July 7, 2011, 12:01 am

How Health Insurance Affects Health

By DAVID LEONHARDT

In the nearly year and a half since Congress passed the health care overhaul, one of the main purposes of the bill — to provide health insurance to people who lack it — has often been lost in the debate. Instead, supporters and opponents of the bill have argued over whether the bill is constitutional, and they’ve argued over whether the bill will cut medical costs more or less than the Congressional Budget Office projects.
Those are obviously important issues. But so is the fact that, unlike any other rich country in the world, the United States has tens of millions of people who do not have health insurance and therefore go without some forms of medical care.
A new study being released today, by some of the country’s top health economists, aims to estimate the effects of not having health insurance — and the effects are large.
The researchers used a lottery that the state of Oregon conducted in 2008 to determine who would become eligible to apply for a limited number of Medicaid slots. The researchers compared the health outcomes of those who won the lottery (many of whom then received insurance) and those who did not (who were more likely to remain uninsured).
The researchers have followed the subjects for only a year so far, so the paper has some clear limitations. But it nonetheless suggests that having health insurance substantially improves health. Expanding insurance does not save society money — as some advocates of preventive medicine have claimed — but it does appear to make people mentally and physically healthier.

The authors point out that the insurance in question — Medicaid — is the same one that many uninsured people will receive as part of the health care law. For that reason, among others, the paper suggests that the law is likely to improve the health and well-being of many of the uninsured.
Katherine Baicker — one of the authors and a Harvard economist who served in President George W. Bush’s administration — wrote the following to me, via e-mail:

There has been a great deal of uncertainty about how much of a difference Medicaid makes to enrollees. Some argued that Medicaid isn’t ‘good’ insurance coverage and that a Medicaid card doesn’t get enrollees much access to care. Others argued that the uninsured already have access to care through the emergency room, clinics, or charity care.
Our study shows that gaining access to Medicaid matters on a number of different dimensions, including increased access to and use of health care.

The authors also point out that the benefits of health insurance aren’t only medical. They’re financial too, as is the case with other forms of insurance. Here’s another author, Amy Finkelstein (an M.I.T. economist who has written for The Wall Street Journal opinion pages and whom I’ve written about), also via e-mail:

Health insurance isn’t just about access to health care – it’s also about protection from financial ruin. This point isn’t often discussed in the debate about health insurance expansions, but the reduction in financial strain that we found was substantial. This is important for enrollees, but it is also important for the providers who see fewer of their bills go unpaid.

Besides Ms. Baicker and Ms. Finkelstein, the paper’s authors include Jonathan Gruber (an M.I.T. economist, who has advised the Obama administration) and Joseph Newhouse (a Harvard economist who designed and ran the famous RAND Health Insurance Experiment in the 1970s and ’80s). The other authors are Sarah Taubman, Bill Wright, Mira Bernstein, Heidi Allen and members of the Oregon Health Study Group.
Excerpts from the study, which my colleague Gina Kolata writes about today, follow:

About one year after enrollment, we find that those selected by the lottery have substantial and statistically significantly higher health care utilization, lower out-of-pocket medical expenditures and medical debt, and better self-reported health than the control group that was not given the opportunity to apply for Medicaid.
The increase in hospital admissions appears to be disproportionately concentrated in the approximately 35 percent of admissions that do not originate in the emergency room, suggesting that these admissions may be more price sensitive.
[W]e find that insurance is associated with improvements across the board in our measures of self-reported physical and mental health, averaging two-tenths of a standard deviation improvement. These results appear to reflect improvements in mental health and also at least partly a general sense of improved well being; they may also reflect improvements in objective, physical health, but this is more difficult to determine with the data we now have available.
[I]nsurance is also associated with an increase in compliance with recommended preventive care. We look at four different measures of preventive care: blood cholesterol checks, blood tests for diabetes, mammograms, and pap tests. …[T]he results indicate … a 20 percent increase in the probability of ever having one’s blood cholesterol checked, a 15 percent increase in the probability of ever having one’s blood tested for high blood sugar or diabetes, a 60 percent increase in the probability of having a mammogram within the last year (for women 40 and over), and a 45 percent change in the probability of having a pap test within the last year (for women).
[Our] calculation suggests that insurance is associated with a $778 (standard error = $371) increase in annual spending, or about a 25 percent increase relative to the implied control mean annual spending.

July 5, 2011

Big Business Leaves Deficit to Politicians By DAVID LEONHARDT

WASHINGTON
If you want to understand why cutting the deficit is so hard, you can’t do much better than to look at the Business Roundtable.
The roundtable is one of the more moderate big-business lobbying groups. Its president is John Engler, the former Michigan governor, and its incoming chairman is James McNerney, the chief executive of Boeing. When roundtable officials talk about the deficit, they use sober, common-sense language that can make them sound more reasonable than either political party.
But the roundtable is actually part of the problem.
Rhetoric aside, it consistently lobbies for a higher deficit. The roundtable defends corporate tax loopholes and even argues for new ones. It pushes for a lower corporate tax rate. It favors the permanent extension of the Bush tax cuts. It opposes a reduction in the tax subsidy for health insurance, a reduction that was part of the 2009 health reform bill. Oh, and the roundtable also favors new spending on roads, bridges and other infrastructure.
It’s easy to look at the squabbling politicians in Washington and decide that they are the cause of the country’s huge looming budget deficit. Certainly, they deserve some blame. The larger problem, though, is what you might call roundtable syndrome.
In short, there isn’t much of a constituency for deficit reduction. Sure, plenty of people and special-interest groups say that they are deeply worried about the deficit. But they are not lobbying for specific spending cuts or tax increases. They aren’t marshaling their resources to defend politicians who take tough stands, like President Obama’s 2009 Medicare cuts or Rand Paul’s proposed military cuts.
Instead, many of the officially nonpartisan groups in Washington are even less fiscally responsible than the partisans. Public sector labor unions have fought changes to pensions and work rules that could lead to less expensive, more effective government. Private sector unions — along with the roundtable — have defended the huge tax subsidy for health insurance, which drives up health costs.
Labor groups have at least been willing to push for some tax increases. Today’s business groups struggle to come up with any specific deficit plan. Last year, the Business Council — a group of top corporate executives headed by Jamie Dimon of JPMorgan Chase — and the roundtable released a 49-page plan that simultaneously warned that projected deficits would “retard future growth” and called for policies that would add hundreds of billions of dollars a year to the deficit. That’s the essence of roundtable syndrome.
When I ask roundtable officials and other lobbyists about this contradiction, they show an impressive ability to avoid specifics and stick to their talking points. Mr. Engler, by e-mail, said, “A simpler, flatter tax system can be enacted in a fiscally responsible manner that better serves American workers and supports economic growth.”
Taken by itself, this statement is entirely accurate. The corporate tax code is a mess. A better code, say both conservative and liberal economists, would be flatter — that is, have a lower rate and fewer loopholes. Companies would then waste less time complying with the code and could still help reduce the deficit.
But the roundtable is not pushing for the simpler, flatter, fiscally responsible code that Mr. Engler mentions. It’s pushing for tax cuts for its members: a lower rate, the continuation of existing loopholes and the creation of new ones, like a permanent credit for research and a tax holiday for overseas profits. Mr. Engler and his colleagues, in other words, are lobbying for a more complex, less fiscally responsible tax code.
Given how much we’re going to talk about the deficit, I’d suggest requiring any self-proclaimed fiscal conservative to give specifics. You’re against the deficit? Great. How do you want to cut it?
The fact is, naming specific ways to reduce the deficit is no more technically challenging than naming new spending programs or tax cuts. To take the current debt ceiling negotiations as a benchmark, White House officials and Congressional leaders are looking for about $200 billion a year in deficit reduction. They could get it any number of ways.
Two different bipartisan groups — the Bowles-Simpson deficit commission and the Sustainable Defense Task Force — have called for roughly $100 billion a year in cuts to the military budget. Getting rid of farm subsidies would save about $15 billion. So would cutting the federal work force by 10 percent.
Allowing the expiration of the Bush tax cuts on income above $250,000 a year would raise about $60 billion a year. The expiration of all the other Bush tax cuts would bring in another $200 billion or so. Various changes to Medicare and Social Security — raising the retirement age, reducing benefits for the affluent, cutting back on some forms of health care — could cut spending even more. In the long term, with projected deficits well above $1 trillion a year, such changes will surely be necessary.
By the standard of specificity, a few of the most prominent politicians in the deficit debate end up looking more serious than many outside groups. Representative Paul Ryan, the Wisconsin Republican who heads the House Budget Committee, has called for the effective elimination of Medicare for everyone under 55 years old. Mr. Obama favors some Medicare cuts, the closing of several modest tax loopholes and tax increases on the affluent.
There are many potential objections to the Obama plan and to the Ryan plan. And neither would eliminate the deficit. But both plans would at least reduce it, which is more than you can say about corporate America’s deficit plan.
The deficit is one of those national challenges that will require tough choices and courageous leadership. Many of those choices and much of that leadership will have to come from politicians. But I’m guessing we won’t solve the deficit until the politicians get some help — and simply calling yourself a fiscal conservative doesn’t count as help.

