Income inequality and wealth redistribution. Doesn't everybody lose in the long run?

There's a lot of talk about what to do about income disparities as the percent of income in society is moving towards the wealthy.  The easy, almost knee jerk reaction of some is redistribution of wealth through raising taxes on the wealthy, raising minimum wage and so forth. 

But simply taking money from higher income people and giving it to another through a government welfare program often benefits no one in the long run.  Welfare, except for the truly needy, discourages work and initiative and encourages dependency.  The wealthy person taxed has less incentive to work hard and invest and create jobs, so there are fewer jobs for lower income folks.

Here's a discussion of this by columnist Robert Samuelson.  He references a French economist Thomas Piketty who dislikes income inequity so he wants to redistribute money.

He objects to extreme economic inequality because it offends democracy: Too much power is conferred on too few. His economic analysis sometimes seems skewed to fit his political agenda.

Take his tax increases. He doubts that they would hurt economic growth. This seems questionable. Incentives must matter, at least slightly. Or consider his predicted slowdown in the world economy.

This seems possible, but if it happens, capital owners would likely suffer lower returns. As for the power of the superrich, they hardly control most democracies. In the United States, where about 70 percent of federal spending goes to the poor and middle class, the richest 1 percent pay nearly a quarter of federal taxes. After-tax and post-government-transfer incomes are less unequal than Piketty's pretax figures.

Still, the present concentration of income and wealth instinctively feels excessive. It understandably stirs resentment. We'd be better off if the rich were less so and other Americans were more so. But it's doubtful that political action to force this transformation would be similarly beneficial. Class warfare is bruising; today, it would degrade the confidence needed for a stronger recovery. 

Is Obamacare a waste of money? Will more health insurance significantly improve people's health? Study suggests not.

The assumption behind the push for Obamacare and making sure millions of Americans had health insurance was the assumption it would improve health care and the ultimately the health of the uninsured.  A study out of Oregon suggests that's not the case.

Robert Samuelson reports on study of Medicaid patients who started getting health insurance versus those who didn't.  While they got more health care, though not dramatically (Uninsured people already receive health care.), they health didn't necessarily improve.

He writes:

Oregon's expansion of Medicaid -- the federal-state insurance for the poor -- unwittingly solved this problem. In 2008, the state decided to increase enrollment by 10,000. But there were 90,000 people on the waiting list, so the state adopted a lottery to decide who would receive coverage. The result was two similar groups of poor, one with insurance (Medicaid) and one without, that could be compared. The New England Journal of Medicine recently published the study.

The most overlooked finding is that the uninsured already receive considerable health care. On average, the uninsured had 5.5 office visits annually, used 1.8 prescription drugs and visited the emergency room once. Almost half (46 percent) said they "had a usual place of care" and 61 percent said they "received all needed care" in the past year. About three-quarters (78 percent) who received care judged it "of high quality." Health spending for them averaged $3,257.

True, when people were covered by Medicaid, many of these figures rose. The number of office visits went to 8.2; the number of drugs, 2.5; the share of patients with a usual place of care, 70 percent; the proportion receiving all needed care, 72 percent. Preventive care also increased. The share of patients receiving screening for cholesterol moved from 27 percent for the uninsured to 42 percent; the share of women over 50 having mammograms jumped from 29 percent to 59 percent; the share of men over 50 getting PSA tests for prostate cancer doubled from 21 percent to 41 percent. Spending rose to $4,429.

Unfortunately, the added care and cost didn't much improve people's physical health. The study screened for high blood pressure, high cholesterol, diabetes and the risk of a future heart attack or stroke. There were no major detected differences between the uninsured and Medicaid recipients. There was more treatment for diabetes, though no difference between the two groups on a key indicator of the disease.

 This is supported by a previous 2007 study of Medicare.

The Congressional Budget Office reported that the uninsured typically received 50 percent to 70 percent of the care of the insured. A study in 2007 of the 1965 creation of Medicare -- insurance for the elderly -- concluded that it had "no discernible impact on elderly mortality" in the first 10 years but improved recipients' financial security by limiting out-of-pocket expenses.

Samuelson takes Obamacare advocates to task:  "They were too busy flaunting their own moral superiority. Universal health insurance is a legitimate goal, but 2009 -- in the midst of a major economic crisis -- was the wrong time to pursue it. Predictably, it polarized public opinion and subverted confidence for what seem, based on the available evidence, modest likely public health improvements. The crusade for universal coverage has been as much about advocates' sense of self-worth as about benefits for the uninsured."

