AEI » Latest Content American Enterprise Institute: Freedom, Opportunity, Enterprise Mon, 24 Nov 2014 19:14:52 +0000 en-US hourly 1 Education that works Tue, 21 Oct 2014 20:49:30 +0000 AEI’s exclusive Vision Talks series convenes America’s leading scholars, thinkers, and practitioners to offer fresh perspectives on key areas of policy and public debate. These talks will be filmed and disseminated as standalone videos, such as Robert Doar’s “What works in helping the poor?” talk.

In the United States, we think of education as the key to equal opportunity. But while spending on education is higher than ever, student achievement — particularly for disadvantaged students — has not kept pace.

Myriad government efforts to improve educational attainment have shown mixed results at best. Is conventional thought on reforming education misguided? Is there a better way to foster excellence? What can parents, educators, and citizens do about it, and how can they make an effective case for change?

Please join us for four concise talks on why America needs to rethink education, what that thinking looks like in practice, and how compelling communication can turn ideas into action.

This event will not be live streamed.

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The Hagel opportunity Mon, 24 Nov 2014 18:35:58 +0000 ...]]]> The resignation of Defense Secretary Chuck Hagel creates a golden opportunity for the new Republican majority in the Congress: not only will the hearings on Hagel’s replacement be a natural venue for reviewing the defense reductions and many retreats of the Obama years, but they provide a forum for Republicans to begin to chart a positive alternative.

That is critical for America and for the party’s prospects in 2016.  Only lately – and thanks to Obama’s serial weakness on issues from Syria to Iraq to Ukraine and even China – has the Republican party reclaimed its traditional advantage as the party of peace through strength.  No doubt we’ll hear plenty of criticism of Obama’s no-boots-on-the-ground-ever conduct of the ISIS war, but will we hear Republicans advancing a theory of victory?  Both the Congress and the prospective defense secretary will rend garments and gnash teeth on the pernicious effects of sequestration, but will the Republicans – whose job it is to frame a budget resolution that reflects the opposition party’s priorities – be so bold as to advance a solution to the underlying problem posed by the limits imposed by the 2011 Budget Control Act?

The confirmation hearings will also naturally focus on Sen. John McCain, in line to take the gavel as chairman of the Senate Armed Services Committee. McCain has a unique position as a voice of American strength in the world, but how he will behave as committee chair and as a steward of the defense establishment is an uncertain prospect. To oversimplify only slightly, McCain has never met a foe he wasn’t willing to fight but has never met a weapons program he didn’t want to cut.  McCain should realize that the armed forces have been so gutted by recent reductions that they are no longer capable of executing even the watered-down Obama defense strategy, let alone fulfilling the actual security needs of our time, in Europe, in the Middle East and in East Asia. And McCain’s “reformist” tendencies have been a skirt for Senate majority leader Sen. Mitch McConnell and other less-than-hawkish Republicans to hide behind. If the Republican Congress is to accomplish anything of serious purpose on defense, McCain must take a leading role, arguing without hesitation that rearmament is now more important than reform.

Despite the White House spin that the president was unsatisfied – the New York Times, almost laughably, pins the blame for the failing anti-ISIS strategy on the outgoing secretary – the need to replace Hagel comes at an unfortunate time. On a crass political level, it knocks the president’s immigration ploy out of the headlines. But it also recalls the underlying and ongoing narrative of Obama weakness, of which Chuck Hagel was a symbol. Indeed, given how Hagel loyally stuck to the White House line both on defense budget and war-related matters, he may be hard to replace.

But Obama’s weakness is not the same thing as a Republican strength. With two years still to go in the president’s term, there are limits to what Congress can do beyond saying no to Obama. But the Congress can – and is in fact constitutionally obligated to – adequately provide for America’s armed forces. The bipartisan National Defense Panel (which included former Undersecretary of Defense Michele Flournoy, one of those frequently mentioned as a Hagel replacement) has already charted a path to do so by returning to the defense spending levels charted in 2011, under the last budget prepared by then-Defense Secretary Robert Gates. By using the panel report as a benchmark, Sen. McCain and the Republican congressional leadership can frame the upcoming hearings not simply as a referendum on Obama, but as measuring stick for the next president.

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Obama’s incoherent immigration speech Mon, 24 Nov 2014 18:28:18 +0000 I count three ways President Barack Obama’s speech on immigration last night contradicted itself.

First, there was the absolutist language he used to justify his policy — coupled with restrictions that aren’t compatible with such language. The argument Obama made for his policy of offering legal status to millions of illegal immigrants was highly moralistic: We’re not supposed to rip apart families, we can’t deny people “a chance to make amends” and so forth. But you don’t qualify for the new forbearance if you’ve only been here a short time, or are coming here tomorrow. No chance to make amends for tomorrow’s illegal immigrant.

Second, the president insisted that all he was doing was exercising routine prosecutorial discretion. Yet he also explained that he was engaging in a quasi-legislative act. When speaking in one vein, he made it sound as though the policy he was announcing was old news: “We’re going to keep focusing enforcement resources on actual threats to our security.” But if that’s all he was doing, he wouldn’t have needed to make a speech.

He was more candid at other times, when he made clear that his policy was a partial substitute for the legislation he wants, which would offer illegal immigrants a path to citizenship. But his political challenge to Congress — I’m acting in your place because you haven’t, and to make you act — makes no sense if he’s just exercising prosecutorial discretion. It makes sense if he’s legislating from the White House.