June 7, 2011

The German Example By DAVID LEONHARDT

WASHINGTON
Germany has been a frequent cudgel in recent fights over the American economy. When Germany has grown faster than the United States, stimulus skeptics like to point across the Atlantic Ocean and say that austerity works. When it has grown more slowly, people who think the American stimulus made a big difference — including me — return the favor.
But the full story is more interesting than any caricature. In the last decade, Germany has succeeded in some important ways that the United States has not. The lessons aren’t simply liberal or conservative. They are both.
With our economy weakening once again — and with Chancellor Angela Merkel of Germany visiting the White House this week — now seems to be a good time to take a closer look.
The brief story is that, despite its reputation for austerity, Germany has been far more willing than the United States to use the power of government to help its economy. Yet it has also been more ruthless about cutting wasteful parts of government.
The results are intriguing. After performing worse than the American economy for years, the German economy has grown faster since the middle of last decade. (It did better than our economy before the crisis and has endured the crisis about equally.) Just as important, most Germans have fared much better than most Americans, because the bounty of their growth has not been concentrated among a small slice of the affluent.
Inflation-adjusted average hourly pay has risen almost 30 percent since 1985 in Germany, the kind of gains American workers have not enjoyed since the ’50s and ’60s. In this country, hourly pay has risen a scant 6 percent since 1985.
Germany also managed to avoid a housing bubble, unlike the United States, Britain, Ireland, Spain and other countries. German children have stronger math and science skills than ours. Its medium-term budget deficit is smaller. Its unemployment rate is like a mirror image of ours: 6.1 percent, well below where it was when the financial crisis began in 2007. Our rate has risen to 9.1 percent.
I’m not saying that the United States should want to become Germany. Americans remain considerably richer. We have the innovative companies — Wal-Mart, Google, Apple, Facebook, Twitter — that make other countries swoon. We remain the world’s immigration Mecca.
Yet for all the strengths of the United States, almost nobody claims that the economy is in especially good shape. It so happens that our current out-of-town guests could teach us a few things.
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The first lesson is that it’s really possible to make government more efficient. Like much of Western Europe, Germany long had a unemployment benefits system that discouraged work. But almost a decade ago, it began to make some changes.
It cut many benefits, in both duration and level, and it reduced the incentives to retire early. It also began trying to move the long-term unemployed into the labor force.
Specifically, the government took a fresh look at people who had not worked in years to determine who could and couldn’t work. The able and healthy were matched with potential employers. If they took a low-paying job, which was often the case, they would still receive a small portion of their benefits for a time. If they refused to work, their benefits were reduced anyway.
“The incentives to take up work were strengthened,” says Felix Hüfner of the Organization for Economic Co-operation and Development, “and also the sanctions were strengthened.” Sure enough, the reforms have nudged more people back into the labor force — and work tends to beget more work, as people develop skills and have more money to spend.
In the United States, short-term jobless benefits are not generous enough to be a major problem. But the Social Security disability program, which is one reason nearly 20 percent of working-age American men are not working, would benefit from some German-like reforms. So would those public sector pensions that encourage people to retire at 55 or 60.
Beyond the job market, Germany has also made a big effort to improve its education system. Eric Hanushek, a Stanford University economist, notes that Germany’s performance on the main international math, reading and science tests have become such a matter of national concern that the name of the tests — Pisa — is now a household word. “In the U.S.,” he says, “Pisa is still a bell tower in Italy.”
The math scores of German students have risen significantly since 2000, extending their existing lead over American students. Germany’s national average is now higher than the average in Massachusetts, this country’s top-performing state. And there is obviously a connection between strong technical skills and a strong manufacturing sector.
But the German story is not merely about making government more efficient. It’s also about understanding the unique role that government must play in a market economy.
That role starts with serious regulation. American regulators stood idle as the housing bubble inflated. German banks often required a down payment of 40 percent.
Unlike what happened here, German laws and regulators have also prevented the decimation of their labor unions. The clout of German unions, at individual companies and in the political system, is one reason the middle class there has fared decently in recent decades. In fact, middle-class pay has risen at roughly the same rate as top incomes.
The top 1 percent of German households earns about 11 percent of all income, virtually unchanged relative to 1970, according to recent estimates. In the United States, the top 1 percent makes more than 20 percent of all income, up from 9 percent in 1970. That’s right: only 40 years ago, Germany was more unequal than this country.
Finally, there are taxes. Germany does not have a smaller budget deficit because it spends less. Germany, you’ll recall, is the original welfare state. It has a smaller deficit because it is more willing to match the benefits it wants with the needed taxes. The current deficit-reduction plan includes about 60 percent spending cuts and 40 percent tax increases, Mr. Hüfner says. It’s like trying to lose weight by both eating less and exercising more.
As I suggested before, the American economy’s strengths may still be greater than the German economy’s. But Germany sure does seem more serious about dealing with its weaknesses.
And us? Well, lobbyists for the mortgage bankers and the N.A.A.C.P. have recently started pushing for less stringent standards for down payments. Wall Street is trying to water down other financial regulation, too.
Some Democrats say Social Security and Medicare must remain unchanged. Most Republicans refuse to consider returning tax rates even to their 1990s levels. Republican leaders also want to make deep cuts in the sort of antipoverty programs that have helped Germany withstand the recession even in the absence of big new stimulus legislation.
There is no getting around the fact that financial crises wreak terrible damage. It’s too late for us to prevent that damage, and it will take a long time to recover fully. It is not too late to learn from our mistakes.      

Top Colleges, Largely for the EliteBy DAVID LEONHARDT

May 24, 2011


Top Colleges, Largely for the EliteBy DAVID LEONHARDT

The last four presidents of the United States each attended a highly selective college. All nine Supreme Court justices did, too, as did the chief executives of General Electric (Dartmouth), Goldman Sachs (Harvard), Wal-Mart (Georgia Tech), Exxon Mobil (Texas) and Google (Michigan).



Like it or not, these colleges have outsize influence on American society. So their admissions policies don’t matter just to high school seniors; they’re a matter of national interest.



More than seven years ago, a 44-year-old political scientist named Anthony Marx became the president of Amherst College, in western Massachusetts, and set out to change its admissions policies. Mr. Marx argued that elite colleges were neither as good nor as meritocratic as they could be, because they mostly overlooked lower-income students.



For all of the other ways that top colleges had become diverse, their student bodies remained shockingly affluent. At the University of Michigan, more entering freshmen in 2003 came from families earning at least $200,000 a year than came from the entire bottom half of the income distribution. At some private colleges, the numbers were even more extreme.



In his 2003 inaugural address, Mr. Marx — quoting from a speech President John F. Kennedy had given at Amherst — asked, “What good is a private college unless it is serving a great national purpose?”



On Sunday, Mr. Marx presided over his final Amherst graduation. This summer, he will become head of the New York Public Library. And he can point to some impressive successes at Amherst.



More than 22 percent of students now receive federal Pell Grants (a rough approximation of how many are in the bottom half of the nation’s income distribution). In 2005, only 13 percent did. Over the same period, other elite colleges have also been doing more to recruit low- and middle-income students, and they have made some progress.



It is tempting, then, to point to all these changes and proclaim that elite higher education is at long last a meritocracy. But Mr. Marx doesn’t buy it. If anything, he worries, the progress has the potential to distract people from how troubling the situation remains.



When we spoke recently, he mentioned a Georgetown University study of the class of 2010 at the country’s 193 most selective colleges. As entering freshmen, only 15 percent of students came from the bottom half of the income distribution. Sixty-seven percent came from the highest-earning fourth of the distribution. These statistics mean that on many campuses affluent students outnumber middle-class students.



“We claim to be part of the American dream and of a system based on merit and opportunity and talent,” Mr. Marx says. “Yet if at the top places, two-thirds of the students come from the top quartile and only 5 percent come from the bottom quartile, then we are actually part of the problem of the growing economic divide rather than part of the solution.”



I think Amherst has created a model for attracting talented low- and middle-income students that other colleges can copy. It borrows, in part, from the University of California, which is by far the most economically diverse top university system in the country. But before we get to the details, I want to address a question that often comes up in this discussion:



Does more economic diversity necessarily mean lower admissions standards?



No, it does not.



The truth is that many of the most capable low- and middle-income students attend community colleges or less selective four-year colleges close to their home. Doing so makes them less likely to graduate from college at all, research has shown. Incredibly, only 44 percent of low-income high school seniors with high standardized test scores enroll in a four-year college, according to a Century Foundation report — compared with about 50 percent of high-income seniors who have average test scores.



“The extent of wasted human capital,” wrote the report’s authors, Anthony P. Carnevale and Jeff Strohl, “is phenomenal.”



This comparison understates the problem, too, because SAT scores are hardly a pure measure of merit. Well-off students often receive SAT coaching and take the test more than once, Mr. Marx notes, and top colleges reward them for doing both. Colleges also reward students for overseas travel and elaborate community service projects. “Colleges don’t recognize, in the same way, if you work at the neighborhood 7-Eleven to support your family,” he adds.



Several years ago, William Bowen, a former president of Princeton, and two other researchers found that top colleges gave no admissions advantage to low-income students, despite claims to the contrary. Children of alumni received an advantage. Minorities (except Asians) and athletes received an even bigger advantage. But all else equal, a low-income applicant was no more likely to get in than a high-income applicant with the same SAT score. It’s pretty hard to call that meritocracy.



•



Amherst has shown that building a better meritocracy is possible, by doing, as Mr. Marx says, “everything we can think of.”



