Robert Reich's Blog

Harry Reid, and What Happened to the Public Option

2009-11-19T15:58:00Z

First there was Medicare for all 300 million of us. But that was a non-starter because private insurers and Big Pharma wouldn't hear of it, and Republicans and "centrists" thought it was too much like what they have up in Canada -- which, by the way, cost Canadians only 10 percent of their GDP and covers every Canadian. (Our current system of private for-profit insurers costs 16 percent of GDP and leaves out 45 million people.)

So the compromise was to give all Americans the option of buying into a "Medicare-like plan" that competed with private insurers. Who could be against freedom of choice? Fully 70 percent of Americans polled supported the idea. Open to all Americans, such a plan would have the scale and authority to negotiate low prices with drug companies and other providers, and force private insurers to provide better service at lower costs. But private insurers and Big Pharma wouldn't hear of it, and Republicans and "centrists" thought it would end up too much like what they have up in Canada.

So the compromise was to give the public option only to Americans who wouldn't be covered either by their employers or by Medicaid. And give them coverage pegged to Medicare rates. But private insurers and ... you know the rest.

So the compromise that ended up in the House bill is to have a mere public option, open only to the 6 million Americans not otherwise covered. The Congressional Budget Office warns this shrunken public option will have no real bargaining leverage and would attract mainly people who need lots of medical care to begin with. So it will actually cost more than it saves.

But even the House's shrunken and costly little public option is too much for private insurers, Big Pharma, Republicans, and "centrists" in the Senate. So Harry Reid has proposed an even tinier public option, which states can decide not to offer their citizens. According to the CBO, it would attract no more than 4 million Americans.

It's a token public option, an ersatz public option, a fleeting gesture toward the idea of a public option, so small and desiccated as to be barely worth mentioning except for the fact that it still (gasp) contains the word "public."

And yet Joe Lieberman and Ben Nelson mumble darkly that they may not even vote to allow debate on the floor of the Senate about the bill if it contains this paltry public option. And Republicans predict a "holy war."

But what more can possibly be compromised? Take away the word "public?" Make it available to only twelve people?

Our private, for-profit health insurance system, designed to fatten the profits of private health insurers and Big Pharma, is about to be turned over to ... our private, for-profit health care system. Except that now private health insurers and Big Pharma will be getting some 30 million additional customers, paid for by the rest of us.

Upbeat policy wonks and political spinners who tend to see only portions of cups that are full will point out some good things: no pre-existing conditions, insurance exchanges, 30 million more Americans covered. But in reality, the cup is 90 percent empty. Most of us will remain stuck with little or no choice -- dependent on private insurers who care only about the bottom line, who deny our claims, who charge us more and more for co-payments and deductibles, who bury us in forms, who don't take our calls.

I'm still not giving up. I want every Senator who's not in the pocket of the private insurers or Big Pharma to introduce and vote for a "Ted Kennedy Medicare for All" amendment to whatever bill Reid takes to the floor. And if this fails, a "Ted Kennedy Real Public Option for All" amendment. Let every Senate Democratic who doesn't have the guts to vote for either of them be known and counted.

The Great Disconnect Between Stocks and Jobs

2009-11-18T15:42:00Z

How can the stock market hit new highs at the same time unemployment is hitting new highs? Simple. The market is up because corporate earnings are up. Corporate earnings are up because companies are cutting costs. And the biggest single cost they’re cutting is their payrolls. So they let people go and, presto, their balance sheets look better and their stock prices rise.

In the old-fashioned kind of recession decades ago, big companies laid off people with the expectation of rehiring them when the economy turned up. Then a few recessions back, companies started laying off people for good, never rehiring them even when the economy recovered.

In the Great Recession of 2008-2009, companies are going a step further. They’re using this sharp downturn to cut payrolls even below where they were when times were good. Outsourcing abroad, setting up shop in China and elsewhere, contracting out, replacing people with software and automated machines – they're doing whatever it takes to get payrolls down so earnings bounce up.

Caterpillar earned $404 million in the third quarter, or 64 cents a share. Analysts had expected only 5 cents. Caterpillar’s stock is up 165 percent since March. How did Caterpillar do it? Not by selling more bulldozers. It did it by cutting over 37,000 jobs.

The result, overall, is an asset-based recovery, not a Main Street recovery. Yes, the economy is growing again, but the surge in productivity is a mirage. Worker output per hour is skyrocketing because companies are generating almost as much output with fewer workers and fewer hours.

The Fed, meanwhile, has become an enabler to all this, making it as cheap as possible for companies to axe their employees. Money costs so little these days it’s easy to substitute capital for labor. It’s also easy to buy up foreign assets with cheap American money. And it’s now blissfully easy for Wall Street to borrow money almost free and buy all sorts of interests in foreign assets, especially commodities. That's why we're seeing the prices of foreign commodities and other assets go through the roof.

At the same time, the Treasury continues to be fixated on keeping banks afloat. The Administration's mortgage mitigation efforts are lagging. Small businesses are starved of credit. The White House has announced a "jobs summit," which is better than nothing but not nearly as good as pushiing immediately for a larger stimulus, a new jobs tax credit, and a WPA-style jobs program.

The Fed and the Teasury have, in effect, placed a huge bet on a recovery driven by asset prices. That’s a bad bet. The great disconnect between the stock market and jobs is pushing stock prices way out of line with the real economy. This isn't sustainable.

No economy can recover without consumers. Yet American consumers, who constitute 70 percent of the U.S. economy, are facing mounting job losses as well as pay cuts. They’re in no mood to buy and won’t be for some time.

