Small Biz Health Care Daily: The Public Option Via the States

It took only two days for the Senate Finance Committee to resurrect the “public option,” that is, to inject a government run plan into its health care reform bill. It came via an amendment from U.S. Senator Maria Cantwell (D-WA) that would hand over federal taxpayer dollars to the states, and allow them run plans.

All of the Republicans on the committee, and Democrat Blanche Lincoln (AR) voted against the measure. Good for them.

Cantwell was quoted by The Hill saying, “This proposal is about giving federal dollars to the states and putting them in the driver’s seat.” And later: “We are putting someone in charge, finally, of negotiating rates.”

A key problem with a federal plan is that government has very few, if any, incentives to spend taxpayer dollars wisely. At the state level, what little incentive might exist to spend with care is completely obliterated when it turns out to be free money from Washington. After all, lawmakers in the states do not have to raise taxes or debate other spending programs. Instead, it’s federal money dropped from the sky. That does not breed responsibility and prudence – rather, just the opposite.

This is a plan to put no one in charge. It takes a very bad idea, and makes it even worse.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Credit and Small Business

Meredith Whitney has been doing excellent work on the issue of credit during these tough economic times. And that continues with a piece in today’s Wall Street Journal titled “The Credit Crunch Continues.”

The entire piece warrants reading, but a few key points need to be highlighted here:

• “Large, well-capitalized companies have no problem finding credit. Small businesses, on the other hand, have never had a harder time getting a loan.”

• “ … small-business credit … has contracted at one of the fastest paces of any lending category. Small business loans are hard to find, and credit-card lines (a critical funding source to small businesses) have been cut by 25% since last year.”

• “Home equity loans, also historically a key funding source for start-up small businesses, are not a source of liquidity anymore because more than 32% of U.S. homes are worth less than their mortgages.”

• “Small businesses primarily fund themselves through credit cards and loans from local lenders. In the past two years, credit-card lines have been cut by over $1.25 trillion. During the same time, 10% of all credit-card accounts have been cancelled. According to the most recent Federal Reserve data, small business lending is down 3%, or $113 billion, from fourth-quarter 2008 peak levels—the first contraction since 1993.”

• “The next phase will likely be credit-line cuts as lenders race to pre-emptively protect themselves from regulatory changes associated with the Credit Card Accountability, Responsibility and Disclosure Act, passed in May of this year, and the 2008 Unfair and Deceptive Acts and Practices Act.”

The last point is critical. Policymakers are working to take a bad situation, and make it far worse.

Whitney’s analysis is critical to keep in mind in terms of how the economy will be affected, given the importance of small business to economic growth, innovation and job creation. However, like most of us, she has not disentangled how much of the decline in credit is due to bank and/or regulatory policies, and how much is from small businesses themselves who have pulled back on capital and business plans given the state of the economy, and given looming tax and regulatory increases.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: Breaking the Tax Promise

Hiking taxes on upper income earners – many of which just happen to be entrepreneurs and investors – is a bad idea for the economy. But that’s what President Obama has pledged to do, while also promising not to raise taxes on individuals earning less than $200,000 and families less than $250,000.

The Washington Post provided this reminder in an October 1 report:

Democrats on the Senate Finance Committee narrowly defeated amendments by GOP senators Mike Crapo of Idaho and John Ensign of Nevada, 11 to 12. But the measures attracted the votes of two moderates, Sen. Olympia J. Snowe (R-Maine) and Sen. Blanche Lincoln (D-Ark.), suggesting that the issue could prove problematic as the health-care debate moves to the House and Senate floors in the weeks to come.

Calling his amendment an effort to make sure that health-care reform lives up to Obama's promises, Crapo proposed to strip out all taxes and fees that would strike individuals who earn less than $200,000 a year and families who earn less than $250,000 a year.

Among the key provisions that would be affected, he said, are a proposed penalty of up to $1,900 a year for failing to buy insurance; a plan to make it much harder to deduct catastrophic medical expenses; and new penalties on those who use their health savings accounts for other purposes. Ensign's amendment targeted only the penalty for failing to buy insurance.