The effort starts with financial aid. The college has devoted more of its resources to aid, even if the dining halls don’t end up being as fancy as those at rival colleges. Outright grants have replaced most loans, not just for poor students but for middle-class ones. The college has started a scholarship for low-income foreign students, who don’t qualify for Pell Grants. And Amherst officials visit high schools they had never visited before to spread the word.



The college has also started using its transfer program mostly to admit community college students. This step may be the single easiest way for a college to become more meritocratic. It’s one reason the University of California campuses in Berkeley, Los Angeles and San Diego are so much more diverse than other top colleges.



Many community colleges have horrifically high dropout rates, but the students who succeed there are often inspiring. They include war veterans, single parents and immigrants who have managed to overcome the odds. At Amherst this year, 62 percent of transfer students came from a community college.



Finally, Mr. Marx says Amherst does put a thumb on the scale to give poor students more credit for a given SAT score. Not everyone will love that policy. “Spots at these places are precious,” he notes. But I find it tough to argue that a 1,300 score for most graduates of Phillips Exeter Academy — or most children of Amherst alumni — is as impressive as a 1,250 for someone from McDowell County, W.Va., or the South Bronx.



The result of these changes is that Amherst has a much higher share of low-income students than almost any other elite college. By itself, of course, Amherst is not big enough to influence the American economy. But its policies could affect the economy if more colleges adopted them.



The United States no longer leads the world in educational attainment, partly because so few low-income students — and surprisingly few middle-income students — graduate from four-year colleges. Getting more of these students into the best colleges would make a difference. Many higher-income students would still graduate from college, even if they went to a less elite one. A more educated population, in turn, would probably lift economic growth.



The Amherst model does cost money. And it would be difficult to maintain if Congress cuts the Pell budget, as some members have proposed. But when you add everything up, I think the model isn’t only the fairest one and the right one for the economy. It’s also the best one for the colleges themselves. Attracting the best of the best — not just the best of the affluent — and letting them learn from one another is the whole point of a place like Amherst.



“We did this for educational reasons,” Mr. Marx says. “We aim to be the most diverse college in the country — and the most selective.”



E-mail: leonhardt@nytimes.com; twitter.com/DLeonhardt

Rent or Buy, a Matter of Lifestyle By DAVID LEONHARDT

May 10, 2011


Rent or Buy, a Matter of Lifestyle By DAVID LEONHARDT

WASHINGTON



Real estate agents across the country are aggressively making the case that now is a good time to buy a house. Mortgage rates are near record lows and will probably rise in coming years. Home prices may not be done falling, but they probably don’t have much further to go in most places either. Rents, on the other hand, seem set to increase, thanks to low vacancy rates.



“Renters beware,” warned a newsletter that I recently received from a real estate agents’ group.



Individually, each of these points is unobjectionable. But it’s important to remember the source. Real estate agents, like mortgage brokers and home builders, have a big financial stake in persuading people to buy homes. That’s why many agents are always pushing home buying, whatever the rationale of the moment happens to be.



The truth is that you can make just as strong a case in many places for renting. For starters, neither mortgage rates nor rents are likely to rise rapidly. Even more important, house prices, relative to rents, remain higher than their long-term average, especially in much of California, the Pacific Northwest and the New York region. In these places, among others, renting is often cheaper than buying — still.



I’ve made a near-annual habit in this column of looking at the rent-versus-buy decision, and The Times has built an online calculator so that readers can make their own comparisons. The idea isn’t only to help potential buyers but also to figure out whether and where house prices are overvalued. That question is of obvious importance to homeowners and to the American economy.



As this year’s spring buying season nears its peak, the relative merits of renting and buying are closer than they have been since the housing bubble began inflating almost a decade ago. So the best single piece of advice for most people is to make a decision based mainly on their stage of life, rather than on any complex financial calculations.



If you think you are ready to settle in one place for at least five years, if not more, buying often makes a lot of sense. That’s why I bought my first house, in the Washington area, a few years ago, despite thinking local prices remained high.



But if the chances are good that you will move again in the next few years, renting is usually the better bet. The various closing costs, including real estate agents’ fees, are just too high. Owning a house also makes it much harder to move when you want to because selling a house is complicated.



Within this basic framework, the numbers — specifically, something called rent ratios — are the next place to turn. A rent ratio is the sale price of a house divided by the annual cost of renting an equivalent house. When the ratio is below 15, most people should lean toward buying.



To see why, look at the Atlanta area, where the average ratio is now about 13. Combined with today’s low interest rates, that ratio means that the typical monthly mortgage payment is several hundred dollars lower than the rent on an equivalent house. Over time, this difference helps make up for the other costs of owning, like closing costs and borrowing costs. And, yes, a mortgage costs money, despite the tax deduction.



Only if home prices in Atlanta fall further and don’t recover for years would most buyers today have reason for regret. The other areas where the average ratio is below 15, according to Moody’s Analytics, include Los Angeles, Miami, Minneapolis, St. Louis, Las Vegas, Cleveland, Detroit, Phoenix, Pittsburgh and Tampa, Fla.



On the other end of the spectrum are metropolitan areas where prices still look bubbly. In San Diego, the ratio was 22 at the end of last year (and most ratios have fallen only slightly since then). In northern and central New Jersey, it was 25, and it was 29 in Manhattan. In Silicon Valley and the nearby East Bay in California, the ratio was above 30.



All these numbers are well down from their peaks from about five years ago. But they’re still higher than they were in the decades before the housing bubble. They are also high enough to make the monthly costs of owning steeper than the costs of renting.



As a rule of thumb, a ratio above roughly 20 means that a monthly mortgage bill is higher than rent for a similar house. In Silicon Valley, the after-tax mortgage payment on a typical house might be $3,500 — while the rent on the same house would be only about $2,500.



The arithmetic of owning then gets mighty tough. On top of closing costs and mortgage costs, owners are also falling further behind renters each month. To make up that ground, house prices would have to rise significantly over the next few years. Does that sound like a good bet?



When you look at the numbers this way, it’s easy to conclude that the excesses of the housing bubble are mostly gone in much of the country. Yet you also start wondering whether New York, San Francisco, Seattle and a few other places still have a housing crash in their future.



I realize there are some important caveats here. Affluent people tend to want to own their houses, even when the dollars don’t make sense, and the Northeast and West Coast are home to much more wealth than a few decades ago. That could cause future rent ratios to be higher than those in the 1990s or even the 1980s, a better decade for real estate. Meanwhile, the coming rise in rents — maybe 4 or 5 percent a year, for the next few years — will reduce rent ratios even if prices don’t fall.



Yet the fact remains that a lot of New Yorkers and Californians, among others, are paying a hefty premium for the privilege of owning. Eventually, some of them may decide it’s not worth it, much as homebuyers in Las Vegas, Phoenix and Florida ultimately decided that prices were too high. If that happens, prices in New York and California will fall, too.



A crash strikes me as unlikely. But any potential homebuyers should know that real estate exuberance — irrational exuberance, it seems — has survived in at least a few places.

One Way to Trim Deficit: Cultivate Growth
By DAVID LEONHARDT
We look back on the late 1990s as a rare time when the federal government ran budget surpluses. We tend to forget that those surpluses came as a surprise to almost everybody.

As late as 1998, the Congressional Budget Office was predicting a deficit for 1999. In fact, Washington ran its biggest surplus in five decades.

What happened? Above all, economic growth. And that may be a big part of the answer to our current problems.

Yes, the government became more fiscally conservative in the 1990s. Both President George H. W. Bush (who doesn’t get enough credit) and President Bill Clinton, working with Congress, raised taxes to attack the 1980s deficits.

But those tax increases were the second most important reason for the surpluses that followed. The most important was the fact that the economy grew more rapidly than expected. The faster growth pushed up incomes and caused more tax revenue to flow into the Treasury.

Today’s looming deficits are almost surely too large to be closed exclusively with growth. The baby boom generation is too big, and the rise in Medicare costs continues to be too steep. Yet growth could still make an enormous difference.

If the economy grew one half of a percentage point faster than forecast each year over the next two decades — no easy feat, to be fair — the country would have to do roughly 40 to 50 percent less deficit-cutting than it now appears, based on my reading of budget data from the economists Alan Auerbach and William Gale.

To get a concrete sense for what this would mean, you can play around with the The Times’s online deficit puzzle. It asks you to find almost $1.4 trillion in annual spending cuts and tax increases by the year 2030. If growth were a half point faster than expected, the needed savings would instead drop to less than $700 billion. That would mean many fewer painful choices, be they tax increases or Medicare cuts.

So arguably the single best way to cut the deficit is to make sure that any deficit-cutting plan does not also cut economic growth. Ideally, it will lift growth.

There are two main ways to do so. First, we shouldn’t plunge ourselves back into another economic slump by raising taxes and cutting spending too quickly. President Franklin Roosevelt made that mistake in 1937, and this time (one hopes) the country won’t be able to rely on war mobilization spending to undo the error.

In the short term, we should actually spend more. “Some politicians and economists present a false choice: reduce unemployment or stabilize the debt,” argues a new bipartisan deficit plan that will be released Wednesday, the second such plan to come out in the last week. As Alice Rivlin, a Democrat who oversaw the writing of the plan with Pete Domenici, a Republican, put it: “We can do both. We can put money in people’s pockets in the short run and trim government spending in the long run.” .