Third, Obama invoked public opinion to legitimize his action — even though the public doesn’t appear to be on his side. “Most Americans support the types of reforms I’ve talked about tonight,” he said. That’s an arguable point. But most Americans don’t support Obama’s imposing those policies unilaterally. Polls shouldn’t trump our constitutional tradition: You know, all that stuff about Congress writing the laws. But the polls aren’t on Obama’s side anyway.

It was a speech, then, that was internally incoherent from top to bottom. Its tone clashed with the policies Obama actually intends to pursue. And it offered no plausible defense of those policies based on the Constitution, on a consistent moral argument or even on public opinion. It’s hard to imagine that it convinced many people about the propriety of the president’s actions.

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Secretary Hagel resigns: What next? Mon, 24 Nov 2014 17:57:19 +0000 ...]]]> The following American Enterprise Institute (AEI) scholars are available to comment on Secretary Chuck Hagel’s resignation:

Impact of the resignation on defense policy — where do we go from here:

Thomas (Tom) Donnelly
Codirector of AEI’s Marilyn Ware Center for Security Studies
Assistant: – 202.862.4872

Gary Schmitt
Codirector of AEI’s Marilyn Ware Center for Security Studies
Assistant: – 202.862.4872

Mackenzie Eaglen
Resident Fellow, AEI’s Marilyn Ware Center for Security Studies
Assistant: – 202.862.5945

On the politics of the resignation:

Danielle Pletka
AEI Senior Vice President, Foreign and Defense Policy Studies
Assistant:  – 202.862.5872

To arrange an interview with one of our scholars, contact a media services team member or email (202.862.5829).

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Hagel’s out: 4 points Mon, 24 Nov 2014 17:07:33 +0000 Just watched Barack Obama throw Chuck Hagel under the bus on national TV. Not a pretty picture, and Hagel looks appropriately miserable. But let’s set aside the theatrics, and examine the profound weirdness of Hagel’s canning. Some questions and observations:

  • So, he should never have been nominated because everyone, including all of Mr. Obama’s aides, said he was a dolt. But he was, and now he’s getting fired because, why? Actually, none of us are certain except that apparently someone needed to be fired.
  • Many assumed that someone in the White House would get the axe, because, well, they deserve it for the disaster of US foreign policy thus far. Instead, the hapless Hagel gets the can for: A) Not carrying out the president’s strategic mandate? B) For failing to win against ISIS? C) For being the guy in the red shirt? If you said C, congratulations.
  • Rumor has it that Senator Jack Reed, ex defense official Michele Flournoy and former deputy Ash Carter are in the running for this lousy job in an administration that doesn’t want a Secretary of Defense nor the department he runs. Reed seems the surest bet, because Flournoy has been unusually critical lately, positioning herself for a Clinton administration. Carter can’t possibly be such a masochist. But Reed, hmmm, maybe. Another possibility is just some White House sheep who will fade into irrelevance as Congress seeks to steer DoD back to financial health.
  • This is a terrible job for anyone with any self-respect. The administration won’t listen to the military, won’t do what’s necessary to fight ISIS, al Qaeda or other groups. Our allies spend all their time desperately pushing on DoD for more security, and no SecDef can deliver because there’s no power at the Pentagon. The Pentagon budget has been so brutalized that it is going to be a rough climb back into health, and the investments necessary won’t be made under the president. America is losing everywhere from Russia to Yemen to China and every soul who cares about the health of our national security realizes the next two years will be the nadir of two devastating terms.

Follow AEIdeas on Twitter at @AEIdeas.

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Thanksgiving week, Iran edition Mon, 24 Nov 2014 16:55:42 +0000 Here’s a modest peek into The Meaning of it All:

  • Despite heroic efforts to capitulate to Iran in the 11th hour, Tehran wasn’t having any of it. Reportedly, the main sticking points were the sanctions (Tehran: Lift them all now.); the duration of restrictions on the Iranian nuclear program (Tehran: 10 minutes is good.); and the scope of Iran’s enrichment program (Tens of thousands of centrifuges!).
  • The deadline was pushed back for another seven months to cut a deal with Iran. What’s going to happen in those seven months? First, Congress may abandon its supine posture, and begin to lay out the limits of any Iran deal. Apparently, among Iran’s demands was the complete lifting of sanctions, a requirement that can be fulfilled only by the legislature. Even the imperious Mr. Obama cannot reverse every piece of law, even with the high aim of satisfying Ayatollah Khamenei. Second, sanctions will continue to erode, and Iran will continue to make progress – perhaps slower, perhaps not – on its illicit nuclear weapons program. No one will call them out because…. The deal. THE DEAL!!!
  • What’s not in the cards for Iran? Cooperation with the International Atomic Energy Agency (IAEA) on possible military dimensions of its nuclear program. Apparently, the Obama administration gave up on that over the last week, in a sweet “what’s past is past” approach, signaling that what’s on Team O’s mind is an agreement that burnishes the president’s mantle, not an actual end to the threat posed by Iranian nuclear weapons. European allies were reportedly gobsmacked at the last capitulation, but what can they do? Nothing, they’ve given up everything but gossiping about the Iran deal.
  • And what does that mean? It means that from now on, all nuclear wannabes can simply say that “military dimensions” of their nuclear weapons programs are off limits. Look at the precedent.
  • Will Israel invade Iran? Now is the time. The shape of the deal isn’t going to be better than today, it’s likely to be far worse. Now that senior administration officials have labeled Netanyahu a coward, cast their lots with the Palestinians (including Hamas), and decided that the Shi’a side is the winning side for the future of the Middle East, Israel has less to lose. And it’s not as if the Iranians will be ready: Troops in Iraq; troops in Syria; proxies in Syria; Hamas in trouble. This is the window. Who knows what Jerusalem will do.
  • Exit question: Hey Mrs. Clinton, what do you think?

