Wednesday, April 22, 2009

Naïve questions about healthcare reform

By: David Adesnik

My knowledge of our healthcare system is basically limited to my own experience as a patient. The actual health care has been quite good. But my experience with health insurance has been pretty awful, mostly because I've spent time at three universities and two different jobs over the past several years.

Right now, I have insurance through COBRA, which means I still have insurance through my previous employer, but have to cover my employer's share of the cost. Basically, I'm now paying three times as much for the same insurance. With premiums as high as they are now, that really hurts.

Not surprisingly, I tend to believe that our healthcare system needs a major overhaul to make it more affordable. What kind of overhaul? I don’t know. I know what I want -- portable and affordable insurance that covers the same high quality services I get now. I just have no idea how to get from here to there. As such, my ears perked up Sunday when Larry Summers, the economics point man at the White House, said this on Meet the Press:

By doing the right kind of cost-effectiveness, by making the right kinds of investments and protection, some experts that we--estimate that we could take as much as $700 billion a year out of our health care system. Now, we wouldn't have to do anything like that, we wouldn't have to do a third of that in order to pay for a very aggressive program of increased coverage.

That seems like a silver bullet. Is it really possible that we could save that much just by being more efficient without consuming less healthcare? I sure hope so. But if healthcare is a business, why haven't insurance firms noticed these mountains of inefficiency and improved their own profit margins by squeezing them out of the system?

But say for a minute that these inefficiencies really are there and ripe for elimination. Summers' estimate suggests that if we get rid of inefficiency, we could either finance a government-supported program to provide healthcare to the uninsured, or we could build a much leaner private insurance system that makes coverage affordable for the currently uninsured.

My sense is that the Obama administration is leaning toward the former option, but we may not know the details for a while. Personally, I don't like the idea of the government taking charge of such a massive program if there is a way for the private sector to do it equally well. If inefficiency is killing the system now, I'm not inclined to believe that more government is the answer. But who is out there, leading the charge, explaining how to save the healthcare system in a way that encourages competition and entrepreneurship, rather than central direction?

I'm all ears.

Cross-posted at Conventional Folly

Friday, April 17, 2009

From Taipei: why we should trade freely with Taiwan

This week marks the thirtieth anniversary of the Taiwan Relations Act, the Carter-era legislation that defines the contours of the relationship between Taipei and Washington. I’m in Taiwan for the occasion on my first trip to East Asia, and, as an amateur on Taiwan issues, I’d like to share what I’ve learned with AIP supporters, who may find interesting the changing dynamics of a country whose meteoric rise from an agrarian country in the 1950s to a country whose purchasing power parity approaches that of Japan (the world’s second largest economy) shows the power that principles of entrepreneurship and personal responsibility can achieve in practice.

Taiwan’s ruling party, the Koumintang (KMT), believes that engagement with China, primarily through the completion of an Economic Cooperation Framework Agreement (ECFA) with Beijing, will bear fruit for Taiwan’s economy and security in the long run. In doing so, President Ma has broken with the policies of his predecessor, Chen Shui-bian, who is currently on trial for corruption charges. KMT officials point to the opening of direct flights with China that have cut travel time from Taipei to Shanghai from 6 hours to 90 minutes (travelers used to have to change planes in Hong Kong) and less heated rhetoric (the lack of a repeat of something similar to the Taiwan-targeting Anti-Secession Law and the absence of other incendiary rhetoric) as proof of their success so far. The KMT also appears hopeful that they will achieve recognition of an observer-type status for Taiwan at the World Health Assembly, the governing body of the World Health Organization, in May; a role at the WHO would be helpful for a country that suffered the SARS crisis primarily in private as its international isolation severely limited its ability to coordinate response and prevention with international health authorities. Events at the WHO next month and further events over the next year – including any potential shifts in the Chinese militaries deployment of missiles in its southeastern coastal provinces – could validate the Ma approach, at least in the short term.

Yet serious questions remain for President Ma’s policy: there remains no solid answer on what China believes it can actually gain from further engagement with Taiwan. The PRC, through annual defense budgets that show double-digit percentage growths over previous years, has made military conquest of Taiwan a much more realistic possibility through advanced military capabilities in the air, on land, and in the sea; today, over 1400 missiles target Taiwan directly. Nationalist elements, seeing Taiwan as the last piece of reunifying China, could use negotiations and military power to demand greater and greater concessions from Taiwan as stepping stones towards re-enveloping Taiwan into Beijing’s sphere of control. The KMT dismisses this possibility while the opposition Democratic Progressive Party (DPP) argues that the ECFA and other KMT policies erode Taiwan’s sovereignty and identity.