The plan calls for a one-year payroll tax holiday for employers and workers, costing $650 billion. But remember that’s a one-time sum, while the needed deficit cuts will be hundreds of billions of dollars a year. Relative to those cuts, a payroll tax holiday — or more spending on roads and bridges, as President Obama favors — is a rounding error. And, of course, putting people back to work has its own benefits.

Even more important than the next couple of years is the second part of a pro-growth strategy: the long term. A good deficit plan doesn’t simply make across-the-board cuts for years on end. It cuts funding for programs that do not spur economic growth and increases funding for those relatively few that do. Likewise, it raises tax rates that do not have a clear record of promoting growth and cuts those that do.

This task is not an easy one, because advocates and lobbyists inevitably claim that their idea, whatever it is, will help the larger economy. Just look at farm subsidies, a form of welfare for agribusiness that is supposedly crucial to the American economy. Or look at President George W. Bush’s tax cuts, which, after being sold as an economic elixir, were followed by the slowest decade of growth since before World War II.

The two bipartisan deficit proposals that have come out over the last week each do a pretty good job, but not quite good enough, of focusing on economic growth. The most pro-growth part of both proposals — the Domenici-Rivlin plan and the one from Erskine Bowles and Alan Simpson — is their emphasis on tax reform.

Today’s tax code is a thicket of deductions, credits and loopholes that force people to change their behavior and waste time trying to avoid too large of a tax bill. A tax code with fewer deductions and lower rates — which, to be clear, is not the same thing as a tax cut — would instead let businesses and households focus on being as productive as possible. The potential to make good money would drive more decisions, and the ability to qualify for a tax break would drive fewer.

Beyond tax reform, both deficit plans mention the importance of making investments that will lead to future growth. In particular, the Bowles-Simpson plan calls for a gradual 15-cents-a-gallon increase in the federal gasoline tax to pay for highways, mass transit and other projects. The plans also urge the government to prioritize education and science.

These are clearly among the best ways to promote growth. The United States created the world’s most prosperous economy last century in large measure because it was the world’s most educated country. It no longer is. Federal science dollars, meanwhile, led to the creation of the intercontinental railroad, the airline industry, the microchip, the personal computer, the Internet and numerous medical breakthroughs. Yet science funding is scheduled to decline as stimulus money runs out.

Unfortunately, the plans don’t get more specific than saying that education and science are important. The only dedicated money for specific investments in either plan is the infrastructure fund financed by the gas tax. And, realistically, exhorting a future Congress to avoid wasteful spending and prioritize growth has about as much chance of success as exhorting it to find the political will to revamp Medicare.

The two bipartisan deficit groups deserve a lot of credit for starting to move the debate beyond vagaries. There is one more step they can take, though: making sure we remember that cutting the deficit is not only about making cuts.

Health Care’s Uneven Road to a New Era By DAVID LEONHARDT

October 5, 2010
Health Care’s Uneven Road to a New Era By DAVID LEONHARDT

Consider what it would be like to have a health insurance plan that capped annual benefits at $2,000. For any medical care costing more than that, you would have to pay out of pocket.

Examples of care that costs more than $2,000 — and often a lot more — include virtually any cancer treatment, any heart surgery, a year’s worth of diabetes treatment and care for many broken bones. Even a single M.R.I. exam can cost more than $2,000. A typical hospital stay runs thousands of dollars more.

So does this insurance plan sound like part of the solution for the country’s health care system — or part of the problem?

A $2,000 plan happens to be one of the main plans that McDonald’s offers its employees. It became big news last week, when The Wall Street Journal reported that the company was worried the plan would run afoul of a provision in the new health care law. In response to the provision, McDonald’s threatened to drop the coverage altogether, until the Obama administration signaled it would grant some exemptions.

This episode was only the latest disruption that the health law seems to be causing. Also last week, the Principal Financial Group said it was getting out of the health insurance business, while other insurers have said they might stop offering certain types of coverage. With each new disruption come loud claims — some from insurance executives — that the health overhaul is damaging American health care.

On the surface, these claims can sound credible. But when you dig a little deeper, you often discover the same lesson that the McDonald’s case provides: the real problem was the status quo.

American families spend almost twice as much on health care — through premiums, paycheck deductions and out-of-pocket expenses — as families in any other country. In exchange, we receive top-notch specialty care in many areas. Yet on the whole, we do not get much better care than countries that spend far less.

We don’t live as long as people in Canada, Japan, most of Western Europe or even relatively poor Jordan. Misdiagnosis is common. Medical errors occur more often than in some other countries. Unique to the developed world, millions of people have no health insurance, and millions more, like many fast-food workers, are underinsured.

In choosing their health reform plan, President Obama and the Democrats eschewed radical changes, for better or worse, and instead tried to minimize the disruptions to the current system. Sometimes, Mr. Obama went so far as to suggest there would be no disruptions, saying that people could keep their current plan if they liked it. But that’s not quite right. It is not possible to change a system as huge, and as hugely flawed, as ours without some disruptions.

•

McDonald’s offers its hourly workers two different health care plans, which are known as “mini-med” plans. In one, workers can pay about $730 a year for benefits of up to $2,000. In the other, they can pay about $1,660 a year for benefits of up to $10,000, The Journal reported.

In a memo to federal regulators, McDonald’s executives argued that their version of health insurance “positively impacts” the almost 30,000 workers who are covered. And that’s true. A plan with a $2,000 or $10,000 cap can cover some modest health problems and is better than being uninsured.

But should the litmus test for American health care really be better than nothing?

Mini-med plans force people to drain their savings accounts for dozens of common medical problems. They also force hospitals to let some bills go unpaid, which drives up costs for everyone else.

Senator Charles Grassley, Republican of Iowa, has previously criticized AARP for marketing similarly limited plans to its members. “It’s not better than nothing,” Mr. Grassley argued, “to encourage people to buy something described as ‘health security’ when there’s no basic protection against high medical costs.”

Dr. Aaron Carroll, an Indiana University pediatrics professor who studies health policy, says of mini-med plans: “They’re great if you’re healthy, because you feel like you’re covered. But if you ever need them, they’re so skimpy, they provide very little.” Gary Claxton of the Kaiser Family Foundation adds, “They really just shouldn’t be considered health insurance.”

The plans’ skimpiness is the main reason they ran into legal jeopardy. Under the new law, most plans must spend at least 85 percent of their revenue on medical care, rather than administrative overhead. The McDonald’s plans aren’t generous enough to clear the hurdle.

At the same time, it’s probably unrealistic to expect McDonald’s to give workers decent health insurance. Many of those workers make less than $20,000 a year. A typical family insurance plan would raise their total compensation by more than half, destroying the McDonald’s business model.

The workers, for their part, cannot afford to buy insurance in the so-called individual market. Plans are even more expensive in that market, because it is dominated by people who desperately need insurance — which is to say, sick people.

This is where health reform comes in. It tried to solve the problem by creating what policy experts call a three-legged stool.

First, people will be required to buy insurance, to spread costs among the sick and the healthy. Second, insurers will be prohibited from cherry-picking only the healthiest customers, again to spread costs. Finally, the government will give subsidies to people, like McDonald’s workers, who can’t afford insurance on their own.

Germany, the Netherlands and Switzerland all use a system along these lines to cover everyone, largely through the private sector, for less money per person than this country spends.

The recent disruptions in our health insurance market are partly a result of the fact that the stool’s three legs were not built on the same timetable. Some of the insurance regulations, like the one on overhead costs, are starting to take effect. But the new markets for health insurance, known as exchanges, won’t be up and running until 2014. This timetable has its problems, and the Obama administration will probably need to grant some more temporary exemptions.

In 2014, however, the choice for McDonald’s workers will no longer be between a bad policy and no policy. Through the exchanges, they will be able to buy a real health insurance plan — one that covers cancer, heart attacks, surgeries, M.R.I.’s and hospital stays. Dr. Carroll notes that many families will end up paying less than they are now paying out of pocket and will get more access to care, too.

For insurance companies, these changes won’t be quite so positive. They will no longer be able to sell plans that devote 30 percent of revenue to salaries for their workers. They will not be allowed to compete over which company can come up with the most ingenious ways to say no to the sick. Their benefits and prices will become more public, thanks to the exchanges.

The health care overhaul that passed Congress is far from ideal, as I have written many times in this space. But it does represent progress.

The fact that it is beginning to disrupt the status quo — that some insurance policies will eventually be eliminated and some inefficient insurers will have to leave the market altogether — is all the proof we need.

E-mail: leonhardt@nytimes.com

Imagining a Deficit Plan From Republicans By DAVID LEONHARDT

September 28, 2010
Imagining a Deficit Plan From Republicans By DAVID LEONHARDT
Washington

In their Pledge to America, Congressional Republicans have used the old trick of promising specific tax cuts and vague spending cuts. It’s the politically easy approach, and it is likely to be as bad for the budget as when George W. Bush tried it.

The sad thing is, a truly conservative approach to the deficit does exist. You can find strands of it among Republican governors, some of the party’s current Congressional candidates and the ranking Republican on the House Budget Committee, Paul Ryan.

The brief version might sound something like this: The federal government has outgrown its ability to pay for itself. Our economic future and even our national security depend on solving the problem. Yet President Obama has expanded health insurance, increased education spending and escalated a war of choice. Elect us, and fiscal responsibility won’t have to wait in line.

