tax jurisdictions.

Under the Better Way proposals business income will be taxed on a territorial or destination rather than source bases. In addition to removing a tax bias for debt financing (by eliminating the deduction of interest costs) and expensing capital investments rather than amortizing them over their estimated life, businesses will be taxed on the basis of their income from domestic sales only. Their so-called Destination Based Cash Flow Tax comes close to being a consumption tax (the gold standard tax bases among economists). “The Principles of Tax Reform” Cayman Financial Review, July 2013. A key feature of their proposal is that the tax would be levied on business revenue from domestic sales of goods and services and not on goods and services sold abroad. For domestic sales the tax would be the same whether they are inputs or were produced domestically.

This would remove the existing tax subsidy for imports. As congressman Brady put it in a June 24, 2016 WSJ article: “And because ’Made in America’ products and services currently face a price disadvantage both at home and abroad, American exports will no longer be taxed, and imports will not be subsidized. Competition will occur on price, quality and service—rather than tax regimes.” “The GOP plan for tax sanity.” It would also remove the existing double taxation of exports, the income from which is now taxable as part of American business income and is taxed again at whatever rates apply in the country receiving them.

This is all very sensible and in fact the practice of most other countries that rely heavily on VATs (Value Added Taxes). Regrettably for public understanding, this proposed treatment has been dubbed a “Border Adjustment Tax” by which imports are taxed and exports are exempted from U.S. taxation. This sounds rather different, but it isn’t. It suggests punitive (protectionist) treatment of imports when in fact, as explained above, it gives imports the same tax treatment as received by domestically produced goods.

Some have argued that by removing the import subsidy (i.e. by taxing them at the same rate as domestically produced goods), American consumers of “cheap” imports will have to pay more. It is certainly true that subsidies encourage consumption in excess of a competitive market rate just as subsidizing debt (by deducting interest costs from taxable income) encourages excessive borrowing. So if people import less because they must pay more for such imports without their subsidy, resource allocation and economic efficiency will be improved. However, the reduced demand for foreign currency needed to pay for imports and the increased supply of those currencies to buy larger amounts of American exports are expected to appreciate the exchange rate of the dollar for these currencies. An appreciated exchange value of the dollar will reduce the cost of imports and increase the cost to foreigners of American exports. The impact on import and export prices of the “Border Adjustment Tax” and the resulting exchange rate adjustment are expected to approximately off set each other.

It is tempting for each affected group to evaluate the fairness of proposed tax reforms on the basis of whether it increases their taxes or lowers them (and thus increases someone else’s taxes). On that basis any tax change will always have proponents and opponents. The proper basis for judging a reform’s fairness is in relation to a broadly agreed concept of fairness. This calls for a John Rawlsian veil of ignorance, i.e., judging the fairness of a tax system without knowing in whose shoes you will stand.

There is much more to the prospective tax reform proposals, including unfortunately changes that might be made to buy off special interests affected one way or another, and it promises to be an interesting debate. I hope that it is more open and considered by all (Republicans and Democrats) than was the case for the now (temporarily) abandoned effort to reform Obamacare. And in the end I hope that something very close to the Better Way proposals of last year is adopted. The reality of a bipartisan approach to Tax reform is unfortunately unlikely under the current climate, but we can always hope and dream.





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Protection from terrorists

My heart goes out to those in London who died at the hands of the British born citizen, Adrian Russell Elms, now going by the name of Khalid Masood. May Keith Palmer, Leslie Rhodes, Kurt Cochran, and Aysha Frade rest in peace. Whether he was a terrorist or a mentally disturbed citizen, he inflicted terror. How should we react?

Like health care reform, some topics never seem to go away. Indeed, striking the right balance between freedom and security is and should be under constant review. However, some approaches should be rejected out of hand. Trump’s travel ban would not have helped (hopefully it will never be implemented). In fact, his disgraceful gesture is a political stunt that does harm if anything at all. His rumored ban on carrying laptops and tablets in the cabins of flights from ten Middle Eastern and North African (predominantly Muslim) cities, while the same items may be checked and thus carried in the hull of the same plane is incomprehensible (other than as a protectionist measure, as only non American carriers fly from these cities). Beyond jeopardizing the cooperation we need from these countries to more effectively combat terrorism, these two measures are hurting our tourism and “jobs in America.”

Reasonable measures should be taken to detect and deter organized terrorist undertakings, without undermining our privacy and freedom of movement. But most attacks since 9/11 have been by lone wolves who didn’t have any actual contact with terrorist organizations. Anyone can decide to drive their car or truck into a crowd as was done in France, Germany and now England. No one in their right mind would suggest extending a travel ban to all road travel in the U.S. as a way of keeping us safe. U.S. traffic deaths have fallen significantly from 54,589 in 1972 to 35,092 in 2015 but dramatically exceed any from terrorists. With the advent and wide spread use of driverless cars such deaths will plummet dramatically in the future. But we accept that risk and drive anyway. No sane person would propose keeping every one home as a safety measure. In any event over 25,000 people die from accidents in their home in the U.S. every year. “Our risks from terrorists”

A full, rich life entails taking calculated risks. It is prudent to limit risks were the cost of doing so is not excessive in terms of our freedom of movement and quality of life. We need to keep this in mind when considering the measures we want our government to take to reduce the risk of terrorist attacks.

A related but different issue is how best to defeat ISIS, al-Qaida and the like. During his presidential campaign Trump stated that: “The other thing with the terrorists is you have to take out their families, when you get these terrorists, you have to take out their families.” “Trump on terrorists families.” Such an approach does not accord with the lessons of experience (aside from being repulsive and violating international law). Combating terrorist groups requires cooperation from the countries in which they operate and from the people in whose neighborhoods they live, etc. The International Crisis Group has distilled these lessons in the following report. From its executive summary they state that Trump’s “administration… should be careful when fighting jihadists not to play into their hands. The risks include angering local populations whose support is critical, picking untimely or counter-productive fights and neglecting the vital role diplomacy and foreign aid must play in national security policy. Most importantly, aggressive counter-terrorism operations should not inadvertently fuel other conflicts and deepen the disorder that both ISIS and al-Qaeda exploit.” “Counter-terrorism pitfalls-what US fight against ISIS and al-Qaeda should avoid”



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