Brookings: Experts - Henry J. Aaron

You Get What You Pay For: Lessons From the IRS Scandal

Henry J. Aaron — Fri, 31 May 2013 00:00:00 -0400

Everyone is outraged by the IRS scandal—Republicans and Democrats, members of Congress and the president, alike. Outrage is a good clean emotion to have when one encounters outrageous behavior. But after a good fist-clenching growl, serious people need to decide what to do to prevent a repetition of such misbehavior.

Here are three suggestions. First, implement the specific reform suggestions put forward by the Inspector General whose report documents the misdeeds. Next, tighten the law under which organizations are granted tax exempt status. The third suggestion—and this may surprise you—raise the budget of the Internal Revenue Service—a lot!

Before explaining the suggestions, let’s start with the facts. As far as tax exemption is concerned, organizations claiming tax exempt status don’t have to apply to the IRS, but most do to avoid challenge later on. Tax exempt status under section 501(c)(4) of the Internal Revenue Code is supposed to be granted to an applicant only if it is a ‘social welfare’ organization. That means that no income of such organizations is taxable and that the names of contributors may be kept secret. Under current administrative interpretation such groups may spend up to half of their income directly on political campaigns and limited amounts on lobbying, but they may spend without limit on ‘general advocacy,’ provided that such spending is related to their ‘social welfare’ purpose. In 2012 some such organizations—conservative and progressive, alike—spent virtually all of their income on ads advancing the cause of one political candidate or another, presumably on the theory that a particular candidate’s victory will advance social welfare.

Spread too thin

Of course, the IRS spends most of its time on other matters. It collects taxes—well over $2 trillion. It must also provide a lot of data for the soon-to-be-implemented health reform law and impose penalties to enforce it. For these tasks, it is dreadfully underfunded. The IRS budget is virtually unchanged since 2008 as is its staffing levels, despite the increase in its responsibilities related to health reform.

The IRS lacks sufficient resources to do all of these jobs adequately. If you doubt me on this point, consider the following facts. The IRS audits only 1 percent of all returns. An estimated $450 billion that is legally due goes uncollected, in significant measure because so few individual returns are audited. If you cheat or make an innocent mistake, there is little chance that the over-worked and under-staffed IRS will find out. The Government Accountability Office estimates that each additional dollar spent on auditing would yield more than $8.

The toll from short-changing the IRS is not just lost revenue. When resources are so meager and the return to enforcement is so high, administrators are loath to divert budget and staff from chasing evaders to staff training and oversight. It would be absurd to say that the administrative abuses now so much in the news are caused by meager budgets—after all, real live people who should have known better did what was done and real live supervisors failed to stop them from doing it. But a major reason why training and oversight were missing is that short-sighted, penny-pinching members of Congress deprived the IRS of enough money and staff to do what Congress asked them to do. Members fearful that the IRS will run amok, should recognize that the way to avoid that risk is more supervision not less.

The law needs to be changed

Even with adequate staffing, however, the law governing tax exempt status for so-called ‘social welfare’ organizations is so vague that anything other than rubber stamping all applications would likely evoke complaints of politicization. What is a tax administrator to do when an organization says it is engaging in “social welfare” and then defines those activities as paying for TV ads and staff devoted entirely to explaining to voters why a particular candidate has taken the right or the wrong position on political issues or why a particular bill should be approved or rejected? What are voters to do when such organizations shield the names of donors who are financing the attack ads that pass as ‘public education’? The result of such a loosely drafted law is an avalanche of anonymous funding for political campaigns. The result is that members of Congress are driven to spend most of their time—and not just in election years—raising money from hard-headed pragmatists many of whom buy influence with their ‘donations.’

Only Congress can remedy this flawed law. It can do so by requiring that names of all donors to tax exempt organizations, not just those the IRS singles out for selective scrutiny, be divulged and by denying tax exempt status to any organization that engages in more than de minimis lobbying or campaign spending. The Supreme Court ruled that past limits on campaign spending were unconstitutional. It did not rule that organizations doing the spending should be exempt from taxes. Only Congress can assure that the Internal Revenue Service has sufficient resources to do the jobs they are charged with doing. But only the IRS management can implement the common-sense reforms that the Inspector General who documented these abuses prescribed to prevent them from recurring.

But for these reforms to occur, the American public must get beyond their well-justified anger with administrators who abused their authority and recognize why shoddy legislation and budgetary penny-pinching created an environment that fostered those abuses.

Authors

Henry J. Aaron

Publication: Yahoo! Finance

Image Source: © Jonathan Ernst / Reuters

What Should the Supreme Court Do About Affirmative Action?

Henry J. Aaron — Mon, 20 May 2013 10:42:00 -0400

Author's note: the following review of the book Mismatch: How Affirmative Action Hurts Students Its Intended to Help and Why Universities Won’t Admit It by Richard H Sander and Stuart Taylor, Jr. was commissioned by Leon Wieseltier of the New Republic on September 10, 2012. It was submitted on January 30, 2013. No editorial comment having been received to date, I am posting it on the Brookings web site.

The Supreme Court decision in Brown versus Board of Education was a watershed event in several respects. It crowned a lengthy legal campaign to overthrow segregation in public schools. It rapidly widened into a multi-front campaign to assure that African Americans, other minorities, and women would not be excluded from any important aspect of American life. And it invoked social science in support of a fundamental reinterpretation of the Constitution.

Following Brown, it soon became clear that removing legal barriers was not enough to end the legacy of discrimination. Lyndon Johnson’s 1965 speech at Howard University stated bluntly that “We seek not just freedom of opportunity. We seek not just legal equity but human ability, not just equality as a right and a theory but equality as a fact and equality as a result.”

To counter the effects of past discrimination, Johnson said, it is necessary not just to remove barriers but also to offer help. Some assistance was procedural. Selective colleges, universities, and graduate schools began for the first time to recruit minorities actively and to mentor them. Other assistance was substantive, such as making race, sex, or national origin a ‘plus factor’ for jobs, contracts, and college admission. Programs of this sort immediately raised knotty conundrums for law, ethics, and social science. Were they constitutional? Were they fair? Did they work?

The legal problem was obvious. The 14^th amendment states: “No State shall...deny to any person within its jurisdiction the equal protection of the laws.” Title VI of the Civil Rights Act of 1964 prohibits discrimination on the basis of race, color, and national origin in programs and activities receiving federal financial assistance. Title VII of the Civil Rights Act flatly bars consideration of race in hiring and promotion decisions. Many universities are state chartered and supported. Private and public institutions of higher learning receive federal contracts. The constitution and civil rights laws make no exception for discrimination practiced to redress past injustices.

Ethical issues are also inescapable. Giving African Americans or Hispanics a special break does not increase the number of jobs or slots in university classes. Giving them an edge means pushing others back in the queue. Many of those ‘others’ never personally did anything wrong. If giving such edges to past or present victims of discrimination was accepted, how large an edge was it fair to give and for how long?

In its earliest phases, affirmative action clearly helped its intended beneficiaries. In 1933 when Harold Ickes and his two lieutenants, Clark Foreman and Robert Weaver—later the first black cabinet officer under president Johnson—required that blacks be hired to help build public housing, there could be little doubt that African Americans benefitted from their action. When Richard Nixon’s Secretary of Labor, George Shultz, commented about discrimination in the building industry: “We found a quota system; it was there; it was zero,” there could be no doubt that moving from zero would help those who had been excluded. The nation was so far from the goal of fair treatment of minorities and women that possible conflicts with other objectives seemed remote. But when selective colleges and universities began to admit minority students with comparatively weak academic credentials, many of whom got poor grades and dropped out at distressing rates, a new question arose...did race preferences, at least in higher education, really help those they were intended to help?

Research on the impact of preferential admissions in higher education and litigation over its constitutionality ran on parallel tracks.

The policy of boosting enrollments at selective universities and colleges from what came to be called ‘under-represented minorities’ developed rapidly during the 1960s and 1970s. It coincided with efforts by those institutions to become genuine meritocracies. Although prestigious undergraduate and graduate programs had always favored the academically talented, they also held many slots for the offspring of previous graduates and generous donors. Athletic or artistic skills helped too, of course. Discrimination in admissions was routine, primarily to hold down the numbers of bright kids with the “wrong” religion or cultural background.

Then in the 1960s and 1970s, the weight attached to good grades and high test scores on entrance exams soared. Bragging rights came to those colleges whose entering classes had the highest scores on college entrance examinations. Some slots were still held for the progeny of previous graduates, the well-connected, the financially generous, and the artistically talented or athletically skilled. But academic standards for admission rose at both the undergraduate and graduate level. In simple terms, the ‘good’ schools, more than ever before, became academically excellent.

As far back as the 1970s concern grew that the policy of giving an edge to African Americans, Hispanics, and other members of under-represented minorities, however well-intentioned, might be doing more harm than good. Giving applicants from these groups an edge in admissions necessarily meant that, on the average, they came with weaker academic credentials than did whites. To be sure, selective schools offered matriculants big advantages—enriched environments, good connections, and, to those who graduated, a valued credential. On the other hand, students without adequate preparation might find the work just too difficult. As a result, they might even learn less than they would at less selective institutions. They might suffer stigma or be marked as second-raters or shamed as beneficiaries of unearned advantages, as many critics of affirmative action claim and some supporters fear. The result would be low-academic performance, high drop-out rates, wasted time and money, and, in extreme cases, blighted lives. The risk of these adverse effects would be larger the greater the gap between the student’s preparation and the norm at the institution they attended. This, in brief, was known as the mismatch hypothesis.

Determining whether a mismatch effect actually exists is extremely difficult. Even if admissions were race blind and even if there were no mismatch effect whatsoever, African Americans and Hispanics admitted to selective colleges and universities would predictably have lower grades and graduate a lower rates than do whites. This expectation is in no manner racist. It follows directly from two indisputable facts. African Americans and Hispanics applying to college have lower test scores and high-school grades on the average than do whites; and test scores and grades both are predictive of academic performance.

A hypothetical example illustrates how these two facts will produce different success rates for various groups. Imagine that colleges use an academic index for selecting students. The index can take on three values: 1 (high), 2 (medium), or 3 (low). Those with a higher academic index do better on the average in college than those with a lower score. Imagine also that out of every 100 whites, 35 score 1, and 35 score 2, and that out of every 100 African Americans and Hispanics 10 score 1 and 50 score 2. Selective schools admit only those who score 1 or 2, and they do so in a race-blind manner. Half of whites but only one-sixth of African Americans and Hispanics score 1. Those who score 1 do better in college than those who score 2. It follows that whites will do better in college on the average than will African Americans or Hispanics. This conclusion would not follow if tests and grades under-predicted performance of minorities relative to that of whites. But repeated studies have shown that tests and grades do not under-predict performance of African Americans and Hispanics.

The observation that African Americans and Hispanics who enroll at selective universities have lower qualifications for admission than do whites should therefore come as no surprise. Affirmative action adds to the difference between test scores and grades of entering students. But gaps would exist even if there were no affirmative action, and whether or not mismatch exists.

So, the challenge...how can one tell from the observation that African Americans and Hispanics do less well in college than do whites at selective schools whether this gap results from mechanical reasons of the sort just described or from harm inflicted through mismatch?

Simply comparing grades and graduation rates of various groups is not enough. The undeniable fact that students from under-represented minorities get poorer grades and drop out more often than white students do proves nothing about whether affirmative action helps or hurts its intended beneficiaries. One could go further and measure whether students at selective institutions do better or worse than do students with similar test scores and grades at other colleges and universities.

That is just what Derek Bok and William Bowen, former presidents of Harvard and Princeton, respectively, did in their evocatively titled book, The Shape of the River. This study, published in 1998, drew on a rich data set developed with the support of the Mellon Foundation, which Bowen then headed. The survey reported on a large data set—College and Beyond—reporting the college experiences, graduation rates, and subsequent earnings of 93,660 students who graduated from thirty-four select universities and colleges in 1951, 1976, and 1989. Using statistical techniques that controlled for the expected influence of high-school grades, pre-college admission tests, race, and certain other characteristics, the authors found that African-American students who attended elite universities did as well as or better than African-American student who attended less elite institutions. The authors reported that they found no evidence to support the mismatch hypothesis.

The Bok-Bowen study was highly influential. The authors are highly respected. The survey was large. The information it contained was broad and detailed. Even so, the survey data were not ideally suited to test the effects of affirmative action. The earliest surveyed cohort attended college before affirmative action was much practiced and it is not clear to what extent that cohort drove the results. The data came mostly from highly selective institutions. Furthermore, because the data have not been freely available, few scholars could check the Bok-Bowen findings or do additional analysis. The importance of making data available so that other scholars may try to replicate results and identify errors hardly needs emphasis in light of recent controversies regarding the impact of government debt on economic growth.