Follow AEIdeas on Twitter at @AEIdeas.

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America’s big economic slowdown, in one chart Mon, 24 Nov 2014 16:28:23 +0000 The above chart from a new CBO report breaks down potential GDP growth (actual GDP growth of late has been far slower) into its key drivers: you have one part labor, one part capital, and one part innovation. And the chart clearly shows why it will be difficult for the US economy to grow in the future as fast as it has in the past. From the report:

The growth in the supply of workers in the economy is expected to be about as slow during the  next 10 years as it was in the past decade, owing both to  the retirement of baby boomers and to a relatively stable  labor force participation rate among working-age women  after sharp increases in some previous decades. For  that reason, innovation that makes those workers more  productive—for instance, by improving the equipment they use and by enabling their work to be organized  more efficiently—will continue to be important.

We could boost labor force growth through more immigration or higher fertility rates. But it seems likely that greater innovation will have to do the heavy lifting. So how can we make the US economy more inventive and innovative? Well, there are some tailwinds. A wealthier world means a better educated one and more minds devoted to scientific and technological advancement. The OECD recently noted that China is headed to overtake the EU and US in science  and technology spending. And while I think the US should spend more on research — federal spending for R&D has generally declined since the 1960s — an open, dynamic economy will efficiently use good ideas from wherever they originate.

As economist Amar Bhide notes in the The Venturesome Economy, “The United States is not locked into a ‘winner take all’ race for scientific and technological leadership, and the growth of research capabilities in China and India—and thus their share of cutting-edge research—does not reduce U.S. prosperity. Indeed my analysis suggests that advances abroad will improve living standards in the U.S.”

We also have ever-better better tools for conducting research, such as superfast computers to DNA sequencing machines. “If tools and instruments are a key to further scientific progress, it is hard not to be impressed by the possibilities of the 21st century,” writes economist Joel Kotkin.

But we also have to make sure the US economy is as open and dynamic as possible, with lots of innovative startups commercializing invention and constantly threatening incumbent players.  Along these lines, it is worth checking out a new Cato Institute online collection of essay on how to boost economic growth.



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Interpreting broadband statistics: Frequently asked questions Mon, 24 Nov 2014 16:00:12 +0000 ...]]]> 1. What is the difference between broadband and the Internet?

The Internet is a global, virtual, or logical “network of networks” that links billions of devices around the world. Broadband, on the other hand, is the high-speed physical network at the edge of the Internet that connects end users to the global system. The most prevalent broadband technologies in the G7 are DSL, cable, fiber, and mobile. Overall, broadband is part of the Internet, but the Internet is more than just broadband.

2. How does the Internet work?

The Internet is 40,000 independently owned and operated networks that connect to each other either directly or through intermediaries, such as transit networks, according to mutually satisfactory terms and conditions. These networks all use the Internet Protocol addressing conventions. Some interconnections are paid – such as when an American ISP uses a transit network to reach other countries – but many are unpaid, such as one American ISP connecting to another. The Internet is administered by multi-stakeholder organizations in which governments play a role but do not dominate.

3. Wired vs. Mobile broadband: how are they the same and how are they different?

Both wired and mobile broadband networks use Internet Protocol and connect to the global Internet at common Internet Exchange Points. But wired and mobile networks run different application mixes and have different technical characteristics.

For instance, mobile networks rely on cell towers, which are part of an existing mobile network. In order to add capacity to mobile networks, operators need to modify tower configurations or, in the worst case scenario, buy spectrum licenses at auction, add additional antennas to each mobile device they sell, and again modify tower configuration. This process is complicated and expensive, and it takes a lot of time to implement. On the plus side, however, the mobile broadband environment is very dynamic and competitive, and it reaches most of us in most of the places we go.

On the other hand, wired networks rely on DSL, cable, FTTP, or other technologies rather than towers. It is easier and far less expensive for wired broadband companies to add capacity to their networks, but they don’t go where we go.

4. Who regulates broadband and what are the options?

Today, broadband companies are regulated to some extent under the FTC and antitrust law, and to some extent under the FCC. The FCC, however, does exercise the same authority over broadband services that it does over telephone services. The FCC is mainly concerned with broadband outcomes for consumers, and it may choose to expand its control should the commissioners believe that current broadband policy does not promote investment, competition, openness, and other political and policy goals.

The FCC could expand its power in three ways: it could reclassify broadband providers under Title II of the Communications Act; issue a broad set of principles that define acceptable and unacceptable practices and ban unacceptable ones on a case-by-case basis through adjudication; or impose anti-discrimination rules without reclassification. Other options for broadband regulation including merging the competition and consumer protection aspects of the FCC and FTC into a single organization, which would in turn regulate broadband companies.

broadband photo 35. Where does the US stand compared to the rest of the world in broadband quality?

Despite inherent challenges in wiring a country as enormous as the US, the country is performing extremely well. Historical data on international broadband speeds shows that the US continually ranks ahead of comparable nations. It is worth noting that the highest-ranking countries in terms of download speed consist of a few tiny, densely-populated nations where Internet use is much lighter in volume terms than it is in the US. Additionally, the US has greater choice of broadband technologies and speeds than most anywhere in the world. The US also has the most extensive build-out of 4G/LTE in the world.

