The debt ceiling crisis is serious, because it’s political

Most crises are brought to Washington from the real world. And—being real—they’re usually dealt with in a businesslike manner. The prospect of federal bankruptcy this summer, however, is overwhelmingly borne of political calculation. For this reason, no one should be sure it will be resolved intelligently.

Raising the debt ceiling by a couple of trillion dollars isn’t sexy; it isn’t something either party wishes to do alone. Still, it must be raised to finance the latest short-term and medium-term tax and spending policies of both Democrats and Republicans. The capital markets, business, and academic economists fortunately all agree: the US federal government is carrying a structural deficit but is several years away from crowding out private borrowing or becoming a high-risk, high-interest rate borrower itself. 

The president and Congress leaders are huddled over multi-trillion-dollar, decade-long options they say they must make “adult decisions” about in the next couple of weeks. They’ll likely fail and that probably will be a good thing.

There is no honorable excuse to even try to settle the shape of federal taxes, defence, and social spending for the next ten years behind closed doors this July. Washington may have been irresponsible for a generation—but that doesn’t mean it’s insolvent, facing a takeover by the IMF, or about to pay double-digit interest rates on its bonds.

The “crisis” has been concocted out of trends—trends that neither justify business as usual nor nihilistic panic. The Congressional Budget Office set the stage in January with this statement:

“For 2011, the Congressional Budget Office (CBO) projects that if current laws remain unchanged, the federal budget will show a deficit of close to $1.5 trillion, or 9.8 percent of GDP. The deficits in CBO's baseline projections drop markedly over the next few years as a share of output and average 3.1 percent of GDP from 2014 to 2021. Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law. Consequently, they understate the budget deficits that would occur if many policies currently in place were continued, rather than allowed to expire as scheduled under current law.

http://www.cbo.gov/doc.cfm?index=12039

Note the sentence: “Those projections, however, are based on the assumption that tax and spending policies unfold as specified in current law.” The federal deficit will decline substantially as the economy recovers and revenues grow—if Congress does not again extend income tax cuts, does not let stimulus spending lapse, and does not repeal the projected savings in the Affordable Health Care Act.

We are facing a financial crisis at the behest of a series of political considerations. Republicans want to be able to extend all the tax cuts and kill “Obamacare.” They’d like a bi-partisan deal this summer to make their tax cuts appear affordable in next year’s election. Furthermore, Republicans want a deal on entitlements now in order to blunt the Democrat campaign against the Ryan Plan to reform Medicare. Obama knows that a longer-term deal would significantly improve his reputation on the economy and weaken Republican claims that he is an extreme tax-and-spend president.

Effectively, both parties are trying to set the table for a winning election by settling extremely difficult and legitimate election issues in the debt-ceiling legislation. 

This is ridiculously ambitious and Machiavellian at the same time. Something modest will soon look more adult.

Once the chest-beaters tire, Obama ought to select from the negotiations a trillion dollar down payment on spending cuts and fiscal targets those Democrats, swing state Republicans, and the economy can bear. He should leave taxes and social entitlements to the next election. Let the people decide which team has the most sensible long-term plan.

If the Republicans in the House of Representatives actually defeat legislation to raise the debt ceiling on the above basis, then Obama will have his chance to address an historic crisis—one with real villains.

Majority governments can serve the majority’s agenda as well

It is widely argued that, if good times permit, it’s nice to have minority governments in Ottawa and a divided congress in Washington. For five years, the opposition in Canada warn that a majority Conservative government would impose “a hidden agenda,” while in the US, Republicans successfully rebalanced Washington by campaigning against a socialist coup. Both messages play on the same fear: once one party gets popular enough to be in charge, it will immediately start doing unpopular things.

This prediction is rather illogical and impossible to prove—or disprove—in advance. (Why would a larger caucus of Conservative MPs who won by broadening their message decide to resurrect issues with marginal appeal and low priority?) The alternative circumstance—a majority government with sufficient time and power to implement major reforms that could enjoy popular support or at least broad acceptance—deserves greater attention.

Canadian history is studded with successes accomplished by majorities—a Charter of Rights and Freedoms, the Goods and Services Tax, and Free Trade with the US are contemporary examples. None of these were ideologically extreme, and they remain securely in place whichever party is in power. Nevertheless, not one of them would have been possible to accomplish without the secure tenure of a majority government.

Yes, public healthcare in Canada was legislated by a minority Liberal government in the 1960s. However, that federal government was awash with surplus money; nothing needed to be traded off. Furthermore, public healthcare was both credible and widely popular because the Tommy Douglas government of Saskatchewan had had a majority government five years before, when it first implemented universal public health insurance for the province.

The big issues that can’t get on the agenda of today’s minority parliament don’t seem to get the attention of those that may be “hidden.” Still, they are many: legislating strict representation by population for the House of Commons, reforming unemployment insurance in order to support individuals regardless of where they live, a security agreement with the US that would involve legislative changes in Canada in return for an open US border, and, someday, a tax on C02 emissions in order for Canada to do its part to fight climate change.

These issues don’t necessarily divide people on predetermined ideological grounds—rural versus urban voters, or Eastern Canada versus the West. But, the benefits and the costs don’t fall equally, and entrenched interests would be aroused. Also, workable and sustainable answers also require time and a spirit of compromise that only secure governments can illicit.

Ontarians who worry about Albertans and resent Quebec’s political savoir faire should recognize that a new deal for Ontario will require a majority government in Ottawa.

Mulroney’s prescription for Canadian healthcare is not reform

Retired politicians often get their best press when they’re showing up their successors.