Bowen and other co-authors revisited the question of how college affects students in 2009 with a new study, Crossing the Finish Line, based on an even larger survey. This study reported on the experiences of 124,522 freshmen who began college in 1999 at one of fifty-seven four-year public universities. These institutions were generally less selective than those included in the College and Beyond survey. Bowen reported some startling results. Regardless of the quality of the high schools that students attended, their grades predicted college performance far better than did standardized tests. The 2009 study also confirmed the major finding of The Shape of the River—that after controlling for high-school grades, test scores, race, and socio-economic status, students were more likely to graduate from more selective than from less selective universities. Once again, Bowen and his co-authors found no evidence to support the mismatch—what they called the ‘over-match’—hypothesis. Students are well-advised, they said, to enroll in the most selective institution that will accept them.

Critics questioned whether the Bok-Bowen studies provided support for affirmative action. Invoking considerations of fairness, Stephen and Abigail Thernstrom noted that high graduation rates from elite institutions reflected not only the high qualifications of enrollees, but the high expectations for graduation at them. Besides, they emphasized, giving a race- or ethnicity-based edge to some necessarily involves a race- or ethnicity-based handicap for others. One of those groups with a race-based handicap, they noted, are Asians, whose academic credentials on the average outshine those of whites and who suffered much discrimination in American history.

Others argued that ordinary survey data are inherently inadequate to test the mismatch hypothesis. No survey can measure all educationally-relevant student characteristics. Specifically, surveys cannot measure aspirations or mental toughness, which are relevant to educational outcome and may be correlated with the schools students attend. Many social scientists argue that the best way, and sometimes the only adequate way, to test the effect of an intervention is the randomized experiment. Such methods are routine in medical and agricultural research, but they are not normally available to those testing the effects of affirmative action. Students cannot be randomly assigned to colleges. And, even if they could be, the very act would color the results. Normally, analysts are stuck with survey data. They can do no more than control statistically for every influence they can measure and hope that omitted factors are not very important.

From the earliest years of affirmative action, those denied admission to schools that gave minorities a race-based or ethnicity-based edge have challenged the practice in court. In 1978, the Supreme Court ruled in The Regents of the University of California v. Bakke that the constitution barred the university from setting aside a fixed number of slots in its medical school class for under-represented minorities. But, universities could use race as a ‘plus’ factor in pursuit of ‘diversity,’ which, the Court said, is a legitimate educational goal. To this day, however, the Court has not defined exactly what diversity is or how one would know if it had been achieved.

Breaking with Bakke, the federal Circuit Court serving Louisiana, Texas, and Mississippi ruled in 1995 in Hopwood v. Texas that the University of Texas Law School could not use race as a factor in admissions. The case never got to the Supreme Court, however, because Texas dropped the challenged admissions practices.

Seven years later, the Supreme Court heard a pair of challenges to admission practices at the University of Michigan. For undergraduate admissions, Michigan used a point scale based on grades, test scores, and other factors. One hundred points assured admission. Under-represented minorities received 20 points automatically. In Gratz v. Bollinger, by a 5-4 margin, the Court reaffirmed that the pursuit of diversity is a legitimate goal, but it ruled that Michigan’s procedure was not ‘narrowly tailored,’ did not in general treat each applicant individually, resembled a quota system, which the Court had disallowed in Bakke, and was therefore unacceptable.

At the same time, also by a 5-4 vote, the Court upheld a race-conscious admission policy by the Michigan Law School. In Grutter v. Bollinger, the court said that the use of race was acceptable because the law school considered many factors and did so on an individual basis. The swing vote in both cases and author of the opinion of the Court was the now-retired Justice Sandra Day O’Connor, who has been succeeded by Justice Samuel Alito, widely thought to be less sympathetic than O’Connor to affirmative action.

The legal history is marked by chaotic disagreement. Not only has the court been divided, but the majorities have disagreed in the reasoning that has led to their judgments. For strong minded, independent jurists to reach a common position by different reasoning is not unusual. But the opinions reflect unresolvable internal conflicts. The Constitution guarantees equal protection, irrespective of race, national origin, sex, and age. Yet, American history is redolent of despicable violations of those principles. When, at last, Congress and private groups began to take steps to counter the legacy of discrimination, the highest court has been willing to curb, but not bar, these measures—at least, not yet.

While the idea that the best qualified people should get jobs, the best proposal should win the contract, and the best students should be admitted to selective colleges commands widespread support, few people adhere rigidly to the principles of meritocracy. They understand that in many cases no clear or reliable metrics exist for measuring merit. Furthermore, once one acknowledges that colleges and universities may legitimately consider factors other than test scores and grades in determining which applicants should be admitted, it is inevitable that some students refused admission will be better qualified on academic grounds than those admitted.

The point made in virtually every legal brief by a litigant complaining of discrimination because an African American or Hispanic with lower test scores or a weaker academic record was admitted reflects a profound confusion—such a result is inescapable once other criteria for admission are allowed to influence results. And because race, musical talent, athletic skills, and other non-academic characteristics predict academic performance less well than do grades and test scores, it is likely that those admitted because of such ‘non-academic’ qualifications will perform less well, on the average, than those admitted for purely academic reasons. Their grades are likely to be lower and they are likely to graduate at lower rates than those with stronger grades and test scores. Other influences, such as compensatory programs for the ill-prepared, easy grading (for athletes), or enrollment in ‘gut’ courses can partly or fully offset such tendencies. But the tendency is basic.

The issue of whether affirmative action in education is constitutional has returned to the Supreme Court docket. On February 21, 2012 the Supreme Court agreed to hear arguments in the case of Fisher v. Texas. Oral arguments took place on October 10, 2012. Outside interest in the case has been intense. The court received 90 ‘friend of the court’ (amicus curiae) briefs from interested parties, including social scientists.

Following the Hopwood decision, Texas adopted a simple policy of admitting applicants in the top 10 percent of Texas high-school graduating classes. Although the top-10-percent formula sacrifices some academic selectivity, it is a transparently reasonable admissions policy for a state-chartered institution dependent on state funds for part of its budget. It does not explicitly involve race or ethnic origin, but de facto residential segregation guarantees that this formula will result in the admission of more African Americans and Latinos than if admissions were based on test scores. Since its adoption, this formula has accounted for 60 to 80 percent of undergraduate admissions to the University of Texas. Following the Grutter decision, which sanctioned admission policies that considered race in a narrowly targeted, individual manner, Texas instituted what it called a “holistic” process to govern other admissions. The holistic admissions procedure uses both an academic index, based on test scores and grades, and a personal achievement index based on a wide range of other factors including two essays, family background, activities in the community and elsewhere, and race.

Ms. Fisher, a white Texas high school graduate, was in the 12^th percent of her class and therefore was not admitted on the 10 percent plan. Nor was she admitted through the alternative selection process. She was offered a place on a waiting list, which she refused. She challenged the constitutionality of the Texas admission policy, claiming that but for her race she would have been admitted and was thereby unconstitutionally denied equal protection under the law.

The briefs of the parties to the case focus on whether the use of race in the Texas formula does or does not qualify as ‘limited and individualized,’ as specified by Justice O’Connor in Grutter v. Bollinger. But the court may go further by limiting or overturning Grutter, and at least four justices are thought to be disposed to do so. Persuasive evidence that affirmative action harms those it is intended to help would buttress the ethical foundation for such a position. One of the amicus briefs, by UCLA law professor Richard Sander and legal journalist Stuart Taylor, argues just that. Their book, Mismatch: How Affirmative Action Hurts Students It’s Intended to Help, and Why Universities Won’t Admit It, is a lengthy and rich argument in support of this position. So significant is this indictment of affirmative action that another amicus brief, by a veritable Who’s Who of empirical social scientists is devoted to rebutting the Sander/Taylor brief. Social scientists submitted several other amicus briefs, some in support of Ms. Fisher’s appeal, some opposed.

Mismatch extends and elaborates an indictment of affirmative action first presented by Sander in 2004 in a Stanford Law Review article. That article provoked intense controversy, personal invective, and allegations of data suppression. Mismatch recounts this controversy in score-settling detail and is, thus, also a personal memoir and an expose of intellectual politics in the academy, as well as a layman’s guide to social science research on a tricky subject. Co-author Stuart Taylor comes to this tale with the background of having written Until Proven Innocent, a chilling and devastating expose of the way a rogue—and subsequently disbarred—district attorney railroaded Duke lacrosse players after a stripper falsely accused them of rape, and tells how Duke faculty members and administrators rushed to condemn the players despite abundant warning signs of prosecutorial abuse.

Sander and Taylor do not argue that affirmative action is inherently harmful to its intended beneficiaries, but rather that it is pushed to a damaging extreme. To make their case, they lay out a theory of how affirmative action, as practiced by the most select universities and colleges, ramifies through much of higher education. A few top universities are able to attract most of the academically able African Americans and Hispanics. Although the academic credentials of these students, on the average, are not as strong as those of their white or Asian classmates, these African-Americans and Hispanic students are mostly able to handle the academic challenges they face at these top schools. Sander and Taylor argue that is why Bok and Bowen found that most of the minority students they surveyed graduate and do well professionally.

But that is just part of the story. The selective institutions, Sander and Taylor argue, so seriously deplete the limited pool of academically well-qualified minorities that lower tier schools, also trying to meet affirmative action goals, admit applicants with credentials so weak that these students do less well than they would at still less selective institutions. Mismatch can be inferred as well, Sander and Taylor argue, from the finding that a larger proportion of students with a given SAT score major in the difficult STEM subjects (science, technology, engineering, and math) at less-selective than at more selective schools.

The reasoning is straightforward. First-level courses in these fields that serve as pre-requisites for upper division study weed out students who are comparatively weak at the institutions they are attending. Because affirmative action allows minority students to attend colleges where their academic preparation is comparatively weak, such students are more likely to get weeded out than they would be had they attended less-selective colleges and universities, where their academic preparation would have been more competitive.

The strongest evidence for the mismatch hypothesis comes not from data on undergraduate admissions but from information on law school graduates. The American Bar Association compiled data on thousands of law school graduates from a wide range of law schools—the Bar Passage Study (BPS). Because student grades and class rank depend, in part, on the average academic strength of classmates, students with a given academic index are more likely to get better grades at lower ranked law schools than they would at higher ranked law schools. Furthermore, African American and Hispanic students covered in the BPS were the beneficiaries of sizeable race- and ethnicity-based admission preferences at most law schools.

Based on data from the BPS, Sander and Taylor report two findings that, they argue, suggest mismatch. First, African American and Hispanic law school graduates with similar academic index scores (based on undergraduate performance) to those of whites passed the bar at lower rates than did whites. But if one controlled for both academic index and law school grade point average, there was no significant difference in passage rates of African Americans, Hispanics, and Whites. The reason why relative class standing influences bar passage, they argue, is that instruction and grading are geared to the median student in each school. Students who are weaker than average at a given school will find it hard to keep up, will learn less than they would if instruction was geared to their level of preparation, and will therefore pass the bar exam at lower rates than they would had they attended a school better tailored to for their academic skills. This finding implies that law school students should not follow the advice from Bok and Bowen gave to undergraduates—go to the most selective school that will admit you—but should instead be very careful not to over-reach.

Could both Bok/Bowen and Sander/Taylor be correct? The curricula at professional and graduate schools are notoriously austere. The environment in law school is ruthlessly meritocratic to an extent true of few undergraduate programs. If the conditions between undergraduate and graduate schools and among undergraduate programs are sufficiently different, affirmative action might help in some cases and hurt in others.

An intense intellectual battle followed Sander’s 2004 article and continues to this day. One exchange illustrates how hard the issues are analytically and how difficult it is to reach consensus. Two members of the Yale Law School faculty, Ian Ayres and Richard Brooks, noted that not all African Americans surveyed in the BPS accepted admission letters from the schools they had listed as their first choices. Some went to lower choice schools that were mostly less selective than the first choice schools. The students in the two groups were otherwise similar. If mismatch were a problem, they reasoned, students who went to first choice schools would be more likely to get low grades and less likely to pass the bar than those who went to less select schools. In an initial draft, Ayres and Brooks found no such differences and stated that the evidence provided no support for the mismatch hypothesis.

Sander reports that Ayres and Brooks shared their analysis with him and that he pointed out errors, which they then corrected. After the corrections were made, Sander and Taylor claim that the corrected results closely match what the mismatch hypothesis suggests—those students who did not go to their first-choice, relatively select law schools got better grades, graduated at a higher rate, and were more likely to pass the bar on their first try. But, they assert, Ayres and Brooks refused to modify the text of their initial draft. In addition, Ayres and Brooks are among the signers of the amicus brief by quantitative social scientists which is highly critical of the methods that Sander and Taylor use. This brief states flatly: “Sander’s research has major methodological flaws—misapplying basic principles of causal inference—that call into doubt his controversial conclusions about affirmative action....Sander’s research does not constitute credible evidence that affirmative action practices are harmful to minorities....”