And the end result is likely wasting billions upon billions of dollars to implement another big government boondoggle.

My, how Social Security has changed and become so costly and unsustainable.

How Social Security has changed from the days of FDR it's creator. That's pointed out in this column by Robert Samuelson.  He thinks FDR wouldn't be supportive of all that Society Security has become today.

Would Franklin Roosevelt approve of Social Security? The question seems absurd. After all, Social Security is considered the New Deal’s signature achievement. It distributes nearly $800 billion a year to 56 million retirees, survivors and disabled beneficiaries. On average, retired workers and spouses receive $1,839 a month — money vital to the well-being of millions. Roosevelt would surely be proud of this, and yet he might also have reservations. Social Security has evolved into something he never intended and actively opposed.

It has become what was then called “the dole” and is now known as “welfare.” This forgotten history clarifies why America’s budget problems are so intractable.

FDR didn't support the "pay as you go" of  today's workers paying for today's retirees.

When Roosevelt proposed Social Security in 1935, he envisioned a contributory pension plan. Workers’ payroll taxes (“contributions”) would be saved and used to pay their retirement benefits. Initially, before workers had time to pay into the system, there would be temporary subsidies. But Roosevelt rejected Social Security as a “pay-as-you-go” system that channeled the taxes of today’s workers to pay today’s retirees. That, he believed, would saddle future generations with huge debts — or higher taxes — as the number of retirees expanded.

Discovering that the original draft wasn’t a contributory pension, Roosevelt ordered it rewritten and complained to Frances Perkins, his labor secretary: “This is the same old dole under another name. It is almost dishonest to build up an accumulated deficit for the Congress . . . to meet.”

That changed however in the 1940s and 50s.  

But Roosevelt’s vision didn’t prevail. In the 1940s and early 1950s, Congress gradually switched Social Security to a pay-as-you-go system. Interestingly, a coalition of liberals and conservatives pushed the change. Liberals wanted higher benefits, which — with few retirees then — existing taxes could support. Conservatives disliked the huge surpluses the government would accumulate under a contributory plan.

All this is well-told in Sylvester Schieber’s “The Predictable Surprise: The Unraveling of the U.S. Retirement System.” Schieber probably knows more about American retirement programs than anyone. He has advised the Social Security system, consulted with private firms and written widely on the subject. His book shows how today’s “entitlement” psychology dates to Social Security’s muddled beginnings.

He notes that Americans falsely think they have a right to social security benefits because they earned it.  It's their money they're getting back.

Millions of Americans believe (falsely) that their payroll taxes have been segregated to pay for their benefits and that, therefore, they “earned” these benefits. To reduce them would be to take something that is rightfully theirs. Indeed, Roosevelt — believing he had created a contributory program — said exactly that:

“We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. . . . No damn politician can ever scrap my Social Security program.”

What we have is a vast welfare program grafted onto the rhetoric and psychology of a contributory pension. The result is entitlement. Unsurprisingly, AARP’s advertising slogan is “You’ve earned a say” on Social Security. The trouble is that contributions weren’t saved. They went to past beneficiaries. The $2.6 trillion in the Social Security trust fund at year-end 2010 sounds like a lot but equals slightly more than three years of benefits.

The problem is the current system isn't sustainable.

With favorable demographics, contradictions were bearable. Early Social Security beneficiaries received huge windfalls. A one-earner couple with average wages retiring at 65 in 1960 received lifetime benefits equal to nearly 14 times their payroll taxes, even if those taxes had been saved and invested (which they weren’t), calculate Eugene Steuerle and Stephanie Rennane of the Urban Institute.

But now, demographics are unfriendly. In 1960, there were five workers per recipient; today, there are three, and by 2025 the ratio will approach two. Roosevelt’s fear has materialized. Paying all benefits requires higher taxes, cuts in other programs or large deficits. Indeed, the burden has increased, because it now includes Medicare, which is also viewed as an entitlement.

Although new recipients have paid payroll taxes higher and longer than their predecessors, their benefits still exceed taxes paid even assuming (again, fictitiously) that they had been invested. A two-earner couple with average wages retiring in 2010 would receive lifetime Social Security and Medicare benefits worth $906,000 compared with taxes of $704,000, estimate Steuerle and Rennane.

