Ryan-Wyden proposal on Medicare needs close scrutiny

Vijay K. Mathur

Published in Standard-Examiner, January 13, 2012, Ogden Utah

Rep. Paul Ryan, R-Wis., and Sen. Ron Wyden, D-Ore., have made a new proposal to reform Medicare. This proposal is in sharp contrast to the earlier proposal by Rep. Ryan.

In that proposal, elderly people who turn 65 in 2022 would have received premium support for private health insurance, and those who turn 65 before 2022 would have had the choice to remain in the traditional Medicare plan or opt out to choose private health insurance with subsidized premiums. This plan was dropped when Democrats and elderly groups objected to this attempt to privatize Medicare. Now Rep. Ryan is at it again with the help of Democratic Sen. Wyden to gain traction to his plan in the Congress, and especially among senior Americans.

On Dec. 31, 2011, the Standard-Examiner, in its editorial page, published an editorial by the Chicago Tribune, in which the Tribune has praised the new proposal by Rep. Ryan and Sen. Wyden. Following is a critical look at some of features of the new proposal:

1. Starting in 2022, Americans over the age of 55 would have the choice to remain in the current Medicare plan or choose a private health insurance plan from the Medicare-approved exchange. However, contrary to many media reports, including the Chicago Tribune, the Center on Budget and Policy Priorities reports that premium support for traditional Medicare or private plans would substantially shift costs to beneficiaries, thus "leading to the demise of traditional Medicare over time..."

2. The plan would tie the growth in spending per beneficiary to Gross Domestic Product, plus 1 percent on per capita basis. For over two decades potential (full employment) GDP growth had been close to 3.5 percent per year, however actual growth may differ from potential. For example, in 2011 the growth rate was close to 2 percent and is expected to be 2.4 percent in 2012. If health care cost rises faster than actual GDP growth as it has over time, beneficiaries will bear substantial out-of-pocket costs for health care. The proposal recommends congressional intervention to restrain cost. However, given the recent congressional paralysis on many significant economic issues, I do not expect much from Congress to restrain the cost of health care in the market place. The Affordable Care Act of 2010 (passed without any Republican vote) restrains cost by reforming delivery systems, payment systems, research, and, as a last resort, it creates an Independent Payment Advisory Board to make proposals to restrain Medicare cost if cost rises more than actual GDP growth plus 1 percent.

3. The CBPP appropriately states that the current Medicare plan -- a defined-benefit plan -- will be replaced by a defined-contribution plan in the new proposal. As opposed to the Affordable Care Act, the proposal does not specify health care cost cutting measures.

4. The proposal claims to protect low-income beneficiaries but, as CBPP reports, the proposal lacks specifics about premiums and cost sharing. Jennifer Rubin writes, for The Washington Post, that under the new plan, Medicaid beneficiaries would continue to receive support for out-of-pocket expenses, while other low-income seniors would receive "fully funded" savings accounts. However, according to the CBPP, the proposal is not clear about who would be eligible, how much would be deposited in savings accounts, and how the funding would be indexed yearly. It is also not clear what will be the states' share in this funding. High-income seniors will face reduced subsidies -- a good idea that can be implemented even now.

The new plan may not result in significant budgetary savings, according to the CBPP. The proposal lacks specific actions to restrain costs of medical care, including hospital cost, insurance premiums and drugs' cost. However, it is clear that it is intended to pass the major burden of health care costs onto seniors. Then there are questions, such as, could one switch between the public option and the private option, how the shortfall will be financed in the traditional Medicare funds in the interim period when the new plan goes into effect, and how the private option will be funded.

The idea that private insurance companies will have to compete with traditional Medicare under the proposal makes economic sense. Rep. Ryan should have voted for the public option in Affordable Care Act. Now he is touting the virtues of public option side by side with private insurance in the Medicare proposal. Given the fact of increasing merger activity among hospitals and among insurance companies and medical care institutions, and the fact that the proposal lacks the specifics to control cost of health care, it is not apparent that this public-private competition would succeed in restraining cost.

Once the details come out, one can then evaluate if this change of mind by Rep. Ryan on public-private competition is meant to create a windfall to private insurance companies or meant to reform and save the Medicare system.

