Friday, October 2, 2009

Thinking About Health Care and Financial Reform, + P. A. Sells Out--Again & Obama Hypocrisy

In This Edition:

- Who Pays for Health-Care Reform, and Is It Fair?
- What About Financial Sector Reform?
- Abbas helps Israel bury its crimes in Gaza
- "Mr. Hope & Reform" Comfortable with Rank Hypocrisy of Double Standard on Israel's Nukes


Who Pays for Health-Care Reform, and Is It Fair?
By Simon Johnson and James Kwak
Tuesday, September 22, 2009; 12:36 AM

No one is against expanding health coverage on principle. As we come down to crunch time, the health-reform debate is all about money.

Once you accept that health insurance plans must meet some minimal criteria and that everyone has to have one (or pay a penalty), you are left with the issue of funding. If 30 million to 45 million additional people will have health insurance, then someone has to pay for it. But the first thing to bear in mind is that, seen from the perspective of American society as a whole, this isn't money that we lose; it's money that we spend on health care for members of society and that goes to health-care providers who are, by and large, also members of society. In this view, in other words, it's a question of redistribution.

This should not be surprising. Insurance itself is a mechanism for redistribution. Take homeowners insurance: Money flows from people who don't lose their houses to people who do. In homeowners insurance, the general principle is that the premiums you pay should be proportional to your expected losses (the damage you could suffer times the probability of that damage). We generally consider this to be fair; if your insurance premiums are too high, you could sell your house and move to a smaller one.

The analog to this would be to force everyone to pay the expected cost of his health care. This would be "fair" in the sense that each person's costs would be proportional to his expected burden on the system. But it would break down because you cannot trade in your body for a healthier one that is cheaper to insure. As a result, the health-care bills on the table require that insurers charge the same amount to all people of the same age.

But even after taking differences in people's health status out of the equation, the numbers still don't add up on their own. The median household income in 2008 was $50,000. The average family health insurance policy provided through employer coverage cost more than $13,000. About 8 million people in households making $50,000 to $75,000 (and 29 million in households making less than $50,000) are uninsured. Asking them to suddenly start paying $13,000 per year for health insurance -- and potentially thousands more in out-of-pocket expenses -- is not going to work.

As a result, health-care reform has to involve redistribution. But this should not come as a big surprise. Social Security, for example, is a vast redistribution scheme. The amount you contribute depends on how much you make (up to the income cap, which makes little sense); the amount you receive depends partially on how much you contribute, but also on many other factors, most notably how long you live.

The real question is: Who pays? The House bill has the most generous subsidies, reaching up to 400 percent of the poverty level, and pays for them in part through an increase in income taxes for the very rich. Sen. Max Baucus's bill has less generous subsidies, and instead of taxing the rich directly, it imposes new fees on insurers, drugmakers and medical device manufacturers, and also has an "excise tax" on expensive health insurance plans. (It also includes a shockingly stupid provision to tax employers for hiring low-income people if they don't provide health insurance, but let's assume someone in the Senate Finance Committee comes to his senses and they kill that.)

Once you've made health care mandatory, lower subsidies are a tax on the middle class, plain and simple. The individual mandate -- the requirement that everyone have health insurance -- is itself a tax. The difference from Social Security and Medicare -- other redistribution schemes with mandatory taxes -- is that the individual mandate taxes the very people who are supposed to benefit from the program. Subsidies lower that tax but don't eliminate it. So the main people paying for health care reform are middle-class Americans who don't have insurance now and will probably get insurance after reform. Is that fair? It depends on whether you think taxes should be an even trade between taxpayer and government -- you get what you pay for -- or you think taxes are a way of spreading the benefits that government provides to all of society.

Taxing the rich is, by contrast, a tax on people who are most able to pay, but also the people who will benefit the least from health-care reform. Because the marginal utility -- the amount of extra enjoyment gained -- of one dollar is much lower for a rich person than for a middle-class person, it is also the most painless way to generate tax revenue. Is that fair? Again, it depends on how you see the relationship between taxpayers and the government.