Where is this heading? No place good. Without a major shift in policy -- both at the Fed and in the White House -- the economics point to a big stock-market correction and a double dip. The politics point to substantial losses for Democrats next year.

Obama, China, and Wishful Thinking About American Jobs

2009-11-17T15:17:00Z

President Obama says he wants to "rebalance" the economic relationship between China and the U.S. as part of his plan to restart the American jobs machine. "We cannot go back," he said in September, "to an era where the Chinese . . . just are selling everything to us, we're taking out a bunch of credit-card debt or home equity loans, but we're not selling anything to them." He hopes that hundreds of millions of Chinese consumers will make up for the inability of American consumers to return to debt-binge spending.

This is wishful thinking. True, the Chinese market is huge and growing fast. By 2009, China was second only to the U.S. in computer sales, with a larger proportion of first-time buyers. It already had more cell-phone users. And excluding SUVs, last year Chinese consumers bought as many cars as Americans (as recently as 2006, Americans bought twice as many).

Even as the U.S. government was bailing out General Motors and Chrysler, the two firms' sales in China were soaring; GM's sales there are almost 50% higher this year than last. Proctor & Gamble is so well-established in China that many Chinese think its products (such as green-tea-flavored Crest toothpaste) are Chinese brands. If the Chinese economy continues to grow at or near its current rate and the benefits of that growth trickle down to 1.3 billion Chinese consumers, the country would become the largest shopping bazaar in the history of the world. They'll be driving over a billion cars and will be the world's biggest purchasers of household electronics, clothing, appliances and almost everything else produced on the planet.

So this will mean millions of American export jobs, right? No.

In fact China is heading in the opposite direction of "rebalancing." Its productive capacity keeps soaring, but Chinese consumers are taking home a shrinking proportion of the total economy. Last year, personal consumption in China amounted to only 35% of the Chinese economy; 10 years ago consumption was almost 50%. Capital investment, by contrast, rose to 44% from 35% over the decade.

China's capital spending is on the way to exceeding that of the U.S., but its consumer spending is barely a sixth as large. Chinese companies are plowing their rising profits back into more productive capacity—additional factories, more equipment, new technologies. China's massive $600 billion stimulus package has been directed at further enlarging China's productive capacity rather than consumption. So where will this productive capacity go if not to Chinese consumers? Net exports to other nations, especially the U.S. and Europe.

Many explanations have been offered for the parsimony of Chinese consumers. Social safety-nets are still inadequate, so Chinese families have to cover the costs of health care, education and retirement. Young Chinese men outnumber young Chinese women by a wide margin, so households with sons have to accumulate and save enough assets to compete in the marriage market. Chinese society is aging quickly because the government has kept a tight lid on population growth for three decades, with the result that households are supporting lots of elderly dependents.

But the larger explanation for Chinese frugality is that the nation is oriented to production, not consumption. China wants to become the world's preeminent producer nation. It also wants to take the lead in the production of advanced technologies. The U.S. would like to retain the lead, but our economy is oriented to consumption rather than production.

Deep down inside the cerebral cortex of our national consciousness we assume that the basic purpose of an economy is to provide more opportunities to consume. We grudgingly support government efforts to rebuild our infrastructure. We want our companies to invest in new equipment and technologies but also want them to pay generous dividends. We approve of government investments in basic research and development, but mainly for the purpose of making the nation more secure through advanced military technologies. (We regard spillovers to the private sector as incidental.)

China's industrial and technological policy is unapologetically direct. It especially wants America's know-how, and the best way to capture knowhow is to get it firsthand. So China continues to condition many sales by U.S. and foreign companies on production in China—often in joint ventures with Chinese companies.

American firms are now helping China build a "smart" infrastructure, tackle pollution with clean technologies, develop a new generation of photovoltaics and wind turbines, find new applications for nanotechologies, and build commercial jets and jet engines. GM recently announced it was planning to make a new subcompact in China designed and developed primarily by the Pan-Asia Technical Automotive Center, a joint venture between GM and SAIC Motor in Shanghai. General Electric is producing wind turbine components in China. Earlier this month, Massachusetts-based Evergreen Solar announced it will be moving its solar panel production to China.

The Chinese government also wants to create more jobs in China, and it will continue to rely on exports. Each year, tens of millions of poor Chinese pour into large cities from the countryside in pursuit of better-paying work. If they don't find it, China risks riots and other upheaval. Massive disorder is one of the greatest risks facing China's governing elite. That elite would much rather create export jobs, even at the cost of subsidizing foreign buyers, than allow the yuan to rise and thereby risk job shortages at home.

To this extent, China's export policy is really a social policy, designed to maintain order. Despite the Obama administration's entreaties, China will continue to peg the yuan to the dollar—when the dollar drops, selling yuan in the foreign-exchange market and adding to its pile of foreign assets in order to maintain the yuan's fixed relation to the dollar. This is costly to China, of course, but for the purposes of industrial and social policy, China figures the cost is worth it.

The dirty little secret on both sides of the Pacific is that both America and China are capable of producing far more than their own consumers are capable of buying. In the U.S., the root of the problem is a growing share of total income going to the richest Americans, leaving the middle class with relatively less purchasing power unless they go deep into debt. Inequality is also widening in China, but the problem there is a declining share of the fruits of economic growth going to average Chinese and an increasing share going to capital investment.