By all rights, we should ask: Who among the elderly need benefits? How much? At what age? If Social Security and Medicare were considered “welfare” — something the nation does for its collective good — these questions would be easier. We would tailor programs to meet national needs. But entitlements are viewed as a higher-order moral claim, owed individuals based on past performance. So a huge part of government spending moves off-limits to intelligent discussion.

We can only imagine how Roosevelt would view this. He consistently advocated a fully funded Social Security and used his second veto on a 1942 tax bill that delayed higher payroll taxes. But Congress overrode the veto, and Roosevelt was preoccupied by World War II.

Welfare state and massive budget deficits. "It's the Welfare State, Stupid!"

Here's a column, "It's the Welfare State, Stupid" by Robert Samuelson on the growing welfare state in the US and the implications of massive federal budget deficits.  Samuelson writes for the Washington Post and isn't necessarily viewed as a member of the conservative camp.  As a finance and economics man he simply realizes that we need to get to a balanced budget, so we don't bankrupt the nation.  One essential ingredient is cutting back government spending. A big area is welfare spending.

If you doubt there's an American welfare state, you should read the new study by demographer Nicholas Eberstadt, whose blizzard of numbers demonstrates otherwise. A welfare state transfers income from some people to other people to improve the recipients' well-being. In 1935, these transfers were less than 3 percent of the economy; now they're almost 20 percent. That's $7,200 a year for every American, calculates Eberstadt. He says that nearly 40 percent of these transfers aim to relieve poverty (through Medicaid, food stamps, unemployment insurance and the like), while most of the rest goes to the elderly (mainly through Social Security and Medicare).

By all means, let's avoid the "fiscal cliff": the $500 billion in tax increases and federal spending cuts scheduled for early 2013 that, if they occurred, might trigger a recession. But let's recognize that we still need to bring the budget into long-term balance. This can't be done only by higher taxes on the rich, which seem inevitable. Nor can it be done by deep cuts in defense and domestic "discretionary" programs (from highways to schools), which are already happening. It requires controlling the welfare state. In 2011, "payments for individuals," including health care, constituted 65 percent of federal spending, up from 21 percent in 1955. That's the welfare state.

 A problem with the welfare programs is they become corrupted.  They stray from their original purpose.

Granting the welfare state's virtues -- the safety net alleviates poverty and cushions the effects of recessions -- it's time to pose some basic questions. Who deserves support? How much? How long? How much compassion can society afford?

Programs have strayed from their original purpose. Take Social Security. Created to prevent destitution among the elderly, it now subsidizes the comfortable. The Wall Street Journal recently ran a story about a couple (he 66, she 70) touring the world. They've visited London, Paris, Florence and Buenos Aires. Their financial adviser sends them $6,000 a month from investments and proceeds from their home sale. They also receive Social Security. How much? They don't say. My hunch: between $25,000 and $50,000 a year. (I emailed the couple for details but received no reply.)

Is this what Franklin Roosevelt intended? Should Social Security be tilted more toward the less affluent? Good questions, but politicians rarely ask them. Anyone who does risks being attacked as hard-hearted.

Welfare programs tend to expand. Advocacy groups discover coverage "gaps." Economic downturns understandably sow sympathy for the needy. Arcane eligibility rules are liberalized. In 2010, a fifth of food stamp recipients had incomes exceeding twice the federal poverty line (about $45,000 for a family of four), estimates a study by David Armor and Sonia Sousa of George Mason University.

 And the dangers of welfare?  Samuelson references a scholar from the American Enterprise Institute.

Eberstadt, a scholar at the conservative American Enterprise Institute, sees three dangers in the welfare state's unchecked growth.

First, it squeezes other government programs. This is already happening. President Obama's budget assumes that defense spending, as a share of the economy, falls 39 percent from 2011 to 2022. The Army is to drop by 80,000 soldiers, the Marines, 20,000. Domestic "discretionary" spending is cut even more, 45 percent. Research, education, transportation, law enforcement and other programs face pressures.

Second, it undermines work incentives. This, too, is occurring. Social Security's eligibility ages influence retirement. If eligibility were higher, people would work longer. Eberstadt thinks that relaxed disability requirements have lowered work effort. In 2011, about 4.5 percent of working-age adults (20-64) received Social Security disability benefits, up from 1.3 percent in 1970.