Quite apart from the analytical case that Sander and Taylor make against affirmative action, Mismatch is an expose of politics and back-biting in the academy. It charges that those controlling what should be publicly available data refuse access to people who it is feared will come up with politically objectionable answers. It charges critics with refusals to admit demonstrable mistakes. Both Taylor’s earlier book on the Duke rape case and Mismatch report enough unreasoned and unreasonable behavior in the name of political correctness to make one gag. Most importantly, Mismatch charges universities and colleges with a stunning lack of candor regarding the extent of affirmative action and refusal to provide data with which analysts could evaluate its effects.

Although Mismatch indicts affirmative action in its current form, Sander and Taylor recommend that affirmative action be modified not ended. They note that minorities who are favored by affirmative action disproportionately come from favored socio-economic groups, children of professionals and others with higher education. They recommend that racial preferences be no larger than preferences based on financial need and socioeconomic status. The emergence of growing economic inequality heightens the appeal of class-based affirmative action. Precisely how such balancing of racial, socio-economic, and needs-based factors might be achieved is not explained in the book. Others have also urged class-based affirmative action as both fairer and politically more acceptable than race-based affirmative action—notably, Richard Kahlenberg who has taken that position for nearly two decades. Unfortunately, Sander and Taylor leave a key question unanswered—if current race-based affirmative action harms intended beneficiaries, why wouldn’t a mix of some race-based and some class-based affirmative action also do so?

Particularly troubling for a technically minded reader/reviewer is the absence from a book running to nearly 300 pages of any clear, technical presentation of the mismatch hypothesis. The authors say at the outset that in order to keep the book to a reasonable length, they are omitting ‘technical or elaborating material’ but that such details can be found at their website. At various other points in the book, readers are also advised that they can find further detail at the same web site. As I write this review and after personal contact with both authors, the website remains without such supporting material.

What conclusions should the Court and the public take from Mismatch and the cacophony of conflicting research on the effects of affirmative action? First, universities and colleges should provide qualified analysts access to data on admission practices. It is not credible that universities would suffer irreparable damage if their admission practices were publicized. Nor is it believable that minorities who benefit from racial preferences would wilt from the stigma if these practices were spelled out. The failure of colleges and universities to divulge data on the way affirmative action operates should not be tolerated. The best way to correct any over-use or misuse of affirmative action is not to ban it but to insist that its operation be illuminated with hard data and further analysis.

Second, on the major theme—the charge that affirmative action hurts its intended beneficiaries—I believe that judgment must still be withheld. Sander and Taylor present a powerful case that it does so in particular instances. But the character of college and university programs and their objectives is enormously varied. It is much more important to make sure that African Americans and Hispanics are well-represented among tomorrow’s public officials and business leaders and that they are well trained than it is to assure racial or ethnic diversity among tomorrow’s mathematicians and biomedical researchers. Meritocratic values have their place. So too do the values of inclusiveness. If there was ever a place where one size does not fit all, it is in the treatment of affirmative action within the academy.

Authors

Henry J. Aaron

Image Source: © Jose Luis Magaua / Reuters

The Future of the Affordable Care Act: a Debate on Its Effects

Henry J. Aaron — Fri, 12 Apr 2013 00:00:00 -0400

Editors' note: Henry Aaron delivered the following remarks at the Conference on Equity and Choice in Health Care Access, hosted by the University of Chicago on April 12, 2013. The conference focused on issues related to health care access post-Affordable Care Act.

It’s late in the day. Everyone is probably a bit tired. And most everything has been said, although, as former Representative Morris Udall once said late in a conference, “not everyone has said it.” You are probably more interested in getting to the airport or going home than in anything I might say. So, I have decided that instead of giving a talk, I’d host a debate.

The two debaters are here with me. I’ve known them so long, I feel they are part of me. The topic is “Prospects for The Affordable Care Act.” The first debater is a happy soul, a real “glass is half-full” person, optimistic and upbeat. The first part of her name is Polly; you can guess the last part.

The second speaker sees problems and threats around every corner. He thinks that anything that can go wrong will. He goes by just one name: Murphy. We will hear from them in turn and you can then ask them questions. Polly?

Thank you, Henry.

Let’s agree on one thing...the nation is politically polarized. Half of us supports the Affordable Care Act. Half of us don’t.

That said, the health reform law has survived its two greatest existential threats. The Supreme Court sustained the core element of the legislation. And, of course, the 2012 presidential election reelected Barack Obama, its champion. So, we know that implementation will proceed.

We know some other things too. Analysts have agreed for decades that coverage should be expanded. They have also agreed that costs have been growing too fast. But they disagreed about just what to do to solve those problems. So, for many years the status quo was the winner.

Meanwhile, it was pretty clear that the public was not much interested in radical change. One minority on the political left wanted some form of single payer system—Medicare-for-all. Another minority on the political right wanted individual consumers to buy insurance aided by some sort of voucher.

But most people were insured. They liked what they had. They feared change would harm them. That meant that replacing the current system was a nonstarter. The only politically feasible way to reform was to build on current insurance arrangements.

And that is just what has happened. A lot of us have come to recognize a paradox. Implementation would have been easier had Congress adopted one of these more radical policy options. President Obama and those then in control of Congress were Democrats. They tried very hard to be conservative—in the sense that they sought to disturb current insurance arrangements as little as possible.

The Affordable Care Act contains elements on which there is broad agreement. The current fee-for-service system needs to be replaced. So do certain current practices of insurance companies that are both understandable and deplorable—charging the sick or the old premiums that are unaffordable except for the well-to-do, denying coverage to those in greatest need, canceling coverage for heavy users of services. Fragmented delivery of care makes high quality hard to establish, maintain, and verify. The tax breaks for employer financed health care need to be curbed or eliminated.

On all of these goals liberals and conservatives mostly agree. On all of them, the Affordable Care Act contains, in at least embryonic form, provisions to move the nation in the right direction.

I want to quote from a recent talk by Alice Rivlin on these matters. I—that is, Polly—sit next door to Alice. She is pretty hard-headed and experienced. But, as far as optimism about the ACA is concerned, she is my—that is, Polly’s—soul mate. Alice writes:

“One of the persistent criticisms of the ACA rings absolutely true: it is a complicated law, not easily explained in sound bites. Its effectiveness will depend heavily on how well it is implemented by numerous players, especially the states. But the complexity is not attributable to its radical nature. On the contrary, the ACA is complex because its authors aspired to tweak our complicated, fragmented system of delivering and paying for health care without changing the system in any drastic way. It takes a lot of words to write that tweaking into legislation.”

Further quoting Alice Rivlin:

“In sum, I believe we are close to a workable bipartisan solution to the health care dilemma that could ... provide universal coverage ... and reduce the growth of health spending to sustainable rates. The elements of such a compromise involve retaining and improving the ACA.... These reforms will not involve blowing up the current system and replacing it with either a European-style single payer model or a fully market-based model. At this point in our history, publicly acceptable changes in health delivery must retain and improve the mixed public-private financing structure, including employer-based insurance coverage, Medicare, Medicaid, and federal subsidies to help low- and moderate-income households purchase health insurance coverage. They must focus on gradually altering incentives to providers and beneficiaries to participate in cost- and quality-oriented health delivery systems.

“These reforms will not give us a perfect health care system—just one that we can keep tinkering with and improving on in order to ensure that the system offers good quality care to almost everyone at sustainable costs. We won’t discover the perfect health care system, but we do have a shot at accepting the main features of a pretty satisfactory status quo and continuing to adjust it around the edges--constantly trying to make it more effective, fairer and less costly to the combination of public and private entities that are paying the bills.”

Thank you, Polly—and Alice. Things may look good to you, but while you were talking Murphy has been grimacing and squirming hin his seat. Now it is his turn. Murphy.

I don’t really disagree with Polly’s political analysis of how we have gotten where we are today. I do want to say that I thought that president Obama’s decision to go after full-blown health reform can fairly be described as either gutsy or rash.

Gutsy, if one looks at the history of health reform failure, the analytic complexity of the task, and the political minefields that had to be safely negotiated.
Rash, if one recalls the other problems he faced.
Rash if one recognizes that he was betting his administration on an issue where the chances of failure were—and I will argue, still are—high.

But as one close advisor remarked “those are the kinds of decisions we elect presidents to make.”

Polly says that the 2012 election determined that the Affordable Care Act will be implemented. I don’t think that is quite right. The 2012 election determined that we will try to implement the Affordable Care Act. It didn’t guarantee that the effort will succeed, nor did it assure that the Affordable Care Act will survive. The 2012 presidential kept the Affordable Care Act alive. The 2016 election will determine whether it survives.

Seventeen states and the District of Columbia are now trying to set up state health exchanges. Seven states are partnering with the federal government to perform the same functions. Twenty-six states are leaving the job largely to the Federal government.

Five and one half months from now, the exchanges must start enrolling individuals and small groups in insurance plans that, as of January 1 next year, people must carry. Many of the states started very late. And the federal government’s implementation efforts are short of money.

The tasks that all of the exchanges have to perform are myriad and complex. I agree with Polly that the job would have been easier had Congress tossed out the whole current, messy system. Things would have been easier if the Affordable Care Act were simpler, as it would have been had it gone to a full conference committee.

But we have to go to implementation with the health system and the health law that we have—[why doesn’t that paraphrase comfort me?].

So here is a sample of items on the “to-do” list that we have five and one-half months to complete.

Software must be written and computers purchased to enable people, most of whom know little of insurance and some of whom are close to innumerate, to choose sensibly among perhaps dozens of insurance plans and enroll in one of them— on-line, over the phone, or in person. Data on age, family status, income, and employment status will be used to compute premium subsidies to be paid to the enrollees’ chosen insurance companies and cost sharing subsidies that will be paid to the enrollees.
Data systems have to be developed to permit enrollment officers to check all of that information in real time.
State insurance regulations need to be conformed to the new national law.
Insurance companies must design the plans they will offer through the exchanges and, in most states, the separate products that they will offer outside the exchanges.
The health exchanges must decide what conditions health insurance plans must satisfy in order to be classified as qualified health plans.
The federal law defines four levels of coverage based on the proportion of health care costs for the specified benefits the insurance must cover. Insurers have to provide the middle two, but the state health exchanges may require them to offer plans at the lowest and highest levels.
Small businesses will have to decide what plans to offer their employees. Individuals and employees of those businesses need to be informed of the options they face and decide what products to buy.

Millions of people will start applying for coverage on October 1, 2013. We don’t know exactly how many. That will depend in part on the rules various exchanges apply. It will also depend on whether the public education campaigns yet to be launched, succeed, and on how the press, bloggers, spin-meisters, state officials, and members of Congress handle the mistakes that will inevitably be made by inexperienced officials, overwhelmed call centers, and confused applicants.

Nothing approaching the complexity of this “roll out” has ever taken place in U.S. peacetime history. People will be eligible for coverage in the following ways:

through Medicaid, if their income is below 138 percent of the federal poverty level in those states that choose to extend Medicaid coverage as permitted under the ACA, but only for those with incomes up to 100 percent of federal poverty level in those states that do not extend coverage;
through a “basic health plan” if their income is between the Medicaid level and 200 percent of the FPL in those states that adopt such a plan (but the federal regulations for such plans have not yet been released);
through ordinary insurance purchased through the exchange, with subsidies, if their income is less than 400 percent of the federal poverty level and without subsidies if their income is higher.

The health insurance exchanges have the authority to require insurance sold to individuals and small businesses to be sold through the exchange. So far, only Vermont and the District of Columbia are considering such a requirement. In most places, everyone will also be able to buy insurance directly from insurance companies.

Different people within the same family may be eligible for coverage under two or more categories of coverage. Each person may be covered by one or two insurance carriers, as dental benefits may be offered separately. The category of coverage may change during the year because incomes fluctuate and family composition changes.

The subsidy payable to an individual depends both on his or her own income and on the coverage categories of other family members. Premium subsidies are based on current income or income expected over some future period. These subsidies are paid directly to the particular insurer that the enrollee selects.

But at the end of the year, a final reckoning based on the enrollees’ actual incomes, which may have risen after application, may require enrollees to repay some or all of the subsidy themselves, although they never laid hands on the overpayment.

The federal government has to set up data systems to enable the exchanges to verify earnings. Tax returns and Social Security earnings records won’t do, as they are available now only with delays of many months or even years.

People who fail to carry required insurance are subject to a fine if they fail to do so. The fine is excused if premiums net of subsidy exceed a fractions of income that themselves vary with income. People may pay the fine voluntarily. But if they don’t, the law authorizes no way to enforce the fine other than by subtracting it from tax refunds due people who over-withheld. And many potential enrollees do not file tax returns.

Mistakes and confusion are inevitable. That is the lesson from the rollout of the Medicare drug benefit and the Massachusetts universal coverage plan that closely resembles the Affordable Care Act. One might draw comfort from the fact that after rough starts, they succeeded. But this challenge is vastly harder for at least three reasons.

First, the Medicare drug benefit and the Massachusetts health plan were both passed with substantial bi-partisan support. The same cannot be said of the Affordable Care Act. Opponents have tried, with some success to deny the administration funds for implementation. This year’s budget asks for $1.5 billion—which Congress will probably not give. Opponents will pounce on the normal start-up glitches as proof that the law was a mistake and should be repealed.

