Our Declaration of Dependence

As we get into the final stretch of the 2012 Presidential election, both parties are trying to convince the voters that this is the most important election of their lifetime and their choice will determine the course of the nation for the generations to come.   

If this is truly the most important election of our lifetime, it surely does not look like from the problems being discussed and the solutions being prescribed by  the two candidates.   One of the biggest problems the new administration will face will be the cost of our growing entitlements.  None of the candidates are providing any serious plans to address this problem.

In a fantastic essay written by Nicholas Eberstadt (A Nation of Takers: America’s Entitlement Epidemic), author makes the case that entitlement mentality is fundamentally changing the American character, which may be sacrificed long before the credibility of the US economy.   In this blog, I will try to summarize key points from this article.

Eberstadt suggests that while the American republic has endured for almost two and a quarter centuries, over the past fifty years, American government has become an entitlement machine which devotes more attention and resources to public transfer of money, goods and services to individual citizens than to any other objectives.

Eberstadt shares some breathtaking numbers.   In 1960, US government transfers to individuals totaled about $24 billion.  By 2010 that total was almost 100 times larger! It was around $2.2 trillion.   In 1960, entitlement related payments accounted for well under a third of the federal government’s total outlays.  By 2010, this share accounted for about two-third of all federal spending, with all other responsibilities of the federal government including defense making up barely one-third.  US government budget divides entitlement spending into six baskets: income maintenance, Medicaid, Medicare, Social Security, unemployment insurance and all the others.  Broadly speaking, the first two baskets attend to entitlements based on income status, the second two based upon old-age status and the next two based upon employment status. 

Income related entitlements including health-care services account for over $650 billion in2010.  For older Americans-Medicare, Social Security  and other pension related payments amounted to about $1.2 trillion in 2010.  To put things in perspective,  total revenue collected by the federal government in 2010 was around $2.2 trillion which is equal to the total entitlement spending that year.  It means every other function of the government including defense was funded thru deficit funding.  Budget deficit in 2010 was more than $1 trillion.

Eberstadt argues that there has been a steady shift towards entitlement lifestyle especially in the last couple of decades.  At the time of the founding of the country, there was an affinity for personal enterprise and industry and a contempt for anything that will smack of entitlements.  That resistance of government entitlement was ultimately overcome.  Today more than half of all American households receive transfer benefits from the government. 

Author argues that omnipresence of entitlements have already altered the American way of life.   With personal dependence on government handouts not only destigmatized but being enshrined as a right, mass behavior is changing in highly uncivil directions.  How many times have we seen elderly protesting “hands off my Medicare”, without realizing that their consumption will be at the expense of those born after them.   They rationalize this behavior with the notion that they have “already paid for” these benefits not knowing that on an average they will take out three times from the system more than what they put in.  The fact is that neither Social Security nor the Medicare trust funds can honor the future promises they have made today.   Unless we make significant changes in entitlement spending, we have decided to mortgage our future for a more comfortable retirement today.

Current fiscal trajectory is unsustainable.   The 2010 Bowles/Simpson commission report dealt with this problem squarely.  Their report was aptly called “The Moment of Truth”.   They provided a framework, which can provide solid underpinning of a legislation to address this problem. 

It is incumbent upon the Presidential candidates to share their plans for addressing this most “predictable crisis” facing us.  Until they clearly articulate their plans to implement recommendations of Bowles/Simpson commission report, they have not earned our vote.

Thinking Fast and Slow

Recently I read the book "Thinking, Fast and Slow" by Daniel Kahneman who received the 2002 Nobel Prize in Economics. It is a fascinating book. In this post, I will try to summarize my understanding of key concepts from the book.

Kahneman starts by introducing two systems, named rather inaptly, System 1 and System 2, that drive the way we think. System 1 is fast, intuitive and emotional which can be somewhat manipulated. System 2 is slower, deliberate and logical but also somewhat lazy. We would like to believe that we are deliberate, rational and logical and hence System 2 is at works but most of the time, System 1 is in charge and funny thing is, we can not do much about it.