Finally, there's a moral cost. It encourages "gaming" the system to maximize benefits. It devalues the ethic of "earned success." There's tension between helping the truly needy and fostering dependence on government and helplessness.

 What needs to happen, according to Samuelson?

The welfare state's great contradiction -- the reason its politics are so messy -- is that what seems good for the individual is not, when multiplied by thousands or millions of cases, always good for society. Politicians appeal to individuals who vote, but in doing so may shortchange the nation. Most obviously: The welfare state's costs may depress economic growth.

The need is not to dismantle the welfare state but to modernize it gradually, preserving its virtues, minimizing its vices and not doing it abruptly so as to derail the recovery. But first we need to admit it exists.

Parenting isn't a priority in today's society.

Robert Samuelson has a great commentary, "The Parent Trap" on the priority or rather lack thereof given parents and parenting in American society.

He notes the cost of raising a child:

Among the government's most interesting reports is one -- published by the Agriculture Department -- that estimates what parents spend on their children. The latest version finds, not surprisingly, the costs are steep. For a middle-class husband-wife family (average pre-tax income in 2009: $76,250), spending per child is about $12,000 a year. Assuming modest annual inflation (2.8 percent), the report estimates that the family's spending on a child born in 2009 would total $286,050 by age 17. A two-child family would cost about $600,000. All these estimates may be understated, because they do not include college costs.

Society doesn't put much value on raising children as reflected in our tax code which is biased against raising children.

These dry statistics ought to inform the deficit debate, because a budget is not just a catalogue of programs and taxes. It reflects a society's priorities and values. Our society does not -- despite rhetoric to the contrary -- put much value on raising children. Present budget policies punish parents, who are taxed heavily to support the elderly. Meanwhile, tax breaks for children are modest. If deficit reduction aggravates these biases, more Americans may choose not to have children or to have fewer children. Down that path lies economic decline.

Fertility rates are dismal in Europe and OK in US but will we move in the direction of Europe given other trends in American society?

Societies that cannot replace their populations discourage investment and innovation. They have stagnant or shrinking markets for goods and services. With older populations, they resist change. For a country to stabilize its population -- discounting immigration -- women must have an average of about two children. That's a "fertility rate" of two. Many countries with struggling economies are well below that. Japan's fertility rate is 1.2. Italy's is 1.3, as is Spain's. These countries are having about one child for every two adults.

The U.S. fertility rate isn't yet close to these dismal levels. In 2007, it was at the replacement rate of 2.1 children per woman, reports the National Center for Health Statistics. Hispanics were at 3.0, and other groups clustered near replacement: 1.9 for non-Hispanic whites; 2.1 for non-Hispanic blacks; and 2.0 for Asian-Americans. (Not all the news is good. About 40 percent of births are to unmarried mothers; many children are entering poor or unstable homes.)

Though having a child is a deeply personal decision, it's shaped by culture, religion, economics and government policy. "No one has a good answer" as to why fertility varies among countries, says sociologist Andrew Cherlin of Johns Hopkins University. Eroding religious belief in Europe may partly explain lowered birth rates. In Japan, young women may be rebelling against their mothers' isolated lives of child-rearing. General optimism and pessimism count. Hopefulness fueled America's Baby Boom. After the Soviet Union's collapse, says Cherlin, "anxiety for the future" depressed birth rates in Russia and Eastern Europe.

Bias against families in tax policies will reduce fertility rates in US as well.

In poor societies, people have children to improve their economic well-being by increasing the number of family workers and providing support for parents in their old age. In wealthy societies, the logic often reverses. Government now supports the elderly, diminishing the need for children. By some studies, the safety nets for retirees have reduced fertility rates by 0.5 children in the United States and almost 1.0 in Western Europe, reports economist Robert Stein in the journal National Affairs. Similarly, some couples don't have children because they don't want to sacrifice their own lifestyles to the time and expense of a family.

Families need to be considered when establishing tax policy.

We need to avoid Western Europe's mix of high taxes, low birth rates and feeble economic growth. Young Americans already face a bleak labor market that cannot instill confidence about having children. Piling on higher taxes won't help. "If higher taxes make it more expensive to raise children," says demographer Nicholas Eberstadt of the American Enterprise Institute, "people will think more about having another child." That seems common sense, despite the multiple influences on becoming parents.

How to reconcile this with deficit reduction is unclear. From 2011 to 2020, the Obama administration projects budget deficits of $8.5 trillion. Other estimates are higher. Even if spending and benefits for the elderly are cut -- as they should be -- higher taxes will still almost certainly be needed. Parents ought to be shielded from the steepest increases.