Second, even if the ACA were flawlessly enforced, many people and businesses are going to find themselves facing big price increases. Why?

The new law limits premium variations based on age to no more than three to one. Current variations are much larger.
The law permits exchanges to impose community rating, which can mean that age-based variations in premiums are barred altogether. That means that the young will tend to face price increases.
The law permits states to charge smokers a 50 percent surcharge. Some states have announced that they will do so. And none of that surcharge will be covered by subsidies.
The ACA benefit standards will force many individuals and employees to buy more insurance than they are accustomed to having, and that will boost cost.
Small businesses will all be pooled in the exchanges. That means premium decreases for businesses employing older workers, but price increases for those with young workers.

What this all means is that even if overhead expenses are reduced, as I believe they will be, and even if administration were perfect, which I am sure it will not be, a lot of people are going to have high-voltage sticker shock. And what that means in turn is that the exchanges may face nasty adverse selection problems, boosting premiums still more.

Third, real errors will be made. This law is complicated. People don’t understand it. Phone banks will be staffed by inexperienced people. The software will be insufficiently tested. There are only three things absolutely certain in this life: death, taxes, and the law named for me, Murphy.

Wow, Murphy, I don’t know whether to thank you for those comments or crawl into a cave. One thing is for sure...you took a lot more time than Polly did. So, I am going to give her a few moments to respond before we take comments from the audience.

Murphy is right to point to the ferociously challenging implementation problems that we will face. I don’t minimize them. But despite all of these threats, I remain hopeful. Seventeen states and the District of Columbia are running their own exchanges. One of those states is Minnesota—and everything works in Minnesota. And the DC exchange has some pretty good people working for it.

More seriously, I believe that some of the states, or the federal exchanges, are going to get things right or almost right. That is all it will take for those who support the Affordable Care Act to make a persuasive case that, given time and patience, all states and the federal government can do the job right.

They can and will point to the stunning advances that have been and will be achieved under the law—improved coverage of adult students, elimination of the donut hole in drug benefits, the end to practices by insurance companies that everyone deplores—charging staggering premiums or denying coverage altogether for those with preexisting conditions or who are just old, and cancellation of policies for those who need coverage most. They will be able to point to the millions of newly insured and to the hard cash that helps them afford it.

And, there is an increasingly good chance that in one area we might just get lucky. The health cost juggernaut stopped abruptly in 2009. The onset of this respite wasn’t attributable to health reform. The calamitous recession gets some of the credit. And also independently of the health law, hospitals and physicians have been reforming the way health care is delivered and paid for.

But the Affordable Care Act promises to extend this respite. It contains pilots, demonstrations, and experiments of virtually every cost control mechanism that any analyst has thought of. If these trends continue, the new law will get credit if the cost climate stays benign. Some of that credit will be undeserved. But who cares? If even a few of the ACA’s innovations in payments and delivery of care pan out, it will deserve much of that credit.

So, when the presidential election of 2016 rolls around—the one that I agree will really settle the fate of the health reform legislation—I think that there is a good chance that most people—not just Democrats and Independents, but Republicans as well—will realize that the administrative clouds are lifting and that the United States is moving ahead to become a fairer and healthier nation because of the Affordable Care Act.

Now, on behalf of all of you who have listened so patiently, I want to ask you to give Polly and Murphy a big hand. I trust that they will take any questions that you may have.

Authors

Henry J. Aaron

Publication: Conference on Equity and Choice in Health Care Access, The University of Chicago

Image Source: © Rebecca Cook / Reuters

A Pop Quiz About Federal Spending That May Surprise You

Henry J. Aaron — Tue, 05 Mar 2013 11:12:00 -0500

Some years ago, former Senator and one-time Harvard professor, Daniel Patrick Moynihan, remarked “It isn’t what you don’t know that hurts you. It’s what you know that isn’t so.” In that spirit, readers: here is a short quiz. Please don’t worry. The quiz is short. You won’t be graded. And you may be surprised.

Question 1: The federal government is spending a larger share of national income than at any time since World War II—True or False

Question 2: The federal government is collecting a larger share of national income in taxes than at any time since World War II—True or False

Question 3: Social Security is currently running a deficit—True or False

Question 4: Health care spending is outpacing the growth of income—True or False

I suspect that large majorities of Americans would answer ‘true’ to at least one, and perhaps to all four, of these questions. Yet, the correct answer to all four is ‘False.’ That you would answer ‘yes’ to any of them shows the unfortunate success of the campaign of misinformation to which Americans have been, and are being, subjected. And this misinformation is doing the nation profound harm.

Let’s start with government spending. According to the Congressional Budget Office, the Federal Government will spend 21.7 percent of GDP next year under current policy. Were the U.S. economy operating at capacity, that share would be less than 20.6 percent, because output would be higher and spending for such items as unemployment insurance would be lower. For the preceding three decades government spending averaged 21.1 percent of national output. In brief, the numbers flatly contradict the assertion that spending is ‘out of control.’

In fact, the reverse is true. The sharp rise in health care costs over the last three decades and the increased outlays to fight two wars and maintain homeland security after the calamitous events of 9/11 mean that federal spending on the rest of government is slated to take a steadily declining share of national output.

Well, what about taxes? The story is almost the same. Federal government revenues are projected to be 16 percent of national output, compared with an average over the last three decades of 17.7 percent. Spending and revenues are both lower than the average of the last three decades, not higher.

Which brings me to spending on Social Security and health care—the two largest elements of the alleged, but nonexistent, ‘entitlement crisis.’ Social Security is projected to have reserves at the end of 2013 $41 billion higher than it had at the start of the year. At the end of 2014, its reserves are projected to rise by another $42 billion. In 2020, reserves are projected to be $285 billion higher than at the end of 2013. What this means is that Social Security is currently running not deficits but surpluses. It means that talk of a pension crisis is poppycock. To be sure, the rising flood of retiring baby-boomers means that deficits will eventually emerge. Raising revenues or lowering benefits to prevent them from happening is vitally important. These changes are better addressed sooner than later, but cries of ‘crisis’ are baseless.

The facts with respect to health care spending are also inconsistent with widely held perceptions. Health care spending has outpaced income growth for decades. That is why the share of gross domestic product devoted to health care has tripled in the last half century. But that spending juggernaut abruptly stopped in 2009. Health care spending is projected to claim a slightly smaller share of national output in 2013 than it did four years earlier.

Over the rest of this decade, the Medicare roles will swell, and total outlays will rise. But spending per enrollee is projected to rise a bit less rapidly than U.S. per capita income. The reason is the Affordable Care Act, health reform. Contrary to the assertions of those who sought its defeat and oppose its implementation, health reform—the Affordable Care Act—will directly slow the growth of health care spending, and it contains numerous pilots, experiments, and incentives that promise to slow the growth of spending still more. Caution is in order. Not all of these measures will work. Some may not be indefinitely sustainable. Spending slow-downs have occurred and proven temporary—and it could happen again. But right now, if you said that health care spending, in general, or Medicare spending per person is rising faster than national income, you would be in error.

The misinformation that stands behind the incorrect answers to these questions is doing the nation vast harm. Because of a false belief that spending is out of control Congress stands willing to let the sequester take effect, putting needless drag and the still-weak economic recovery. Because of a false belief that Americans are shouldering unusually high taxes, Congress is unwilling to close loopholes that would raise revenue without raising marginal tax rates. Because of a failure to recognize that Social Security is actually running cash flow surpluses and will do so for years, elected officials insist on enacting benefit cuts now as a precondition for dealing with nation’s immediate crisis, a weak economy and long-term unemployment. Because people assume that health care spending continues to grow unacceptably fast, they insist on the inevitability of a long-term fiscal crisis that may never occur and will in no case occur soon.

Meanwhile, the national economic blood-letting continues with an annual loss of nearly $1 trillion a year in output that would generate added revenues and put the long-term unemployed back to work. The mistaken beliefs about overall spending, taxes, Social Security, and health care spending that are simply not so are harming and will continue to harm the country most grievously.

Authors

Henry J. Aaron

Publication: Real Clear Markets

Economic Recovery, Not the Deficit, Is the Number One Problem

Henry J. Aaron — Thu, 07 Feb 2013 14:08:00 -0500

The preeminent domestic challenge that the United States faces is returning the nation as rapidly as feasible to full employment. The State of the Union should focus on how best to do that. This is today’s problem. The waste of potential output, currently running at roughly $1 trillion a year, is bad enough. The erosion of human capital of the millions of long-term unemployed and the blighted careers of the millions of young labor force entrants are even worse, injuries from which the nation will suffer for decades in lost potential output even after full employment is restored.

The problem that has mesmerized the nation of late, the long-term structural deficit, will eventually cause problems if left unattended. But it is not the most urgent problem the nation faces today. The optimal policy response both to the catastrophe of lost output and lost human resources and to the long-term structural deficit would be increased fiscal stimulus today combined with a combination of spending cuts and higher taxes set to take effect after the nation has returned to full employment. Unfortunately, fiscal policy today is acting as a drag on the economy, rather than helping the recovery. And things threaten to get much worse when, as now seems likely, the sequester takes effect.

Authors

Henry J. Aaron

Image Source: © Lucas Jackson / Reuters

Tax Reform? Between a Rock and a Hard Place

Henry J. Aaron — Mon, 14 Jan 2013 16:12:00 -0500

During the political knife-fight known as the 'fiscal cliff debate,' there was one topic on which virtually everyone seemed to agree -- that the income tax is a mess and needs reform. The idea on tax reform was straightforward. Broaden the tax base by curbing what are variously called tax expenditures, loopholes, special breaks, or simply deductions, credits, and allowances. Then, use the resulting revenues in part to lower rates and in part to lower deficits. The template for such reform was the Tax Reform Act of 1986 when Congress broadened the tax base and cut rates. We did it then, and we could do it again.

Now that most of the Bush tax cuts have been made as permanent as anything in the tax code can be, interest in tax reform has abated somewhat. But, the income tax remains a mess and still needs reform. So, it would be worth understanding why reform succeeded in 1986 -- if only barely -- and what it will take for it to succeed in the future. Unfortunately, the job will be even harder this time.

The key to success in 1986 was that Congress cut personal income tax collections. Although overall tax collections were to remain unchanged, tax burdens were supposed to be moved from individuals to corporations. The shift was large, equivalent to moving about $1 trillion in taxes in today's economy from individuals to corporations over ten years.

Cutting taxes always makes reform easier. Tax reform is income redistribution. Tax breaks are of value to some people, rate cuts to others. Some gain, some lose. Of course, reform advocates always promise that everyone will gain because economic growth will increase and tax simplification will spare everyone needless hassle and compliance expense. But people know that some of these promises are not true and that even when they are true, the benefits take time to materialize. But who pays more and who pays less when tax breaks are ended is instantly clear once the legislative specifics are known.

Cutting personal income taxes greatly increased the appeal of reform. It reduced the number of people were net losers and the amounts they would lose, and it raised the number who were net gainers and the amounts they would gain. Nonetheless the Tax Reform Act of 1986 almost died several times and the outcome was in doubt until the very end. Many regarded its ultimate enactment as something of a political miracle.

Today, the job is even harder. Shifting taxes from individuals to corporations is now out of the question. The increased international mobility of capital and the proliferation of multinational corporations means that any attempt to raise business taxes will be largely frustrated by companies that can readily transfer profits to low-tax jurisdictions. Even worse, the need to narrow projected budget deficits means that taxes have to be increased.

To be sure, there are other ways to raise revenues. A new tax could be levied on energy or on value-added -- a sort of national sales tax -- and some of the resulting revenue could be used to cut the deficit and some to lower personal income taxes. But opposition to a new tax on energy or on value-added is currently fierce and unbending. New taxes of this sort are politically fanciful in the current environment.

Or the nation could avoid the need to raise taxes by walking away from its commitment to provide basic income and health care support to America's elderly, disabled, and poor. But a majority of members of both parties opposes cutting Social Security or Medicare.

All this means that successful tax reform today will be tied to raising personal income tax revenue, not, as in 1986, to cutting it. Until such time as the nation is prepared to entertain a new tax on energy or value-added, tax reform means that most filers will see themselves as losers. Even if the partisan divide were not as wide and deep as it is today, there would be little chance that serious reform of the personal income tax could get through Congress without some way of lowering total personal income taxes to lessen the opposition from those who would lose the special tax breaks. With partisanship at current pathological levels, the chances are nil. A rock and a hard place, indeed!

Authors

Henry J. Aaron

Publication: Huffington Post

Image Source: © Mary Calvert / Reuters

Where Is the Urgency on the Debt Ceiling?

Henry J. Aaron — Wed, 09 Jan 2013 13:05:00 -0500

The degree to which words can distort our view of reality is remarkable and ominous. For some time, debate on public policy has been debased and misdirected by terms that bear little relation to reality. Exhibit 1 in this indictment is the term "entitlement crisis"; exhibit 2 is "fiscal cliff."