Congressional tax analysts have determined that all three provisions would fall heavily on taxpayers that Obama has defined as middle class.

The President is emphasizing that his health care reform agenda, which is focused on expanding government, will not increase the budget deficit. That’s open for debate, to say the least. But the plan will force huge tax increases – both now and in the future as costs continue to skyrocket.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Poland’s Answer to Budget Woes

As the U.S. federal budget careens out of control, a former communist country offers a solution – privatization.

According to the September 29 Wall Street Journal, Poland President Lech Kasczynski is against both tax increases (that’s good) and spending cuts (that’s not so good). An updated plan from the Polish Treasury calls for accelerating privatization this year and next, thereby “bringing Poland’s privatization process to a close 20 years after the end of communism.”

Poland’s government is shedding stakes in a copper mine, a refiner, the Warsaw Stock Exchange, power companies, a chemical plant, a bank, and a telecommunications firm.

Compare that to what’s been going on with taxpayer bailouts and buyouts by the Bush and Obama administrations over the past year. Hmmm.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: The Public Option Still There

For those of us who foresee nothing but higher costs and diminished care with government running health care, there were two moments of hope on Tuesday, September 28. The Senate Finance Committee voted down two proposals to establish government-run health care plans.

But it is important to keep in mind that this is not the end of the “public option” battle.

First, leaders in the House of Representatives are still pushing a government plan, and they have the support of the President.

Second, the leaders on this in the Senate Finance Committee – Senators Charles Schumer (D-NY) and Jay Rockefeller (D-WV) – believe they can still get this through. Some see opportunities on the Senate floor or in conference.

Third, Senator Finance Committee Chairman Max Baucus’ (D-MT) proposal for co-ops created and seeded with taxpayer dollars amounts to little more than another avenue for a government plan.

Fourth, another proposal being considered is that a public plan would be triggered if certain cost and competition goals fail to be met. Well, considering that this agenda features massive increases in government regulations and mandates, it’s pretty hard to see how costs would decline and competition would expand. Hence, the government plan.

As noted in yesterday’s posting, this entire effort amounts to a “public option.” It’s just a matter of whether or not those advocating government run health care can disguise their effort so enough people fail to recognize its reality.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

The Real Lessons for Policy Today from the Great Depression

The Great Depression has gotten a great deal of attention over the past year. Policymakers, including President Barack Obama and Federal Reserve Chairman Ben Bernanke, have spoken of not making the same policy mistakes as back then.

Unfortunately, too often, the wrong lessons have been learned. Bernanke, for example, seems to think that the Great Depression was all about the Fed’s monetary policy being too tight. The Obama administration, leaders in Congress, and many of their supporters apparently choose to ignore the ills caused by misguided trade and tax policies at the time.

Both are wrong. The Great Depression was overwhelmingly about bad trade, tax, spending and regulatory policies.

If you have not read it, check out Arthur Laffer’s piece from the September 22 Wall Street Journal. It’s invaluable in terms of a quick, solid primer on the roles that massive increases in tariffs, and in federal and states taxes played in sinking the economy into depression and keeping it there, along with the part that the Roosevelt administration, not necessarily the Fed, played in messing with the nation’s money. These remain critical lessons for today.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Small Biz Health Care Daily: The Public Option Never Went Away

A variety of media reports have noted that the “public option” in health care reform is back in the debate.

The Hill, for example, reported on September 29 that New York Senator Charles Schumer has led the charge:

Schumer has become the Senate’s most outspoken advocate for a government-run health insurance plan, investing significant political capital in the proposal. While that may have seemed a losing bet a month ago, the political odds have shifted in recent weeks.

Though an effort to include the public option in the Finance Committee’s health reform package is expected to fall short, proponents say it will garner enough support among panel Democrats to affect the bill that reaches the Senate floor.

“Just bringing it up in the Finance Committee at all has revitalized the push for the public plan, and its chances only get better from here going forward,” said Schumer spokesman Brian Fallon.