Any tax system rewards some activities and punishes others. A case in point is the mortgage interest rate deduction that rewards people for buying larger homes with more debt. We might reduce this dubious subsidy and shift some savings toward children. Stein advocates combining existing pro-child tax breaks (the personal exemption, the child tax credit, the child-care credit and the adoption credit) into one generous credit. Whatever the details, policies should have a pro-family bias because parenting is, as he writes, "one of the most important services any American can perform."

I would argue the overall level of government and taxation needs to drop rather than merely shielding families from assumed tax increases. Families will invariably be hit with higher taxes because they're where the money is. High income folks are few and sustaining big government will invariably fall back on families to fund.

Gazing into the future of ObamaCare -- Look at Massachusetts.

Washington Post and Newsweek economics columnist Robert Samuelson has written an article on the experience of Massachusetts with state mandated and regulated health care. ObamaCare was modeled after it and therefore Samuelson says it can give us a picture of how the federal government plan might play out.

If you want a preview of President Obama's health-care "reform," take a look at Massachusetts. In 2006, it enacted a "reform" that became a model for Obama. What's happened since isn't encouraging. The state did the easy part: expanding state-subsidized insurance coverage. It evaded the hard part: controlling costs and ensuring that spending improves people's health. Unfortunately, Obama has done the same.

Like Obama, Massachusetts requires most individuals to have health insurance (the "individual mandate"). To aid middle-class families too well-off to qualify for Medicaid -- government insurance for the poor -- the state subsidizes insurance for people with incomes up to three times the federal poverty line (about $66,000 in 2008 for a family of four). Together, the mandate and subsidies have raised insurance coverage from 87.5 percent of the non-elderly population in 2006 to 95.2 percent in the fall of 2009, report Sharon Long and Karen Stockley of the Urban Institute.

Improved access to health care are negligible:

People have more access to treatment, though changes are small. In 2006, 87 percent of the non-elderly had a "usual source of care," presumably a doctor or clinic, Long and Stockley note in the journal Health Affairs. By 2009, that was 89.9 percent. In 2006, 70.9 percent received "preventive care"; in 2009, that was 77.7 percent. Out-of-pocket costs were less burdensome.

Emergency rooms are as crowded as ever:

But much didn't change. Emergency rooms remain as crowded as ever; about a third of the non-elderly go at least once a year, and half their visits involve "non-emergency conditions." As for improvements in health, most probably lie in the future. "Many of the uninsured were young and healthy," writes Long. Their "expected gains in health status" would be mostly long-term. Finally -- and most important -- health costs continue to soar.

Aside from squeezing take-home pay (employers provide almost 70 percent of insurance), higher costs have automatically shifted government priorities toward health care and away from everything else -- schools, police, roads, prisons, lower taxes. In 1990, health spending represented about 16 percent of the state budget, says the Massachusetts Taxpayers Foundation. By 2000, health's share was 22 percent. In 2010, it's 35 percent. About 90 percent of the health spending is Medicaid.

Not controlling costs of health care:

State leaders have proved powerless to control these costs. Facing a tough reelection campaign, Gov. Deval Patrick effectively ordered his insurance commissioner to reject premium increases for small employers (50 workers or fewer) and individuals -- an unprecedented step. Commissioner Joseph Murphy then disallowed premium increases ranging from 7 percent to 34 percent. The insurers appealed; hearing examiners ruled Murphy's action illegal. Murphy has now settled with one insurer allowing premium increases, he says, of 7 to 11 percent. More settlements are expected.

The scapegoats are the same - insurance companies:

Attacking unpopular insurance companies is easy -- and ultimately ineffectual. The trouble is that they're mostly middlemen. They collect premiums and pay providers: doctors, hospitals, clinics. Limiting premiums without controlling the costs of providers will ultimately cause insurer bankruptcies, which would then threaten providers because they won't be fully reimbursed. The state might regulate hospitals' and doctors' fees directly; but in the past, providers have often offset lower rates by performing more tests and procedures.

Efforts to move further away from the market approach aren't working:

A year ago, a state commission urged another approach: Scrap the present "fee-for-service" system. The commission argued that fee-for-service -- which ties reimbursement to individual services -- rewards quantity over quality and discourages coordinated care among doctors and hospitals. The commission recommended a "global payments" system to force hospitals, doctors and clinics to create networks ("accountable care organizations"). These would receive flat per-patient payments to promote effective -- not just expensive -- care. Payments would be "risk adjusted"; sicker patients would justify higher payments.