The detailed plan would start in the same place that Republican campaign rhetoric does, with rooting out waste and bloat. Some tasks, like mail delivery and air traffic control, could be privatized. The federal work force could be reduced, and pay for federal workers could be cut. Federal aid to states could be cut, too.

But then comes the crucial difference.

Actual fiscal conservatives acknowledge that these steps do not come anywhere close to solving the long-term deficit. By 2035, the deficit (even without counting interest payments on the federal debt) is on course to reach $1.9 trillion, according to the Congressional Budget Office. If you reduced domestic discretionary spending to its share of the economy under Ronald Reagan and then eviscerated it an additional 20 percent, you would shrink the deficit by all of $100 billion.

The bulk of the deficit problem instead comes from three popular programs, Medicare, Social Security and the military, and they happen to be the ones the Republican pledge exempts from cuts. But it’s impossible to fix the deficit without making cuts to these programs or raising taxes. To suggest otherwise is to claim that 10 minus 1 equals 5.

“We as Republicans need to realize that you can’t just cut off the welfare queen and balance the budget,” says Rand Paul, a Senate candidate in Kentucky, who has some extreme views on other issues but is evidently pro-arithmetic. “The only way you’ll ever get close to balancing the budget is if you look at the entire budget.”

When they’re not talking for quotation, some Republicans will explain that the pledge is, of course, a political document: although it may not spell out specific budget cuts, the party is willing to make them. But I think this view misreads recent history.

Republicans controlled the White House and Congress for much of 2001 to 2006, and they turned a big surplus into a big deficit. In the last two years, they have opposed several Obama administration plans for reducing the deficit, including cuts to Medicare, weapons programs and farm subsidies, as well as tax increases on the affluent. Given this history, my colleague Ross Douthat concluded that the pledge “might create a larger deficit than the Obama alternative.”

In short, the pledge imagines a world without tough choices, where we can have low taxes, big government and a balanced budget. And therein lies the path to ever larger deficits.

•

The essential question for any would-be budget balancer is how large the federal government should be.

For most of the last century, the government has been getting bigger. Its spending equaled about 2 percent of gross domestic product in 1900, 14 percent just after World War II and, after ballooning to almost 25 percent during the financial crisis, will fall to 23 percent in the next few years.

There is a good argument that the government should grow as societies become richer. Once people can afford the basics, they want services that the private sector often does not provide, like a strong military, good schools, generous medical care and a comfortable retirement, as Matt Miller, a McKinsey & Company consultant and former Clinton administration official, has pointed out.

To me, this pattern argues for making tax increases a big part of the deficit solution. Maybe taxes would eventually rise to 23 percent of G.D.P., rather than 19 percent, as under current policy. Spending could then be cut from the 26 percent it is scheduled to reach in 2035, yet still be high enough to afford the investments that lead to prosperity. After all, the Internet, the highway system and the biotechnology sector all began as government programs.

Conservatives counter that governments just as often allocate resources badly, and there is something to this. It’s the small-government case that Mr. Paul, Mr. Ryan and governors like Mitch Daniels of Indiana and Chris Christie of New Jersey are making.

Mr. Paul emphasizes wasteful military spending that lines the pockets of military contractors rather than protecting the country. A bipartisan task force of military experts has identified cuts that would eventually equal almost 1 percent of G.D.P.

On Social Security, Marco Rubio, the Republican Senate candidate in Florida, has suggested raising the eligibility age. Two other Republican Senate candidates, Sharron Angle of Nevada and Joe Miller of Alaska, have gone further, suggesting a phaseout of Social Security. In the long run, changes to Social Security could save even more money than military cuts.

But the biggest cause of looming deficits is Medicare. Mr. Daniels, a possible 2012 presidential candidate, recently told Newsweek that he favored Medicare cuts. Mr. Ryan has been willing to get specific. For everyone now under 55, he wants to turn Medicare into a voucher program that’s much less generous than the program is scheduled to be.

Mr. Ryan’s budget blueprint offers an especially pointed contrast with the pledge. The Ryan plan calls for holding taxes at around 19 percent of G.D.P. and suggests specific cuts to bring spending in line. The pledge calls for even lower taxes — while offering almost no detail on spending cuts.

Which seems more credible?

Unfortunately, elected Republicans have often backed away from their own fiscally conservative ideas when pushed. Mr. Ryan says he supports the pledge. Ms. Angle has reversed herself on Social Security. Mr. Daniels has said tax increases should be an option, but that will be a tough position to keep in a presidential campaign.

And I get it. Voters don’t like having their taxes raised or their benefits cut. I don’t like it, either.

But, remember, when politicians tell you that they are opposed to tax increases, Medicare cuts, Social Security cuts and military cuts, they’re really saying that they are in favor of crippling deficits.

E-mail: leonhardt@nytimes.com

Saving Energy, and Its Cost By DAVID LEONHARDT

June 15, 2010
Saving Energy, and Its Cost By DAVID LEONHARDT
There once was a time when the government relied on a very blunt way of regulating the economy. It told companies and individuals what they could do and what they could not do. These were the days of command-and-control regulation.

But then came the market revolution of the last three decades. With the Soviet empire collapsing, the United States economy growing more rapidly than Europe’s, and newly market-friendly China and India booming, people saw the drawbacks of command and control. Governments were usually better off avoiding outright bans and instead giving people incentives to behave in productive ways.

The classic example was environmental policy.

Most famously, a 1990 bill signed by the first President Bush forced coal plants to buy permits if they were going to emit the sulfur dioxide that caused acid rain. With the price of emissions suddenly higher, the plants looked for innovative ways to reduce pollution — and succeeded more rapidly and cheaply than experts had predicted.

This history is the basic argument for putting a price on carbon today, and the next several weeks are likely to determine whether that happens. The chances of Congress’s passing a permit — or cap-and-trade — system that applies to the whole economy are low. But it could still create a version that covered power plants, if not factories and transportation. That would be no small thing.

“There is a little bit of a window,” says Jason Grumet, an energy expert and the head of the Bipartisan Policy Center in Washington. The BP spill has focused attention on energy policy, and Congress still has seven weeks before its August recess. “Setting a price on carbon in the power sector,” Mr. Grumet added, “is the most significant opportunity we have to achieve domestic greenhouse gas reductions.”

•

Unfortunately, the great economic strength of market systems like cap and trade also happens to be their political weakness. They set prices and allow people to react. In the process, market systems acknowledge that reducing pollution may actually cost a little bit of money.

Politicians don’t like to admit this, because voters don’t like it. Accepting higher costs is especially hard when the economy is weak. So Congressional Democrats have been repackaging their energy bills to make them look less and less market-oriented. Senator John McCain, who supported a permit system for carbon as the Republican presidential nominee, no longer does. Senator Lindsey Graham, the South Carolina Republican, has reversed his position as well.

What does Mr. Graham now favor? A series of command-and-control regulations. He has introduced a bill with Senator Richard Lugar, an Indiana Republican, that would mandate specific standards for cars, trucks, homes and offices. It would also give the energy secretary the power to award loans to companies he thought could do a good job of setting up programs to retrofit buildings. State officials would do the same for factories. The bill, in short, puts more faith in government than the market.

This approach can certainly reduce the carbon emissions causing climate change. Fuel economy rules have cut per-mile gasoline use by 40 percent since 1975. As a result, vehicles have made more progress on energy efficiency than office buildings, houses and apartments. That’s one reason a cap-and-trade system for power plants — which provide energy to offices and homes — has such potential to reduce carbon emissions.

The Lugar-Graham bill focuses on offices and homes, too, and would make a difference. But it wouldn’t make as much of a difference, and it also has other drawbacks.

In a market system, businesses and consumers have a clear incentive to reduce their carbon use, and they can choose the cheapest way to do so. Some would decide to retrofit current buildings and homes to make them more energy-efficient. Some would buy new, more efficient machinery or appliances. Some would switch to alternative energy and, in the process, create a much bigger market for it.

“Instead of leaving it up to the government to identify the solution and tell people what to do, you are leaving that decision to the people who know best,” says Nathaniel Keohane of the Environmental Defense Fund. “A bureaucrat would never have enough information to do as good a job.”

Under a command-and-control system, businesses and consumers have to focus not just on carbon use but also on the details of the government’s rules: the intricacies of vehicle and building standards, the types of appliances that qualify for subsidies, the fine print of the Energy Department’s loan applications. Each bit of compliance brings costs.

It’s just that those costs are hidden in a thicket of bureaucracy. The fuel economy rules, for example, have raised the price of minivans, pickup trucks and S.U.V.’s by limiting how many can be sold. But the price increase has not been obvious, as it would be with a gas tax. We can pretend prices are no higher than they otherwise would have been.

In some ways, it is not fair to pick on Mr. Lugar, Mr. Graham and the other senators, both Democratic and Republican, who support the command-and-control approach. It is far better than nothing. The ideal energy policy, in fact, would include some ironclad rules and regulations, because people do not always respond rationally to prices. Consultants at McKinsey & Company argue that many families and businesses could already save money by taking simple energy-saving steps, yet they don’t do so. Building standards could overcome their inertia.