The US can help stabilize the situation by opening trade with Taiwan, whose export-based economy desperately needs expanded market opportunities abroad. The PRC has attempted to use trade to isolate Taiwan’s export-reliant economy (Taiwan leads in production of flat panels, mobile phones, and other electronics): in 2007, after South Korea signed an FTA with ASEAN, South Korean trade with ASEAN member nations grew by 24 percent compared to an 11.8 percent growth rate between Taiwan and ASEAN states. In 2004-2006, before the FTA, Taiwanese trade with ASEAN grew by 20.1 percent compared to annual growth of South Korean – ASEAN trade by 16.6 percent (source: China Post).  Moreover, the current failure of the WTO to resolve tariff disputes means Taiwan cannot use its membership in the international trade organization to solve trade disputes with China, yet another example that the Doha round needs revival.

An FTA would have modest effects for the US, interestingly providing the greatest benefit for US auto sector, increasing auto exports by $1.6 billion according to a 2004 study (Nicholas Lardy and Daniel Rosen, Prospects for a US-Taiwan Free Trade Agreement, Institute for International Economics Research, December 2004);  Chen Tain-Jy, Taiwan’s Minister of Economic Planning and Development cited this benefit and provided an interesting sidenote for those interested in the Social Security debate in the US: Taiwan implemented a nationwide pension program at the beginning of this year, yet will likely face problems for the program’s fiscal solvency in the long run, as Taiwanese families have of 3.1 members on average, less than the replacement rate. When asked about his solutions for an eventuality where pension payees far outnumber pension payers, Chen said a good solution did not exist, refused to cut benefits, and said the government would raise revenues to compensate for the difference.

Beyond securing the freedom of a country whose democratic system and independence deserve protection, Taiwan probably has more soft power influence than any other country in promoting democracy in China. Given that the PRC leadership recognizes Taiwan as a part of China, the Communist Party may have an increasingly hard time denying that democracy cannot work on the mainland. Taiwan’s Deputy National Security Advisor Ho Szu-Yin claimed that most tourists from China – as many as 2500 daily according to President Ma – make visits to Taiwan’s bookstores and watching Taiwanese TV news priorities in their trips to China. Ho also cited statistics that as many as 80 million PRC citizens watched a recent Taiwanese election via satellite television. Given the closed nature of the PRC (and resulting lack of statistical evidence to back up the anecdotal accounts) and long timeline of democratization in China, is difficult to assess how successful engagement with Beijing will be in promoting democracy in China. But, as long as Taiwan persists, more mainland tourists may begin to ask: if it can work in Taiwan, why not here?

Yesterday, we visited the island of Kinmen, a Taiwanese possession that lies, at low tide, just 1800m from the mainland coast. Meeting the military leadership there, talking with junior officers who had recently graduated from the Virginia Military Institute and West Point, and touring tunnels built to withstand PRC bombardment reinforced the seriousness of the challenge. While debate may exist in Taiwan over its proper approach, the US role seems clear: a broken international trade system and increasing Taiwanese trade isolation necessitate a US-Taiwanese FTA so that East Asia’s entrepreneurs can continue to show the success of their model to their mainland neighbors. 

Monday, March 30, 2009

Could Regulation Spur Innovation?

The financial sector is going to become more heavily regulated soon. Last week, the Treasury department unveiled a new framework for regulatory reform. The framework places special emphasis on firms deemed to be “systemically important.” This designation will account for firm’s size, their level of interdependence with other firms, and how important they are to lending, although metrics for none of these criteria have been announced.

The new regulations will seek to counter the instability created by new financial products like credit default swaps and collateralized debt obligations. Regulators will always seek to point out the cause of the current crisis for new rules. Yet the cause of this crisis is unlikely to be the cause of the next (see for instance the creation of the Office of Thrift Supervision following the Savings and Loan crisis).