6. How does the US regulatory policy for broadband compare to the rest of the world?

The US and Canada share a similar broadband regulatory framework. Both nations reserve subsidies for research and development, as well as for rural network expansion. They rely mostly on private capital to finance advanced urban systems. The role of government in this framework is to accelerate diffusion of advanced technologies to rural areas.

In contrast, Japan, Germany, and the U.K. have adopted a semi-deregulated regulatory frameworks in which legacy networks such as DLS are price-controlled but advanced fiber networks are not.

Finally, broadband in countries like France and Italy is almost entirely subsidy-dependent. Public investment drives broadband build-out and innovation, and the resulting broadband connections are cheap but low-quality. Additionally, the low sticker price of broadband in these countries does not take into account the enormous tax revenue that funds broadband service in the first place.

broadband photo 27. What effects does competition have on Internet quality? Price?

Contrary to popular belief, the market for broadband is dynamic and competitive. Firms like Comcast, AT&T, Verizon, and others face enormous incentives to invest in R&D and quickly introduce broad, sweeping innovations to the market. These innovations temporarily earn them more customers, higher revenues, and greater market share. However, firms that fall behind risk falling out of the market entirely.

Such competition generates increasingly better connections for consumers. While the cost of providing broadband in the US is inherently greater than costs in smaller, more densely-populated nations, consumers here pay less for more speed and capacity than citizens in comparable European nations.

Additionally, people usually come across several different Internet access points in a given day. For example, you probably have access to wired broadband both at home and at work. Meanwhile, you can simultaneously connect wirelessly on a smartphone or tablet in restaurants, cafes, public spaces, and elsewhere. Consumers are not beholden to any single ISP and can quickly and easily compare quality across services. Ultimately, ISPs compete against each other for overall market share and for shares of a single customer’s time. Consumers have a considerable amount of leverage in this market, which keeps quality high and prices low.

8. How are Internet services like Netflix and Amazon that depend on broadband regulated?

Netflix and Amazon are regulated under the FTC’s antitrust and consumer protection laws. As long as they continue to innovate and operate competitively, Netflix and Amazon are mostly ignored by federal regulators.

9. How profitable are broadband companies compared to: A) content creators; B) “Edge services?”

Averaging returns on invested capital (ROIC) across firms in each sector and then comparing sector averages shows that the edge services sector is most profitable and best protected from competition. Internet edge providers are protected from competition in the sense that their ROIC average consistently exceeds 15 percent, a common benchmark for determining whether a company has a “moat” against competition; these firms have averaged 17.8 percent ROIC over the past five years. In comparison, network service providers consistently earn around 5 percent ROIC.

Internet edge firms have produced 63 percent greater ROIC than content creators and 178 percent greater return than network service providers. There is clearly no factual basis on which to accuse networking companies of being excessively profitable.

10. What’s the next generation of broadband and how do we get there? Apps?

Most likely, the next generation of broadband will be wireless. The US is investing more in mobile and other wireless networks today than in residential wired connections. Wireless is the main focus of innovation in consumer products, and those who rely on wired connections at home are often supplied with more capacity than they need or use. Across the OECD, most of the growth in broadband subscriptions takes place on mobile.

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A pivotal shift in the new Child Care Development and Block Grant Mon, 24 Nov 2014 15:48:25 +0000 Last Wednesday, largely overshadowed by the immigration reform debacle, President Obama signed into law a bipartisan bill reauthorizing the Child Care Development and Block Grant Act (CCDBG)—the primary federal grant program providing child care assistance to low-income working families—just two days after it passed in the Senate with an overwhelming majority of 88 to 1. In an era when signed bills are all too rare, the CCDBG reauthorization isn’t just a signed bill but a good signed bill, with thoughtful new focus on early learning, quality, and transparency.

The most striking aspect of the newly-reauthorized CCDBG is its pivotal shift from viewing child care solely as a babysitting service for working parents to seeing it, too, as a crucial opportunity for young children’s early development and learning. CCDBG’s aim has long been to help lower-income parents—especially mothers—remain employed and off welfare, by ensuring they have safe, affordable care for their children while they’re at work. But a rapidly growing body of scientific research shows that a child’s early years are much more important to learning and brain development than was understood when CCDBG was first written in 1990 and last reauthorized in 1996. And in response to this new knowledge, the bill’s focus has been considerably expanded to providing young children with high quality learning opportunities, while supporting their working parents at the same time.

The new bill heavily stresses child development and learning (neither “development” nor “learning” were even mentioned in the previous bill), now requiring that states establish guidelines for what very young children should know and be able to do at progressive stages of their early development. It puts much stronger emphasis on improving program quality: while not telling states how to define quality, the bill requires that states both come up with their own definition of quality and develop a plan for improving it. “Standards” were barely mentioned in the previous bill, but in this one they’re underscored throughout with respect to program design, quality, safety, licensing, and oversight. The new CCDBG reflects an impressive commitment to maximizing the benefit of child care for the children who are in it.

Finally, the reauthorization includes a notable new stipulation for the federal government itself, mandating that in the coming year the Department of Health and Human Services (which runs both CCDBG and Head Start) work with the Department of Education (which runs several other early education programs) conduct an “interdepartmental review” of all programs for children from ages 0 – 5 and submit a recommendation to Congress for integrating and streamlining them. Those two agencies are hardly known for their close collaboration and, in theory anyway, this approach could lead to big improvements in the quality and combined impact of the federal government’s fragmented early childhood programs. Such reform would be an admirable accomplishment for stakeholders “inside the beltway” and a significant win for America’s most vulnerable young children.