But relying only on rules, regulations, standards, loan programs and research financing seems inadequate to the task we’re facing. The last 12 months have been the warmest 12-month period on record, NASA says. Nine of the 10 warmest calendar years occurred in the last decade.

The market is the most powerful tool available for dealing with the costs and risks of a hotter planet. Given how loudly politicians like to proclaim their belief in the market, it sure would be nice if they could figure out a way to make it part of the solution.

E-mail: leonhardt@nytimes.com

A Few Steps Short on Jobs By DAVID LEONHARDT

June 8, 2010
A Few Steps Short on Jobs By DAVID LEONHARDT
Washington

One of the political mysteries of the last year is why the White House and Congress have not been even more aggressive about trying to put people back to work.

It is true that President Obama and Democratic leaders in Congress favor more stimulus and have been stymied by Republicans and, more recently, conservative Blue Dog Democrats worried about the deficit. But it’s also true that Mr. Obama, Nancy Pelosi and Harry Reid have done less than they could have.

The president has not wrapped his arms around teachers, firefighters and other government workers facing layoffs and dared Republicans to oppose him, much as he did with financial reregulation. He has not pushed for a big new round of tax cuts, which could also put Republicans in a bind. And the White House has been slow to fill vacancies at the Federal Reserve that could go to officials who favor the Fed’s doing more to lift economic growth.

None of these steps would have cured the job market on their own. The aftermath of the financial crisis was always going to be long and harsh. Still, the Democrats find themselves in the position of heading into a midterm election campaign with the unemployment rate near 10 percent, knowing that they have not done everything in their power to bring it down.

Publicly, Mr. Obama’s advisers reject this description. “Job creation and economic recovery were and remain President Obama’s top priority,” Lawrence Summers said recently. Mr. Obama is now lobbying the Senate to pass a larger jobs bill than the House passed two weeks ago and pushing for an energy bill that could also create jobs.

But when they are not speaking for quotation, some White House and Congressional officials acknowledge that they could have done more to stimulate the economy, and sooner. In part, they have been busy with other things: legislation on health care, finance and education that could shape the economy for decades to come. The bigger reason, though, is politics.

In the face of near-united Republican opposition, top Democrats have decided that the political costs of aggressively pushing for more stimulus are too high. Any new bill will help only on the margins, and it will give Republicans another chance to blame Mr. Obama for the deficit, even though the current deficit is more of their own party’s making. The Democrats may be right, too. We will never know, because we will never be able to re-run the 2010 election under a different set of circumstances.

Yet the current circumstances bring their own political risks and their own economic costs, especially for anybody who is out of work or soon may be.

•

If there was any doubt that the government could put people to work, at least temporarily, last year’s $787 billion stimulus program should have removed it.

The bill passed in February 2009, when the economy was shedding more than 700,000 jobs a month, and it was greeted with considerable skepticism. Some economists went so far as to suggest it would hurt the economy. Michael Boskin, a Stanford professor and former aide to the first President Bush, wrote an opinion article in The Wall Street Journal on March 6, 2009, blaming Mr. Obama and his policies for the stock market’s drop in previous weeks.

Soon, though, job losses began shrinking. The details — a rebound in state spending, an increase in corporate investment and a spurt in home sales helped by tax credits — suggested that the stimulus bill was a major cause. The Congressional Budget Office and private research firms estimate that the bill has added on the order of 2.5 million jobs. Since Mr. Boskin’s op-ed article appeared, stocks are up 56 percent.

But the stimulus has been less popular than effective, polls show. People see that the economy remains in bad shape, and they have a hard time getting excited by the notion that it could be worse.

These lukewarm views have then been aggravated by the country’s very real deficit problem. The federal government has promised to pay out vastly more in Medicare, Medicaid and Social Security over coming decades than it will collect in taxes. Any additional stimulus would only increase the deficit.

Of course, it would have a much smaller impact on the deficit than the 2001 and 2003 tax cuts, the bipartisan Medicare prescription drug program or the wars in Iraq and Afghanistan did. The bond market, for its part, remains utterly calm about the near-term deficit, based on the government’s extremely low borrowing costs.

But the political dynamic is set. Voters are wary of stimulus and worried about the deficit. Almost nobody in Congress is agitating for the ideal economic solution: a combination of short-term stimulus with longer-term spending cuts and tax increases. It’s easier just to express somber concern about both the deficit and jobs.

Against this backdrop, Mr. Obama and his aides decided not to go all out for more stimulus.

The one part of their strategy that seems almost impossible to defend is their approach to the Fed. By law, the Fed’s mission is to maintain low inflation and maximum employment. Over the last three months, inflation has been zero. Over the last two years, it has risen at the slowest pace in more than 50 years. Meanwhile, 15 million people remain unemployed.

Yet the Fed has taken no recent action to spur the economy — like buying bonds to reduce long-term borrowing costs for households and businesses, as Joseph Gagnon, a former Fed economist, has urged. And the White House and Treasury Department have allowed two of the seven Fed governor spots to sit empty since Mr. Obama took office. He finally announced nominees on April 29, and they await Senate confirmation.

Despite all this, there is reason to think that more stimulus may finally be on the way. Last Friday’s jobs report showed little private-sector job growth in May, which was a good reminder that recoveries from financial crises are usually rocky. The report has the potential to persuade Congress to expand the jobs bill passed by the House, which is now before the Senate.

As is, the House bill would cut taxes for businesses and temporarily extend jobless benefits, among other things. By the end of the year, it would add about 170,000 jobs, Moody’s Economy.com estimates. Expanding the bill to include extra Medicaid funds for states — which seems politically conceivable — could add 100,000 more jobs. Expanding it to keep teachers employed — which is unlikely — could add 200,000 or so.

Will another half-million jobs make the economy feel strong again? No. Will the next round of stimulus be more popular than the last one? Probably not.

Is it nonetheless the right thing to do? That’s another question entirely.

Jobs Bill vs. Deficit, a Showdown in the Senate by DAVID LEONHARDT

June 1, 2010
Jobs Bill vs. Deficit, a Showdown in the Senate by DAVID LEONHARDT
WASHINGTON

You are a member of the Senate, and you’re starting to get spooked by the deficit. Polls show that voters are worried about it. Economists are, too. Something needs to change.

But you’re tired of politicians who pound the table about the issue without actually naming programs they would cut or taxes they would increase. You know that reducing the deficit is like losing weight: it’s as straightforward as it is difficult. “We have to stop spending money we don’t have,” as Jim Cooper, a House member from Tennessee, said the other day.

When Congressional leaders announced plans for a new $200 billion jobs bill recently, Mr. Cooper and other centrist House Democrats saw a chance to do something tangible. Only about a third of the bill’s cost would have been paid, by closing tax loopholes for investment managers and overseas businesses. The remaining $134 billion would have been added to the deficit. In response, the centrists said no and forced the leaders to cut the bill’s spending nearly in half.

Now the slimmed-down bill is coming to the Senate, and you need to decide what to do.

It would still add about $54 billion to the deficit over the next decade. On the other hand, it could also do some good. Among other things, it would cut taxes for businesses, expand summer jobs programs and temporarily extend jobless benefits for some of today’s 15 million unemployed workers.

“Oh, Master, make me chaste and celibate — but not yet,” Saint Augustine famously said.

What you want to know is when, at long last, will it be yet?

The case against the jobs bill starts with the idea that the economy is recovering. Since the recession’s nadir, in January 2009, the job market has improved at the most rapid pace since 1983. On Friday, forecasters expect the Labor Department to report that job growth continued to accelerate in May.

There is always the chance that the economy could slip back again. But the case for optimism seems stronger. Corporate executives are becoming more upbeat, surveys show. Business travel has picked up. Silicon Valley firms are doing more deals. Nissan broke ground last week on a car battery plant in Tennessee, and Chrysler is adding 1,100 jobs at a Jeep plant in Michigan.

No one doubts that Washington will eventually have to switch from Keynesian pump-priming to fiscal discipline. If the economy has turned a corner, you wonder if maybe that moment has arrived. You know it certainly can’t be too far off.

Including the jobs bill, the deficit is projected to grow to about $1.3 trillion next year (and that’s assuming the White House can persuade Congress to make some proposed spending cuts and repeal the Bush tax cuts for the affluent). To be at a level that economists consider sustainable, the deficit needs to be closer to $400 billion. Only then would normal economic growth be able to pay it off.

So Congress would need to find almost $900 billion in savings. By voting down the jobs bill, it would save more than $50 billion by 2015 and get 7 percent of the way to the goal. That’s not nothing. In a nutshell, it’s the case against the bill.

Unfortunately, you also know that the deficit over the next several years isn’t the main problem. Medicare is. It and, to a lesser extent, Social Security and Medicaid are on pace to spend far more money than taxpayers will pay into the system.

That means the deficit will continue to grow in the years ahead. To get it under control, Congress doesn’t just need to find savings for 2011. It needs to do that and then find more cuts for 2012, yet more for 2013 and vastly more for the decades that follow.

In this context, the jobs bill looks a lot smaller. Its cost is equal to only about 2 percent of the total cuts needed to get the deficit to an acceptable level over the next decade. Beyond the next decade, the bill could actually save money, because its spending is temporary — mostly by 2012 — while its closing of tax loopholes is permanent.

Of course, even if the bill is not very expensive, it is worth passing only if it will make a difference. And economists say it will.