But the commission offered no blueprint, and efforts to craft consensus among providers, consumer groups and insurers have failed. State Senate President Therese Murray, an advocate of payment change, has given up for this year. "Nobody is in agreement on anything," she told the Boston Globe.

Similar forces will define Obamacare. Even if its modest measures to restrain costs succeed -- which seems unlikely -- the effect on overall spending would be slight. The system's fundamental incentives won't change. The lesson from Massachusetts is that genuine cost control is avoided because it's so politically difficult. It means curbing the incomes of doctors, hospitals and other providers. They object. To encourage "accountable care organizations" would limit consumer choice of doctors and hospitals. That's unpopular. Spending restrictions, whether imposed by regulation or "global payments," raise the specter of essential care denied. Also unpopular.

Obama dodged the tough issues in favor of grandstanding. Imitating Patrick, he's already denouncing insurers' rates, as if that would solve the spending problem. What's occurring in Massachusetts is the plausible future: Unchecked health spending shapes government priorities and inflates budget deficits and taxes, with small health gains. And they call this "reform"?

The answer? Move towards a market based system which gives individuals greater power and responsibility over their own health care decisions. Certainly, government has a role to play. But as a referee or umpire rather than making health care decisions for individuals.

Recession is equal opportunity recession. Big wake up call to the wealthier.

Here's an interesting analysis of who are the most affected by the deepest recession since World War II. Everyone has been hit but it seems those hit the hardest or it's at least been the most impacted are the rich. The housing and stock market crash has hit the rich big time.

Robert Samuelson says the recession has hit everyone:

It has been the most egalitarian of all the 11 recessions since World War II. In various ways, it has touched every social class through job loss, pay cuts, depressed home values, shrunken stock portfolios, eroded retirement savings, grown children returning home -- and anxiety about all of the above. The Great Recession (as it is widely called) has changed America psychologically, politically, economically and socially. Just how will be examined and debated for years. Here comes a booming cottage industry of scholars, pollsters and pundits.

And it's probably been most impactful on the higher income folks. The housing bust and stock market downturn has hit them big time and changed their thinking and behavior.

Another theory -- more powerful, I think -- is that the Great Recession, though jarring to almost everyone, has been most disruptive and disillusioning to those who were previously the most protected. It punctured their cocoons so unexpectedly that they became more cautious and fearful, whereas those who even in good times faced job loss and income shifts (many blacks, the young and the poor) were less surprised. One legacy of the Great Recession is that insecurity and uncertainty have gone upscale. People feel more exposed. They tend to plan for the worst rather than hope for the best. Their reluctance to make major purchase commitments (a new car or home) validates their pessimism by retarding recovery.

We've so far avoided a depression, but for how long given Obama's policies?

There's article in the Washington Post by columnist and economist Robert Samuelson entitled, "Why there was no depression." I would add the word "yet", because I don't think we're out of the woods yet. I say that because the problems and sources of problems underlying the 1930s Great Depression are still distinct possibilities today with policy proposals trumpeted by President Obama.

The Depression in the 1930s is attributed largely to bad government policies. Raising up tariffs dramatically during the early 1930s which choked off trade and reduced economic activity. Raising taxes dramatically on businesses, which create jobs, and private individuals. Bad monetary policy -- keeping interest rates artificially low which distorted investment and business decisions. And so forth.

Now fast forward to 2009. There are efforts to restrict trade on some goods and services with other countries, e.g. tariff barriers.

And the Fed has continued to print money and have kept interest rates artificially low.

President Obama has exploded the government's debt load and to close the gap he'll invariably choose taxes increases over spending decreases. He'll allow many of the Bush tax cuts to expire in the next year or two. He's proposing "cap and trade" policies which will slow economic activity and drive up the cost of goods and services for families. Estimates suggest cost increases would be the equivalent of anywhere from a $800 to $1700 tax increase per family. And he's proposing a massive increase in health care spending. By as much as $100 billion a year.

Arthur Laffer in a Wall Street Journal article, "Taxes, Depression and Our Current Problems" argues that bad fiscal policy played an important role in continuing and deepening the depression.