Both societies are threatened by the disconnect between production and consumption. In China, the threat is civil unrest. In the U.S., it's a prolonged jobs and earnings recession that, when combined with widening inequality, could create political backlash.

An Open Letter to Harry Reid on Controlling Health Care Costs

2009-11-13T14:16:00Z

Dear Senator,

I know you're in a tough spot. It would be bad enough if you only had to get Ben Nelson, Evan Bayh, Mary Landrieu, and Blanche Lincoln on board, but anyone who has to kiss Joe Lieberman's derriere deserves a congressional medal of honor.

But Harry, you really need to take on future health-care costs. The House bill fails to do this. The public option in the House bill is open only to people without employer-provided health insurance. That will be too small a number to have bargaining clout to get good deals from drug companies and medical providers. And it will mainly attract people who have more expensive medical needs, which is why the Congressional Budget Office decided it would cost more than it would save.

]]>
In addition to the House's weak public option, the deals the White House and Max Baucus made with the drug companies and the AMA will force Americans to pay even more. If, on the other hand, Medicare were allowed to negotiate lower drug prices, biotech drugs weren't granted a twelve-years monopoly, and doctors had to accept Medicare reimbursements in line with legislation enacted years ago, Americans would save billions.

You know all this but you're also trying to get 60 votes in order get any bill to the floor. You have my sympathies, but unless you get these reforms into the final Senate bill you're not really helping most Americans afford future health care.

So what do you do?

First, try for the "reconciliation" process, which requires only 51 votes. Every one of the reforms I mention above would fit under the Byrd rule.

If that doesn't work, wrap these reforms together -- a public option open to everyone (allow states to opt out of this if they dare), Medicare-negotiated drug benefits, no 12-year monopoly for new drugs, and a major squeeze on Medicare reimbursements for doctors -- and have CBO score the savings. I guarantee you, the number will be large. Then you should dare anyone, Democrat or Republican, to vote against saving Americans so much money in years ahead. How is Ben Nelson going to face voters in Nebraska who would have to pay, say, 20 percent more for health care in the future if Nelson refuses to go along?

If neither of these tactics work, then take whatever bill you must to the Senate floor. But then introduce this reform package as the very first amendment to the bill. Call it the "Ted Kennedy Amendment for Helping Middle Class Families Afford Health Care," and whip the hell out of the Democrats. Get the President to help you. Surely Joe Biden will. If you can't get 51 votes out of Dems for this, publish the list of Dems who vote against it, strip them of their committee chairs or sub-chairs, and make sure the Democratic Senate Campaign Committee gives them zilch when they're up for re-election.

Nobody promised you this would be easy, Harry. But, hell, why are you there, anyway? Your responsibility isn't just to pass whatever will muster 60 votes and that the President and Dems can later call "health care reform." It's to do the right thing by the American people and bring down future health-care costs. Don't cave in to Lieberman or Nelson or the drug companies or the private insurers or the AMA or anyone else. Lead the charge.

All best.

How Obama Can Convince Congress to Enact a Larger Stimulus, and Why He Must

2009-11-04T00:49:00Z

The Administration's biggest economic mistake so far was to badly underestimate last January how bad the employment situation would become by Fall. As a result, it low-balled the stimulus -- settling for a plan that, while avoiding even worse job losses, didn't go nearly far enough.

Obama has to return to Congress, seeking a larger stimulus.

Yes, I know. We're already in the gravitational pull of the midterm elections (look at the bizarre attention given to gubernatorial elections in New Jersey and Virginia, and even to a congressional election in the 23rd district of New York, as supposed harbingers of voter behavior a year from now!) so it will be even harder to round up the needed votes from Blue Dog Dems fretting over the deficit. And you can forget the Republicans.

And yes, I know: Only about half the current stimulus has been spent, so it will be awkward to make the case that we need a larger one.

But here's the problem. Everything else on the table -- a new jobs tax credit, more loans to small businesses, more help to troubled homeowners, another extension of unemployment insurance, another round of subsidies to first-time home buyers -- are small potatoes relative to the importance and likely effect of a larger stimulus. Some of these initiatives may do some good, but even combined they'll barely make a dent in the growing numbers of jobless Americans.

Meanwhile, the states are slicing their budgets, laying off workers, and ratcheting up taxes. That's because state tax revenues are falling off a cliff, and almost every state is barred by its constitution from running a deficit. That means the states are actively implementing an anti-stimulus plan.

Let's be clear about this. The national rate of unemployment will almost surely hit 10 percent; we'll know Friday whether it already has. This is more a psychological and political threshold than an economic one (it doesn't include everyone who's too discouraged to look for work, or working part time who'd rather be working full time, or working fewer hours in an ostensible full-time job, or otherwise fully employed but being paid less; the Bureau of Labor Statistics' payroll survey, also due Friday, provides a more accurate picture). But it nonetheless represents a degree of hardship this country hasn't seen in decades.

Public approval of Obama’s handling of the economy has slipped to 46 percent in an Oct. 30-Nov. 1 CNN poll, from 59 percent in March. Remember, Obama was elected in part because the public didn't have confidence in McCain's ability to manage the economy. In exit polls last November, almost two-thirds of voters listed the economy as the nation's top issue. If the job numbers don't start moving in the right direction, not only will Obama's poll ratings continue to drop but congressional Dems will all be in trouble.

That should be Obama's selling point to the Blue Dogs. He should tell them the economy needs a bigger stimulus in order to show improved job numbers by the mid-term elections. And he should make sure they understand that they're more politically endangered next November if the the job numbers aren't moving in the right direction by then than if they vote for a larger stimulus now.