A lot of things we do, like answer to 2+2=?, or drive a car on an empty road, detect hostility in a voice, orient to the source of a sudden sound, all happen without much effort or attention from our side. We do these and similar things, involuntarily and can not prevent ourselves from doing even if we want to. This is all System 1 at work.

Operations of System 2, however, require attention and are disrupted when attention is drawn away. Few examples would be to search memory to identify a surprising sound, count the occurrence of letter "a" in a page of text, compare two washing machines for overall value, fill out a tax form.

According to the author, System 1 and System 2 are both active whenever we are awake. System 1 runs automatically and System 2 is normally in a comfortable low-effort mode. System 1 continuously generates suggestions for System 2. When all goes smoothly, which is most of the time, System 2 adopts the suggestions from System 1 with little or no modification. We generally believe our impressions and act on our desires, and that is fine - usually.

When System 1 runs into difficulty, it calls on System 2 for support. For example, when we are surprised, or someone asks a questions for which we do not have a ready made answer, like 17X24=?, System 2 is activated.

The division of labor between System 1 and System 2 is highly efficient. Arrangement works well most of the time because System 1 is generally good at what it does. System 1 has biases, however, systematic errors that it is prone to make in specified circumstances. It sometimes answers easier questions than the one it was asked, and it has little understanding of logic and statistics. Here is a good example.

Let us take a simple puzzle. Do not try to solve it but listen to your intuition.

A bat and ball cost $1.10.
The bat costs one dollar more than the ball.
How much does the ball cost?

What number came to your mind? If you are like most people, your intuitive answer is 10 cents. Now actually do the math. Correct answer is 5 cents. It is safe to assume that intuitive answer also came to the mind of those who ended with the correct answer - they somehow managed to engage their System 2 and resist the suggestion of System 1.

Author also introduces the concept of WYSIATI (What You See Is All There Is). System 1 is radically insensitive to both the quality and quantity of the information that gives rise to impressions and intuitions. It leads us to jumping to conclusions on the basis of limited evidence.

There are other important concepts in the book, all of which can not be described here. Kahneman uses these concepts to conclude that humans need help to make more accurate and better decisions and in some cases policies and institutions can provide that help. Libertarian approach assumes that humans are perfectly rational (System 2 is at works all the time) and they will make the right decision every time so we should not interfere with the individual's right to choose, unless the choice harms others. Kahneman makes a case for "Nudge", based on the book of the same name, written by Richard Thaler and Cass Sunstein. They advocate a position of libertarian paternalism, in which state and other institutions are allowed to "nudge" people to make decisions that serve their own long-term interest. A good example of Nudge would be the designation of joining a pension plan as the default option. It is difficult to argue that anyone's freedom is diminished by being automatically enrolled in the plan, when they merely have to check a box to opt out. Humans need help to make good decisions and there are informed and unintrusive ways to provide that help.

Downgrade of Our Political System

It seems we will ultimately not default. Just hours before the looming deadline, President signed the bill passed by both houses of congress which will allow treasury to borrow money and continue to pay its bills.

The whole spectacle forces one to wonder about the quality of our political system. If Moody's or S&P were in the business of rating political systems, they should have downgraded us to junk status.

While no one party or group came out looking good, I think following three entities especially came out diminished.

Tea party, which propelled republicans into majority in the house in the last years elections, seems to have misread their mandate. They looked irresponsible in this debate when they denied that defaulting on our debt is a big deal. They don't understand that complex problem like our debt which has been accumulated over decades requires thoughtful solution and can not be fixed overnight. They have one answer to all the problems of the world: tax-cuts.

Liberals on the other end seem to be living in a different planet where there are unlimited resources, country has no debt and more spending is the answer to all the problems. They believe in Keynesian economics and want to spend more and tax more. They blame corporations and rich people for almost everything that ails us today ignoring the fact that it is the private sector which drives our economic engine. According to them, if people are getting richer, they must be doing it on the backs of working poor.