In the meantime, CCDBG’s reauthorization establishes a solid, sensible framework that enables the people closest to children to make decisions for their care, while leaving the major decision-making and implementation power in the hands of the states. Now it’s up to the states to use that power wisely—so parents who have to can work and kids get the early care and education they need to thrive.

Follow AEIdeas on Twitter at @AEIdeas.

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Obamacare’s three-legged stool of deception regarding employer health plans Mon, 24 Nov 2014 15:21:15 +0000 ...]]]> Anyone who has listened to the Gruber tapes has heard Prof. Gruber’s repeated references to the “three-legged stool” that forms the core of Obamacare.[1]  However, those who pay close attention to his remarks–variously characterized as “arrogant” (Charles Krauthammer), “ careless” (New York Times), “dumb” (Ezra Klein) “ ill-advised and indefensible” (Times Argus), “offensive” (New York Times), and “stupid” (David Axelrod)–may have detected that Gruber enthusiastically endorses (and Obamacare contains) a more sinister three-legged stool of deception regarding employer health plans.

The first leg is that the Cadillac tax is paid by insurance companies, when in reality it is paid by employees. The second leg is that the Cadillac tax is aimed at “lavish” high cost plans, when in reality it is designed to eventually hit virtually every employer health plan (even those with lower-than-average costs). The third leg is that the Cadillac tax is functionally equivalent to a reform long championed by conservatives: a cap on the tax exclusion for employer-sponsored health insurance.  For reasons explained below, that is the most pernicious deception of all.

This carefully designed three-legged stool of deception was crafted to achieve the greatest deception of all: that Obamacare “would support and sustain the employer-based system, not erode it.”   In fact, Obamacare is designed to slowly but surely erode and eventually eradicate the employer-based health system .

Deception #1: The Cadillac Tax is Paid By Insurance Companies

This is the deception about which Prof. Gruber is most transparent. Several different lecture videos make reference to this tax: the first from from a 2011 lecture on Pioneer Institute for public policy research in Boston, another in January 18, 2012 at the Noblis Innovation and Collaboration Center (Falls Church, VA), another at University of Rhode Island on November 1, 2012 and the third at an October 2013 event at Washington University in St. Louis. In the latter lecture (31:48), he gleefully notes that “the American voters are too stupid to know the difference” between a 40% excise tax on employer-provided health benefits and the identical tax levied on health insurers. For reasons he discusses earlier in that tape, the former would have been perceived as “taxing my health benefits” (which would have incited fierce opposition) whereas the designers firmly believed that the latter would be perceived as being paid by the very same big bad insurance companies that had been repeatedly vilified by President ObamaKathleen SebeliusNancy Pelosi and progessive bloggers throughout the debate over health reform.  

Ezra Klein acknowledges quite clearly what was going on: “That [the Cadillac tax on insurers] was a purely political move that was meant to slightly obscure what the law was really doing. Obama had run against Sen. John McCain’s plan to cap the employer deduction, and he couldn’t propose the exact same policy.[2] And Democrats preferred the optics of taxing insurers rather than taxing employers, even though, in the end, workers would pay in either scenario. It was a perfectly transparent political ploy that slightly degraded the underlying policy.”

But why does this seemingly minor subterfuge matter?  As Forbes opinion editor Avik Roy has pointed out: “This allowed President Obama and his allies to falsely claim that Obamacare wouldn’t increase taxes on the middle class, despite the fact that the Cadillac tax clearly affects middle-income Americans, especially unionized industrial laborers.  This was a direct violation of Senator Obama’s 2008 vow not to raise middle-class taxes. “I can make a firm pledge,” said Obama on September 12, 2008. “Under my plan, no family making less than $250,000 a year will see any form of tax increase. Not your income tax, not your payroll tax, not your capital gains taxes, not any of your taxes.”

In short, Obamacare was deliberately crafted to break that “no new taxes on the middle class” pledge by relying on the “stupidity” of the American voter not to notice.[3]  This was not an inadvertent “whoops” unintended consequence of a hastily-put-together-poorly-drafted law: it was deliberate deception well understood by all the cooks who baked this awful cake.

Deception #2: The Cadillac Tax is Aimed Only at “Lavish” High Cost Plans

The very name “Cadillac” tax connotes that it is aimed at gold-plated rather than run-of-the-mill health insurance plans. Prof. Gruber’s comic book explanation of Obamacare elaborates: “As for the Cadillac tax, it is designed to keep people from loading up on unnecessary health care as a tax write-off….What it will do is cut into the one-third of unnecessary care that we waste” (p. 136).  In his 2013 video (31:07), he states “for insurance above a certain level, a very high level, then we tax extra above that” (emphasis added).

Even the president weighed in: as summarized by CNN’s Jake Tapper,

at a town hall meeting on health care on July 23, 2009 in Shaker Heights, Ohio, Obama explained that the thinking of the Cadillac tax was to target plans that spend unnecessarily and excessively, thus driving up health care costs, such as a $25,000 plan, ‘so one that’s a lot more expensive and a lot fancier than the one that even members of Congress get.’ The thinking, Obama explained, was that ‘maybe at that point what you should do is you should sort of cap the exclusion, the tax deduction that is available, so that we’re discouraging these really fancy plans that end up driving up costs’” (emphasis added).