Health Care Reform is Critically Important, But Getting Americans Back to Work is More So

2009-11-02T00:55:00Z

Presidents tend to overcompensate for the errors of their predecessors in the same party and in so doing sow seeds of their own mistakes. Bill Clinton wanted above all to avoid Jimmy Carter's fate -- losing re-election because the economy was heading south on Election Day. So Clinton made a deal with Alan Greenspan to slash the budget deficit and thereby jettison much of his ambitious campaign agenda (that was Greenspan's precondition for lowering interest rates and causing an economic boom in time for the re-election) and then Clinton took direction from Dick Morris, who told him to move to the right. The result: Clinton avoided Carter's failure and won re-election handily. But the Clinton years produced few if any major social reforms. Clinton spent so much of his initial political capital, as well as his time and energy, on deficit reduction that he didn't have enough left to enact health care in 1994.

Barack Obama came to the White House intent on not repeating Clinton's failure to enact universal health care. Did he overlearn the Clinton lesson? Obama seems to have made all the right moves to enact something he can credibly label health-care reform: Rather than spend his political capital elsewhere, he reserved most of it for health care.]]>
I sincerely hope America gets genuine health reform and I hope it's stronger than what's emerging in the Senate. (Whoever voted for Joe Lieberman last time around ought to pray for continued good health.) I worry, though, that Obama's strategy may turn out to be a mistake comparable to Clinton's overemphasis on deficit reduction. Obama's focus on health care rather than jobs, when the economy is still so fragile and unemployment moving toward double digits, could make it appear that the administration has its priorities confused. While affordable health care is critically important to Americans, making a living is more urgent. Yet the administration's efforts to date on this more basic concern have been neither particularly visible nor coherent.

The current rate of unemployment would have been even higher were it not for the federal stimulus package, but the stimulus should have been much larger. Especially with the states still cutting back on spending and raising taxes, the federal stimulus will be barely enough to keep unemployment from hitting 11 percent by the middle of 2010. Yet as the rate of unemployment continued to rise faster and higher than the White House anticipated, Obama could not return to Congress to seek a larger stimulus. He was spending political capital on health care.

The Wall Street bailout, meanwhile, has saved Wall Street but left most regional banks in deep distress. Almost nothing has trickled down. Small businesses still can't get loans. Foreclosures continue to mount largely because jobs continue to vanish and homeowners can't pay their mortgages. Yet at this point, on the eve of a health care bill, it would be difficult for Obama to return to Congress seeking billions more to aid distressed homeowners and small businesses.

While health care reform, if done right, can help American families stay afloat in the economy, the current bills won't offer most Americans any appreciable decline in the cost of their health insurance nor clear improvement in the efficiency or quality of the health care they receive, and those who will benefit won't see the benefits until 2014 at the earliest. All this is partly a result of Obama's sharpest break from Clinton -- whose ambitious health care plan drew immediate fire from Big Pharma, the American Medical Association, and health insurers: The Obama White House bought off the medical-industrial complex by promising it fatter profits, bolstered by tens of millions of new paying customers.

That and other deals cut with industry -- including promises to Big Pharma that Medicare wouldn't use its bargaining clout to reduce drug prices, to the AMA that doctors wouldn't have to face larger cuts in Medicare reimbursement rates, and to private insurers that the White House wouldn't fight hard for a public insurance option -- are likely to make the resulting reform far more costly than it would be otherwise. These extra costs will be borne by those Americans who will be required to buy insurance but won't qualify for federal assistance, along with Medicare beneficiaries who will be paying more and receiving less. These people may not know they're indirectly paying the costs of buying off these industries, but they'll know they're getting shafted (Republicans will be sure to make them aware, even though the GOP has a much longer record of shafting the middle class for the benefit of big business).

The optimist in me says Obama can pivot off a health-care victory and launch some new initiatives that palpably and quickly spur job growth. The realist says there aren't any such initiatives -- at least none that can work fast enough to reverse the tide of unemployment before the midterm elections. Fiddles such as a new jobs tax credit can help but they won't make much of a dent. Even with a larger stimulus, a jobs recovery would still be far off. The tangible benefits of health-care reform are likely to be so elusive in the meantime that the public may become easy prey for demagogues on the right who blame Democrats for the economic insecurities that bedevil the nation next November.

If Obama and the Democrats lose one or both houses of Congress in the midterms, it will be because the president learned only the most superficial lesson of the Clinton years. Health-care reform is critically important. But when one out of six Americans is unemployed or underemployed, getting the nation back to work is more so.

Too Big to Fail: Why The Big Banks Should Be Broken Up, But Why The White House and Congress Don't Want To

2009-10-25T14:33:00Z

And now there are five -- five Wall Street behemoths, bigger than they were before the Great Meltdown, paying fatter salaries and bonuses to retain their so-called"talent," and raking in huge profits. The biggest difference between now and last October is these biggies didn't know then that they were too big to fail and the government would bail them out if they got into trouble. Now they do. And like a giant, gawking adolescent who's just discovered he can crash the Lexus convertible his rich dad gave him and the next morning have a new one waiting in his driveway courtesy of a dad who can't say no, the biggies will drive even faster now, taking even bigger risks.

What to do? Two ideas are floating around Washington, but only one is supported by the Treasury and the White House. Unfortunately, it's the wrong one.