"Entitlement crisis" conjures up an "oh God, we have to do something" mentality that is appropriate to emergencies. In fact, the challenges of paying for Social Security and Medicare unfold slowly. In the case of health care, we are well on our way to solving them. The term, fiscal cliff, focused public attention on a non-event, the various legislative provisions expiring on January 1, 2013. But it obscured what threatens to become an economic and constitutional crisis of historical proportions, the potentially catastrophic deadlock over the debt ceiling.

Misplaced Urgency?

The simple fact is that there is no "entitlement crisis." "How can you say that?" you ask. Everyone talks about it. Are they deluded?” The answer is “yes, if one is focusing on Social Security and Medicare, they are deluded.”

Here are the facts. Social Security is expected to run a surplus, not a deficit, in 2013 of $41 billion. As the baby-boomers retire, spending will grow faster than revenues, but 2021 will be the first year in which total outlays are projected to exceed total income. In 2012, Social Security will have reserves estimated to be over $3 trillion. To be sure, deficits will increase thereafter, and eventually those reserves will be exhausted. So, revenues must be increased, benefits cut, or both. A problem? Yes, definitely. But hardly a crisis.

The situation with Medicare is more complicated, but not critical. The Medicare Hospital Insurance trust fund is going to run a deficit of about $18 billion in 2013— less than 2 percent of the overall federal deficit. No crisis there. But, you may say, spending on the retiring baby-boomers will cause Medicare’s spending to explode...right? Well, not at first. This Medicare deficit is expected to shrink for several years and to return to today’s level only in 2021. The reason costs are well contained may surprise you. The reason is that the Affordable Care Act (aka Obama Care) significantly slowed the increase in Medicare spending. In fact, growth of per person spending under Medicare has been a bit slower, and is projected to be considerably slower, than growth of per person spending in the rest of the health care system.

Indisputably, the United States spends more on health care than does any other nation. Our system is replete with inefficiency and waste—and that is a problem. But it is a systemic problem, not one confined to Medicare. Health reform is intended, among other things, to begin to deal with that problem by changing the way we organize and pay for health care. A health system problem? Yes. A health "entitlement crisis"? No.

What the Fiscal Cliff Was Hiding

As the New Year approached, no sentient being could escape febrile maundering from talking heads, newspaper pundits, and internet bloggers warning of the "fiscal cliff"—the collection of legislative events timed to occur on January 1st. There was a sizeable kernel of truth in these concerns. If all were allowed to take effect and continue for a few months, there is little doubt that they could have seriously damaged the economic recovery.

But with one major exception—the abrupt end on December 31, 2012 of extended unemployment benefits for about 2 million long-term unemployed—none of these events would have done great immediate damage. Rather their effects would have cumulated with time. In short, there was a need for action but there was nothing particularly special about January 1st.

Despite this fact, many acted as if the fate of the republic would be jeopardized if New Years day passed without a decision on what to do about the various expiring tax rules and the impending cut in payments to physicians under Medicare.

In the madcap rush to get legislation enacted and signed, two very bad things happened. But virtually no one noticed. The first bad thing that happened was that the president and Congressional Democrats and Republicans settled on a bill that exacerbated the very long-term deficit problem that both agreed poses a serious long-term economic threat to the nation.

When Congress passed The American Taxpayer Relief Act and the president signed it, they increased the budget deficit over the next decade by $4 trillion. If they had done nothing, if they had continued to be just as deadlocked and ineffective as they had been for most of 2012, the deficit would eventually have begun to grow less rapidly than national income. The long-term budget deficit problem would have been largely solved.

Such a course was not acceptable, of course, because the tax increases and spending cuts set to take effect in on January 1, 2013 would have turned economic recovery into renewed recession. But if the recovery needed support, then the proper course would have been to continue, or even increase, economic stimulus in 2013 while boosting tax rates and cutting spending growth once economic recovery was underway.

Instead, Congress took no action to spur economic recovery in the near term. And it increased the long-term budget deficits that virtually everyone properly fears will generate an unsustainable increase in the national debt.

About That Debt Ceiling

Not only did the American Taxpayer Relief Act create the very problem its authors said they wanted to solve, but it diverted attention from a looming crisis of vastly greater proportions. The U.S. government has reached the legislated limit on borrowing, the national debt ceiling. The mere existence of such a ceiling is a mathematical absurdity. Having voted for expenditures and tax laws, the Congress cannot logically also put a limit on the difference between those two sums.

Most past debates on the debt ceiling have been little more than an opportunity for bloviation—pious statements about the virtues of frugality but little more. In 2011, however, Congressional Republicans announced a new principle, christened the Boehner rule. According to the Boehner rule, the debt ceiling should be increased only if projected spending over the next decade is cut by the same amount. Advocates of the Boehner rule are now also saying that taxes are off the table because not all of the Bush tax cuts made permanent.

To see what the Boehner rule means, consider the following facts. Based on projections done last August by the Congressional Budget Office, the national debt will increase over the next decade by about $12 trillion under current law. To cut spending over the next decade by $12 trillion, it would be necessary to cut annual spending by an average of $1.2 trillion a year. Since total non-interest spending over that period will average $4 trillion a year under current law, about 30 percent of projected spending would have to be eliminated. Because big cuts are impossible next year or the year after, the required cuts toward the end of the decade would have to approach 50 percent to satisfy the Boehner rule. As it happens, no one in either party—and, most tellingly, none of those insisting on the dollar-of-cuts-for-a-dollar-of-increase-in-the-debt-ceiling trade-off—has indicated where spending cuts of even one half this amount should come from. Even so, they have declared that they will oppose any increase in the debt ceiling unless these terms are met. And they have the votes to make their commitment hold.

People within the Administration have referred to these demands as economic terrorism, which in my view is entirely fair and accurate. They have said flatly: "We don’t negotiate with terrorists.”

It's About to Get Ugly

The official debt ceiling has been reached. Now, the Treasury Department is using so-called "extraordinary financial means" to pay bills. The moment of reckoning will come when the limit of such extraordinary means is reached, probably late in February. What happens then is anyone’s guess. The only benign outcome would be for those who have propounded the Boehner rule to abandon it as unreasonable and face up to the fact that if they want spending cuts, they will have to name them and win enough votes to make them the law of the land.

Otherwise, the results will not be pretty. The president may cave and agree to cuts that would eviscerate public services. A deadlock may continue causing the nation to default on its debt or fail to pay at least some of its bills, including Social Security benefits, salaries of federal employees, bills from doctors and hospitals under Medicare, and veterans benefits. The president might invoke a controversial provision of the 14th amendment that some Constitutional scholars think authorizes him to borrow as needed in order to maintain "the validity of the public debt." Alternatively, he might rely on a financial gimmick to ignore the borrowing limit. Whether he invokes the 14th amendment or uses a financial gimmick, the possibility of impeachment or other political crisis would ensue.

In brief, "fiscal cliff" was a metaphor so vivid that it made people believe an event was momentous when it really wasn’t. Now the nation faces a genuinely critical event. It is not arousing appropriate concern and outrage, however, because no one has found a metaphor to make a real crisis seem real.

Authors

Henry J. Aaron

Publication: Yahoo! Finance

Image Source: © Kevin Lamarque / Reuters

Health Reform: The Political Storms are Far From Over

Henry J. Aaron — Thu, 27 Dec 2012 11:00:00 -0500

The history of president Obama’s health reform bears an uncanny and disturbing similarity to the life cycle of a hurricane. With Sandy fresh in our memory, the similarity is not comforting.

Hurricanes have three phases. The front wall of the storm brings high winds, lightening, and rain. Next, at the hurricane’s center, or eye, the wind drops and the air warms. If one is at sea, the water may turn calm and warm, bringing the illusion that the storm has ended. As the storm moves on, wind and rain return, often with increased force. Those fooled by the calm who leave safe havens may be destroyed by what follows.

The life cycle of a hurricane will bear an eerie similarity to that of health reform. Nearly four years elapsed between president Obama’s initial call for national health reform until the bill became law and the Supreme Court ruled on its constitutionality. The political and legal turmoil was intense and continuous. The process was rancourous and the outcome in doubt from start to finish. It took a bitterly fought presidential election to put an end to this phase of the struggle.

Now, we are in a period of relative calm. The 2012 election settled the immediate fate of the Affordable Care Act (ACA). The candidate who swore to repeal it lost. The ACA was the major domestic legislative achievement of the victorious incumbent president who won reelection. Now, eighteen states are in process of designing rules for health insurance exchanges—the administrative entities that will manage implementation of the new law, the most important provisions of which will take effect one year hence. The other states will either leave implementation entirely to the federal government or share administrative responsibilities with federal agencies.

A huge amount of work remains to be done by October 1, 2013 when people can begin enrolling for insurance coverage in the new exchanges.

• Data systems have to be developed.

• Software must be written and computers purchased to permit on-line enrollment or assist officials in signing people up in hundreds, if not thousands, of offices.

• State insurance regulations need to be conformed to the new national law. Insurance companies must design the plans they will offer through the exchanges and, in most states, the separate products that they will offer outside the exchanges.

• Small businesses will have to decide what plans to offer their employees. Individuals and employees of those businesses need to be informed of the options they face and decide what products to buy.

• The state insurance exchanges or their federal equivalent will have to enroll people, compute the subsidy to which each person is entitled, and pay that subsidy to the insurer that each person has selected.

• Myriad other activities are going on in many federal government offices and to a greater or lesser extent–or not at all–in state government agencies.

By its very nature, these activities are decentralized and dull. No exchange, other than two that existed before enactment of the Affordable Care Act, has yet opened its doors or will before late 2013. No one is yet applying to them for insurance coverage or for subsidies. A hive of activity is ongoing in state and federal agencies, but no one is fully aware of everything that is going on. More importantly, perhaps, no one is aware of what activities that should be but are not going on. Like those in the eye of a hurricane, a deceptive and short-lived calm is upon us.

The storm will gather force once again starting on October 1, 2013. That is when millions of people will start applying for coverage through the newly created health insurance exchanges. Exactly how many will apply will depend on the rules that the 18 states setting up their own exchanges and the federal government adopt. The full fury of the storm will return on January 1, 2014. Nothing approaching the complexity of this ‘roll out’ has ever taken place in U.S. peacetime history.

To appreciate what is involved, consider the complexity of the law.

• People will be eligible for coverage in one of the following ways: 1) through Medicaid, if their income is below 138 percent of the federal poverty level (FPL) in those states that choose to extend Medicaid coverage as permitted under the ACA, but only those with incomes up to 100 percent of FPL will be covered in those states that do not extend coverage; 2) through a ‘basic health plan’ if their income is between the Medicaid level and 200 percent of the FPL in those states that adopt such a plan (but the federal regulations for such plans have not yet been released); 3) through ordinary insurance if they are not covered by Medicaid or a basic health plan, with subsidies provided through the exchange if their income is less than 400 percent of the FPL and without subsidies if their incomes are above 400 percent of the FPL.

• People within the same family may be eligible for coverage under two or more categories of coverage.

• Each exchange will offer insurance at a minimum of four levels of generosity. People under age 30 will have a fifth option, a special bare-bones class of insurance to keep costs down.

• The subsidy payable to an individual depends both on his or her own income and on the coverage categories of other family members.

• Coverage and subsidy amounts can change if income changes—for example, if the person or some other family member changes employment status—or if family structure changes.

• Premium subsidy amounts, based on current income or income expected over some future period are paid directly to the particular insurer that the enrollee selects. If those payments turn out to be excessive—for example, because income rose after application, the individual must repay the overage, up to legislatively specified maximums based on income.

• Families residing in metropolitan areas that span state borders, such as New York, Washington DC, Kansas City, or St. Louis, may have family members working in different states and, hence, come under different exchange rules.

• The federal government must provide earnings data for people, many of whom do not and will not file tax returns that are sufficiently accurate and current to enable the health exchanges to compute the correct subsidies for applicants. Tax returns and Social Security earnings records won’t do, as they are available now only with delays of months or even years.

• Individuals will be required to carry insurance of one sort or another that meets standards under the law and may have other features required by the state exchanges. They are subject to a fine if they fail to do so, but there is no effective enforcement mechanism other than failure to return tax refunds due people who had more tax withheld than they end up owing. The requirement is waived altogether if premiums exceed more than certain proportions of income.

This is just a partial list of the more visible administrative challenges that have to be met. Confronting this list, one could either feel optimistic or lapse into despair. Optimists regarding prospects for implementation will recall the comparatively trouble-free introductions of two other even larger federal programs—Social Security and Medicare. These programs differed in essential and administratively-relevant ways from the Affordable Care Act. Both entailed relatively simple eligibility criteria—age or disability and requisite work experience over many years. Under both programs, workers and their employers were required simply to pay a tax proportional to covered earnings. Social Security beneficiaries initially had nothing to do other than cash the checks they receive each month. Administration of Medicare is somewhat more complex and subject to error and fraud. Even so, the challenges under the ACA associated with enrolling people, determining subsidies, paying them to the right companies, and adjusting subsidies as circumstances change are vastly more complicated.