To be sure, the Cadillac tax is aimed at the highest cost plans, but only initially. But as Gruber himself states (2:53 in this clip assembled by Jake Tapper): ”What that means is a tax that starts by only taxing about the top eight percent of health insurance plans, essentially amounts over the next 20 years to basically getting rid of the employer exclusion-provided health insurance. This was the only political way we were ever going to take on what is one of the worst public policies in America” (emphasis added). More concretely:

  • Tevi Troy and Mark Wilson estimate that “by 2031 the cost of the average family health-care plan is expected to hit the excise-tax threshold.”
  • But the adverse impact could play out much more rapidly than that 2031 figure might imply. Bradley Herring, a health economist at Johns Hopkins Bloomberg School of Public Health, estimates that as many as 75 percent of plans could be affected by the tax just in the next decade.
  • A recent Towers Watson survey of employers had an even more bleak forecast, with 82% of employers expecting to hit the Cadillac tax threshold by 2023.

In short, what was advertised as a 40% tax on a small number of egregiously high cost employer-provided health plans will–by design–morph into a 40% tax on all employer-sponsored coverage! [To avoid any confusion: the 40% excise tax is applied to the amount of the employee benefit that exceeds the tax threshold, not the entire cost of an employer's health plan; my point is that eventually all employer-sponsored health benefits would see at least a portion of their costs subjected to the 40% tax].

This again was literally the opposite of what the president pledged. In the Shaker Heights town meeting, the president had stated:

what I said and I’ve taken off the table would be the idea that you just described, which would be that you would actually provide — you would eliminate the tax deduction that employers get for providing you with health insurance, because, frankly, a lot of employers then would stop providing health care, and we’d probably see more people lose their health insurance than currently have it. And that’s not obviously our objective in reform

Note that none of what President Obama said in those remarks is in dispute. Indeed, in 2010, Gruber himself estimated that elimination of the tax exclusion would result in 15 million fewer people getting employer-sponsored coverage, with an attendant rise in the number of uninsured by 11 million. Admittedly, the Shaker Heights remarks were made 5 months before the Senate passed the plan that ultimately would be signed into law by the president. But was the president truly that badly informed about the contents of his own health law that he would sign a bill that did the exact opposite of what he pledged?  Or was he engaging in flagrant deception knowing that (in Gruber’s words) “this was the only political way we were ever going to take on what is one of the worst public policies in America”?  You be the judge.

Deception #3: The Cadillac Tax is Functionally Equivalent to Capping (or Eliminating) the Tax Exclusion

Ezra Klein to this day continues to promote this canard: “Gruber was rightly pissed off when Democrats moved from the clean, simple solution of capping the deduction permitted for employer-based health care to the more complex, but functionally similar, excise-tax on high-cost health plans” (emphasis added).  Of course, Gruber’s anger evidently dissipated rather quickly. By 2013, we see him enthusiastically explaining that “The Cadillac tax is a great thing. It puts an end to this incredibly inefficient structure [the employer tax exclusion] that induces excess medical spending” (31:55).

But there’s a rather sizable difference between imposing a 40% excise tax on every single health plan provided by employers and a policy that simply caps (or even eliminates) the tax exclusion from those same policies.  Remember that the 40% excise tax does not eliminate the awful tax exclusion that motivates the Cadillac tax. Instead, it merely “cancels” or “offsets” the subsidy (or in terms of other policy debates, serves as a “ clawback” to reduce or eliminate that subsidy).

The easiest way to understand this is to compare the Cadillac tax to capping the tax exclusion at the identical dollar threshold used to determine whether a plan is subject to the Cadillac tax. Consider 2 California workers, one earning $10 an hour and the other earning $50. The first worker does not have enough income to pay any federal income tax, so the marginal tax rate on the last dollar earned is only 17.3%, consisting of 15.3% for Social Security and 2% for California income taxes.[4]  Thus, by not taxing that worker’s health benefits as income, the tax exclusion essentially provides a 17.3% discount or subsidy.  The second worker faces a marginal tax rate of 52.6%, consisting of 28% for federal income taxes, another 9.3% for California income taxes and 15.3% for Social Security. This worker receives a 52.6% savings (subsidy) on whatever premiums are paid for employer-sponsored coverage. This upside-down subsidy structure clearly is very offensive to Jon Gruber (listen to the tapes!) and is part of the motivation that conservative health reformers have instead advocated for some sort of standardized tax credits to replace the exclusion.

But the Cadillac tax does not eliminate this unfairness!  The current tax exclusion remains in full force for the full amount of employer-provided coverage costs. The excise tax effectively subtracts 40% from whatever subsidy a worker is getting–but only for the component of costs that exceeds the Cadillac tax threshold. Thus, if both illustrative workers are enrolled in health plans costing $12,200 for individual coverage, $2,000 would be subject to the Cadillac tax of 40%. Thus, the low-wage worker would get a subsidy of $2111 (17.3% x $12,200) minus $800, for a net of $1,311 and the high-wage worker would get a subsidy of $6417 (52.6% x $12,200) minus $800, for a net of $5,617. Sound fair to you?

Obviously, as the amount of premiums subject to the excise tax rises, there will come a cross-over point for the low-wage worker who eventually would pay a tax penalty for the privilege of retaining employer-provided health coverage. But that point never comes for the high-wage worker!  That is, even if the inflation adjuster got us to a point where virtually the entire premium were subject to the excise tax, the high-wage work still would enjoy a net subsidy of 12.6% (52.6% minus 40%).  Sound fair to you?

In short, whereas capping the tax exclusion even-handedly eliminates the tax subsidy for all workers above a certain premium dollar threshold, the Cadillac tax is far more pernicious–imposing a far heavier burden on low-wage workers than high-wage workers. That is, instead of merely reducing the low-wage worker’s tax subsidy to zero, the Cadillac tax goes overboard by using the tax code to actually penalize the provision of employer-provided health benefits to low wage workers. In contrast, while it obviously reduces the magnitude of the subsidy for high wage workers, it nevertheless leaves in place a net taxpayer subsidy for the identical health coverage for which a low-wage worker would face a tax penalty! Leave aside fairness: does that make any policy sense to you?