The right idea is to break up the giant banks. I don't often agree with Alan Greenspan but he was right when he said last week that "[i]f they're too big to fail, they're too big." Greenspan noted that the government broke up Standard Oil in 1911, and what happened? "The individual parts became more valuable than the whole. Maybe that's what we need to do." (Historic footnote: Had Greenspan not supported in 1999 Congress's repeal of the Glass Stagall Act, which separated investment from commercial banking, we wouldn't be in the soup we're in to begin with.)

Former Fed Chair Paul Volcker, whose only problem is he's much too tall, last week told the New York Times he'd like to see the restoration of the Glass-Steagall Act provisions that would separate the financial giants' deposit-taking activities from their investment and trading businesses. If this separation went into effect, JPMorgan Chase would have to give up the trading operations acquired from Bear Stearns. Bank of America and Merrill Lynch would go back to being separate companies. And Goldman Sachs could no longer be a bank holding company.

But the Obama Administration doesn't agree with either Greenspan or Volcker. While it says it doesn't want another bank bailout, its solution to the "too big to fail" problem doesn't go nearly far enough. In fact, it doesn't really go anywhere. The Administration would wait until a giant bank was in danger of failing and then put it into a process akin to bankruptcy. The bank's assets would be sold off to pay its creditors, and its shareholders would likely walk off with nothing. The Treasury would determine when such a "resolution" process was needed, and appoint a receiver, such as the FDIC, to wind down the bank's operations.

There should be an orderly process for putting big failing banks out of business. But this isn't nearly enough. By the time a truly big bank gets into trouble -- one that poses a "systemic risk" to the entire economy -- it's too late. Other banks, competing like mad for the same talent and profits, will already have adopted many of the excessively-risky banks techniques. And the pending failure will already have rocked the entire financial sector.

Worse yet, the Administration's plan gives the big failing bank an escape hatch: The receiver might decide that the bank doesn't need to go out of business after all -- that all it needs is some government money to tide it over until the crisis passes. So the Treasury would also have the authority to provide the bank with financial assistance in the form of loans or guarantees. In other words, back to bailout. (Historical footnote: Summers and Geithner, along with Bob Rubin, while at Treasury in 1999, joined Greenspan in urging Congress to repeal Glass-Steagall. The four of them -- Greenspan, Summers, Rubin and Geithner also refused to regulate derivatives, and pushed Congress to stop the Commodity Futures Trading Corporation from doing so.)

Congress is cooking up a variation on the "resolution" idea that would give the Federal Deposit Insurance Corporation authority to trigger and handle the winding-down of big banks in trouble, without Treasury involvement, and without an escape hatch.

Needless to say, Wall Street favors the Administration's approach -- which is why the Administration chose it to begin with. If I were less charitable I'd say Geithner and Summers continue to bend over bankwards to make Wall Street happy, and in doing so continue to risk the credibility of the President, as well as the long-term financial stability of the system.

Wall Street could live with the slightly less delectable variation that Congress is coming up with. But Congress won't go as far as to unleash the antitrust laws on the big banks or resurrect the Glass-Steagall Act. After all, the Street is a major benefactor of Congress and the Street's lobbyists and lackeys are all over Capitol Hill.

The Street obviously detests the notion that its behemoths should be broken up. That's why the idea isn't even on the table. But it should be. No important public interest is served by allowing giant banks to grow too big to fail. Winding them down after they get into trouble is no answer. By then the damage will already have been done.

Whether it's using the antitrust laws or enacting a new Glass-Steagall Act, the Wall Street giants should be split up -- and soon.

Why Wall Street Reform is Stuck in Reverse

2009-10-21T15:03:00Z

At a conference in London, a Goldman Sachs international adviser, Brian Griffiths, praised inequality. As his company was putting aside $16.7 billion for compensation and benefits in the first nine months of 2009, up 46 percent from a year earlier, Griffiths told us not to worry. “We have to tolerate the inequality as a way to achieve greater prosperity and opportunity for all,” he said.

Eight months ago it looked as if Wall Street was in store for strong financial regulation -- oversight of derivative trading, pay linked to long-term performance, much higher capital requirements, an end to conflicts of interest (i.e. credit rating agencies being paid by the very companies whose securities they're rating), and even resurrection of the Glass-Steagall Act separating commercial from investment banking.

Today, Congress is struggling to produce the tiniest shards of regulation that would at least give the appearance of doing something to rein in the Street.

What happened in the intervening months? Two things. First, America's attention wandered. We're now focusing on health care, Letterman's frolics, and little boys who hide in attics rather than balloons. And, hey, the Dow is up again. The politicians who put off Wall Street regulation for ten months knew that the public would probably lose interest by now.

Second, the banks keep paying off Congress. The big guns on Wall Street increased their political donations last month after increasing their lobbying muscle. Morgan Stanley's Political Action Committee donated $110,000 in September, for example, of which Democrats got $43,000.

Official Wall Street PAC donations are piddling compared to the tens of millions of dollars that Wall Street executives dole out to candidates on their own (or with a gentle nudge from their firms). Remember -- the Street is where the money is. Executives and traders on the Street have become the single biggest sources of money for Democrats as well as Republicans. And with mid-term elections looming next year, you can bet every member of Congress has a glint in his or her eye directed at the Street.

That's why the President went to Wall Street to raise money Tuesday night, gleaning about $2 million for the effort. He politely asked the crowd to cooperate with reform -- “If there are members of the financial industry in the audience today, I would ask that you join us in passing necessary reforms" -- but those were hardly fighting words. It's hard to fight people you're trying to squeeze money out of.

Which is the essential problem.