President also came out of this debate diminished. Instead of showing true leadership on fiscal issues, in the beginning, he just offered lip service. Having taken a beating in health care debate, he could not muster the courage to take on this problem. He setup the debt commission but completely ignored its recommendations. His budget this year did nothing to address the probelm. He made a political calculation of not coming out with specific debt reduction plan of his own and in this he completely misread the mood of the country.

The real solution to our long term fiscal challenges will require entitlement reform and tax reform, not addressed in the current deal. Looking at what it took to just increase the debt ceiling, I am not very confident that we will solve this problem any time soon.

Chairman Ryan's Budget for 2012: Path to Prosperity

House budget committee chairman unveiled his budget for 2012. His budget is the first honest attempt to address the fiscal crisis facing the country. While I don't agree with all the proposals in the budget, he actually has a serious proposal. Same can not be said of administration or democratic controlled senate.

Last year President appointed Bowles-Simposon bipartisan commission to develop a framework to address our looming fiscal crisis. Commission submitted its findings to the President who has been missing-in-action on its recommendations. His budget blue print, submitted to congress in February, made no serious attempt at tackling what some have called "most predictable fiscal crisis". We just learnt that President will address the nation this week with his own proposal for deficit reduction. He is finally coming around.

As expected, Chairman Ryan is being blamed by democrats for balancing the budget on the backs of seniors. I think it was courageous of him to submit his proposal knowing that it will be used as ammunition against him. Some have even called his proposal "suicidal". It is little disheartening to note that nobody from Republican leadership, including 2012 potential Presidential candidates, have come out in support of the plan. It is clear that his plan will not be adopted as it is. Compromises will be made. However nobody can deny that he has set the agenda for the debate and others are following.

Libyan Crisis: Should we or should we not intervene

In Libya, Col. Gadhafi is massacring its people to keep his hold on power. He has been ruling Libya for more than 40 years and seems in no hurry to leave. To say that the man is insane is an understatement. In 1975, he published "The Green Book" and made it a required reading for all Libyans. It documents his political philosophy. In here, he rejects liberal democracy, capitalism and free press and touts "Direct Democracy" being practiced in Libya where he appoints all key office holders.

One Libyan scholar, Dirk Vandewalle, has described the following passage from the book as encapsulating Gadhafi thought best:

"While it is democratically not permissible for an individual to own any information or publishing medium, all individuals have a natural right to self-expression by any means, even if such means were insane and meant to prove a person's insanity."

The question for American administration is whether to intervene militarily or not to remove Col. Gadhafi from power. It seems to me that Libyan ruler currently does not represent a clear and present danger to United States and thus obviates any need for an unilateral military intervention.

Having said that, international community can not ignore the prospect of a full-fledged civil wire in Libya and thus a co-ordinated respond by the world community makes sense. Towards that goal, Arab League, last week approved creation of a "no-fly" zone over Libya. This is the first time Arab League has recommended such a measure against one of its own members. United States should now lead the effort in UN to get a security council approval for no-fly zone and work with its NATO member nations to implement it.

President Obama is being deliberate in this matter and I fully agree with his approach. We are still paying the price for hastily invading Iraq. We can not make that mistake again.

Tragedy in Tuscon

By now, a lot has been written and said about the tragedy in Tuscon last Saturday. In recent history, there have been very few incidents like this which have rallied the whole nation. Challenger disaster in 1986, Oklahoma city bombing in 1995 and September 11, 2001 come to mind. While we grieve and mourn for the dead and pray for the survivors, we also want to know why it happened and how can we stop it from happening in future.

It is very tempting to lay the blame for this tragedy on the door steps of people or policies we don't agree with. People on extreme right and left have pointed fingers at each other. This serves no purpose. Frankly, we may never know the reason. If this tragedy can help start the right debate about our policies about mental illness, gun control etc., it might serve some purpose but pointing fingers at this stage does more harm than good.

I thought President Obama struck the right tone at the memorial service on Wednesday. He was inspiring and comforting at the same time. He really rose to the occasion. It was one of the best moments of his presidency.