The Ultimate Purpose of Obamacare: A Slowed Forced March Into Government-Run Exchanges

In the 2013 video (10:01), Prof. Gruber explicitly acknowledges “most Americans are pretty happy with their health insurance….you don’t get far in America politics by taking away something that makes 250 million people happy to make 50 million other people happy.”  And yet, at its core, Obamacare is designed to do precisely that: to eventually force every American with employer-based coverage onto the Exchanges whether they like it or not.

You may think I’m exaggerating, but don’t take my word for it. First, progressive Obamacare advocates Timothy Jost and Joseph White have conceded that a “major reason why some distinguished economists with whom we have discussed the excise tax endorse the tax is that they see it as a step towards eliminating the employer role in health insurance” (emphasis added).  Second (and more important than intentions in any case), the (now former) Medicare actuary said as much just months after the law was passed. According to a McClatchy report (9.10.10), “CMS chief actuary Richard Foster said he expected “essentially all” Americans to get their private coverage through the exchanges one day.”  This is not some “scientific wild-assed guess:”  it represents the professional judgment of the Medicare actuary based on an analysis of how the inflation-adjustment factor for the Cadillac tax will play out over time.

Under the law, “in 2019, the threshold amounts for the excise tax are increased by the Consumer Price Index (CPI) plus one percentage point. In 2020 and thereafter, the threshold amounts are indexed by just the CPI.” According to the Kaiser Employer Health Benefits Survey, the average cost of family coverage has risen 5.2% annually over the past 4 years (Exhibit 1.1). According the CBO’s latest projections, the CPI will increase by only 2.1% over the next four years (Table 2-3). With such a large gap between the rate at which the cost of employer-provided health coverage is increasing (a reflection of both utilization and price trends) and the rate at which the Cadillac threshold rises, it should be plain to see that a) eventually every employer plan will be subject to the Cadillac tax; and b) for every employer plan that hits the Cadillac tax threshold, the share of plan premiums subject to that tax will steadily grow every year.  It should be quickly evident that for most employees, if the amount to which the Cadillac tax applies exceeds $5000, it would be cheaper for an employer simply to pay the $2000 penalty for not providing mandatory health insurance coverage and instead let workers shop on the Exchanges. That strategy would have the side benefit of letting the lowest paid workers qualify for subsidies whose size would great exceed the tax subsidies provided through the exclusion.  This is why, even though it may take decades to play out, Obamacare can be said to be designed to eradicate employer-provided coverage.

This is yet another instance of the nanny-state mentality that permeates Obamacare. Instead of merely correcting flawed tax policy to make tax incentives neutral between providing employer-provided coverage or letting workers choose their own coverage, Obamacare is using the tax code to engineer the designer’s preferred solution: a world in which employers do not provide health coverage. Let me be clear that I myself actually favor such a world: Avik Roy has repeatedly demonstrated how Switzerland and Singapore (based entirely on individual private insurance) could achieve superior results at far less cost than Obamacare.  But I would never dream of relying on subterfuge to force all Americans into my preferred health system.

In light of the fact that “Gruber has contracts with the federal government and at least eight states totaling about $6 million,” there now are demands that he pay some of that money back. Indeed, Vermont has already stopped payment on one of those contracts. Prof. Gruber evidently will be in the hot seat as he faces chairman Darrell Issa and others on the House Committee on Oversight and Government Reform on December 9. But perhaps instead Prof. Gruber deserves thanks and a bonus for single-handedly having done more than any other Obamacare advocate to expose the web of deceptions on which this law was built.[5]


[1] In Jon Gruber’s telling, one leg consists of insurance reforms such as requiring insurers to take all comers–even those with pre-existing conditions–without charging higher premiums to those who are sick. The second leg consists of an individual mandate to make such reforms viable to insurers–since without such a mandate to force the young and healthy to have coverage, the requirement to take all comers without risk-adjusting premiums could quickly lead to a “death spiral.” The third leg are subsidies to make mandated coverage affordable.

[2] Mr. Klein’s language is quite revealing here. It’s not that President Obama couldn’t endorse John McCain’s bold solution to health reform: it’s that he wouldn’t. Recall that candidate Obama was fiercely opposed to the individual mandate: indeed, this was one of the principal issues on which he and Hillary Clinton famously disagreed in primary debates on the matter. Yet once in office, he had no problem whatsoever in literally reversing his position on the matter, ultimately coming around to the view of Jon Gruber and others that such a mandate was one of the essential legs in the three-legged stool logic of how Democrats intended to approach health reform. In short, the president might have elected to go down a bipartisan path on health reform, but deliberately chose not to do so. This is quite different than the conventional wisdom among progressives that Republicans stone-walled the president and never offered any good ideas of their own.

[3] Of course, the Cadillac tax is but one illustration, but Prof. Gruber’s detailed account reveals the mentality behind other taxes in the law. Americans will resist taxes levied directly on themselves, but will passively accept the identical taxes when passed along by businesses that at first glance appear to be paying the tax. I have earlier shown that when we trace back such hidden taxes to the families who ultimately bear them, it turns out that in its first 10 years, Obamacare will force even the lowest cost families to pay roughly $7,000 in higher taxes.  On a similar note, I have pointed out that only 30% of the myriad of Obamacare taxes explicitly target “rich” households.