The damage caused by high taxation during the Great Depression is the real lesson we should learn. A government simply cannot tax a country into prosperity. If there were one warning I'd give to all who will listen, it is that U.S. federal and state tax policies are on an economic crash trajectory today just as they were in the 1930s. Net legislated state-tax increases as a percentage of previous year tax receipts are at 3.1%, their highest level since 1991; the Bush tax cuts are set to expire in 2011; and additional taxes to pay for health-care and the proposed cap-and-trade scheme are on the horizon.

The longer I look at things, the more convinced I am that government got us into this mess and government will likely keep us in this mess longer than necessary.

Obama's health care proposal is only more of status quo and will only make matters worse.

Washington Post economics' columnist Robert Samuelson did a story on Obama's health care plan now in Congress, "Obama's Health Care Will Make it Worse."

Samuelson says Obama isn't doing what he said he would -- change the status.

Obama took a pass. He simply claims that his plan will do things it won't. What he's offering is an enlarged version of the status quo that, as he says, is already unsustainable.

Samuelson adds:

...open-ended reimbursement by government and private insurance has ballooned health spending despite repeated pledges to "contain" costs. For example, health payments for individuals rose from less than 1 percent of federal spending in 1965 to 23 percent in 2008.

Obama would perpetuate this system. No president has spoken more forcefully about the need to control costs. Failure, he's argued, would expand federal budget deficits, raise out-of-pocket health costs and squeeze take-home pay (more compensation would go to insurance). All true. But Obama's program would do little to reduce costs and would increase spending by expanding subsidized insurance. The House legislation would cut the uninsured by 37 million by 2018, estimates the Congressional Budget Office. The uninsured get care now; with insurance they'd get more.

"You'd be adding a third medical entitlement on top of Medicare and Medicaid," says James Capretta, a top official at the Office of Management and Budget from 2001 to 2004.

What would a debate over controlling health care costs really look like?

For starters, we wouldn't be arguing about how to "pay for" the $1 trillion or so of costs over a decade of Obama's "reform." Congress wouldn't create new benefits until it had disciplined the old. We'd be debating how to trim the $10 trillion, as estimated by CBO, that Medicare and Medicaid will spend over the next decade, without impairing Americans' health. We'd use Medicare as a vehicle of change. Accounting for more than one-fifth of all health spending, its costs per beneficiary, now about $12,000, rose at a dizzying average annual rate of 8.5 percent a year from 1970 to 2007. (True, that's lower than private insurers' rate at 9.7 percent. But the gap may partly reflect cost-shifting to private payers. When Medicare restrains reimbursement rates, hospitals and doctors raise charges to private insurers.)

Medicare is so big that shifts in its practices spread to the rest of the delivery system. But changing Medicare, and through it one-sixth of the U.S. economy, requires more than a few demonstration projects of "comparative outcomes" research or economic incentives. What's needed is a fundamental restructuring. Fee-for-service medicine -- Medicare's dominant form of payment -- is outmoded. The more doctors and hospitals do, the more they get paid. This promotes fragmentation and the overuse of services.

We should move toward coordinated care networks that take responsibility for their members' medical needs in return for fixed annual payments (called "capitation"). One approach is through vouchers; Medicare recipients would receive a fixed amount and shop for networks with the lowest cost and highest quality. Alternatively, government could shift its reimbursement of hospitals and doctors to "capitation" payments. Limited dollars would, in theory, force improvements in efficiency and effective care.

We're not having this debate. To engage it would require genuine presidential leadership, because, admittedly, these proposals would be hugely controversial. Medicare recipients -- present and future -- would feel threatened. Existing doctor-patient relationships might be disrupted. Spending limits would inspire fears of short-changed care. Hospitals, doctors and device manufacturers would object.

I think the answer, and Samuelson only mentions it in passing and indirectly, is restoring market forces to the health care system, e.g. vouchers for one. Government will have to stop offering everybody something for nothing. More government control and regulation will only make matters worse, e.g. rationing, less access to medical care for those with serious conditions, reduced quality of care, etc.

Is Obama's stimulus package a colossal waste of money? Some think so.

With the ink hardly dry from President Obama's pen signing into a law a $790 billion spending and tax bill designed to stimulate our economy, observers are already asking whether it's a "colossal waste" of money.

Robert Samuelson, economics columnist with the increasingly left leaning Newsweek magazine wonders whether that's not so in a recent column.