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.

Difficult Year Gone By

Washington area has been been blanketed by snow. On this weekend before Christmas, instead of being struck in traffic trying to finish that last minute shopping, I am enjoying the breathtaking beauty of the white snow cover combined with bright sun peaking from the sky. Scenery gave me a pause and I started reflecting on the year which has gone by. Undoubtedly it was a tough year. With everything that happened this year, it seems that it has diminished our own confidence in American exceptionalism. Are we still the hope of the world? Can the world look to us for leadership on major challenges of our time? Domestically can we tackle thorny issues of health care and unemployment?

I think on the international front, policies of the current administration are on the right track. We have adopted a "realist" foreign policy approach which takes into account the contraints in which we operate. We have been deliberate in our thinking and multilateral in our approach, almost exact opposite of the operating principles of the last administration.

On the domestic front, the administration has a mixed record in its first year. Fed and the Treasury get good grade for pulling us back from the financial abyss. It is easy in the hindsight to criticize the administration for bailing out banks and shoveling lot of money thru TARP. However it achieved its purpose. Our financial institutions survived and are healthy again. Now we should sit down and devise the kinds of financial regulations which will prevent us from being in the same situation again.

Another major initiative of the administration has been health care reform. Anybody who whole heartedly supports the bill or wholeheartedly opposes the bill, has really not understood the bill. I think it is a very difficult call. While there are a lot of good measures in the bill for health insurance reform, it does not do enough to bend the cost curve in the long run. David Brooks captures this difficult choice very well in his NYTimes article http://www.nytimes.com/2009/12/18/opinion/18brooks.html

If I were a senator, I will vote for the bill giving the benefit of doubt to the current administration. President has shown in his major foreign policy initiative that he is very pragmatic and that gives me the confidence that he will take the issue of cost seriously and implement the provisions of the bill in a way to ultimately reduce the deficit.

All in all, a very tough year has gone by and coming year may not be any easier. However I think we will remain a force of good in the world, our strength will come from our ability to marshell the world opinion and not just thru our arms and our economy will turn around, though at a slower pace.

Happy Holidays and a very Happy New Year.

No More Public Option

Majority leader senator Harry Reid announced this week that a "grand compromise" has been reached between liberal and centrist democrats where they agreed to drop the "public option". They replaced it with two new proposals. One proposal is to expand Medicare for people between the ages of 55 and 64 (currently Medicare is available to people 65 & above). Second proposal will require Insurance companies to create not-for-profit insurance plans in every state to be sold on the "exchange" along side for-profit plans. These plans will be supervised by the Office of Personnel Management which currently administers the health insurance plans offered to federal employees.

There is a very good analysis of this new proposal at http://www.nytimes.com/2009/12/10/opinion/10thu1.html

I will wait to see how CBO "scores" these proposals with respect to the budget deficit but my initial reaction is of a sigh of relief. I have argued in this blog before that public option will not help reduce cost. The biggest lacuna of this bill is its inability to "bend the cost curve" in any significant way and that will undo everything else that is good in this bill in the long run.

However politics is an art of compromise. I am hoping that thru amendments on the senate floor and thru more back-room deals like this, final product will be a major improvement on what is being debated in the senate currently.

Worlds most deliberative body deliberates healthcare reform

Last week senate started debating the healthcare reform bill. Most of the senators agree that this might be the most important vote they will cast in the senate but listening to the debate one does not get a sense of the importance and urgency of the debate. Here is an example of the focus of the debate from last week.

Republicans brought out their big guns to oppose the "big cuts in medicare". They derided almost $500 billion of proposed cuts in medicare. They read thru countless letters sent by seniors who urged them to oppose this bill which will, in their view, bankrupt medicare. Listening to them defend medicare, you will not get a sense that same senators are tooth and nail opposed to any "government involvement in healthcare" and were earlier lambasting medicare for being an entitlement program which is full of fraud, run by "government bureaucrats" who want to come between you and your doctor.