Vijay K. Mathur is the former chair and professor of economics and is now professor emeritus, Economics Department, Cleveland State University, Cleveland, Ohio.  He writes original blogs for the Standard-Examiner at http://blogs.standard.net/economics-etc/

Time to consider financial transactions tax

Vijay K. Mathur

Published in Standard-Examiner, Ogden, UT, December 9, 2011

Financial transactions are a transfer of funds from people who are savers-lenders, to people who are borrowers-consumers or investors and financial markets, such as bonds, stocks, or foreign exchange, channel those funds. Financial intermediaries, such as banks, savings and loan institutions, insurance companies, pension funds, and mutual funds, facilitate financial transactions in financial markets. They enable small and large savers and lenders to lend their funds to those who need those funds at reasonable transactions costs, with ability to earn reasonable returns based upon their tolerance and preferences for risk. Financial intermediaries decrease costs of financial transactions due to economies of scale.

Sen. Tom Harkin, D-Iowa, and Rep. Peter DeFazio, D-Ore., have introduced legislation that proposes to levy a 0.03 percent financial transactions tax (FTT). The tax will be on transactions on previously issued securities. For example, if you buy $100 worth of previously issued stocks or bonds, the tax will be 3 cents. According to Dean Baker, Center for Economic and Policy Studies, the tax may raise more than $100 billion per year. The tax, especially on short-term transactions, will tend to reduce volatility in financial markets. Competition among financial intermediaries will prevent them from passing most of the tax burden on borrowers. One can think of FTT as a sales tax on financial transactions.

Financial services have acquired increasing importance in the U.S. private industrial sector and in the economy. Federal Reserve Board data show that total private credit market borrowing/lending was about $3.7 trillion (92 percent of all borrowing/lending) in 2006, before the financial meltdown in 2008. Bureau of Economic Analysis data show that value added growth in financial and insurance services was 6.7 percent when average growth of value added in private industries was 3 percent in 2006; this industry contributed 20 percent to the growth in Gross Domestic Product. In 2009, total private industry growth in value added was -3.0 percent while finance and insurance grew at the rate of 6.1 percent.

John Maynard Keynes advocated the FTT in 1936 to curb excessive speculations on Wall Street. The U.S. used the FTT from 1914 to 1966, and the idea was further revived in 1978 when Nobel Price winner economist James Tobin proposed a tax on short-term foreign currency transactions to stem speculation in the foreign exchange market. A similar problem exists in financial markets with high frequency trading. High frequency trading (increasing at a rapid rate) involves trading where computers are programmed to buy and sell securities when there is even a slight variation in security prices. When millions of securities are traded in an instant automatically without any change in economic fundamentals, it makes long-term business planning risky. Thus, increase in risk increases cost of capital (not financial capital) and thus investment in machinery, tools and factories that contribute to economic growth.

Volatility in bonds and stocks also affects consumption plans due to the wealth effect. For example, when the stock market is very volatile, it becomes riskier to plan ahead on consumption spending, especially for durable goods. This affects economic growth. In addition, when we impose a sales tax on transactions of many goods, the absence of a financial tax amounts to a subsidy to the financial sector, because sales tax on other goods makes those goods relatively more expensive than financial transactions. The financial transactions tax will level the playing field and will make all financial transactions more transparent. Also, there is no economic justification for giving a favorable tax treatment to corporate bonds (debt capital) as opposed to stocks (equity capital). The tax subsidy to bonds is one reason for the increased indebtedness and the financial meltdown in 2008.

Some have claimed that the tax will drive financial businesses away from the U.S. First, as CEPS suggests, we should follow the example of U.K. in levying the tax on trades of firms that are incorporated in the US. Secondly, the tax proposed in Sen. Harkin's and Rep. DeFazio's

CEPS reports that U.K. has a stamp duty of 0.5 percent on trades made on the London Stock Exchange, and London remains a thriving financial hub in the world. Many other countries have a variant of FTT. Germany and France are spearheading a campaign for a 0.1 percent FTT in the European Union, a much higher tax than 0.03 percent proposed by Sen. Harkin and Rep. DeFazio.

Conservatives should join the Democrats in Congress in passing this bill because this tax not only levels the playing field but also reduces volatility in financial markets. Since we are interested in stimulating growth, such a tax will reduce speculation, volatility and uncertainty in asset prices, stimulate investment and consumption for the long run, thus creating more stability in the economy.

Mathur is former chair and professor of economics and is now professor emeritus, Economics Department, Cleveland State University, Cleveland, Ohio. He writes original blogs for the Standard-Examiner at http://standard.net/economics-etc/