Judged by his own standards, President Obama's $787 billion economic stimulus program is deeply disappointing. For weeks, Obama has described the economy in grim terms. "This is not your ordinary run-of-the-mill recession," he said at his Feb. 9 news conference. It's "the worst economic crisis since the Great Depression." Given these dire warnings, you'd expect the stimulus package to focus almost exclusively on reviving the economy. It doesn't, and for that, Obama bears much of the blame.

Samuelson then goes on to point out that the bill won't provide much stimulus for the economy but rather is full of pork and spending programs that won't go into effect for years.

The case for a huge stimulus -- which I support -- is to prevent a devastating downward economic spiral. Spending is tumbling worldwide. In the fourth quarter of 2008, the U.S. economy contracted at a nearly 4 percent annual rate. In Japan, the economy fell at a nearly 13 percent rate; in Europe, the rate was about 6 percent. These are gruesome declines. If the economic outlook is as bleak as Obama says, there's no reason to dilute the upfront power of the stimulus. But that's what he's done.

His politics compromise the program's economics. Look at the numbers. The Congressional Budget Office (CBO) estimates that about $200 billion will be spent in 2011 or later -- after it would do the most good. For starters, there's $8 billion for high-speed rail. "Everyone is saying this is (for) high-speed rail between Los Angeles and Las Vegas -- I don't know," says Ray Scheppach, executive director of the National Governors Association. Whatever's done, the design and construction will occupy many years. It's not a quick stimulus.

Then there's $20.8 billion for improved health information technology -- more electronic records and the like. Probably most people regard this as desirable, but here, too, changes occur slowly. The CBO expects only 3 percent of the money ($595 million) to be spent in fiscal 2009 and 2010. The peak year of projected spending is 2014 at $14.2 billion.

Big projects take time. They're included in the stimulus because Obama and Democratic congressional leaders are using the legislation to advance many political priorities instead of just spurring the economy. At his news conference, Obama argued (inaccurately) that the two goals don't conflict. Consider, he said, the retrofitting of federal buildings to make them more energy efficient. "We're creating jobs immediately," he said.

Yes -- but not many. The stimulus package includes $5.5 billion for overhauling federal buildings. The CBO estimates that only 23 percent of that would be spent in 2009 and 2010.

Worse, the economic impact of the stimulus is already smaller than advertised. The package includes an obscure tax provision: a "patch" for the alternative minimum tax (AMT). This protects many middle-class Americans against higher taxes and, on paper, adds $85 billion of "stimulus" in 2009 and 2010. One problem: "It's not stimulus," says Len Burman of the nonpartisan Tax Policy Center. "(Congress was) going to do it anyway. They do it every year." Strip out the AMT patch, and the stimulus drops to about $700 billion, with almost 30 percent spent after 2010.

The purpose of the stimulus is to minimize declines in one part of the economy from dragging other sectors down. The next big vulnerable sector seems to be state and local governments. Weakening tax payments create massive budget shortfalls. From now until the end of fiscal 2011, these may total $350 billion, says the Center on Budget and Policy Priorities (CBPP), a liberal advocacy group. Required to balance their budgets, states face huge pressures to cut spending and jobs or to raise taxes. All would worsen the recession and deepen pessimism.

Yet, the stimulus package offers only modest relief. Using funds from the stimulus, states might offset 40 percent of their looming deficits, says the CBPP's Nicholas Johnson. The effect on localities would probably be less. Congress might have done more by providing large, temporary block grants to states and localities and letting them decide how to spend the money. Instead, the stimulus provides most funds through specific programs. There's $90 billion more for Medicaid, $12 billion for special education, $2.8 billion for various policing programs. More power is being centralized in Washington.

No one knows the economic effects of all this; estimates vary. But Obama's political strategy stunts the impact from what it might have been. By using the stimulus for unrelated policy goals, spending will be delayed and diluted. There's another downside: "Temporary" spending increases for specific programs, as opposed to block grants, will be harder to undo, worsening the long-term budget outlook.

Politics cannot be removed from the political process. But here, partisan politics ran roughshod over pragmatic economic policy. Token concessions (including the AMT provision) to some Republicans weakened the package. Obama is gambling that his flawed stimulus will seem to work well enough that he'll receive credit for restarting the economy -- and not blamed for engineering a colossal waste.

If the economy continues to go south and the stimulus bill is understood by the voters as a "colossal waste", those who voted for it had better be concerned.