Democrats on the other end read thru their own letters sent by their constituents on how insurance companies are "robbing" common man to pay millions of dollars in compensation to their CEOs. They did not stop there. Senator Blanche Lincoln from Arkansas actually proposed an amendment which will limit the deductibility of executive compensation for insurance companies to $400,000. You wonder why $400,000! Her argument is that if it is good enough for the President of United States (US President makes $400,000 a year), it should be good enough for insurance companies executives. This amendment will raise around $650 million in new taxes which she plans to use to "save" medicare.

This is the tenor of the debate in the most deliberative body in the world when it is debating possibly the most important bill of our generation and you wonder why people are cynical about politicians...

Government & Healthcare

If you listen carefully to the debate on healthcare and for that matter on other pending legislations in Congress, you will find that the basic argument is over how far we want government involved in private enterprise. There seem to be two schools of thought.

On the left, there is a general disdain for businesses who make profit from healthcare. They want to "rescue" the common man from the "clutches" of big business. Their approach is to get government micro-manage private enterprise.

On the right, there is a general disdain for government. They like the laissez-faire approach where government has no role in private enterprise. WSJ recently published an article Ayn Rand on the Economic Crisis - WSJ.com which discusses Ayn Rand's take on government involvement in private enterprise.

I feel the answer lies somewhere in the middle of this continuum. An important lesson from the current economic crisis is that laissez faire approach does not work. Alan Greenspan, an ardent follower of Ayn Rand and a strong proponent of deregulation admitted this in his testimony to Congress last year after the economic crisis when he said that he was "shocked" to learn that markets can not self-regulate.

If we start with the premise that government has a role to play in private enterprise then we need to decide how much government involvement is appropriate. In my view, government should ensure there is no monopoly, should ensure that no one company holds the whole industry or sector hostage by becoming "too big to fail" and should establish broad regulatory framework based on outcomes. Government should not be too narrowly defining what a company can or can not sell.

For example, current healthcare bills actually defines what should or should not be covered by an insurance plan. It goes on to define what procedures should have no co-insurance cost ("mammograms should be free"). Government should not legislate what type of products are sold in the market. It should just ensure that there are enough companies selling that product and market will take care of the rest. I say this from my personal experience. Recently I was in the market for health insurance for my family. After comparing various plans in the individual market on an exchange like the one my company hCentive http://www.hcentive.com/ is building , I recently bought a very high deductible HSA (Health Savings Account) compatible plan. My deductible is $10,000 but my monthly premium is very low. Knowing the health of my family and our financial risk appetite, I feel this is the right plan for me. Until my deductible is met, nothing is "free" in this plan. If Congress has it way, it will be illegal for me to buy this plan in future. Congress is substituting its mandate for my judgement on what is right for me.

I feel this is the problem with the current approach to healthcare reform. Government has an important role to play but that role should be to ensure their is true competition in the market place and proper regulatory framework exists. Congress should not substitute its mandate over consumers own judgement on what is right for them.

Faith in the Future

Current economic climate has had a profound impact on people's outlook on life. I find people who used to be cheery, hopeful, excited about the future have become cynical, suspicious and angry. I am an avid listener of "Washington Journal" program on C-SPAN. This is a program where people call in to speak their mind about current hop topics like Health Care, War, Climate, Education etc. There is a palpable shift in the mood of the callers from what it used to be couple of years back. Rationality has given way to partisanship. Cyncisim about governement seems at all time high. Instead of being hopeful about future, more and more people are succumbing to a victims mentality where they are looking to lay the blame for their current state of affairs on somebody else like Wall Street, Politicians, Globalization, Immigrants etc.. How did we reach here and what is the remedy for it?

David Brooks address this topic beautifully in his column in NYTimes http://www.nytimes.com/2009/11/17/opinion/17brooks.html?_r=1

I can think of one group of people who has remained untouched from all this gloom and doom. They are the entrepreneurs. They are eternal optimist. Odds of survival of a startup are less than those who landed in the beaches of Normandy and that was 1 in 500. Even with such high odds, every day new companies are started, innovation boundaries pushed further, capital raised, people hired. This is the real stimulus. Instead of spending stimulus money in artificially creating jobs (cash for clunkers is a classic example), we should make long term investments in things like basic R&D, education, health care with proven ROI over the long term.