Former Progressive Conservative Prime Minister Brian Mulroney recently prodded current Prime Minister Stephen Harper to concentrate on the “big ticket items” and set up a   “blue ribbon panel of distinguished Canadians” to fix the financing of Canada’s burgeoning healthcare budgets. Click on: http://www.theglobeandmail.com/news/politics/ottawa-notebook/mulroneys-advice-to-harper-do-something-big/article1879648/

“We are facing a genuine, genuine problem of quite enormous dimensions,” Mr. Mulroney says. “We have a pretty good system here, but obviously the financing is completely out of whack.

“Someone has to provide some unbiased, thoughtful but effective leadership in the thinking on this,” he says. “Without some new thinking and some visionary approaches, health care is going to consume 70 to 75 per cent of provincial budgets.”

Classic Brian Mulroney.

Before teeing up for another favorable reference to his big ticket accomplishments, however, Mulroney could have acknowledged Harper’s radically different political circumstance. Mulroney himself went big on free trade with the US and introduced the Goods and Services tax in a majority parliament, after winning an electoral majority without reference to either issue. Indeed, in the election Mulroney was either silent on these latent issues or postured as a red-Tory nationalist.

While not always first to those issues that call for boldness, Mulroney has every right to offer bold advice and to be listened to carefully. Once committed to act, great projects did bring out in Mulroney great talent and resolve. Unfortunately, his advice on this occasion is not bold and, indeed, could lead to less change, not more.

Red Tories, like Mulroney, reflexively send big problems to Ottawa. They are the same as liberal Democrats in the US.  Once they see that a significant problem growing in every province in the country, they look for a federal response. However, in the case of healthcare costs Ottawa may, in fact, be the worst place to turn for effective solutions.

Fundamentally, the principal national challenge—universal access across Canada--has been long resolved. The federal government—through equalization payments and per capita health grants to the provinces—provides incentives and support to ensure each province maintains universal and portable healthcare services.

That federal contribution has grown with the growth of provincial costs and there is broad agreement that Ottawa maintain is share.

The provinces are almost entirely responsible for the delivery of those services and, as important, have the competence and political responsibility to manage the individual provincial systems.

In Ontario, for instance, the Ontario government operates a $47 billion health system and pays for approximately 80 % of the costs. A new national vision might end up simply increasing the federal share to above 20 % and, thereby, relieve the province of a fraction of the political and managerial challenge of keeping the system affordable and up to date.

Recent federal silence on changing the status quo, however, hasn’t necessarily been a bad thing. It’s now clearer in people’s minds that the provinces are actually responsible. And governments in Quebec, Ontario, Alberta and elsewhere are implementing and testing new ideas.

Other than re-opening demands for $billions more from Ottawa, Mr. Mulroney’s blue ribbon panel could actually distract the provinces and only confuse the public about who is accountable.

Health service charges and customer empowerment

In a rather teasing but ham-fisted attempt to make healthcare user fees respectable, Canadian economics columnist Neil Reynolds evoked the words of Tommy Douglas, certainly the political father of universal public healthcare in Canada. Douglas once advised: “I think that there is value in having every family, and every individual, make some individual contribution . . .  I think it keeps the public aware of the cost and gives people a sense of personal responsibility. Even if we could finance (medicare) without a per capita tax, I personally would advise against it.” Reynolds concluded from this, “Mr. Douglas, the pragmatic socialist, was right. Free medical care lets people remain personally indifferent to costs, discourages thrift and encourages debt. Medicare needs Tommy Douglas memorial user fees.


Click on: http://www.theglobeandmail.com/news/opinions/opinion/tommy-douglas-the-pragmatic-socialist/article1806775/

OK, Douglas didn’t endorse a punitive user fee and didn’t suggest that in appearing to be “free,” health services would be heedlessly abused by patients. Nevertheless, Reynolds was right to raise Douglas’s statement in considering healthcare reform. There is a connection between making an individual contribution (paying something) and individual responsibility. Let’s suggest as well: when you pay even a nominal fee for a service, you may likely experience a heightened concern for its quality.


It's easy to feel abused under a regime of taxation without representation. It’s revolting. There are risks as well, however, in an exchange in which you claim a service for free. 


In Tommy Douglas’s vision, albeit of a less atomized society, the patient is an interested shareholder in a health service he or she owns as a citizen and taxpayer. It seems possible that a shareholder’s sense of empowerment could be enlivened by introducing some form of service charge.


Taxes are high today as well; democratic socialists of the past would be impressed. However, today millions of patients pay no income taxes. And taxpayers generally have no accurate idea what share of their taxes actually goes to public healthcare services. Those jurisdictions that levy a separate healthcare tax only use the separate tax to pay a fraction of the total healthcare budget. This, in practice, may have the unfortunate affect of bolstering the impression that healthcare is affordable—indeed, a bargain.


The financial costs of rising utilization rates for health services are expected to grow almost twice as fast as the cost pressures caused by our aging populations, as noted recently by The Canadian Health Services Research Foundation. Click on: http://www.theglobeandmail.com/news/national/time-to-lead/healthcare/stop-blaming-seniors-for-soaring-health-costs/article1793802/.


User fees to abate these costs have been widely discredited. To make a real difference, they’d end up unfairly discouraging those with lower incomes. Nevertheless, as the area of greatest growth in costs, surely, the direct relationship between the doctor/prescriber and the prospective patient/client is critical to reform. Conceptually, some form of service charge should help prod both parties to act most efficiently and empower the patient to insist on quality service.


If Tommy Douglas’ reformers could stand up to a full-fledged doctor’s strike, surely, we can consider making  changes to the healthcare system we have inherited—and which, like to one he challenged, also claims to be a seamless virtuous whole.