In testimony before the House Financial Services Committee, Treasury Secretary Timothy Geither expressed conflicting thoughts on innovation. He first explained that innovation and complexity “overwhelmed the checks and balances in the [financial] system” but proposed that regulation recognize a role for future innovation.

The new rules must be simpler and more effectively enforced and produce a more stable system that protects consumers and investors, rewards innovation, is able to adapt and evolve with changes in the financial market.

Even if initiating a single financial regulator and expanding their scope clarifies rules, the new regime will still give businesses new conditions to play by. While the regulation is likely to lead to new compliance costs, it could also cause innovation. In fact, new financial instruments are often in response to regulation. For example, changes in benefit requirements by the Pension Benefit Guarantee Program, which insures defined benefit retirement plans, increased interest in defined contribution plans.

In fact the troubles at large firms like Citibank or AIG may free space for new firms to innovate. Long-standing work by the late Mancur Olson argued that political stability hindered economic growth. He looked at Europe following World War II and argued that its countries were able to grow quickly because new governments had weak relationships with business and little lobbying occurred. While the current crisis will do little to decrease lobbying, populist anger may reduce the efficacy of such work and free up space for smaller firms or new, as of yet unregulated, products.

Saturday, March 28, 2009

Fixing Entitlements for a Fiscally Sustainable Future

“A billion here, a billion there, and pretty soon you’re talking about real money,” or so goes the famed quote from the late senator Everett Dirksen (R-Ill.). But recently--given the astounding figures presented in Geithner’s housing plan, President Obama’s budget, and annualized deficit projections by the Congressional Budget Office--a “trillion here, a trillion there” seems more appropriate. Regardless of their merit, current spending programs to fix our economy are only the beginning of a long-term budget crisis precipitated by Social Security, Medicare, and Medicaid; America’s so-called entitlements.

These entitlements threaten our generation with a fiscally unsustainable future. According to the Treasury Department’s Financial Report of the U.S. Government, our nation’s unfunded entitlement obligations have ballooned to $56 trillion--an estimated debt of $185,000 per American citizen.

Just how much do we spend on entitlements? In 2008 the U.S. spent over 40 percent of its federal budget--roughly $1.3 trillion--on them. But the situation will get worse. Projections that account for increases in health care costs, falling fertility rates, and advances in medical technology predict that by 2082 Social Security and Medicare will cost 18 percent of gross domestic product--roughly what the entire government costs today.

Under current law the government is legally mandated to fulfill its entitlement obligations; without reform, Americans will experience the elimination of important government programs, economically stifling tax increases, or both. Though leaders in Congress, including Paul Ryan (R-WI) and Jim Cooper (D-TN), and President Obama have shifted their focus to fixing entitlements, little has been done. A dialogue on real solutions fits within AIP’s priority of pursuing a prosperous future for our generation. But how do we do this?

We must build a political will to reform entitlements. Though poll numbers reflecting young Americans’ sentiments since the beginning of the financial crisis are not yet available, studies profiling our generation through 2006 provide a detailed outline of our priorities; entitlement reform was not one of them. In 2007, our generation favored approaches that privatized Social Security and provided universal access to health care. But, according to a Harvard Institute of Politics poll, however, health care was only the most important issue to 6% of 18-24 year olds. Social Security did not make the list, which was topped by the economy as the primary concern of 39 percent of young voters.

The government’s spending obligations are inextricably linked with the economy’s performance. Overwhelming entitlement costs mean less money for essential government commitments like education, foreign aid, and infrastructure spending. But perhaps more importantly, necessary tax increases will translate into less entrepreneurship and an unyielding economic climate for small businesses. Ensuring health care for everyone and saving Social Security without breaking the bank is possible, but we must renew the political debate.

One idea for doing this is to rein in costs and ensure health insurance for everyone by separating health insurance from employers and the government. Through personalized insurance funds (or vouchers, like Ezekiel Emanuel’s plan), the government can ensure that all Americans are able to purchase private policies--empowering individuals to choose tailor-made health care, maintaining the viability of private insurance companies, while reining in costs for the government. Additionally, Americans don’t want government-run health care: only 41% support replacing the current system with a government-run system. Simply put, Americans believe that a government-run universal health is unaffordable and will lead to rationed care, decreased innovation, and insolvent entitlements.

