Obama's Mixed Messages

President Obama's health care plan is in trouble. If he really wants to accomplish reform, he might start by learning some lessons from the past. I witnessed firsthand President George W. Bush's attempt, and unfortunate failure, to reform Social Security. Now, Mr. Obama is making similar mistakes in his effort to fix our health care system.

One of the most important lessons is that words matter--maybe too much. Mr. Bush allowed his unwavering emphasis on "personal accounts" to derail a compromise that could have helped solve the larger problem of restoring the fiscal sustainability of Social Security.

In his campaign for the presidency, George W. Bush rightly noted the low rates of return that would be available to younger workers. He proposed an alternative: Allow a portion of payroll taxes to be invested in personal savings accounts. The idea was that at least some of this money would be invested in the stock market, thus enabling households to earn a higher rate of return on their contribution than they would receive from traditional Social Security.

Universal insurance coverage would enshrine the present inefficient system by increasing aggregate demand for, and thus the prices of, health care services.

While many economists (including me) have supported personal accounts as a better way to pre-finance Social Security benefits than government investment in the private sector, personal accounts on their own do not offer higher, risk-adjusted returns. Much of Social Security's projected lower returns to younger workers is a result of the high returns received by current retirees, who will continue to be paid. (Social Security is a pay-as-you-go system, in which current taxes go principally to finance current benefits.) Furthermore, investing in stocks, which over long periods can yield more than bonds, for example, is no free lunch.

As the Council of Economic Advisers chairman in 2002, I tried to make this very point to President Bush. In the Oval Office, I showed him two $1 bills and asked: "If one of these dollars is invested in bonds and the other in stocks, what is the present value of either today?" The answer, I told him, is $1. The higher return on stocks reflects greater risk than investments like bonds, and investors cannot be as confident about the outcome of their investments.

The bigger problem for Social Security, then and now, is that the present value of its unfinanced liabilities is in the trillions of dollars. President Bush understood this, but his primary emphasis on personal accounts sent a mixed message. After all, these accounts on their own would not solve Social Security's long-run financial problems. Mr. Bush's fixation thus dimmed prospects for the compromise that was probably available to advance Social Security reform.

Many Democrats saw personal accounts as the thin end of a wedge to dismantle traditional Social Security. Mr. Bush should have just jettisoned the term "personal accounts" and offered add-on expanded saving incentives--like letting individuals contribute more pretax dollars to I.R.A.'s and other pre-existing savings vehicles.

He also could have focused on low-income workers, as Social Security's central role is to be a safety net for seniors. He could have done this by supporting a higher benefit for low-income workers than their record of contributions might offer, or by matching their contributions to private savings incentives with refundable tax credits. To pay for these changes and restore Social Security's long-run financial stability, Congress could have slowed the growth rate of benefits for middle- and upper-income workers. Such a compromise would have achieved the goals of increasing private saving for retirement and shoring up Social Security's ability to meet the retirement needs of millions of Americans. Yet Mr. Bush's emphasis on both personal accounts and the future viability of Social Security allowed opponents to exploit inconsistencies in his reform agenda.

President Obama is now making the same kind of mistake with his relentless emphasis on the public option and universal coverage--two pet causes during his campaign. The big issue for health care reform is high costs relative to the value of health care received. The currently insured face high premiums, which act as a powerful disincentive for the uninsured to buy coverage. Large, looming fiscal burdens from Medicare and Medicaid are another burden on both taxpayers and the economy as a whole.

The Obama administration seems to understand the importance of reducing health care costs. But the president's universal coverage and public option proposals are directly at odds with his emphasis on cost containment. A public option that reduces costs through public subsidies simply shifts the expense to taxpayers (still us!), while increasing the share of health care the government (again back to us) would pay for with taxes. Mr. Obama's rhetoric is also extremely divisive: many Republicans see the public option as the thin end of a wedge to crowd out private health arrangements and are thus fiercely opposed to his reform efforts.

Universal coverage also undercuts the president's mantra of cost containment. Universal insurance coverage would enshrine the present inefficient system by increasing aggregate demand for, and thus the prices of, health care services. The increases in insurance costs for those already covered are estimated at 10 percent from this effort alone.

There is, however, a clear route to compromise. Limiting the tax exclusion for employer-provided insurance would promote cost sharing and reduce the cost of health insurance. Regulatory reforms to make lower-cost insurance options available to individual purchasers would also help. These cost reductions would make coverage available to a greater number of people. Revenue from limiting the tax exclusion could be used to offer modest tax credits to the currently uninsured, to subsidize coverage and to support the expansion of community health centers.

In the case of Social Security, we should have had two debates. The first would have been about how to shore up Social Security's long-term standing. Again, reductions in benefit growth for middle- and upper-income individuals offered a budget-neutral progressive solution. The second should have been about how to accomplish the president's goals of more private saving for retirement. There, enhanced savings incentives--including for lower-income households--offered a solution.

In the case of health care reform, we also need two debates. The first is over how to reform insurance arrangements to reduce cost growth and provide better value for the money spent. The second should be about access to health care. To achieve these goals, the president could embrace a compromise of tax and regulatory reform for cost containment, and progressive intervention to offer assistance to low-income individuals. But President Obama, like his predecessor, has been unwilling to let go of his campaign goals even as his words fuel intense partisan debate and obstruct his ultimate objective of improving health care value.

President Obama's message on reform is even more inconsistent than Mr. Bush's on Social Security, and his opponents know it. The president should stop talking about a "public option" and "universal coverage" and focus on real reform.

R. Glenn Hubbard is an adjunct scholar and a member of AEI's Council of Academic Advisers.

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About the Author


R. Glenn
  • Glenn Hubbard, a former chairman of the President's Council of Economic Advisers, is currently the dean of Columbia Business School. He specializes in public and corporate finance and financial markets and institutions. He has written more than ninety articles and books, including two textbooks, on corporate finance, investment decisions, banking, energy economics, and public policy. He has served as a deputy assistant secretary at the U.S. Treasury Department and as a consultant to, among others, the Federal Reserve Board and the Federal Reserve Bank of New York.
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