Last year’s big stimulus program certainly did. The Congressional Budget Office estimates that 1.4 million to 3.4 million people now working would be unemployed were it not for the stimulus. Private economists have made similar estimates.

There are two arguments for more stimulus today. The first is that, however hopeful the economic signs, the risk of a double-dip recession remains. Financial crises often bring bumpy recoveries. The recent troubles in Europe surely won’t help.

The second argument is that the economy has a terribly long way to go before it can be considered healthy. Here is a sobering way to think about the situation: If the next four years were to bring job growth as fast as the job growth during the best four years of the 1990s boom — which isn’t likely — the unemployment rate would still be higher in 2014 than when the recession began in late 2007.

Voters may not like deficits, but they really do not like unemployment.

Looking at the problem this way makes the jobs bill seem like less of a tough call. Luckily, the country’s two big economic problems — the budget deficit and the job market — are not on the same timeline. The unemployment rate is near a 27-year high right now. Deficit reduction can wait a bit, given that lenders continue to show confidence in Washington’s ability to repay the debt.

As a result, Congress does not have to choose between the problems. It can pass the jobs bill, putting people back to work, and even pass a separate bill to help struggling states. History has shown that state aid, which prevents layoffs of teachers, emergency medical technicians and other workers, is the single most effective form of stimulus.

But this new spending needs to be accompanied by something more credible than Augustine-like vows of future parsimony. It should be paired with substantive cuts to continuing policies, like subsidies for oil companies and agribusinesses, outdated weapons systems, NASA’s moon program and at least some Bush tax cuts, among many other things.

That is the right economic strategy. It’s probably the right political one, too. It shows serious concern about both jobs and the deficit.

So what do you say, Senator?

E-mail: leonhardt@nytimes.com

An earlier version of this column incorrectly described the year in which a jobs bill before the Senate would add about $50 billion to the deficit and the percentage of the savings needed to reduce next year's deficit to a level economists consider sustainable.

This article has been revised to reflect the following correction:

Correction: June 5, 2010


The Economic Scene column on Wednesday about the effect a federal jobs bill would have on the federal deficit misstated the year in which a jobs bill before the Senate would add about $50 billion to the deficit and the percent of the deficit it represents. The bill would affect the deficit next year, not 2015. If the jobs bill is not passed, the $50 billion would represent 7 percent of the savings needed to reduce next year’s deficit to a level economists consider sustainable, not one-fourth of the savings.

Spillonomics: Underestimating Risk By DAVID LEONHARDT

May 31, 2010
Spillonomics: Underestimating Risk By DAVID LEONHARDT
In retrospect, the pattern seems clear. Years before the Deepwater Horizon rig blew, BP was developing a reputation as an oil company that took safety risks to save money. An explosion at a Texas refinery killed 15 workers in 2005, and federal regulators and a panel led by James A. Baker III, the former secretary of state, said that cost cutting was partly to blame. The next year, a corroded pipeline in Alaska poured oil into Prudhoe Bay. None other than Joe Barton, a Republican congressman from Texas and a global-warming skeptic, upbraided BP managers for their “seeming indifference to safety and environmental issues.”

Much of this indifference stemmed from an obsession with profits, come what may. But there also appears to have been another factor, one more universally human, at work. The people running BP did a dreadful job of estimating the true chances of events that seemed unlikely — and may even have been unlikely — but that would bring enormous costs.

Perhaps the easiest way to see this is to consider what BP executives must be thinking today. Surely, given the expense of the clean-up and the hit to BP’s reputation, the executives wish they could go back and spend the extra money to make Deepwater Horizon safer. That they did not suggests that they figured the rig would be fine as it was.

For all the criticism BP executives may deserve, they are far from the only people to struggle with such low-probability, high-cost events. Nearly everyone does. “These are precisely the kinds of events that are hard for us as humans to get our hands around and react to rationally,” Robert N. Stavins, an environmental economist at Harvard, says. We make two basic — and opposite — types of mistakes. When an event is difficult to imagine, we tend to underestimate its likelihood. This is the proverbial black swan. Most of the people running Deepwater Horizon probably never had a rig explode on them. So they assumed it would not happen, at least not to them.

Similarly, Ben Bernanke and Alan Greenspan liked to argue, not so long ago, that the national real estate market was not in a bubble because it had never been in one before. Wall Street traders took the same view and built mathematical models that did not allow for the possibility that house prices would decline. And many home buyers signed up for unaffordable mortgages, believing they could refinance or sell the house once its price rose. That’s what house prices did, it seemed.

On the other hand, when an unlikely event is all too easy to imagine, we often go in the opposite direction and overestimate the odds. After the 9/11 attacks, Americans canceled plane trips and took to the road. There were no terrorist attacks in this country in 2002, yet the additional driving apparently led to an increase in traffic fatalities.

When the stakes are high enough, it falls to government to help its citizens avoid these entirely human errors. The market, left to its own devices, often cannot do so. Yet in the case of Deepwater Horizon, government policy actually went the other way. It encouraged BP to underestimate the odds of a catastrophe.

In a little-noticed provision in a 1990 law passed after the Exxon Valdez spill, Congress capped a spiller’s liability over and above cleanup costs at $75 million for a rig spill. Even if the economic damages — to tourism, fishing and the like — stretch into the billions, the responsible party is on the hook for only $75 million. (In this instance, BP has agreed to waive the cap for claims it deems legitimate.) Michael Greenstone, an M.I.T. economist who runs the Hamilton Project in Washington, says the law fundamentally distorts a company’s decision making. Without the cap, executives would have to weigh the possible revenue from a well against the cost of drilling there and the risk of damage. With the cap, they can largely ignore the potential damage beyond cleanup costs. So they end up drilling wells even in places where the damage can be horrific, like close to a shoreline. To put it another way, human frailty helped BP’s executives underestimate the chance of a low-probability, high-cost event. Federal law helped them underestimate the costs.

In the wake of Deepwater Horizon, Congress and the Obama administration will no doubt be tempted to pass laws meant to reduce the risks of another deep-water disaster. Certainly there are some sensible steps they can take, like lifting the liability cap and freeing regulators from the sway of industry. But it would be foolish to think that the only risks we are still underestimating are the ones that have suddenly become salient.

The big financial risk is no longer a housing bubble. Instead, it may be the huge deficits that the growth of Medicare, Medicaid and Social Security will cause in coming years — and the possibility that lenders will eventually become nervous about extending credit to Washington. True, some economists and policy makers insist the country should not get worked up about this possibility, because lenders have never soured on the United States government before and show no signs of doing so now. But isn’t that reminiscent of the old Bernanke-Greenspan tune about the housing market?

Then, of course, there are the greenhouse gases that oil wells (among other things) send into the atmosphere even when the wells function properly. Scientists say the buildup of these gases is already likely to warm the planet by at least three degrees over the next century and cause droughts, storms and more ice-cap melting. The researchers’ estimates have risen recently, too, and it is also possible the planet could get around 12 degrees hotter. That kind of warming could flood major cities and cause parts of Antarctica to collapse.

Nothing like that has ever happened before. Even imagining it is difficult. It is much easier to hope that the odds of such an outcome are vanishingly small. In fact, it’s only natural to have this hope. But that doesn’t make it wise.

David Leonhardt is an economics columnist for The Times and a staff writer for the magazine.

In Greek Debt Crisis, Some See Parallels to U.S. By DAVID LEONHARDT

May 11, 2010
In Greek Debt Crisis, Some See Parallels to U.S. By DAVID LEONHARDT

It’s easy to look at the protesters and the politicians in Greece — and at the other European countries with huge debts — and wonder why they don’t get it. They have been enjoying more generous government benefits than they can afford. No mass rally and no bailout fund will change that. Only benefit cuts or tax increases can.

Yet in the back of your mind comes a nagging question: how different, really, is the United States?

The numbers on our federal debt are becoming frighteningly familiar. The debt is projected to equal 140 percent of gross domestic product within two decades. Add in the budget troubles of state governments, and the true shortfall grows even larger. Greece’s debt, by comparison, equals about 115 percent of its G.D.P. today.

The United States will probably not face the same kind of crisis as Greece, for all sorts of reasons. But the basic problem is the same. Both countries have a bigger government than they’re paying for. And politicians, spendthrift as some may be, are not the main source of the problem.

We, the people, are.

We have not figured out the kind of government we want. We’re in favor of Medicare, Social Security, good schools, wide highways, a strong military — and low taxes. Dealing with this disconnect will be the central economic issue of the next decade, in Europe, Japan and this country.

Many people, including some who claim to be outraged by the deficit, still haven’t acknowledged the disconnect. Just last weekend, Tea Party members helped deny Senator Robert Bennett, the Utah Republican, his party’s nomination for his re-election campaign, in part because he had co-sponsored a health reform plan with a Democratic senator. Economists generally think the plan would have done more to reduce Medicare spending than the bill that passed. So, whatever its intentions, the Tea Party effectively punished Mr. Bennett for not being a big enough fan of big government.

Or consider the different fates of two parts of President Obama’s agenda. Mr. Obama has unrealistically said that taxes do not need to rise on households making less than $250,000, and this position has come to be seen as an ironclad vow. He has also called for billions of dollars in sensible cuts to agribusiness subsidies, tax loopholes and the like. The news media and Congress have largely ignored these proposals.