The excise tax is more complicated. All other things being equal, it should affect the rich more than the poor. But other things are not equal. Some people need more expensive plans because of their health conditions. Health care is more expensive in some states than in others. So who pays will depend on a lot of factors that most people have little control over. (The one thing we can be sure of is that insurers won't pay; though this is billed as a tax on insurers, they will just pass the costs to consumers.) The excise tax would also have knock-on effects: As employers start hitting the threshold at which their plans become taxed, they and their employees will shift into cheaper plans with higher deductibles and higher copays -- which means that more of the net costs will shift to employees. Is that fair?

The challenge today is that politicians are wary of voting for anything that is called a tax, even though we know we need to pay for health-care reform somehow. In the end, if you think that individuals are responsible for dealing with their problems on their own, you probably see health-care reform as a special interest program for the uninsured and think the uninsured should pay for it (through lower subsidies). On the other hand, if you think that all Americans should have the right to a minimal level of health insurance, you probably think health-care reform is good for America, pure and simple, and favor increasing taxes on the people who can actually pay them.

What About Financial Sector Reform?
Where Are We Again? (Pre-G20 Pittsburgh summit)

Simon Johnson--Baseline Scenario

This revision to our Baseline Scenario is required reading for my Global Entrepreneurship Lab (GLAB) class at MIT this week.
[see link above for entire article and all links to other articles]

Financial markets have stabilized – people believe that the US and West European governments will not allow big financial institutions to fail. We have effectively nationalized any banking system losses, but we’ll let bank executives enjoy the full benefits of the upside. . . . .

We are on a dangerous and slippery slope.

Yet there is no real reform underway or on the table on any issue central to (a) how the banking system operates, or (b) more broadly, how hubris in finance led us into this crisis. The financial sector lobbies appear stronger than ever. The administration ducked the early fights that set the tone (credit cards, bankruptcy, even cap and trade); it’s hard to see them making much progress on anything – with the possible exception of healthcare (and even there, the final achievement looks likely to be limited).

The latest New York Times assessment of financial sector reforms is bleak. The Washington Post is running an excellent series on exactly how and why the banks have become stronger (part one; part two). Big banks have risen greatly in power over the past 20 years and were already strong enough this winter to ensure there was no serious attempt to rein them in.

Financial innovation is under intense pressure in both popular and technocratic discussions, but does not face any effective regulatory controls (our view; Adair Turner). This is a dangerous combination. Unless and until there is real re-regulation of finance, repeated major crises seem hard to avoid. Wall Street responds, “we have changed how we behave,” but this must at best be cyclical – after any emerging market crisis, the survivors are careful for a while. But then they go on another spree and you re-run the same boom-bubble-bust-bailout sequence, in a slightly different form and with potentially more devastating consequences. The potential for serious crisis will not decline unless and until you change incentives – and this frequently requires a change in power structure (think Korean chaebol, Thai banks, or Indonesia under Suharto).

The consensus from conventional macroeconomics is that there can’t be significant inflation with unemployment so high, and the Fed will not tighten before mid-2010. The financial markets are not so convinced – presumably worrying, in part, about easy credit leading to dollar depreciation, higher import prices, and potential commodity price inflation worldwide. In all recent showdowns with standard macro models recently, the markets’ view of reality has prevailed. My advice: pay close attention to oil prices. The conventional oil market view is that there is plenty of spare capacity so we cannot experience the price spike of early 2008; we’ll see if this proves complacent.

Emerging markets, in particular in Asia, are increasingly viewed as having “decoupled” from the US/European malaise. Increasingly, we hear that Asia’s fundamentals allow strong growth irrespective of what is happening in the rest of the world. This idea was wrong in early 2008, when it gained consensus status; this time around, it is probably setting us up for a new round of financial speculation – based in part on a “carry trade” that now runs out of the US. Most Asian currencies are a one-way bet against the US dollar over the medium-term, as they are already considerably undervalued and their central banks actively intervene to prevent significant appreciation. The appetite for this kind of risk among investors is up sharply.

What should we expect from the Pittsburgh summit on September 24-25? “Nothing much” seems the most likely outcome. The leadership of industrial countries does not want to take on the big banks, and the technocrats have contented themselves with very minor adjustments to key regulations (“dinky” is the term being used in some well-informed circles.) The G7/G8/G20 is back to being irrelevant or, worse, mere cheerleaders for the financial sector.