Ken Feinberg, the President's "pay czar" came down hard on executive pay yesterday, for those banks still collecting money under TARP, as well he should. But Feinberg isn't trying to pass new financial reform legislation, and TARP no longer covers several of the biggest banks with the highest pay and bonuses -- although they're still getting subsidized by the government with low-interest loans.

Wall Street and the Treasury want us to believe that the TARP money will be repaid to taxpayers, but Neil Barofsky, the special inspector general keeping watch over TARP, said yesterday that just 17 percent of the TARP money has been repaid, and “[i]t’s extremely unlikely that taxpayers will see a full return on their investment." Later he told a reporter that it's unlikely "we'll get a lot of our money back at all."

Brian Griffiths, the Goldman international adviser who told us inequality is good for us, doesn't know what he's talking about. America is lurching toward inequality once again, led by the financial industry. The Street is back to where it was in 2007, but most of the rest of us are poorer than we were then -- largely due to the meltdown that occurred because Wall Street overreached. The oddity is that we bailed out the Street, including Griffiths and his colleagues, but apparently won't even be repaid.
And now that Griffiths et al knows his firm and the other big ones on the Street are too big to fail, he and his colleagues will make even bigger gambles in the future with our money.

Why Obama Has to do What Letterman Did: Refuse to Pay Hush Money

2009-10-18T14:37:00Z

Last January, as I understand it, the White House promised Big Pharma, big insurance, and the American Medical Association the moral equivalent of what Joel Halderman allegedly demanded of David Letterman: hush money. The groups agreed to stay silent or even be supportive of healthcare reform, as long as they were paid off.

But now that it's time to collect, the bill is larger than the White House expected, and it's going to fall like an avalanche on middle class Americans in coming years. That could mean an ugly 2012 election (read Sarah Palin).

So the President has to do what Letterman did: Refuse to pay. ]]>
Big Pharma is on the road to getting its deal: not only 25 to 30 million more paying customers, but also a continued ban on Medicare using its bargaining clout to reduce drug prices, a bar on genetic drug manufacturers introducing similar biologic drugs until the originals have been on the market at least twelve years, and no public insurance option to negotiate low drug prices. (Big Pharma did agree to $80 billion of cost cuts over the next ten years, to be sure, but its hush money payoffs far exceeded that sum.)

Big insurance is well on the way to getting what it wants: 25 to 30 million more paying customers (many of them young and healthy), a requirement that almost all businesses "pay or play," and no competition from a public option.

Doctors (that is, the American Medical Association) are on the way to getting what they want: Instead of a temporary patch on scheduled decreases in Medicare reimbursements to them, a permanent fix that would change the reimbursement formula altogether and reward them $240 billion over the next ten years.

But when they all get paid off, who will do the paying? Middle-class Americans who are already in a financial squeeze -- whose wages are lower, adjusted for inflation, than they were thirty years ago, and whose jobs are disappearing. They'll face still higher premiums, co-payments, and deductibles; and they'll pay higher drug prices, Medicare premiums, and taxes to cover the rest.

That's because these payoffs make it next to impossible to contain the wildly escalating costs of health care. And 25 to 30 million additional Americans will be covered.

The only thing in the emerging bills that's related to cost containment is a proposed excise tax on so-called "Cadillac" insurance plans, priced over a certain threshold amount (the threshold is now up for grabs). But because the costs of health care are likely to rise faster than inflation, whatever the threshold, the middle class will get socked again.

So Obama has to forcefully weigh in with Nancy Pelosi and Harry Reid as the two try to cobble together passable bills for each chamber -- demanding real cost containment.

The three big means of containing costs: (1) A true public option (better yet, one that allows anyone now holding private insurance to opt into; (2) authority for Medicare to negotiate low drug prices; and (3) lower Medicare reimbursement rates to doctors (in other words, no "doctor fix").

In addition, the so-called "medical exchanges" in the emerging bills (as well as the public option, which hopefully will be included) should give preference to pre-paid heathcare plans, like Kaiser Permanente, whose doctors are on salary and have every incentive to keep people healthy rather than charge for more services and tests.

But if Obama doesn't weigh in forcefully and say "no" to the hush money for Big Pharma, big insurance, and the AMA, America's middle class will get walloped. And if the walloping starts before 2012, Sarah Palin or some other right wing-nut populist will wallop Obama. And after she or he wallops Obama, America will get walloped even worse.

More Desperation from the Right

2009-10-15T05:01:00Z

Lou Dobbs, Sean Hannity, Rush, and the right-wing blogosphere seem interested in a talk I gave in September, 2007 to students in a political science class here at Berkeley, in which I played the role of a presidential candidate so politically incorrect and tone-deaf as to pummel every sacred cow in sight -- including the notion that our society could afford and would continue forever to pay whatever amount of money was required to keep everyone alive forever. The whole point of the mock exercise was to show that presidential candidates can't state what everyone knows to be the truth because they'll be taken apart by the Right or the Left. I slew many other sacred cows in that mock exercise, some of which are held dearly by the Left. Nonetheless, two years later the Right has exhumed the lecture and taken my words completely out of context purportedly to show that Obama and the Democrats plan death panels.

If their desperation weren't so pathetic it would be funny. After all, they have proven the whole point of my lecture. UC Berkeley maintains an archive of webcasts and my speech is available there verbatim, should you wish to listen to it in its entirety.

Why the Dow Broke 10,000, and Why You Should Still Watch Your Wallet

2009-10-15T00:21:00Z

How did the Dow break 10,000 when the rest of the economy is in the toilet?