This is, of course, only the beginning of a dialogue that AIP will have on reforming our entitlements. Through smart entitlement reform we can allow Americans to choose personalized health care and retirement plans that suit their needs without bankrupting future generations. Our leaders have gotten us into this mess. It’s up to us to get ourselves out.

Friday, March 27, 2009

We Could Have Prevented the GSE Crisis 10 Years Ago

By: Emily Renwick

Next month, America will have officially entered the longest recession since World War II. Dubbed the “Subprime Crisis of 2008-2009,” much of the blame for the current economic turmoil can be attributed to greedy, predatory lenders that locked people in to homes they could not afford.

Fannie Mae and Freddie Mac, officially sanctioned as Government Sponsored Enterprises, were collectively behind this drastic increase in subprime and ALT-A mortgages. As lenders targeted individuals who had poor or no credit, Freddie and Fannie quickly pooled together these risky mortgages and sold them as Mortgage Backed Securities (MBS). Investors immediately recognized the potential to make a quick and sizeable profit off of these securitized mortgages, and little by little, these MBS’s poisoned the portfolios of banks across the world.

Ten years ago, the New York Times issued a prophetic warning, cautioning policy makers to be weary of easing credit requirements for low income home owners.

In an article featured in the New York Times, my AEI colleague Peter Wallison had a prophetic caution, “If [Freddie and Fannie] fail, the government will have to step up and bail them out the way it stepped up and bailed out the thrift industry.”

The Times further cautions that if “Fannie Mae is taking on significantly more risk, which may not pose any difficulties during flush economic times. But the government-subsidized corporation may run into trouble in an economic downturn, prompting a government rescue similar to that of the savings and loan industry in the 1980’s.”

We are now facing such a time, and the scale of government intervention has surpassed that of the S&L crisis of 1980s.

Ten years ago, we knew we were putting the tax payer’s dollar at risk. We cannot wait another ten years to reflect upon the warnings today.

Please note that a version of this piece was cross-posted here.

Obama Chooses the Middle Way in Afghanistan: An Initial Assessment

By: Tim Sullivan

Hopes that President Obama’s announcement last month of a 17 thousand troop plus-up in Afghanistan was simply an initial down payment on the way toward satisfying U.S. commander David McKiernan’s request for 30 thousand more combat forces have been dashed. According to officials cited in the New York Times, the the President’s long-awaited Afghanistan strategy calls for the deployment of only 4,000 more troops, who will serve as trainers and advisors to the Afghan National Security Forces, beyond the initial 17 thousand. The new strategy for Afghanistan and Pakistan will also feature a surge of U.S. civilian experts, along with a plan to establish “benchmarks” designed to elicit greater cooperation and accountability from the governments of Afghanistan and Pakistan.

At the time, some commentators and analysts (myself included) had seen the 17K announcement as an encouraging move to the extent that the increased American force presence would enable U.S. troops to take steps toward prosecuting a population-centric counterinsurgency (COIN) strategy. The President instead appears to have decided upon a more limited, counterterrorism (CT)-focused approach to Afghanistan’s security challenges—a decision-making process outlined by Fred Kaplan in a recent article in Slate:

“According to close observers, the key debate in the White House is whether the United States and NATO should wage a counterinsurgency campaign—securing the Afghan population, helping to provide basic services, and thus strengthening support for the government—or whether we should devote most of our resources to going after al-Qaida terrorists directly. Obviously, any plan will wind up doing at least a bit of both; the debate is over priorities and emphasis.”

It appears likely that Obama will emphasize the latter. COIN is expensive, time-consuming, and—as even its most dedicated students will readily admit—exceedingly difficult. CT, on the other hand, involves strikes against high-value targets—in terms of blood and treasure, it’s not quite so messy, by comparison. A carefully executed hybrid of the two seems sensible enough on its face. But according to David Kilcullen, small wars guru and former COIN advisor to General David Petraeus, it may have unexpected consequences. In his recent testimony before the Senate Foreign Relations Committee, Kilcullen explained why such a “middle way” strategy is unlikely to work:

“Afghanistan is an independent sovereign state: why would it tolerate an approach that treated its territory as little more than a launch pad for strikes against Al Qa’ida, while doing little to alleviate poverty, institute the rule of law or improve health and education? What would be in it for Afghanistan? How would we gain the information needed for effective counterterrorism operations – much of it derived from human sources, human terrain intelligence and close-access signals intelligence – without maintaining a substantial coalition force in close contact with the local population? Why would that population cooperate with an effort which, in the absence of substantial development assistance and the creation of functioning responsive government, brought the people little but danger in return? Why would the Taliban obligingly put their insurgency on hold, if we ignored them to focus on Al Qa’ida? Wouldn’t Option B [a CT-only strategy] accelerate the loss of popular confidence among Afghans, and make the insurgency even more likely to overthrow the government? And how would we finesse our failure to honor the pledges we gave our allies and the Afghan people in the Bonn agreement, not to mention the campaign promises of a new and popular President?