Overall, the global economy begins to recover, but the crisis created huge lasting costs for many poorer people in the US and around the world. Recovery without financial sector reform and reregulation sows the seeds for the next crisis. The precise timing of crises is always uncertain but the broad contours are clear – just like many emerging markets over past decades, the US, Europe, and the world economy look set to repeat the boom-bailout cycle. This will go on until at least until one or more major countries goes completely bankrupt, or until a real financial reform movement takes hold either among technocrats or more broadly politically – and the consensus then shifts back towards the kind of much tighter financial regulation that was established after the last major global fiasco in the 1930s.

-- Simon Johnson

Abbas helps Israel bury its crimes in Gaza
Ali Abunimah, The Electronic Intifada, 2 October 2009

Representing the moribund Palestine Liberation Organization, the executive committee of which seen here, Mahmoud Abbas has abandoned a resolution to hold Israel accountable for its alleged war crimes in Gaza. (MaanImages/POOL/Omar Rashidi)

Just when it seemed that the Ramallah Palestinian Authority (PA) and its leader Mahmoud Abbas could not sink any lower in their complicity with Israel's occupation of the West Bank and the murderous blockade of Gaza, Ramallah has dealt a further stunning blow to the Palestinian people.

The Abbas delegation to the United Nations in Geneva (officially representing the moribund Palestine Liberation Organization) abandoned a resolution requesting the Human Rights Council to forward Judge Richard Goldstone's report on war crimes in Gaza to the UN Security Council for further action. Although the PA acted under US pressure, there are strong indications that the commercial interests of Palestinian and Gulf businessmen closely linked to Abbas also played a part.

The 575-page Goldstone report documents evidence of shocking Israeli war crimes and crimes against humanity during last winter's assault on the Gaza Strip which killed 1,400 Palestinians, the vast majority noncombatants and hundreds of them children. The report also accuses the Palestinian resistance movement Hamas of war crimes for firing rockets into Israel that killed three civilians.

Goldstone's report was hailed by Palestinians and supporters of the rule of law worldwide as a watershed; it called for suspects to be held accountable before international courts if Israel failed to prosecute them. Israel has no history, ever, of holding its political and military leaders judicially accountable for war crimes against the Palestinians.

Israel was rightly terrified of the report, mobilizing all its diplomatic and political resources to discredit it. In recent days, Prime Minister Benjamin Netanyahu claimed that if the report were acted on, it would "strike a severe blow to the war against terrorism," and "strike a fatal blow to the peace process, because Israel will no longer be able to take additional steps and take risks for peace if its right to self-defense is denied."

Unsurprisingly, an early ally in the Israeli campaign for impunity was the Obama Administration, whose UN ambassador, Susan Rice, expressed "very serious concerns" about the report and trashed Goldstone's mandate as "unbalanced, one-sided and basically unacceptable." (Rice was acting true to her word; in April she told the newspaper Politico that one of the main reasons the Obama Administration decided to join the UN Human Rights Council was to fight what she called "the anti-Israel crap.")

Goldstone, whose daughter has publicly described her father as a Zionist who loves Israel, is a former judge of the South African Supreme Court, and a highly respected international jurist. He was the chief prosecutor at UN war crimes tribunals for Rwanda and the former Yugoslavia.

That the Goldstone report was a severe blow to Israel's ability to commit future war crimes with impunity is not in doubt; this week bolstered by the report, lawyers in the UK asked a court to issue an arrest warrant for visiting Israeli Defense Minister Ehud Barak. That action did not succeed, but Israel's government has taken extraordinary measures in recent months to try to shield its officials from prosecution, fearing that successful arrests are just a matter of time. Along with the growing international campaign of boycott, divestment and sanctions, the fear of ending up in The Hague seems to be the only thing that causes the Israeli government and society to reconsider their destructive path.

One would think, then, that the self-described representatives of the Palestinian people would not casually throw away this weapon. And yet, according to Abbas ambassador Ibrahim Khraishi, the Ramallah PA shelved its effort at the request of the Americans because "We don't want to create an obstacle for them."

Khraishi's excuse that the resolution is merely being deferred until the spring does not pass muster. Unless action is taken now, the Goldstone report will be buried by then and evidence of Israel's crimes -- necessary for prosecutions -- may be harder to collect.