1. Corporate earnings are up -- mainly because companies have been cutting costs. Payrolls comprise 70 percent of most companies' costs, which means companies have been slashing jobs. In the end, this is a self-defeating strategy. If workers don't have jobs or are afraid of losing them, they won't buy, and company profits will disappear.

2. Federal borrowing has filled the gap that consumers and businesses created when the latter began to reduce their debt. Federal debt, in other words, has kept the economy from tanking. Can't keep up forever, though.

3. With such horrid employment numbers, Wall Street figures the Fed will keep interest rates low for some time, and continue to flood the economy with money. That's good news for the Street because it means money stays cheap -- and with cheap money the Street can make lots of bets on almost everything under the sun and moon. As a result, the Street's earnings are way up. But this, too, is temporary. At some point the Fed is going to worry about inflation and a falling dollar.

4. Investors of all stripes want to get in early and ride the wave. Pension funds, mutual funds, and other institutional investors figure the bull market has more oomph in it because, well, other investors will jump in. Think Ponzi scheme. Nice for now, but watch out if you're one of the last in.

In other words, this is all temporary fluff, folks. Anyone who hasn't learned by now that there's almost no relationship between the Dow and the real economy deserves to lose his or her shirt in the Wall Street casino.

The Audacity of Greed: How Private Health Insurers Just Blew Their Cover

2009-10-13T03:24:00Z

The health-insurance industry has finally revealed itself for what it is.

Background: The industry hates the idea that's emerged from the Senate Finance Committee of lowering penalties on younger and healthier people who don't buy insurance. Relying on an analysis by PricewaterhouseCoopers, insurers say this means new enrollees will be older and less healthy -- which will drive up costs. And, says the industry, these costs will be passed on to consumers in the form of higher premiums. Proposed taxes on high-priced "Cadillac" policies will also be passed on to consumers. As a result, premiums will rise faster and higher than the government projects.

It's an eleventh-hour bombshell.

]]>
But the bomb went off under the insurers. The only reason these costs can be passed on to consumers in the form of higher premiums is because there's not enough competition among private insurers to force them to absorb the costs by becoming more efficient. Get it? Health insurers have just made the best argument yet about why a public insurance option is necessary.

Right now they run their markets and set their prices, and pass on any increased costs directly to consumers. That's what they're threatening to do if the legislation attempts to squeeze, even slightly, the colossal profits they plan to make off of thirty million new paying customers.

They want every penny of those profits. They demand every cent. And if the government dares raise their costs a tad higher than they expected when they first signed on to support the bill, they'll pass those costs on to consumers in the form of higher premiums. They can carry out their threat only because they have unaccountable, untrammeled market power.

But they've now hoisted themselves on their own insured petard. They've exposed themselves. If they had to compete with a public insurance plan, they couldn't get away with this threat. They couldn't pass on the extra costs. They'd have to compete with a public insurance option that forced them to give consumers the best deals possible.

Now's the time for Senate Finance Committee and the White House to say to the insurance industry: You want to play hardball? Okay. We'll play it, too. You didn't want a public insurance option. That was one of your conditions for supporting the bill. You wanted gigantic profits from having thirty million new paying customers and the market to yourself. We agreed because we wanted your support and were afraid of the negative ads and hurricane of opposition you could finance. But you're even greedier than we imagined. And now you've demonstrated that greed to the American people. They don't want to turn over even more of their hard-earned money to you. So, insurance companies, we've got news for you. We're going to make sure Americans have the freedom to choose a public insurance option that's cheaper and better, and you're going to have to work hard to keep them your customers.

Empty Hands on the Climate, and What Obama Needs to Do

2009-10-12T14:31:00Z

On Friday, Denmark's climate and energy minister, Connie Hedegaard, who will be chairing U.N.-sponsored climate talks in December in Copenhagen, said President Obama needs to do more on climate. "It is hard to imagine that he will be receiving the Nobel Peace Prize in Oslo on Dec. 10 and then come empty-handed to Copenhagen a week later," she said.

But there's no way between now and then Obama can get a strong climate bill through Congress.

Over the next months, the White House needs to focus on health care if it's to have any hope of coming up with anything more than Big Pharma and the private insurance companies want.

This is the cost of trying to do so much so quickly. Initiatives revert to powerful industry lobbyists because there's no time to organize countervailing power. When he's trying to do everything at once, the President can't mobilize public opinion behind any one thing. Progressive voices (which have difficulty being heard even under the best of circumstances) drown each other out because they're hollering over one another.

]]>

Climate change legislation is moving forward -- but big polluters have shaped much of it. As I noted recently, the Waxman-Markey climate bill, passed by the House last June, gives away 85 percent of pollution permits to the nation's biggest polluters, and the "cap" it proposes on overall carbon emissions would cut greenhouse gas emissions only by an estimated 2 to 4 percent by 2020 compared to the UN reference year of 1990. The Kerry-Boxer bill has a stronger cap on emissions but it's still far short of what's necessary -- and it leaves out the hardest part, which is the actual cap-and-trade mechanism.

Why has so little been accomplished? Because coal, shale, oil, big manufacturers, and utilities -- the big old polluters (BOPs) -- have beaten back anything better.

The only real countervailing powers on climate change are industries that stand to gain from stronger legislation -- mostly nuclear and ethanol, along with a smattering of companies that have invested in wind, biomass, and solar. But they're no match for the BOPs. Nor do their bottom lines necessarily match what's good for the world.