The reality is that, like it or not, the short-term counterterrorism task (preventing another 9/11) can’t be separated from the long-term counterinsurgency and nation-building tasks (protecting the Afghan people and building sustainable institutions in preparation for hand-off to a viable Afghan state).

A middle option…would be even worse: it would cost almost as much as Option A [COIN], and be just as likely to fail as Option B [CT]. No, the hard fact is that however unpalatable, Option A is a hill we simply have to climb if we seek anything worthy of the name “success” in Afghanistan.”

One final encouraging note: administration officials also made clear that "this strategy is a strategy, it's not a straightjacket. It's designed to be flexible. We will re-asses as we go along." Let’s hope so.

Thursday, March 26, 2009

Low Volunteer Hours and New Legislation Challenge Our Generation to Serve

Exposure to grim realities around the world through the Internet, globalization, and terrorist attacks have inspired our generation to want to serve. Last fall, 59 percent of 18-24 year-olds said they wanted to engage in “public service.” For thousands of young men and women, this desire has manifested in military service in wars abroad.

But those of us out of uniform haven’t always backed up our beliefs with actions. From September 2004 to September 2008, the percentage of 16 to 24 year-olds who volunteered in their communities decreased from 24.2 percent to 21.9 percent – and that’s less than the September 2007 valley at 20.8 percent. Clearly, for a generation that espouses a belief in serving our communities, we have a lot of work to do.

How do we begin to rectify this trend and expand upon the 2007-2008 momentum?

We can, of course, simply do more ourselves, by taking time out of our schedules to engage in opportunities. Those of us in DC, for example can volunteer at events like the Servathon on May 1. It’s a great event consistent with AIP’s priorities of education and service: thousands of volunteers get together to patch up DC schools. DC Cares (an umbrella organization that connects volunteers with opportunities around the city) still needs almost 2,000 volunteers and nearly $100,000 to meet its goals, so if you can spare a morning and a few bucks, think about helping out. (EDIT 3/30/09: For those of you looking beyond one-time volunteer opportunities to sustained commitments, which often create more social value for communities, please check out

Beyond volunteering more ourselves and convincing our friends to do the same, is there a role for governmental policy to encourage greater service?

This week, the Senate took up that question in debate over the Kennedy-Hatch Serve America Act (S 277). The legislation, as currently written, aims to expand government funding for volunteer activities in a wide variety of areas.

Perhaps most interesting to AIP, the bill proposes to make a series of 5-year, $250,000-$1,000,000 grants in “Youth Engagement Zones.” The legislation intends to use the “zones” to promote service-learning in areas with schools that have a significant number of low-income students or graduation rates lower than 70 percent. The bill currently requests a total of $20mn, with higher amounts in following years, for Fiscal Year 2010.

The bill also proposes a series of grants to establish “innovative nonprofit organizations to address national and local challenges” – depending on the implementation details of the program, it could be a boon to social entrepreneurs across the country.

The gap between service action and service belief in our generation does demand action. We certainly need to light a fire under ourselves and our friends to get out there and volunteer more. But we should also consider the merits of legislation like the Serve America Act.

Targeted grants to effective organizations could indeed make a difference in a time, such as now, when wealthy individuals donate less because of an economic downturn. In the long run, however, what is the proper balance between government grants to volunteer organizations and government encouragement of private donations?

According to research presented by Alex Brill and Phillip Swagel on today, current executive branch proposals could reduce charitable donations by $125 billion over 10 years, a dramatic reduction that could significantly curtail the efforts of many charities.

Could we consider a government policy that continues to provide some grants but reduces the burdens on private donations to organizations that prove themselves? Shouldn’t we demand the same slim overhead of the federal government that we currently demand of any charity we give to?