People will again begin to have faith in the future if they see their political, community and business leaders take on tough problems, make hard decisions and think long term.

House Passes Landmark Health Reform Bill

On Saturday house passed the landmark health reform bill by a narrow margin, 220 to 215. In the final tally, 219 Democrats voted for the legislation, and 39 voted against it. Rep. Joe Cao (R-Louisiana) was the only Republican who voted in favor of the bill.

While the bill is being hailed by many as a victory for healthcare reform, I think it is more apt to call it an insurance reform bill. The bill addresses issues with coverage and insurance. It does not address issues with health care delivery in any material fashion.

At the outset, the two main objective of this effort were expanding coverage and reducing cost of health care. If I were to rate the bill on these objectives, it gets “B+” on coverage expansion but gets “ F” on reducing cost. The irony is that it is impossible to meet the objective of coverage expansion on a long term basis unless we address the issue of rising cost.

Bill achieves coverage expansion by establishing a mandate for most legal residents to obtain health insurance. Individuals and families who cannot afford to buy health insurance in the private market can use “insurance exchanges” like http://www.hcentive.com/ where they will receive federal subsidy based on their income. Bill also mandates “guaranteed issue” which means insurance companies cannot deny coverage on the basis of pre-existing condition. Considering that now there should be no reason for individuals not to have health insurance (individuals cannot be denied coverage and coverage is affordable thru government subsidies if you cannot afford), bill levies a penalty on those who still do not buy coverage.

All this makes sense so far. However here is the challenge. Cost of health care has been increasing 8% to 12% year after year. Because of the looming budget deficit which was $ 1.4 trillion last year and is expected to be around $ 9 Trillion over the next 10 years, government is limited in its capacity to provide subsidies to people who cannot afford to buy health insurance. At the current level of subsidies proposed in the bill, the cost of the bill is close to $ 894 billion over the next 10 years. To pay for this cost, bill proposes an income tax surcharge on high- income individual (which brings in $ 572 billion in additional revenue) and proposes other spending cuts, primarily in Medicare to make up for the rest. Federal subsidies will be limited because congress is limited in its capacity to pass massive tax hike because of the current economic and political conditions. If the current trend of double digit cost escalation continues, people at the lower end of the strata will not be able to afford health coverage even after receiving federal subsidy which will not be enough to cover rising cost. So the bill will not achieve its stated goal of universal health coverage if nothing is done to address the issue of cost escalation.

When it comes to the issue of bending the cost curve, I feel congress has punted. It is easy to blame profit motives of insurance companies for the rising cost. If one buys this argument, one automatically suggests an easy but ineffective solution which is public option. Reality however is more complex. The main reason for rising cost is increase in utilization of health care which is happening for a number of reasons. First it is the demographic changes. % of older people who tend to use health care system more is increasing. Second we have fee for service model. Providers are paid on the “unit” of health care delivered not on the “outcome”. This results in increased utilization of the system. Add to this the fact that more and more advancements in the area of pharmaceutical, medical devices and biotechnology results in better but more expensive medical care. While these are the main reasons for the rising cost there are other factors as well like practicing of defensive medicine by doctors because of lack of malpractice reform, higher administration cost at providers and payers because of lack of electronic medical records, Medicare fraud etc. As you can see, it is a very complex problem which congress has failed to tackle in the current bill.

Unless congress address the difficult issue of bending the cost curve, just expanding coverage will further exasperate the budget deficit problem which we have with current entitlement programs. The total present value of unfunded federal obligations for Medicare and Social Security alone is around $ 38.8 trillion which translates into a mortgage of $150,000 placed in the lap of each and every baby born in America. I think of my daughter who is one year old. When she joins the work force in 20 some years, majority of the taxes she will pay will go to cover the interest on the money federal government is borrowing now to pay for these unfunded mandates. This is un-conscionable. Congress should address the difficult issue of bending the cost curve first before it expands the entitlement programs.