Pessimists might conclude that implementation will inevitably break down or go through an error-prone period of administrative over-load so long and politically fraught that program collapse is likely. In contrast to the redundancy built into such complex enterprises as the space program—where, if one system fails, one, two, or even three back-up systems are built in to keep things working—health reform is replete with elements each of which is vital to success, such that if any one fails, the whole system could ‘seize up’ and fail. Determining eligibility, keeping track of which type of insurance applies to which family members, computing subsidies, and making sure that premiums go to the right insurers will be a never-ending headache.

In my view, neither the optimistic nor the pessimistic view is fully justified, although the pessimists have the better case, at least at the outset. The mixed-public-private insurance system perpetuated in the ACA is inherently complex. But, with time, bugs in the software will be ironed out and initially overloaded and imperfect data systems will be steadily improved. Among the 18 states setting up exchanges, a few are bound to get the job mostly done and show the way for other states. In brief, with time, most administrative problems can be overcome. The major challenge will be to make sure that the system works in enough places and fast enough to permit supporters to point to the successes and explain that the inevitable glitches are reparable. It is also worth noting that were Congress not neck deep in a swamp of partisanship legislators could find ways to minimize the problems that remain.

The actual course of events after January 1, 2014 is likely to be stormy and filled with developments investigative reporters will enthusiastically describe and ACA opponents will point to with relish. There is every prospect that during the years 2014 and 2015 the political storms will be as furious as they were when a committed president and Democratic Congressional leadership gave life to the long-delayed dream of national health reform. Those who said that the presidential election would settle the fate of heath reform will be proven mostly right. But it will become clear that they had the date wrong: the key election will turn out to have been not 2012, but 2016.

Authors

Henry J. Aaron

Image Source: © Jason Reed / Reuters

A Fiscal Cliff Compromise Through Alternative CPI?

Henry J. Aaron — Thu, 20 Dec 2012 00:00:00 -0500

President Obama and Speaker Boehner have reportedly agreed to support a change in the price index used to adjust Social Security benefits for inflation. Such a shift is therefore likely to be part of any deal to avoid going over the fiscal cliff. What is this proposal? Is it a good idea?

The idea is straightforward. All retirement, disability, and survivors pensions are adjusted each year to offset inflation as measured by the consumer price index (CPI). Studies have indicated that the particular version of the CPI now in use somewhat overstates actual inflation. An alternative index would be more accurate and would grow a bit more slowly—by about 3/10 of 1 percent less per year—than the current index does. In its most stripped down form, the proposal would apply to the annual inflation adjustments in Social Security benefits. But the swap could also apply to other federal expenditures, such as Supplemental Security Income (SSI), the program of cash assistance to the very poor, and to provisions of the personal income tax, such as the standard deduction, personal exemptions, and bracket widths.

One’s judgment on use of the alternative index should depend on how broadly it is applied. If the answer is that the new CPI would be used just for expenditure programs, but not for taxes, it is a truly terrible proposal and should be regarded as a ‘deal breaker.’ If the alternative CPI is used for Social Security and for tax provisions, it is still a dubious proposal, but would be an acceptable component of a larger budget deal that resolved the multiple uncertainties called ‘the fiscal cliff.’

From a purely technical standpoint, most analysts agree the alternative CPI measures inflation better than the current index does for most Americans. Whether it is a better measure of inflation for the elderly is less clear. A special price index based on the market-basket that the elderly on average consume indicates that the prices of those goods actually grow somewhat faster, not slower, than the current CPI. So, if one is engaging in a green-eyeshade exercise in which the only objective was technical accuracy, the case for the alternative CPI is not clearly correct. The special price index for the elderly might make more sense for adjusting pensions. On the other hand, the alternative, more-slowly-growing index might make more sense when adjusting provisions of the tax code which applies to people of all ages.

But this debate should not be about the formal properties of price indices. It should be about whether the substantive impact of the resulting changes in pensions the retired and disabled receive, in the amount of assistance available to poor SSI recipients, and the amount of taxes that people pay.

The impact of the alternative index on Social Security would be deplorable. The small annual cuts would cumulate, growing larger the longer one is on the benefit rolls. It would hit hardest the very old and the long-term disabled. People who come on the disability rolls at age 40 would lose nearly a full months benefits each year by the time they reach age 65. The same would be true of retirees by the time they turn age 87. Poverty among the elderly tends to increase with the age. Cutting benefits more each year for those whose economic condition has deteriorated most is perverse. That is true whether or not the instrument of such perversity is a ‘technical’ improvement.

The effects of cutting the price index used to update SSI benefits are more complicated but are even worse. Half of SSI recipients are also Social Security beneficiaries. These are people whose Social Security benefits are even lower than the meager SSI benefit. For these poor elderly and disabled people, SSI brings not just a bit of cash, but also eligibility for Medicaid, which pays medical expenses not covered by Medicare. These expenses include premiums, deductibles (now$1,156 for a hospitalization), and other cost sharing. If a switch to the alternative price index slows the growth of SSI benefits, some who now qualify would lose SSI eligibility. Because Medicaid eligibility is often contingent on SSI eligibility, some people of very modest means would abruptly face sharply increased out-of-pocket medical costs. If, as both parties have agreed, the poor should be spared undue burden from deficit reduction, SSI benefits should not be cut.

Mr. Boehner has now accepted the truth, long recognized by budget analysts, that higher taxes must be part of any politically viable deficit reduction program and any package to avoid going over the fiscal cliff. The switch to the alternative price index for adjusting the standard deduction, personal exemptions, and bracket widths would generate additional revenues across the income spectrum. In this case, improving technical accuracy achieves a substantively necessary objective.

So, the bottom line is that applying the alternative price index just to Social Security is a bad idea. Applying it to the income tax is constructive. And sparing SSI recipients from the alternative index is vital. If the alternative price index is applied to Social Security and taxes, but not to SSI, and if such a package is the glue that enables an agreement on measures to resolve the profoundly dangerous ‘fiscal cliff’ uncertainties that Congress now faces, then it is an unsavory pill worth swallowing.

Authors

Henry J. Aaron

Publication: Real Clear Markets

Image Source: © ERIC THAYER / Reuters

Progressives and the Safety Net

Henry J. Aaron — Mon, 10 Dec 2012 15:59:00 -0500

Something wonderful happened in the United States during the middle third of the twentieth century. After decades of policies that smacked of Social Darwinism, our country created a strong, if incomplete, social-insurance safety net. The actions our government took expressed a solemn promise to vulnerable Americans. Social Security and Medicare assured the elderly and disabled basic cash income and health care roughly similar to that enjoyed by the rest of the population. They lifted the elderly and disabled from a status of privation to near equality with the nonelderly in both money income and access to health care. Various other federal programs provided food, housing, and educational support, or encouraged their provision by state and local governments. By official measures, poverty among the elderly fell below that of other age groups thanks to Social Security, and health coverage improved markedly for the nonelderly poor because of Medicaid.

Now, in the second decade of the twenty-first century, these advances are under attack and that solemn promise is in jeopardy. To be sure, these programs enjoy enormous popularity. At the same time, however, a solid minority has never accepted the idea that taxes should be used to pay for pensions and health insurance. As long as economic growth generated enough revenue to pay for these programs and the rest of government’s commitments, opponents of social insurance and other elements of the safety net gained little political traction. Three deficit reduction plans enacted during the presidencies of George H.W. Bush and Bill Clinton, along with sustained economic growth, produced budget surpluses in the late 1990s and early 2000s.

But then everything changed, and the national debt ballooned. The recessions of 2001 and 2007-2009 led to higher unemployment and lower revenues. Imprudent tax cuts slashed revenues still more. Wars in Iraq and Afghanistan following the tragedy of 9/11 led to huge increases in military spending. As a result, large and seemingly limitless deficits emerged, and budgetary angst has become epidemic.

In addition, official projections have warned that retiring baby boomers and rapidly rising health-care costs will cause Social Security and Medicare benefits to greatly outpace program revenues. Although these long-term forces have little to do with current budget deficits, they have combined to generate a sense of fiscal crisis. On top of this comes the “fiscal cliff,” the concatenation of dubious fiscal decisions timed to take effect almost simultaneously. The tax cuts enacted during President George W. Bush’s first term and the payroll-tax holiday enacted in early 2011 are set to expire on December 31, 2012. The government debt will soon breach the ceiling set in August 2011. Mindless spending cuts passed in 2011, based on formulas that pay no heed to the relative importance of programs and that have nothing to recommend them other than simplicity, are also to begin on New Year’s Day 2013.

Analysts agree that if all of the tax increases and expenditure cuts take effect, economic activity will slow, and a weak recovery will morph into recession. Failure to raise the debt ceiling would wreak tsunami-like devastation on financial markets that would inundate the rest of the U.S. and world economy.

Against this backdrop, the American public is being told that the cause of looming financial catastrophe is an “entitlement crisis.” Fiscal Jeremiahs warn that the only way to deal effectively with current deficits is to cut back Social Security, Medicare, and Medicaid years in the future. The full House of Representatives has twice passed budget plans, crafted by Budget Committee Chairman Paul Ryan, that would replace Medicare with a voucher that beneficiaries could use to buy either private insurance or a plan like traditional Medicare. The Ryan plan would also convert Medicaid into a block grant at spending levels well below what is projected under current law. The grants would not increase during recessions when Medicaid enrollments tend to spike. States, pinched by falling revenues and rising service demands, would have to cut benefits just when they are most needed.

But while reports of a crisis are overblown, and conservative proposals to solve it are draconian, progressives do need to think about how best to reform the entitlement programs. The simple fact is that Social Security, Medicare, and Medicaid form a very large and growing part of the federal budget—currently 50 percent of noninterest spending. Furthermore, the phrase “entitlement crisis” has been repeated so often and so earnestly that denying its reality is more likely to damage one’s own credibility than to dislodge what is actually profound confusion. Cuts in Social Security, Medicare, and Medicaid benefits are neither necessary nor desirable and should be resisted, even as reform of the whole health-care delivery system proceeds. But political and economic realities—the need to secure majority support for measures to lower deficits once economic recovery is well advanced—make some cuts highly likely. It behooves supporters of social insurance to have in reserve program cuts that would do the least harm and might advance other meritorious objectives. To begin this search, one should start with the underlying economic and demographic forces that are driving spending.

Read the full article at democracyjournal.org »

Authors

Henry J. Aaron

Publication: Democracy: A Journal of Ideas

Image Source: © JASON REDMOND / Reuters

Can Working Longer Solve Our Budget Problems?

Fri, 07 Dec 2012 09:00:00 -0500

Event Information

December 7, 2012
9:00 AM - 2:00 PM EST

Saul/Zilkha Rooms
Brookings Institution
1775 Massachusetts Avenue NW
Washington, DC 20036

The Baby Boomer generation is reaching retirement age. The long-term outlook for the federal budget is bleak, with much of the federal budget devoted to the elderly and people with disabilities through Social Security, Medicare, and Medicaid. As more Americans leave the workforce, the cost of these programs will soar. The budget outlook would improve if American workers delayed their retirement. Longer work lives would reduce the near-term cost of Social Security and Medicare benefits and boost the income and payroll taxes that older Americans pay. How much would later retirement contribute to solving the federal deficit problem?

On December 7, the Economic Studies program at Brookings hosted a forum to discuss the impact of longer work lives on the budget outlook. How would later retirement affect government outlays, particularly on programs targeted on the aged, and how would it affect income and payroll taxes? What kinds of Americans are most likely to delay their retirements? Will workers delay their departure from career jobs or will they take bridge jobs that have less responsibility, lower hours, or worse pay than their previous jobs? How would longer work lives affect younger workers and the distribution of income? What kinds of policies can boost employment of the elderly and disabled while preserving the crucial functions of the social safety net?

Transcript

Uncorrected Transcript (.pdf)

Event Materials

After the 2012 Election, Is a Return to Sanity Possible?

Henry J. Aaron — Tue, 02 Oct 2012 00:00:00 -0400

Well, political junkies, only five weeks of the 2012 presidential campaign remain. But, don't despair. You have four years and five weeks until the end of the 2016 presidential campaign, which will almost surely start the day after the 2012 campaign ends. If, as now seems likely, President Obama wins four more years and Republicans retain control of the House, you will be exposed to four more years of Republican efforts to make a Democratic president fail, just like the last two. And, misguided fans of divided government, you will have your way—the election will not have changed a thing.

But, wait! Maybe, just maybe, enough representatives and senators will conclude that elections do, as the pundits say, have consequences. Republican leaders just might recognize that the Affordable Care Act is, and will remain, the law of the land, that closing the deficit while retaining government services Americans demand must include tax increases, and that trying to privatize Social Security and Medicare is a losing strategy. Democrats might recognize that deficits in Social Security and Medicare sap public confidence in those programs and keep them fair game for political attacks, and that if even one of those attacks succeeds, the proudest achievements of the Democratic party would be damaged or lost. Democrats might accept program cuts they don't really like but that will lower the political heat surrounding both programs. It is just conceivable that the ‘compromise virus' might infect leaders of both parties and permit needed legislation to reach the president's desk for signature.

