Don’t ask cronies to reform crony capitalism

MARTIN HUTCHINSON

Paul Ryan’s health care “reform” bill was defeated last week without even receiving a vote in the House of Representatives, in spite of the care he had taken to get input from the health insurance industry. That was the problem. In a crony capitalist system, where bad lobbyist-pushed laws and regulations have poured illicit profits into the pockets of oligopolists, the oligopolists are the last people to consult on how to reform those laws. The same dynamic is visible in monetary policy, in bank regulation and in corporate and individual tax. We are a long way from true free-market capitalism, and we won’t get there by consulting the current crony “capitalists.”

Healthcare is a classic example. U.S. healthcare costs 18% of GDP, compared to 12% in the next-highest cost countries, France, Sweden and Switzerland, 11% in Germany and Canada, 10% in Japan and 9% in Britain and Australia. Effectively, the U.S. government pays as much for healthcare as Britain’s state-run system, then private American citizens pay the same amount all over again. The U.S. gets nothing extra in terms of outcomes for all this expenditure; indeed U.S. indicators of healthcare results, such as life expectancy, are distinctly mediocre by rich-world standards.

Whatever your political view on who should pay for what, getting the United States’ appallingly high healthcare costs down to those of its competitors should surely be the top priority, indeed more or less the only priority, in any healthcare system reform.

Paul Ryan’s American Health Care Act achieved essentially nothing in the way of cost control. It claimed to do so, replacing Medicaid by a system of “block grants” to the states, but that change does not actually reduce the cost of healthcare at all, it merely shifts it from the Federal government to the states and, inevitably, to America’s less wealthy citizens who depend on Medicaid.

The legislation did nothing about the trial lawyer blight, it kept all Obamacare’s cost-increasing regulations in place, it did not provide for insurers bidding across state lines and it did not remove the egregious 1986 emergency room mandate, by which hospital emergency rooms must treat indigent patients without limit and without receiving any kind of compensation from the state that mandates this nonsense. Without proper cost-reducing measures, the legislation was essentially useless; its 17% approval in the polls was probably higher than would have been achieved once the public discovered what a colossal waste of Congressional time it had been.

The reason for the Ryan bill’s poor quality is that it was designed after extensive discussions with the insurance industry and other beneficiaries of the current system. Ryan is a champion fund-raiser and much admired as a “policy wonk”, largely because of the care he takes to consult the special interests before proposing new policies. Thus, the provisions that might make a serious dent in insurance company incomes were missing from Ryan’s bill, as were provisions that would collapse the cost of medical care overall, reducing the economic rents that health insurers, hospital chains, trial lawyers and others could extract.

This is not a problem limited to healthcare. We are likely to get another almost perfect example of it when Ryan unveils his corporate tax reform plan. While it may include some form of “border adjustment tax”, favored by President Trump, which redistributes income from retailers to manufacturers, it’s likely that the main feature of it will be the abandonment of worldwide taxation and a movement to “territoriality” in corporate tax, by which corporations will pay U.S. corporate income tax only on U.S. income.

This is a move in precisely the wrong direction. The economically neutral and efficient means of taxing multinationals would tax all worldwide income, without any deferral of income earned overseas, but with a full tax credit for taxes paid overseas. The United States has never had this system; corporations’ overseas income is deferred from tax until it is remitted to the United States, under “Subpart F” legislation introduced in 1962.

Thus, we have a system in which U.S. corporations have stashed over $2 trillion overseas to avoid taxes, and companies such as Apple are borrowing domestically to pay dividends and engage in economically damaging repurchases of stock, while keeping ziggurats of cash offshore.

The current system makes no sense at all. It encourages companies to invest overseas, by giving them the potential to avoid tax on the investment, thus discriminating against domestic investment, precisely the problem against which Trump rightly rails. It is also grossly unfair to U.S. individual taxpayers, who have only a very limited ability to use this loophole. U.S. taxpayers who earn income overseas, as I did for some years, must pay full U.S. tax (and in some cases, state tax) on that income, with a modest $75,000 foreign earned income exemption. What’s more if they attempt to keep their own money overseas tax free, in a tax haven bank account, the U.S Treasury goes after the foreign banks, with a spurious excuse of finding terrorist funding, and subjects the taxpayers to threats of imprisonment.

The corporate tax bill Ryan is likely to propose, as favored by corporatist lobbyists from the Wall Street Journal down, would make this economic insanity worse, by allowing all foreign income to be fully exempt from U.S. corporate tax. Of course, the first effect of this would be a “giant sucking sound” of money rushing out of the U.S. into tax havens for spurious foreign investment, doubtless leveraged to the eyeballs by Fed-induced cheap money.

There are other examples of this. President Trump’s economic crew, made up largely of alumni of Goldman Sachs, are unlikely to reform the disgraceful Fed funny-money policies that have distorted resource allocation and destroyed productivity growth for the last decade. They are also likely to gut banking regulations that restrict the insane amount of leverage in the system, while retaining those that add cost and bureaucracy, which provide useful barriers to entry against new and smaller competitors.

We are also likely to see this problem in the Trump administration’s “reform” of individual taxes. It may well be inspired by President Reagan’s 1986 tax law, which reduced rates of tax by eliminating deductions. It may well eliminate the deductions relied upon by the upper middle class, for home mortgage interest and state and local taxes. But you can be absolutely sure that, guided as they will be by the billionaires in the political donor class, the tax law’s drafters will not reform the true source of inequality and scams: the charitable tax deduction. This serves the combined purpose of funding a myriad of sleazy left wing agitators and allowing the ultra-rich to finance their lifestyles tax-free through foundations such as the Clintons’ while the merely mega-rich on the two coasts tax-deduct their repulsive social climbing and networking through charity dinners.