This latest surrender comes less than two weeks after Abbas appeared at a summit in New York with US President Barack Obama and Netanyahu despite Obama abandoning his demand that Israel halt construction of Jewish-only settlements on occupied Palestinian land. Also under US pressure, the PA abandoned its pledge not to resume negotiations unless settlement-building stopped, and agreed to take part in US-mediated "peace talks" with Israel in Washington this week. Israel, meanwhile, announced plans for the largest ever West Bank settlement since 1967.

What makes this even more galling, is the real possibility that the PA is helping Israel wash its hands of the blood it spilled in Gaza for something as base as the financial gain of businessmen closely linked to Abbas.

The Independent (UK) reported on 1 October:

"Shalom Kital, an aide to defense minister Ehud Barak, said today that Israel will not release a share of the radio spectrum that has long been sought by the Palestinian Authority to enable the launch of a second mobile telecommunications company unless the PA drops its efforts to put Israeli soldiers and officers in the dock over the Israeli operation." ("Palestinians cry 'blackmail' over Israel phone service threat," The Independent, 1 October).

Kital added that it was a "condition" that the PA specifically drop its efforts to advance the Goldstone report. The phone company, Wataniya, was described last April by Reuters as an "Abbas-backed company" which is a joint venture between Qatari and Kuwaiti investors and the Palestinian Investment Fund with which one of Abbas' sons is closely involved. Moreover, Reuters revealed that the start-up company apparently had no shortage of capital due to the Gulf investors receiving millions of dollars of "US aid in the form of loan guarantees meant for Palestinian farmers and other small to mid-sized businesses" (See "US aid goes to Abbas-backed Palestinian phone venture," Reuters, 24 April 2009).

Just a day before the Abbas delegation pulled its resolution in Geneva, Nabil Shaath, the PA "foreign minister" denounced the Israeli threat over Wataniya as "blackmail" and vowed that the Palestinians would never back down.

The PA's betrayal of the Palestinian people over the Goldstone report, as well as its continued "security coordination" with Israel to suppress resistance and political activity in the West Bank, should banish all doubt that it is an active arm of the Israeli occupation doing tangible and escalating harm to the Palestinian people and their just cause.

Co-founder of The Electronic Intifada, Ali Abunimah is author of One Country: A Bold Proposal to End the Israeli-Palestinian Impasse.

Obama Agrees to Keep Israel's Nukes "Secret"

By Eli Lake

October 02, 2009 "Washington Times" -- President Obama has reaffirmed a 4-decade-old secret understanding that has allowed Israel to keep a nuclear arsenal without opening it to international inspections, three officials familiar with the understanding said.

The officials, who spoke on the condition that they not be named because they were discussing private conversations, said Mr. Obama pledged to maintain the agreement when he first hosted Israeli Prime Minister Benjamin Netanyahu at the White House in May.

Under the understanding, the U.S. has not pressured Israel to disclose its nuclear weapons or to sign the nuclear Non-Proliferation Treaty (NPT), which could require Israel to give up its estimated several hundred nuclear bombs.

Israel had been nervous that Mr. Obama would not continue the 1969 understanding because of his strong support for nonproliferation and priority on preventing Iran from developing nuclear weapons. The U.S. and five other world powers made progress during talks with Iran in Geneva on Thursday as Iran agreed in principle to transfer some potential bomb fuel out of the country and to open a recently disclosed facility to international inspection.

Mr. Netanyahu let the news of the continued U.S.-Israeli accord slip last week in a remark that attracted little notice. He was asked by Israel's Channel 2 whether he was worried that Mr. Obama's speech at the U.N. General Assembly, calling for a world without nuclear weapons, would apply to Israel.

"It was utterly clear from the context of the speech that he was speaking about North Korea and Iran," the Israeli leader said. "But I want to remind you that in my first meeting with President Obama in Washington I received from him, and I asked to receive from him, an itemized list of the strategic understandings that have existed for many years between Israel and the United States on that issue. It was not for naught that I requested, and it was not for naught that I received [that document]."

The chief nuclear understanding was reached at a summit between President Nixon and Israeli Prime Minister Golda Meir that began on Sept. 25, 1969. Avner Cohen, author of "Israel and the Bomb" and the leading authority outside the Israeli government on the history of Israel's nuclear program, said the accord amounts to "the United States passively accepting Israel's nuclear weapons status as long as Israel does not unveil publicly its capability or test a weapon."
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