Impossible, you may say. But let's dream. And let's dream about legislation that in a saner political world than ours seems to be should appeal to both parties. Here are some changes to Medicare, Social Security, and the Affordable Care Act that members of both parties could vote for if they were willing to focus on principles they claim to care about.

First, beef up Medicare administration. Supporters brag how little Medicare spends on administration. But spending so little is, in this case, false economy. Hiring fewer government employees can actually cost money. For each additional dollar we spend on Medicare auditors and investigators, studies show that we will save several dollars from reduced fraud. Spending a bit more on administration will also save money. When Medicare approves a new procedure for particular types of cases, a larger number of administrators could make sure that Medicare does not pay for use of those procedures in cases for which use was not approved because safety and efficacy were unproven. Medicare enrollees could still have those services—if they are willing to pay for the services themselves.

Second, add to Medicare a key protection of the Affordable Care Act—insurance against catastrophic illnesses. Pay for this added benefit with somewhat higher premiums on upper income beneficiaries. If protection against catastrophic drug costs is a good idea, then why not for the rest of Medicare? President George W. Bush supported protections against catastrophic expenses as part of his Medicare drug benefit. Members of both parties should endorse this change because it would spare many people the added cost and complexity of buying supplemental coverage.

Third, beef up the Affordable Care Act's penalty on Cadillac health insurance plans. Ronald Reagan was the first president to call for limits on tax breaks for very expensive employer-sponsored health insurance. Although this reform has Republican paternity, no Republican supported those Democrats who won inclusion of these penalties in the Affordable Care Act. Both parties should agree to strengthen them.

Fourth, the projected long-term deficit dogging Social Security lends credence to the bogus claim that the program is unsustainable. Small tax increases or benefit cuts would assure solvency indefinitely. That said, the case for benefit cuts is weak. Social Security benefits are actually lower in relation to earnings than they have been for decades. They are downright parsimonious compared with those of most other developed countries—40 percent lower for average earners than the mean of the sixteen other richest members of the Organization for Economic Cooperation and Development. Furthermore, benefits are tied to earnings and U.S. earnings have either fallen or barely increased for decades, other than for very high earners. High earners have also been the principal beneficiaries of increased longevity. Life-expectancy among those with little education and, accordingly, with low earnings has actually fallen for the last two decades.

These trends suggest that the bulk of the work in closing Social Security's projected deficit should be carried by taxing more earnings and at a slightly higher rate, rather than by cutting benefits. But any benefit cuts should spare those with low or moderate earnings and focus on those with comparatively high earnings. Given their longer life-expectancies and the general downward age-adjusted trend in the incidence of impairments, benefits should be restructured to encourage those with comparatively high earnings to retire later than they now do.

Finally, if President Obama wins reelection, the Affordable Care Act will not be repealed. It will be implemented. It is inevitable that problems will emerge in the implementation of a law as complicated and far reaching as this one. In a politically sane world members of Congress would work out compromises on these and other issues. Members of both parties would give a little, to get a little, thereby advancing principles each party espouses.

Is it fantasy to hope that in the post-election United States of 2013 enough members of both parties will put solving problems for the American people ahead of positioning themselves for the elections of 2016?

Authors

Henry J. Aaron

Publication: Real Clear Markets

The Affordable Care Act Does Control Health Care Costs

Henry J. Aaron — Tue, 18 Sep 2012 00:00:00 -0400

Editor's Note: In this letter to the editor of the New York Times, Henry Aaron responds to Steven Rattner's September 16, 2012 op-ed on the Affordable Care Act, writing that the Act does an effective job in controlling health care costs.

To the Editor:

I disagree with Steven Rattner that President Obama’s health reform was inattentive to cost control and that rationing care to the elderly is needed to slow the growth of health care spending.

The Affordable Care Act deserves a solid “A” for including virtually every cost control idea anyone has come up with — limits on tax breaks for employer-sponsored health insurance, accountable care organizations, bundled payments, comparative effectiveness analysis, a commission to regulate payments, reforms in insurance design and much more.

Transforming the current chaotic mélange of health care payment and delivery arrangements into a genuine system will take many years, because current arrangements are entrenched and structured to resist effective cost control.

The task for this generation should be to implement the many promising cost-control measures in the health reform legislation. There are better ways to respond to today’s budget challenges than to renege on the commitment made nearly half a century ago to assure the elderly, people with disabilities and the poor health care comparable to that enjoyed by the rest of us.

HENRY J. AARON
Washington, September 18, 2012

Authors

Henry J. Aaron

Publication: The New York Times

The New Census Numbers: Some Good News, But Major Challenges Remain

Henry J. Aaron — Wed, 12 Sep 2012 00:00:00 -0400

Over the past year, the American economy has been gradually recovering from the Great Recession. The pace has been well below everyone’s hopes. Meanwhile, some elements of the Affordable Care Act have been put into effect. Against that background, what should one expect from the annual report of the Census Bureau on income, poverty, and health insurance coverage?

The answer is that one should not expect much: little change in income, possibly a minor reduction in poverty, and some slight increase in health insurance coverage. In some respects, that is what the Census Bureau reported. But not exactly, and some of the differences are disturbing.

The Good News: Health Insurance Trends

The one genuinely bright spot in the Census Bureau report today is the reversal of two worrisome trends: the steady increase in the number of uninsured and the steady drop in the number of people insured through work. Both trends reversed in 2011. With the admittedly modest bounce in employment from recession lows, employment-based coverage increased, even as the proportion insured through work continued its decade-long slide. For adults in the prime working ages, 25 through 54, the drop in employer-sponsored coverage has been large: from 73.8 percent in 2000 to 61.8 percent in 2011.

The number of people insured by one government program or another rose 5 percent to just under 100 million, an increase that accounted for most of the total gain in health insurance between 2010 and 2011. Since 2000, the proportion of the total population insured by a government program has risen by one-third.

In the last year, coverage of 18 to 24 year-olds increased. Much of that jump came because young adults remained on their parents’ insurance plans, abetted by one of the key provisions of the Affordable Care Act that has already taken effect.

Income Trends And The Role Of Health Spending

Each month for the past two years, the Bureau of Labor Statistics has reported modest increases in employment. Thus, it should surprise no one that the Census Bureau reports that the number of people with income from earnings also increased. Although employment rose, median earnings of people who worked full-time, all year dropped a jarring 2.5 percent between 2010 and 2011. In contrast, average income rose a bit. Hammered by two recessions, both income measures remained well below levels reached in 2000. In fact, median income is virtually the same as it was in 1989.

With average and median income moving in opposite directions, it follows that inequality increased. The share of income received by the middle 60 percent of the population dropped and the share received by the top 5 percent rose by 5 percent. These data underscore the plight of the middle class, a theme of the recent political conventions.

The 2011 Census Bureau report provides no solace to those concerned about the problems of people who live in poverty. The absolute number of people in poverty is almost unchanged. The fraction who are poor fell 0.1 percentage points. Scanning the long-term trend in the proportion of the U.S. population living in poverty is deeply depressing. Nearly four decades ago, in 1974, the proportion of American living in poverty reached a low of 11.1 percent. There has been little good news since. Poverty increased after 1974 then fell during the booming 1990s, dropping to 11.3 percent in 2000. Two recessions later the rate is back up to 15 percent.

These numbers tell a story that is simple and, for most Americans, sad: poverty has increased, the middle class has stagnated, and the wealthy have become richer.

As those who have studied income data know well, measuring poverty is extremely difficult and fraught with ambiguity. In fact, the Census Bureau provides several measures of poverty. The traditional poverty measure makes no adjustment for out-of-pocket medical expenses, even though most are involuntary and reduce funds available for ordinary living expenses. An experimental measure subtracts out-of-pocket medical expenses and makes some other adjustments as well.

How health care spending is treated has a dramatic effect on the proportion of various age groups counted as poor. The cost of health care has increased hugely over time. So has health care’s contribution to well-being. Because health care spending rises sharply with age, these trends have simultaneously boosted the well-being of the elderly relative to other age groups and placed an increased financial burden on them. The proportion of those over age 65 counted as poor is dramatically higher under the experimental measure, which subtracts out-of-pocket medical expenses from income used in measuring poverty, than it is under the traditional measure. The proportion of those 18 or younger counted as poor under the experimental measure is lower than under the traditional measure.

How should one interpret these differences? Over time, the elderly, as disproportionate users of health care, benefit disproportionately from the increase in the value of those services. But if one subtracts out-of-pocket medical expenses from available resources, that adjustment pushes up trends in the poverty rate of the elderly relative to that of younger people. On the other hand, if one focuses on a single point in time, it remains true that out-of-pocket medical spending is mostly involuntary and is unavailable for the purchase of all other goods and services.

Accordingly, measures of poverty suffer from an inescapable conceptual ambiguity. The traditional measure of poverty, which does not subtract out-of-pocket spending on health care, provides a better indication of the trend of well-being for various age groups than does the experimental measure. But if one is interested in the relative well being of various age groups at a point in time, the experimental measure, which does subtract out-of-pocket medical spending, is the better measure. As one analyst quipped many years ago, ‘you can’t eat your wheelchair.’

The Work Ahead

Implicit in all of these statistics is the urgent need for the nation to undertake steps to speed economic recovery. Added demand for labor will push up earnings and employment. More employment will mean more people will receive health insurance as a fringe benefit. Although long-term trends in poverty are not encouraging, reductions in unemployment lower poverty. The grave risk is that as the duration of unemployment increases more and more workers will see their skills atrophy, to their personal cost and the nation’s loss. It did not take the recent Census Bureau report to reveal these risks and opportunities. But that report surely underscores them.

Authors

Henry J. Aaron

Publication: Health Affairs Blog

Why the Medicare Fight Matters to Americans Over 55

Henry J. Aaron — Mon, 20 Aug 2012 00:00:00 -0400

Now that Mitt Romney has picked Paul Ryan to be his running mate, a major national debate on Representative Ryan’s so-called ‘premium support’ plan has become certain. Ryan’s plan would replace the current Medicare program for workers under the age of 55. When eligible, they would receive a flat dollar amount—or voucher—that would cover part of the cost of a health insurance plan. The value of the voucher would be adjusted annually according to a pre-specified index. If health care costs increased faster than that index, enrollees would have to pay the added cost themselves or accept narrowed insurance coverage.

Because that plan would not apply to anyone age 55 or older, supporters claim that older Americans don’t ‘have a dog in that fight.’ For reasons I explain below, that isn’t true, even if one looks only at Representative Ryan’s Medicare proposal. Other elements of the Romney/Ryan health care program have even larger implications for older Americans, but let’s start with the Ryan Medicare plan.

Costs for Seniors Could Rise

The claim that the Ryan plan leaves American’s over age 55 unaffected is untrue because it is likely to raise the amount they have to pay out-of-pocket for insurance. The reason is technical, but easy to understand. The premium for those who stay in traditional Medicare under the Ryan plan would be calculated as under current law, but the average cost of serving those who remain in traditional Medicare would go up as private insurance companies market selectively to those with relatively low anticipated costs. The average cost of those who remain in traditional Medicare would therefore increase. As a result of this gap, the financing for traditional Medicare would become progressively less adequate, throwing into doubt the very survival of the program.

Other Benefits at Risk

The Romney/Ryan health program contains much more than Representative Ryan’s Medicare plan. Both candidates have sworn to seek repeal of President Obama’s health reform law, the Affordable Care Act. If that law is repealed, here is a short and incomplete list of the benefits for older Americans would lose.

Health reform closes in the infamous ‘donut hole’ in Medicare drug coverage—the gap of thousands of dollars of drug costs that the original drug benefit left open. If health reform is repealed, that benefit vanishes.
Gone also would be health reform’s coverage of cost sharing for prevention services.
Gone would be the subsidies that will eventually cover 75 percent of the cost of generic drugs.
Gone would be Medicaid benefits for millions of older Americans, working and retired, who would be newly covered by Medicaid expansions under the Affordable Care Act.
Until enactment of the Affordable Care Act, a 60-year-old who did not work for an employer that offered group health coverage had to pay high or unaffordable premiums for individual coverage or go uninsured. If health reform is repealed, they will return to that intolerable predicament.
The savings that are to be achieved under health reform would vanish. As a result, the Hospital Insurance Trust Fund would be exhausted in 2016 rather than in 2024, as projected under current law.

More portentous even than the specified health proposals—for both the elderly and the nation as a whole—are the budget targets that Governor Romney has pledged to meet. He promises to hold government spending to 20 percent of gross domestic product. Within that ceiling, 4 percent of GDP would be reserved for national defense. He has also pledged to balance the budget, although he has not said exactly when. Neither Governor Romney nor Representative Ryan is currently proposing to cut Social Security, although Mr. Ryan has proposed large cuts in the past.