Yes, the Environmental Protection Agency is moving forward on its own efforts to reduce greenhouse gases, and the White House is quietly using the threat of the EPA doing more as a prod to get the BOPs on board with legislation that the White House says will be easier on them than what the EPA comes up with. But that's no real threat. The BOPs know they can keep the EPA tied up in litigation for years.

So here's my suggestion. The White House should tell Congress it's raising the bar on climate change but is simultaneously putting the current legislation on hold -- until it can focus the public's attention on it. That is, until after a worthy piece of healthcare legislation is on the President's desk.

Arriving in Copenhagen strongly committed to fight for a large reduction in greenhouse gases, even if that means empty hands at the time, is better than arriving there with a weak and ineffective law.

Why Obama Should Not Have Received the Peace Prize -- Yet

2009-10-09T14:18:00Z

President Obama's only real diplomatic accomplishment so far has been to change the direction and tone of American foreign policy from unilateral bullying to multilateral listening and cooperating. That's important, to be sure, but not nearly enough. The Prize is really more of Booby Prize for Obama's predecessor. Had the world not suffered eight years of George W. Bush, Obama would not be receiving the Prize. He's prizeworthy and praiseworthy only by comparison.

I'd rather Obama had won it after Congress agreed to substantial cuts in greenhouse gases comparable to what Europe is proposing, after he brought Palestinians and Israelis together to accept a two-state solution, after he got the United States out of Afghanistan and reduced the nuclear arm's threat between Pakistan and India, or after he was well on the way to eliminating the world's stockpile of nuclear weapons. Any one of these would have been worthy of global praise. Perhaps the Nobel committee can give him half the prize now and withhold the other half until he accomplishes one or more of these crucial missions.

Giving the Peace Prize to the President before any of these goals has been attained only underscores the paradox of Obama at this early stage of his presidency. He has demonstrated mastery in both delivering powerful rhetoric and providing the nation and the world with fresh and important ways of understanding current challenges. But he has not yet delivered. To the contrary, he often seems to hold back from the fight -- temporizing, delaying, or compromising so much that the rhetoric and insight he offers seem strangely disconnected from what he actually does. Yet there's time. He may yet prove to be one of the best presidents this nation has ever had -- worthy not only of the Peace Prize but of every global accolade he could possibly summon. Just not yet.

So Much Happening in Washington and So Little to Show For It

2009-10-08T15:02:00Z

The Senate Finance Committee is set to vote Tuesday on a healthcare bill that just got a seal of approval from the Congressional Budget Office and is very likely to garner the vote of Republican Senator Olympia Snowe -- a twofer that gives the bill preeminence over four other healthcare bills that have emerged from House and Senate committees over these long months. Unlike those bills, though, the Senate Finance bill won't it have a public insurance option to compete with private insurers. Nor does it allow Medicare to use its bargaining power to negotiate lower drug prices, or adequately subsidize millions of middle-class families who will be required to buy health insurance that will be hard for them to afford. In short, it's a great deal for private insurers and Big Pharma but not such a great deal for middle-class Americans.

Meanwhile, the House Banking Committee is quietly circulating a draft set of reforms of financial markets likely to become the basis for whatever legislation emerges to fix the Street. Barney Frank, who heads the Committee, is a thoughtful progressive. But the draft has gaping loopholes that will let most financial firms escape -- such as one that exempts corporations that deal in financial derivatives from any requirements for capital, business conduct, record-keeping, and reporting if they use derivatives for the purpose of "risk management," which is the very thing they all claim they're doing. Neither the draft bill, nor the Committee, nor anyone on the Hill having anything to do with financial regulation, is raising what I consider to be the two key reforms necessary for avoiding another financial meltdown -- resurrecting the Glass-Steagall Act that once separated commercial from investment banking, and applying antitrust laws to the remaining five biggest Wall Street banks so none is "too big to fail."

]]>
And what's happening on the job's front? Nothing except a blip of interest in tax credits to small businesses that create new jobs. That's not a bad move (I suggested it myself), but it's rather like bailing out the ocean with a teacup. If that's all there is, we're headed toward two years of double-digit unemployment. No one on the Hill or in the Administration is yet willing to say openly and clearly that the stimulus plan must be larger, and continued through 2010 and 2011.

My friends in the Administration and on the Hill repeatedly tell me "don't make the perfect the enemy of the better," or words to that effect. Politics is the art of the possible, blah blah blah. True. But in each of these areas -- healthcare, financial regulation, environment, and jobs -- the "better" is really not that much better. Forget perfect; anything that offered real reform would be enough. But in every case, what should be the centerpieces of reform are being left out.

Why? Congress is overwhelmed with corporate and Wall Street lobbyists (far too many of whom are former Democratic office holders). The White House is trying best it can to push and prod in the right direction but there's too much going on, too many arenas where private interests are framing the debate and stifling major reform, and too many friends of friends and relations of relations who are making tons of money working for the other side. The public doesn't know what's going on because the national media would rather report on the sexual escapades of famous people or social trends or high finance (a recent Pew report on economic reporting shows that most stories about the Great Recession have been focused on Wall Street rather than Main Street). And progressives -- that is, progressive organizations in our nation's capital -- have been remarkably and consistently outgunned, outmaneuvered, or just plain ineffectual. This is largely due to the fact that they're sitting in Washington rather than organizing and mobilizing the rest of the country.

And I haven't even brought up Afghanistan.

Never have so many crucial issues come to a head at the same time, when Democrats run the White House and Congress, with so little real reform to show for it.

At least so far.