[4] 15.3% includes both the employee share (7.65%) and companion employer share on grounds that the worker effectively pays for the latter in the form of reduced cash wages even though the employer writes the check.

[5] The caveat “more than any other Obamacare advocate” is important here. Conservative health reformers have been systematically revealing the deceptions embedded in this misguided law since even before its inception (the most noteworthy being Rep. Paul Ryan’s devastating take-down of the Senate bill–the one eventually signed into law–at the Bipartisan Meeting on Health Reform held at Blair House just weeks before the bill was signed into law). It speaks volumes that Rep. Ryan’s 6 minutes of remarks–arguably the clearest, most cogent and memorable of the 6.5 hours of discussion that day–are not included among the 20 clips included in Recommended Highlights on the White House web page devoted to that event. I myself have tried to codify the most egregious deceptions contained in Obamacare.

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Unfulfilled political promises Mon, 24 Nov 2014 14:58:20 +0000 ...]]]> The Obama administration has wisely decided to lower expectations about new health coverage under the Affordable Care Act in the hope that by setting the bar low enough even mediocre enrollment gains become a political victory. Contrary to earlier predictions that the exchanges would enroll 13 million people during the second open enrollment period (which runs for 3 months starting Nov. 15), the administration now says the number is likely to range from 9 to 9.9 million people. Health and Human Services Secretary Sylvia Mathews Burwell said the administration is aiming for 9.1 million paid-up enrollees by the end of 2015.

That can hardly be considered a sign that Obamacare is working. The new enrollment target is just over 2 million greater than the number of people who currently buy their health insurance through the exchanges. It falls far short of the 25 million who, according to the Congressional Budget Office, will have exchange coverage within three years.

This is not surprising. The Affordable Care Act enrollment process is complicated even when the website is working. The second round of sign-ups will be that much harder. The 6.7 million people who ran the gauntlet of the 2014 open enrollment season knew they wanted health coverage and were willing to put up with the frustrations of broken websites and unclear answers.

New enrollees have to be convinced, and the insurance offered this year is as unattractive as ever. Many people will be discouraged by high costs (with deductibles often exceeding $4,000 a year) and not being able to keep their doctors.

To achieve high enrollment numbers, the exchanges must keep those who bought coverage this year as well as attract new customers. The administration announced at the end of June that anyone who had purchased insurance through the exchange could be auto-enrolled in the same plan next year. That reduces disruption in the insurance market and avoids having people lose coverage if they fail to take action. The auto-enrollment option would take pressure off the exchanges if millions of current enrollees decide not to look at the options for next year.

That could be an expensive mistake, and the Department of Health and Human Services has backed off its enthusiasm for auto-enrollment. Unlike employer-sponsored insurance, which uses auto-enrollment routinely for employees, the Affordable Care Act combines health coverage with a welfare program. The exchange subsidy is tied to the second-lowest cost silver plan. Anyone who selected such a plan for this year could find that their plan’s premiums for 2015 have increased 30 percent or more – much higher than that plan’s actual increase. What had been the lowest premium plan after the subsidy this year may become a very pricey option because a competitor did what smart competitors do: undercut the competition.

The health care law has turned the virtues of competition on its head. Plan competition helps lower the market price of insurance, as one would expect. But the complicated subsidy scheme converts those savings into higher costs for many low-income families who are eligible for federal subsidy payments unless they brave the enrollment process again.

[SEE: Editorial Cartoons on the Economy]

As difficult as enrollment has been for the Affordable Care Act, greater troubles are ahead. The individual mandate requires the Internal Revenue Service to withhold refunds from anyone who failed to maintain insurance coverage, starting with 2014 tax returns. The White House might excuse that requirement, at least for this year. Penalizing anyone who did not have insurance because the government’s contractors were unable to create a functioning is unfair and poor politics. Dropping enforcement opens the door for Congress to eliminate the penalty altogether, in what could be a bipartisan rebuke of regulatory overreach.

The IRS is also supposed to recover subsidy overpayments from families who underestimated their incomes when they applied for exchange coverage. Instead of a fine of a few hundred dollars for not being insured, some families will be faced with the demand to repay thousands of dollars that they cannot afford. In most cases, these overpayments are simply mistakes, not fraud. Aggressive enforcement will drive more people away from the exchanges. Better to pay the mandate fine than risk IRS collection actions that can ruin credit and destroy credibility.

The employer mandate has proven to be an unworkable and unnecessary mistake. Instead of forcing employers to give generous insurance coverage to their low-wage workers, the mandate is threatening to reduce the number of hours they work below 30 hours. Perversely, workers who most deserve our help will suffer the consequences of lower incomes with no greater access to insurance.

The pending Supreme Court decision on whether the federal exchange can distribute premium subsidies to its enrollees is another threat to the Affordable Care Act. If the court sides with the plaintiffs and agrees that only state exchanges may distribute subsidies, enrollees in the 37 states that rely on the federal exchange will lose their subsidies and enrollment will plummet.

By now it is clear that the political promises made by the president and his supporters could not be fulfilled. You cannot keep your old insurance and you cannot be certain that you can keep your doctor. Insurance costs are not lower, and the new subsidies are being paid through higher taxes and higher private premiums. These are not “glitches.” They are part and parcel of the law.

Over its entire history, a majority of the public has opposed the Affordable Care Act. As the open enrollment season kicked off, a Gallup survey found that only 37 percent of Americans approve of Obamacare. Maybe Americans are not so dumb, after all.

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