Budget Alternatives

There are many ways to meet these broad budget targets, but none that would not entail massive cuts in programs affecting older Americans. One way—if Social Security is left untouched—would be to cut all government spending 29 percent by 2016 and 59 percent by 2022, the last budget year in his second term for which a president Romney would submit a budget. Those cuts would fall alike on every government program, including Medicare and Medicaid, food stamps, supplemental security income, government retirement benefits, and veterans benefits. Some programs might be spared, but if there were then others would have to be cut more deeply.

Governor Romney’s tax program would intensify the impact of these spending cuts for most older Americans. That tax program includes cuts in tax rates and specific additional breaks for many forms of capital income. He proposes to make up the revenue loss by ‘base broadening’—in plain English, by ending a wide range of deductions, exemptions, and credits. Mr. Romney has not specified which tax breaks he would end. But a recent analysis by the Urban/Brookings Tax Policy Center points out that if rates are cut as Mr. Romney proposes, there is no possible set of changes to the tax base that would avoid shifting tax burdens from those with incomes above $200,000 a year to those with lower incomes. This cross-over point applies to young and old alike.

The late and much beloved economist, Herb Stein, authored a now-famous quip: if something can’t possibly happen, it won’t. Reading the implications of the Romney program, one is hard pressed to believe that such a program could possibly happen. But it is even less possible to read the combination of proposals—the replacement of Medicare with a voucher, the proposed repeal of health reform and the many benefits for older Americans that it contains, the regressive tax program that Mr. Romney has laid out, and the budget program he has endorsed—and to believe that older Americans don’t have a dog in this policy fight. They have a whole kennel-full of dogs in this fight.

Authors

Henry J. Aaron

Publication: Yahoo! Finance

Supreme Court Decides Affordable Care Act Is Constitutional

Henry J. Aaron — Thu, 28 Jun 2012 00:00:00 -0400

In a landmark decision that will shape the future of the U.S. healthcare system, the Supreme Court ruled to uphold nearly all provisions under the controversial Affordable Care Act. The majority of justices, including Chief Justice John Roberts, declared the law constitutional under Congress’ power to tax. Senior Fellow Henry Aaron explains the Court’s reasoning, the roadblocks still facing the law’s full implementation, and how the decision will impact this year’s heated presidential campaign.

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Supreme Court: Affordable Care Act Constitutional Under Congress’ Power to Tax

Authors

Henry J. Aaron

The Supreme Court Ruling on the Affordable Care Act—A Bullet Dodged

Henry J. Aaron — Thu, 28 Jun 2012 17:00:00 -0400

Health care reform is a drama in four acts. The first two acts—the Congressional debate leading to enactment of the Affordable Care Act, and the multiple court cases culminating in today’s Supreme Court decision—were nail-biters. The next two acts—the political debate that will culminate with the November elections, and the struggle to implement this enormously complex law—promise to be equally tense.

Few people correctly anticipated much about today’s Court action. Most believed that Chief Justice Roberts would write the opinion of the court, whether or not the law was sustained. That expectation proved correct. But the final alignment is surprising—Roberts aligned with the four liberals—Justices Breyer, Ginsburg, Kagan, and Sotomoyor—to sustain the law in its entirety, although not uniformly on the government’s reasoning. Some aspects of the Court’s reasoning are bewildering. The tone of the separate opinions written by Justice Ginsburg and jointly by Justices Kennedy, Alito, Scalia, and Thomas bespeak ferocious behind-the-scenes disagreements within the court.

The outcome can be stated simply. People must pay a tax if they fail to carry approved health insurance. States may extend Medicaid coverage as specified in the Affordable Care Act, but if they don’t, none of the funds for previously eligible Medicaid enrollees will be in jeopardy. All other provisions of the Affordable Care Act stand.

Aaron discusses the ruling in this video

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Supreme Court: Affordable Care Act Constitutional Under Congress’ Power to Tax

Behind this seemingly simple outcome stand sharp disagreements over constitutional interpretation.

For starters, by a vote of 5 to 4, the Court rejected the federal government’s argument that it can use its power to regulate interstate commerce to require people to carry insurance. Congress can impose a tax on those who don’t carry such insurance, but the concept of ‘mandate’ really doesn’t arise. The distinction between a mandate and a tax is without significance as far as the Affordable Care Act is concerned. The reason is that enforcement of the ‘mandate’ under the power to regulate interstate commerce depended solely on the ‘penalty/tax’ that the opinion of the chief justice leaves unaltered. The incentive is extremely weak in either case. The charge is modest for most people. It can be collected only from over-withheld income taxes. It does not apply to many people—for example, those for whom the cost of insurance would exceed a certain share of income. The law provides no mechanism for collecting the ‘tax/penalty’ from people who owe no tax. In brief, the incentive to carry insurance is largely hortatory for many people. In any event, whether the charge people are expected to pay is called a ‘penalty’ justified under the power to regulate interstate commerce, or a ‘tax’ under the government’s power to tax makes not a whit of difference in what the charge actually is or how it can be collected.

The argument over whether or not the power to regulate interstate commerce authorizes the requirement to carry insurance is therefore important only because of its implications for federal legislation other than the Affordable Care Act. And it is important. Justice Thomas dissent underscores why. Although he wrote only for himself, he articulated a position, popular in the conservative legal community, that the power to regulate interstate commerce should be drastically curtailed. The other conservative members of the court were unwilling to sign on to his rather extreme position. But they were nothing if not clear that the assertion of power to regulate interstate commerce under the Affordable Care Act is major legislative overreach.

Today’s decision says that the interstate commerce clause is not necessary to sustain the Affordable Care Act. But the Court clearly, if by only a 5-4 majority, rejected the government’s assertion that the Affordable Care Act is well within established precedent regarding the commerce clause, a view that had been the prevailing opinion among lawyers before this case. For seventy years, the Court placed few and minor limits on the power of the government to regulate economic activity under the Commerce Clause. This case suggests that this permissive era is over.

With respect to the extension of Medicaid coverage, seven members of the court, including two justices usually counted as liberals—Breyer and Kagan—ruled that it would be unconstitutional to penalize a state that refused to extend Medicaid coverage by curtailing current Medicaid matching funds.

The reasoning is bewildering. Medicaid, it was argued, is so important to every state that curtailment of current matching funds would dragoon states into extending coverage. Under the Constitution, it is the states that are sovereign and grant only limited powers to the federal government. No action by the federal government can convert the states into unwilling instruments of federal purpose. The majority’s view is that the threat of cutting off Medicaid funding would do just that and is therefore unconstitutional.

Yet it seems clear that the federal government could have taken two legislative steps, both clearly constitutional, that in combination would have been equivalent to the Affordable Care Act. The first step would be to repeal title XIX of the Social Security Act, which creates Medicaid. The second step would be to enact a new title XIX, creating a new Medicaid program with exactly the coverage requirements in the Affordable Care Act. States would be free to join the new Medicaid program or not, as they chose. There could be no constitutional bar to the repeal of a law Congress duly enacted. Nor would the terms of the new Medicaid law be any different from those of the old Medicaid law, which states were free to join or not to join (one state, Arizona, remained outside the program for many years). In combination, these two legislative steps, each doubtlessly constitutional, would have done precisely what seven members of the Court decided the Affordable Care Act could not do—tell states that if they did not extend coverage as specified in the Affordable Care Act, they would lose current Medicaid funding.

The tone as well as the substance of the three major opinions—by the chief justice, Justice Ginsburg, and the joint dissent of Kennedy, Alito, Scalia, and Thomas—is striking. Justice Ginsburg attacks the opinion of the chief justice with brio and scorn. She writes that the Robert’s opinion suffers from ‘multiple flaws,’ uses ‘inapt analogies,’ and ‘spurious’ complaints, charges that his argument is ‘difficult to follow,’ accepts ‘specious logic, is ‘long on rhetoric’ and ‘short on substance,’ and says one aspect of his opinion ‘disserves future courts.’ In one amusing passage, she ridicules Roberts for invoking what she calls ‘the broccoli horrible’—the suggestion that a health insurance mandate might pave the way for a mandate to eat a healthful diet, which is obviously beyond Congress’s constitutional powers.

Consider the chain of inferences the Court would have to accept to conclude that a vegetable -purchase mandate was likely to have a substantial effect on the health-care costs borne by lithe Americans. The Court would have to believe that individuals forced to buy vegetables would then eat them (instead of throwing or giving them away), would prepare the vegetables in a healthy way (steamed or raw, not deep-fried), would cut back on unhealthy foods, and would not allow other factors (such as lack of exercise or little sleep) to trump the improved diet. Such “pil[ing of] inference upon inference” is just what the Court refused to do in [two previous cases].

Unlike Justice Ginsburg, the four dissenting conservative justices do not explicitly scorn Roberts’ opinion. They simply disregard much of it, reserving their derision for the government’s claims—which just happen to be ones that Robert invoked. They agree that the commerce clause does not empower Congress to require anyone to buy insurance. And, because the Affordable Care Act describes the financial charge imposed on those without proper insurance as a ‘penalty’ imposed for violating a law that Congress lacks the power to legislate, that is the end of the story. The claim that the penalty is a tax is labeled as ‘feeble.’ The Government is the author of this ‘feeble’ argument, not the chief justice who based his reasoning on it.

Thus ends Act II in the Affordable Care Act drama. There will be no intermission. Act III was already well underway before Act II ended. It will see the obscenely well-financed political battle between supporters and opponents of the health reform law. They will contend over who will sit in the White House after next January 20. Will it be the person who staked his administration on winning passage of health reform? Or will it be the person who actually once thought the same idea was pretty terrific but who now says it isn’t and has sworn to repeal it? Act III, like the first two, promises to be a down-to-the-wire cliff-hanger. Act IV—if there is an Act IV—will play out across fifty states where governors, legislators, and state civil servants will struggle to implement the most beneficial/misguided [Choose one.] domestic legislation enacted in the last seventy-seven years.

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Supreme Court: Affordable Care Act Constitutional Under Congress’ Power to Tax

Authors

Henry J. Aaron

Image Source: Joshua Roberts / Reuters

A Supreme Court ACA Scorecard

Henry J. Aaron — Mon, 18 Jun 2012 12:06:00 -0400

Editor's note: During the Supreme Court's March hearing of the Patient Protection and Affordable Care Act, Henry Aaron wrote daily blog posts detailing his thoughts on the court's proceedings. Read Aaron’s posts on the first, second and third days of the hearing.

Watching the Supreme Court is not the same as watching a baseball game. But in both cases, a scorecard helps. So, here for those interested in making sense of what the Supreme Court says when it hands its decision on the Affordable Care Act is a scorecard of sorts. It lays out the options from which the Justices will choose in reaching their judgment.

Issue	Options for the Court	Likely Outcomes
1a. Is the ACA penalty for failure to carry insurance a tax? 1b. If it is does the Tax Anti-Injunction Act bar jurisdiction?	i. It isn’t a tax for purposes of the TAIA, skip to other issues. ii. If it is a ‘tax,’ does the TAIA flatly bar jurisdiction? If so, plaintiffs cannot sue until they pay the ‘tax’–end of decision. iii. If it is a tax and the government can waive its rights to bar suit under the TAIA, go to the other issues	Both sides want a decision. Court unlikely to treat the TAIA as a bar.

2. Does the Constitution permit Congress to require people to buy health insurance?	2a. Yes, under the commerce clause 2b. Yes, under its power to tax 2c. No, under narrow reasoning 2d. No, under broad reasoning	Likely, 2a or 2c

3. If the individual mandate is not allowed, should the rest of the bill stand?	3a. Yes, all other provisions should stand 3b. (The government’s position) Two other provisions should be tossed out—‘rate bands’ and mandatory issue; the rest should stand 3c. (Plaintiff’s position) The entire bill should be declared unconstitutional	?

4. Is the Medicaid extension constitutional?	4a. Yes 4b. No, narrow reasoning 4c. No, broad reasoning	4a 4b would be a shock; 4c would be revolutionary

Which of these options the Supreme Court chooses is obviously critical. So too is the language in which the Court couches its decision. For much of the twentieth century, the Court limited federal action to regulate business on the ground that freedom of contract was a sacred and sweeping right. That changed in the 1930s when the Court began to interpret the Congress’ constitutionally-based power to regulate interstate commerce in very broad terms. A broadly worded Court decision on the Affordable Care Act could signal limits on those powers that in the end could be even more important than the fate of the Affordable Care Act. Similarly, the federal government has used financial carrots and sticks to make the states instruments of national economic and social policy. A decision by the Supreme Court barring the extension of Medicaid coverage under the Affordable Care Act could signal limits on this federal power with ramifications far beyond the Affordable Care Act.

In brief, it is not just insurance companies, hospitals, the uninsured, and those whose taxes would be raised by the Affordable Care Act who have ‘dogs in this fight.’ Depending on how the Court decides the various cases involving this landmark legislation, the decision soon to be handed down could reshape not only health care policy, but also remake broad swathes of American constitutional law.

Authors

Henry J. Aaron