Barack Obama for President

Today former secretary of state Colin Powell endorsed senator Barack Obama for president.  Mr. Powell is one of the most respected Americans.  He served under both senior President Bush and as well as current President Bush.  This came days after Chicago Tribune, a right leaning news paper also endorsed Barack Obama for President.  This is the first time the newspaper has endorsed the Democratic Party's nominee for president in more than 150 years.

 What does all this mean?  I think it means centrist Republicans, who understand the gravity of the current situation have decided to look beyond the party line for the good of the country.  I will add myself to this list.

 After the primaries I was open to looking at McCain because of my impression of him from the race of year 2000.  I was torn between him and Senator Obama whom I supported during democratic primaries. I was in doubt until he chose Governor Palin as his running mate.  That just did it for me.  How, somebody aspiring for the highest office in the land, can be so reckless?  It was politics at its worst.  The events in the last couple of weeks have only reinforced my belief that Senator McCain does not put country first.  He puts politics first.  When the country is facing such economic crisis, the center piece of his campaign has become Senator Obama’s association with Mr Ayers.  

 Many Americans have doubts about the lack of experience of Senator Obama.  I am one of them.  However I have seen him in action for the last two years.  He has shown an almost infinite capacity to listen and learn.  He is not an ideologue.  He has the intellectual rigor to get deep into complex issues, listen to competing point of views and then make a decision.  It is evident from the way he has run his campaign.  He has shown a steadiness during this rollercoaster campaign which will serve him well in office.  He has surrounded himself with experts on key issues facing the country. He showed great judgment in the most important decision he made during the campaign in choosing Senator Biden as his running mate.

 To be frank, I do worry when I listen to some of his ideas on taxes.  I don’t like the idea of giving tax dollars to people who do not pay any taxes.  I am hoping he will address this issue as part of the bigger issue of fixing the current economic mess and not look for easy solutions like redistribution of wealth.

 I may not agree with him on everything, but of the two candidates running for the highest office, I will give Senator Obama my vote.

Passing Away of Tim Russert

Tim Russert, the moderator of "Meet the Press" died on Friday at the age of 58. Like Millions of Americans, my Sunday was not complete unless I watched "Meet the Press". The program set the bar on what TV journalism should be. Tim was fair, balanced but tough. For presidential candidates this was the ultimate right of passage. Unless you came on this show, you were not a candidate.

In the last 15 years since I moved to US, a number of famous personalities have passed away including three presidents (Nixon, Reagan and Ford), many sports figures, business persons, people in the arts and culture. In these cases, I did not feel the tinge of sadness that I feel with the passing of Tim. I don't know the reason for this but may be it is because I was not able to relate to others in a way I was able to relate to Tim. I feel as if I knew him personally though I never met him. I cried today watching Tom Brokaw conduct a special "Meet the Press" program to honor Tim. It is a measure of greatness of a person when people who never met you cry at your passing.

Tim grew up in Buffalo NY in a very modest surroundings. His father was a sanitary worker. When growing up, he imagined, maybe going to college and may be becoming a lawyer. He never thought that one day he will reach the pinnacle of political journalism and literally would become a gatekeeper for people aspiring for the highest office in the country. If you did not do well on his show, there was no chance you will go on to become the President. He took this job very seriously. For one hour show on Sunday, he prepared for full one week. It showed in the quality of the program. I guess it is a lesson for all of us that to reach the highest standards, you should do what you love and put your heart into it.

Tim was passionate about politics but he was passionate about life in general. He wrote couple of best sellers. His book "Big Russ and me" is about his dad. He was big time into sports. He was passionate about everything from Buffalo, NY. He was Catholic and evoked God often. He was passionate about the country. It all reflected in his show.

Today is Father's day. All across the country, fathers and sons are celebrating. I feel sad for Tim's father Big Russ and Tim's son. I wish them happy fathers day. I will take a moment today to celebrate Tim's life and life in general.