The Moment of Truth: Report of the National Commission on Fiscal Responsibility and Reform

The moment of truth is upon us. The national commission on fiscal responsibility and reform issued its report, aptly named, "The Moment of Truth". If you are not convinced that we are facing a fiscal crisis, here is something that will convince you. This is a quote from the report....

"Over the long run, as the baby boomers retire and health care costs continue to grow, the situation will become far worse. By 2025 revenue will be able to finance only interest payments, Medicare, Medicaid, and Social Security. Every other federal government activity – from national defense and homeland security to transportation and energy – will have to be paid for with borrowed money. Debt held by the public will outstrip the entire American economy, growing to as much as 185 percent of GDP by 2035. Interest on the debt could rise to nearly $1 trillion by 2020. These mandatory payments – which buy absolutely no goods or services – will squeeze out funding for all other priorities."

By recommending some very tough choices, taken as a whole, the plan will:
␣ Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history.
␣ Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP).2
␣ Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code.
␣ Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%.
␣ Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.
␣ Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.

This is a serious proposal. 11 of the 18 members including three Republican Senators voted yes for the plan. Considering how broken Washington is currently, this is an achievement. All three house Republican members voted no so did two liberal Democratic house members. I was surprised to find that Democratic senator Max Baucus, chairman of finance committee voted no and so did Andy Stern, former President of Service Employees Union, a Presidential appointee.

The questions is what now. I think it is another chance for Presidential leadership. President Obama should engage the Congress and the whole nation on a debate on how to implement the recommendations of this commission. If he does that and succeeds in implementing majority of the recommendations, he will leave behind a legacy similar to of some of our greatest Presidents like Abraham Lincoln or FDR.

Oil Spill in the Gulf of Mexico

It has been more than a month since the oil spill started in the Gulf of Mexico. Everyday we hear of a new attempt by BP of trying to plug this leak but to no avail. Hundreds of thousands of gallons of oil is leaking into the Gulf everyday. It is hard to even estimate the fall out of this leak on the environment, people living near the Gulf, businesses etc.

However what is most disturbing is a sense of helplessness displayed by our Government. Secretary Salazar and Secretary Napolitano have been giving out one press release after another on how the whole government machinery is working to stop the leak but it is clear that they are helplessly watching from the sideline as BP fumbles from one promising solution to another.

While comparison with Katrina may not be apt, Obama administrations actions have been less than steller. There is no leadership on this issue from the President. He has handed it over it to his cabinet secretaries who seem clueless.

Political posturing has already started in all it earnest. Democrats in Congress and White House want to retroactively raise liability limit of oil companies from $75 million to $10 billion unconcerned that constitution expressly prohibits "after the fact" laws. Republicans are lining up to oppose the measure.

All this when oil continues to spill into the Gulf with no end in sight.

And you wonder why common man is so cynical about the government...

HealthCare Reform Bill Passes thru Congress

After more than a year of debates and discussions, last night, in a historic vote, Congress passed the HealthCare reform bill. I must admit that after the victory of Scott Brown in MA, I had written off the prospects of passage of the bill. While I don't like many provisions of the bill (I have written about them in my previous posts), I am glad that the bill passed. As a practical matter, we can not make perfect the enemy of good.

I think the passage of the bill is also a lesson in leadership. It is easy to lead when you have a consensus and strong support for whatever you are trying to do. However the real test of leadership comes when you are trying to do something that is not popular but you believe is the right thing to do. It requires unwavering conviction and tremendous perseverance both of which were at display on how President led this effort. Critics will call it arrogance. They will point to the flawed process used to pass the bill. While it should not always be the case, I think in this case, end justifies the means. Arms were twisted, deals were done but nothing that has not happened before (remember Tom Delay anyone...).

While it was hard to get to this point, really hard work will begin with the implementations of the provisions of the bill. CBO estimates of deficit reduction of $150 billion this decade and almost $1 trillion in the next decade will happen only when Congress can muster the courage to implement the tough provisions like cuts in subsidy to health insurance companies for medicare advantage. With the passage of the bill, Congress has shown its willingness to step up to the plate. Let us hope this continues.

What Comes After the Summit

Healthcare summit is over. Was it worth the all the hoopla surrounding it? Actually I found it quite informative.

In between lots of campaign speeches from both sides, there were moments where the philosophical differences between the two sides became evident.

One big difference was on the priority. Republicans want to tackle cost first and coverage second whereas democrats are primarily focussed on coverage. I wrote in this blog last year that expanding coverage without reducing cost will undo the benefits of the bill in the long run. We will not be able to afford this new entitlement until we reduce cost significantly.

Second big difference was around government's role. For the reason of "protecting the consumers", democratic bill mandates minimum benefits to be included in the plans sold by insurance companies whereas republicans want to leave it to the consumers to decide what benefits they want.