The message seems clear: woe unto the politician — in Washington, Athens or London — who tries to go beyond platitudes and show some actual fiscal restraint.

This situation obviously can’t continue, as Robert Greenstein, perhaps the leading liberal budget expert, points out. Mr. Greenstein’s politics make him sympathetic to the worry that all the deficit talk will become an excuse to pull back on stimulus spending while unemployment remains high or to gut social programs. But he also knows the numbers well enough to understand that our Greece moment, whether it takes the form of a crisis or not, is coming.

“Most of the public thinks, ‘If only the darn politicians could get their act together to cut waste, fraud and abuse, and to make tax avoidance go away and so on,’ ” Mr. Greenstein, head of the Center on Budget and Policy Priorities, says. “But the bottom line is, there really is no avoiding the hard choices.”

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For Greece and possibly other European countries, change will come from the outside. The countries lending the money for the Greek bailout — chiefly Germany — are demanding big cuts to the welfare state. Greek citizens will soon have a harder time retiring in their 40s.

Here in the United States, we’re likely to have the chance to solve our problems before our lenders demand it. Those lenders continue see the American economy as a safe haven, thanks to our history of strong economic growth and political flexibility.

It is even possible that future growth will make the current deficit projections look too pessimistic. That sometimes happens when the economy is weak. In the wake of the early 1990s recession, for example, almost no one imagined that the budget would show a surplus by the end of the decade.

But the main issue isn’t the near-term deficit — the one created by the recession, the wars in Iraq and Afghanistan, the Bush tax cuts and the Obama stimulus. The main issue is the long-term deficit.

As societies become richer, citizens tend to want better schools, better medical care and other government services. This country is following that pattern, but without paying the necessary taxes. That combination has us on a course to Greece-like debt.

As a rough estimate, the government will need to find spending cuts and tax increases equal to 7 to 10 percent of G.D.P. The longer we wait, the bigger the cuts will need to be (because of the accumulating interest costs).

Seven percent of G.D.P. is about $1 trillion today. In concrete terms, Medicare’s entire budget is about $450 billion. The combined budgets of the Education, Energy, Homeland Security, Justice, Labor, State, Transportation and Veterans Affairs Departments are less than $600 billion.

This is why fixing the budget through spending cuts alone, as Congressional Republicans say they favor, would be so hard. Representative Paul Ryan of Wisconsin has a plan for doing so, and it includes big cuts to Social Security and the end of Medicare for anyone now under 55 years old. Other Republicans have generally refused to endorse the Ryan plan. Until that changes or until the party becomes open to new taxes, its deficit strategy will remain unclear.

Democrats have more of a strategy — raising taxes on the rich and using health reform to reduce the growth of Medicare spending — but it is not nearly sufficient.

What would be? A plan that included a little bit of everything, and then some: say, raising the retirement age; reducing the huge deductions for mortgage interest and health insurance; closing corporate tax loopholes; cutting pensions of some public workers, as Republican governors favor; scrapping wasteful military and space projects; doing more to hold down Medicare spending growth.

Much of this may be unpleasant. But by no means will it doom us to reduced living standards or even slow economic growth. We can still afford to spend more on Medicare — even more per person — than we do today, and more on education, the military and other areas, too. We just can’t afford the unrealistic promises that the government has made. We need to make choices.

“It’s not a matter of whether we have the resources to solve our problems,” as Alan Krueger, the chief economist at the Treasury Department, says. “It’s a matter of political will.”

For now at least, our elected officials are hardly the only ones who lack that will.

April 27, 2010 A Bank Tax as Insurance for Us All By DAVID LEONHARDT Washington The financial regulation bill before the Senate has the potential to

April 27, 2010
A Bank Tax as Insurance for Us All By DAVID LEONHARDT

Washington

The financial regulation bill before the Senate has the potential to do a lot of good. But it also has at least one major flaw: it would not do enough to prevent taxpayers from paying the bill for a future crisis.

What would? A tax on banks. The International Monetary Fund has started pushing for a bank tax, and a tax has also become part of the debate in Britain’s election campaign. In this country, however, the subject has taken a back seat to issues like derivatives regulation and the Goldman Sachs case. Those other issues are important, but they are not as central to minimizing the damage from the next crisis.

To understand why, let’s take a glimpse into the future. Imagine the year is 2020, and a major financial firm is collapsing.

The financial regulation bill that President Obama signed back in 2010 was meant to deal with just such a problem. It gave regulators something called “resolution authority.” They could seize a dying firm, wipe out its shareholders, fire its top executives and keep it operating until its surviving parts could be sold off in an orderly fashion. Now, in 2020, the regulators are preparing to use that authority for the first time.

But as they dig into the details, they realize they are facing a raft of problems. One of the biggest is that the firm has 70 percent of its assets abroad (roughly the share of Citicorp’s business that was overseas in 2009). Washington can’t simply seize assets held in London, Shanghai or Moscow.

So ultimately, the regulators are left with the same choice that arose in 2008: bankruptcy or bailout. Regulators can let the firm fall apart suddenly and risk the kind of collateral damage that the bankruptcy of Lehman Brothers caused. Or they can spend billions of taxpayer dollars propping up the firm, as was the case with A.I.G. It’s a miserable choice.

You also can be pretty sure which of the two options tomorrow’s policy makers will choose: bailout. History — in the form of the Great Depression and, more recently, Lehman — argues against the idea of liquidate, liquidate, liquidate, as Herbert Hoover’s Treasury secretary, Andrew Mellon, advocated. The downside, of course, is that taxpayers end up paying for Wall Street’s sins.

Obama administration officials insist that the reregulation plan will prevent this outcome. They note that both the Senate and House bills will give regulators more authority to monitor financial firms. Banks will also be required to hold more cash in reserve, which will give them a bigger cushion when some investments do go bad. The rules for resolution authority, meanwhile, will be written with international cooperation in mind.

And maybe time will prove the administration correct. But a good number of economists and banking experts are worried. They think the odds of a future bankruptcy-or-bailout dilemma will remain uncomfortably high even if reregulation passes.

For starters, there are the cross-border problems; in the midst of a crisis, governments may have trouble cooperating. Then there is the fact that the regulators have never before tried to shut down anything as complex as a multibillion-dollar financial firm. “It’s really hard — really hard,” says Robert Steel, who worked on the financial crisis in the Bush Treasury Department and later was chief executive of Wachovia. “Anyone who says they know exactly what we should do is overconfident.”

Another former top government official adds, bluntly, “Don’t kid yourself into thinking that if J. P. Morgan were on the rocks, it would disappear.”

Above all, no one knows what the next crisis will look like. So no one can be sure exactly how to prevent it. In all likelihood, Wall Street will eventually figure out ways around technocratic rules — and technocrats — and create trouble that today’s proposals don’t anticipate.

The beauty of a bank tax is that it acknowledges as much. Financial firms play a vital role in a market economy. But they also have a long record of causing crises, be it the South Sea bubble of 1720, the Panic of 1873, the Great Depression or our own Great Recession. A bank tax is akin to an insurance policy that taxpayers would require Wall Street to hold. The premiums on that policy would keep Wall Street from making big profits in good times while foisting its losses on society in bad.

The current Senate bill includes a kind of bank tax, but it has all kinds of problems. It would initially collect only $50 billion from firms and then set the money aside to pay the costs of future bailouts. Other crises have cost far more than $50 billion.

For this reason, the Obama administration prefers a postcrisis tax. The White House has proposed a so-called TARP tax, to raise at least $90 billion over the next decade and cover the costs of the 2008 bailout fund (the Troubled Asset Relief Program). But this idea has its own flaws. It does not leave any money for future busts. It assumes Washington will always be able to recoup those costs later, which doesn’t sound like a great bet.

The I.M.F. prefers a permanent tax, for the good reason that the risk of crises is permanent. “The challenge is to ensure that financial institutions bear the direct financial costs that any future failures or crises will impose — and maybe somewhat more, given all the other costs that bank failure can impose on the economy,” Carlo Cottarelli, the head of the I.M.F.’s fiscal affairs unit, wrote last weekend. The tax wouldn’t go into a dedicated bailout fund. Its purpose instead would be to discourage too much risk-taking and, over the long term, help offset any bailout costs.

Because the tax would be calculated based on a firm’s holdings, a small local bank or a larger bank with billions of dollars in safe consumer deposits might pay nothing. A leveraged investment bank would surely be taxed.

The TARP tax, in its technical design, would be similar. And Timothy Geithner, the Treasury secretary, told me recently that he was open to the idea of the tax’s becoming permanent. “There is a very good argument you should put a fee on finance, like a tax on pollution,” he said.

Yet the administration — nervous about upsetting the fragile support in Congress for financial reregulation — has been afraid of making the tax part of the broader bill. That strikes me as a mistake, given the tax’s importance. Obviously, though, if Congress passes a bank tax in a separate bill later this year, it will work out the same in the end.

There is some reason for optimism, too. Max Baucus, the chairman of the Senate Finance Committee, told Politico this week, “I don’t think there’s much doubt that there will be a bank tax.” Why? The tax is not just about punishing banks.

The federal government, remember, is facing a huge deficit. To pay it off, Washington will need to make spending cuts and raise taxes. Can you think of a better candidate for taxation than an industry that made huge profits during the boom and then helped cause the bust that has sent the deficit soaring?