In the truest sense, however, the so-called “public option” never went away. This entire effort amounts to a “public option.” It is focused on getting government more involved in health care, including through more regulations and mandates; increased funding; and expanded programs. Those measures will help to drive up costs even faster and further. Throw in a new government-run plan, and the cost story promises only to get worse – certainly not better, as advocates claim.

The entire health care cost debate – and therefore the access to coverage debate – always and ultimately comes back to who is footing the bill. When government pays, costs inevitably rise as consumers and providers have no incentive to care about prices and utilization, while there are no incentives in government to control costs, as politicians and their appointees are spending other people’s money.

With government expanding its role in health care, it’s inevitably about increased costs, and sooner or later, rationing of care.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

A Road to Stimulating the Economy?

The September 29 Wall Street Journal ran an article titled “Road Project Tests Power of Stimulus.” It focused on a $128 million federal grant to widen a seven-mile portion of I-215 in San Bernardino, California. It’s the nation’s “fourth-largest stimulus investment in a road project.”

The Journal reported: “The project will test whether a dollop of government stimulus can make an impact in a region hit hard by the housing crisis and where more than half the home sales are foreclosures.”

The argument in favor of such projects is that they will employ people, who will then spend their earnings, and it will improve transportation in the region, which will be a positive for the region’s economy.

Of course, the people that get jobs from government stimulus projects will have money to spend, and a wider highway, especially in California, is a positive for drivers. But the problem, of course, is the following: Is this the best use of these resources? After all, those dollars – whether acquired via taxes or borrowing – are being diverted from the private sector.

Are we really expected to believe that politicians taking more resources out of the private sector to spend on widening a few lanes of highway over a short distance is really going to stimulate the economy? Of course not. In fact, even those interviewed by the Journal who backed the project did not seem all that enthusiastic that it will make much difference to the area economy.

Hey, here’s a thought for the California economy – cut taxes, deregulate and let entrepreneurs, investors and businesses drive real economic growth.

Raymond J. Keating
Chief Economist
Small Business & Entrepreneurship Council

Broadband Deployment and Internet Regulation

Nearly everyone seems to be in agreement that broadband deployment has been and will continue to be a huge plus for consumers, entrepreneurs, business and the economy.

Before and after taking office, President Obama has spoken of broadband deployment as a priority.

FCC Chairman Julius Genachowski has declared: "Broadband is our generation's infrastructure challenge. It is as important as electricity and highways were for past generations."

But is more regulation then the best way to accelerate broadband deployment?

On September 21, Genachowski proposed "net neutrality" rules on all Internet service providers, including wireless firms. While "net neutrality" sounds nice; it's really all about government regulating how providers operate their networks.

ISPs have every incentive to provide the best service to both content providers and consumers. And that includes managing and prioritizing traffic, especially given the vast expansion in bandwidth-gobbling applications, such as video downloads.

And complaints against network operators in terms of traffic flow issues have been practically nonexistent, as one would expect. Again, why would ISPs go out of their way to stir up consumer, media and political opposition? Meanwhile, competition and choice have expanded and continue to expand, especially given the wireless revolution.

So, it's bewildering as to why the FCC is going down this path at all - especially given the risks that come with unwarranted government dictates and interference in such a dynamic and innovative market.

A September 22 Wall Street Journal warned about potential lawsuits, given that Congress has never passed a law providing the FCC with "net neutrality enforcement powers." The article also pointed out that "telecom firms ... recently paid a premium at auction for what was advertised as unencumbered radio spectrum."

Strangely, this is being billed in the media as a loss for ISPs, but a win for content providers. However, both would wind up losing if the FCC regulates how networks are managed. Why? Incentives for innovation, differentiation and investment in broadband would suffer, which means both content providers and consumers would suffer as well. And most certainly among those listed in the negative column will be entrepreneurs who use the Internet to build and run their businesses, and the entrepreneurial firms involved in building broadband networks.

In fact, in the end, more government regulation of the Internet would only be a plus for the political class. Both politicians and regulators seeking more power would acquire it, with little regard for the restraints they are placing on competition, investment, innovation and technological change actually geared towards serving consumers and businesses in the marketplace.

Raymond Keating, Chief Economist
Small Business & Entrepreneurship Council