On both these points I find myself agreeing with the republican position. A consumer should be able to decide what he or she is buying. Only proven way to reduce cost is to ensure consumers have a stake in the decisions they make. For example expanding the use of Health Savings Accounts (HSA) will do more to reduce the cost than anything suggested in the bill as has been shown in this experiment in Indiana.

Lately in my discussions with providers, they tell me that when suggested to undergo a test or a procedure, consumers today ask about the cost of the procedures. They try to compare prices and quality of different providers before deciding where they will have the test done because they have a stake in that decision due to the increased co-insurance amount they need to pay. We need to provide tools and information so that healthcare consumer can get the price and quality transparency they are looking for. At hCentive, we have made this our mission to provide quality and price transparency to consumers for all their health related purchase decision whether it is health insurance or a health procedure.

While I agree with the republican positions, it is also clear to me from the summit that Republicans have no incentive to pass any kind of healthcare reform. Their insistance on "start over" is actually Washington Speak for doing nothing. It was very reassuring to see President's grasp of the complexities of this very difficult subject. I may not agree with many of his positions but I feel he is making a good faith effort to incorporate some of the good ideas from the other side. In the end whether it will be enough to bridge this big gap is anybody's guess...

HealthCare Summit

To revive the stalled Healthcare Reform bill, President last week announced a white house summit where he invited leaders from both the parties to join him in a televised session so that they can look at all the best ideas out there and move the process forward.

I suggest anyone looking to participate in the summit should first read A Wasted Opportunity, an interview with Angela Braly, CEO and President of WellPoint, nations largest commercial health insurer.

There are couple of points in the article summit participants might want to focus on. First is that Government mandates have costs and have unintended consequences. For example if you want to mandate "guaranteed issue" so that health insurance can not be denied for a preexisting condition, there has to be meaningful requirements for everybody to buy health insurance. Otherwise people will not buy insurance until they are sick. As she says in the interview, if you can call on your way to the hospital and get coverage, it is not insurance anymore. This increases insurance cost and reduces coverage. For a 20 something old, it is almost four times more expensive to buy health insurance in New York State than in Indiana and the main reason is mandated regulations.

Second point she makes is that to stem the tide of rising cost, we have to "reintroduce the consumer to the healthcare equation". Patients will make more cost-conscious decisions if they have the incentives and the tools—namely, the information about cost and quality that is the basis of any ordinary market. I firmly believe in this and this is really the mission of my company hCentive. Our goal is to ensure that health care dollars go as far as possible by helping consumers make right financial decision with respect to their health. It will be one place consumers will come to when they are looking for the best health insurance plan, quality and cost information about the test or procedure they are about to undergo, help reconciling their medical bills and much more.

Cost of healthcare will come down by innovations like this coming out of the private sectors and not thru mandates coming out of Washington.

Aid to Haiti

American citizens as well as the American government have responded admirably to Haiti crisis. They deserve our kudos.

While we should do everything possible to help the people of Haiti in this hour of crisis, we should also think long term and ask a broader question which is "whether financial aid is the answer to the problem of eliminating poverty from the world".

It seems there are two schools of thoughts here. I will label one as Jeffrey Sachs school of thought. People in this camp believe more financial aid is the answer. There is another group, may be much smaller, which believes that providing more financial aid to poor countries does them no good and rather further damages their ability to come out of poverty. I belong to the later group.

Recently Bret Stephens made a strong case against financial aid, To help Haiti, end foreign aid, in the Opinion pages of WSJ.

Evidence is overwhelming that financial aid model has failed. Countries that have been the most intensive recipients of financial aid are in sub-saharan Africa and that region has seen the worst economic growth. In fact, in the last 50 years, around $568 billion have gone to Africa and over that period income of the average citizen of the average African nation has virtually not increased at all. In From Poverty to Prosperity, Arnold Kling and Nick Schulz argue for an approach that they describe as "Economics 2.0". They argue that countries ability to prosper is a function of "software" (meaning intangible assets and invisible liabilities) and is not dependent on "hardware" (meaning physical resources). Intangible assets will be the protocols or recipes of interaction among individuals, basically rules of the game. Invisible liabilities are social arrangements and political institutions that drag down the productivity.

The foreign aid approach is based on the "hardware" or "resource scarcity" approach. It assumes that countries can't grow because they lack necessary tangible "stuff". However if you compare Zimbabwe or North Korea with South Korea, Singapore, Israel, it becomes clear that it is not the "hardware" but the "software" that makes the difference.

Adopting this new paradigm will have massive consequences. For example we will have to reevaluate the role of agencies like The World Bank and IMF. This is an uphill task but one that policy makers should look into if we want to eradicate poverty from the face of the earth in near future.