There is an overall principle here, and it should be pretty obvious. Once an economic system has moved away from a free market, usually through legislation drafted by panicky and economically illiterate leftists given license by a war or an economic crisis, it creates crony capitalists. These benefit from the new restrictions and build businesses optimized for the restrictions that the laws and regulations have introduced. Very often, as in the case of medical care and modern financial services, the new system absorbs a far larger share of GDP than would the equivalent activity in a free market, with the result that new avenues are opened up for crony capitalists to generate extraordinary levels of profits, while the old free-market businesses are squeezed out of existence.

This happened most visibly in Britain after the 1986 Financial Services Act, when the merchant banks, which had provided sophisticated financial services worldwide, some of them for as long as 200 years at modest economic cost, were within a decade squeezed out by foreign behemoths. The behemoths were much larger (and so less efficient) because of the compliance costs they were forced to absorb, which increased the economic share absorbed by the financial services businesses and their practitioners, while destroying the quality of service that the merchant banks had provided.

Similarly in U.S. healthcare, a business with which I am less familiar, the addition of regulations after 1960 took away the family doctors and small hospitals that had provided good cost-effective services, and pushed the business towards large bureaucratic hospital chains, with teams of lawyers attached to resist shyster lawsuits, plus an entirely new and unnecessary layer of health insurance companies that exist purely to shuffle paper and intermediate between patients and health services providers. As in finance, these new “crony capitalists” have no interest whatever in dismantling the system under which they have grown rich.

Every now and then a government is elected that wants to return, at least partially, to a free market system. To do so, that government must dismantle a host of regulations which in many sectors have destroyed the free market and replaced it with a crony capitalist rent-seeking cabal. The free-market-seeking government will face huge opposition from the crony capitalists, as well as from the myriad of citizens who benefit from heavy regulation, high taxes and government control, or are ideologically in favor of them.

To win through, a free-market government will need to draft the new laws itself, and not rely on crony capitalist help, however generous the crony capitalists may be as political donors. If Paul Ryan is a major political fund-raiser, he should not be allowed near the drafting of free-market legislation.

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Meals on Wheels Outrage is Based on a Lie

It made for great copy—irresistibly clickable and compulsively shareable. “Trump’s Budget Would Kill a Program That Feeds 2.4 Million Senior Citizens,” blared Time’s headline. “Trump Proposed Budget Eliminates Funds for Meals on Wheels,” claimed The Hill, in a piece that got 26,000 shares.

But it was false. And it wouldn’t have taken long for reporters to find and provide some needed context to the relationship between federal block grant programs, specifically Community Development Block Grants (CDBG), and the popular Meals on Wheels program.

Funding Has Not Been Cut

From Thursday’s conversation in the press, it was easy to assume that block grant programs—CDBG and similar block grants for community services and social services—are the main source of federal funding for Meals on Wheels. Not so.

Instead, as the national Meals on Wheels site explains, the major source of federal funding for the programs, accounting for 35 percent of overall local budgets, comes through the Sixties-era Older Americans Act. (Local programs also obtain support from state and county governments, private donors, and so on.)

According to the website, cuts have not been announced in Older Americans Act funding, although the group fears that they may lie ahead.

So where do the federal block grant programs come in? Well, they give states and localities a lot of discretion on where to allocate the money, one option is to add money to supplement Meals on Wheels funding. Some do use it for that purpose.

But as Scott Shackford makes clear in his new piece for Reason, that isn’t what CDBG is mostly about. CDBG funds regularly go into pork-barrel and business-subsidy schemes with a cronyish flavor. That’s why the program has been a prime target for budget-cutters for decades, in administration after administration.

It’s important to the CDBG program’s political durability that its grantees wind up sprinkling a bit of extra money on popular programs mostly funded by other means. That way, defenders can argue that the block grants “fund programs like Meals on Wheels.”

That’s what happened in the press this week.

Outrage Over Nothing

The New York Times got things rolling by reporting that the new budget proposes “the complete elimination of the $3 billion Community Development Block Grant program, which funds popular programs like Meals on Wheels, housing assistance and other community assistance efforts.”

CNN’s Jake Tapper then boiled it down to a tweet: “On chopping block: $3 billion Community Development Block Grant program, which funds programs like Meals on Wheels.”

Meals on Wheels’s own national website, meanwhile, quotes its CEO and president Ellie Hollander being appropriately cautious and conditional: “We don’t know the exact impact yet,” she said. Big cuts “would be a devastating blow.” According to the website, “Details on our network’s primary source of funding, the Older Americans Act, which has supported senior nutrition programs for 45 years, have not yet been released.”

Most of the major press coverage Thursday had nothing at all to say about the OAA, which would only have complicated the shock headlines. And social media burned all day with indignant posts that seemed unaware that no cuts had been announced as of yet in the main program that funds Meals on Wheels.

One reason was the press conference at which budget director Mick Mulvaney faced a host of questions about the new budget release, with Peter Alexander of NBC News pressing him especially hard on the aren’t-you-trying-to-cut-things-like-Meals-on-Wheels angle.

Mulvaney repeatedly tried to switch the conversation over to the shortcomings of the wider CDBG program, and did not bring up the point about OAA funding at all. Amid further awkward exchanges, Mulvaney spoke about how social programs had often not been shown to have benefits.

A charitable reading of his intended point was that activities funded by block grants in general often lack any proof of positive effect; a less charitable reading was that he was trying to single out Meals on Wheels in particular as an endeavor of no proven use to anyone. (A middle ground, I suppose, would have been to call his office for a clarification.) No prizes for guessing which direction the press, from MSNBC to New York magazine, chose to take for its headlines.

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