Saving a Million Jobs at $787,000 Per Job

Saving A Million Jobs at $787,000 Per Job

By Bill Frezza

The White House Council of Economic Advisers said Thursday the $787 billion stimulus plan kept one million people working who would otherwise not have had jobs.

You wouldn't let me stand up and make the simplistic claim that these million jobs were saved at a cost of $787,000 per job without challenging the details of my accounting, would you? Surely, reality is more complex.

But when the White House Council of Economic Advisers calculated the number of jobs saved by our government's massive stimulus spending, how is it that they entirely neglected to account for the impact on employment of removing $787 billion dollars from the balance sheet of the private economy?

What kind of single-entry bookkeeping is this? Who are these experts so willing to make glib claims with a straight face? How is it that the press, politicians, and pundits credulously report these claims as facts? And why are those who question whether the emperor is wearing any clothes treated like obstructionist members of some lunatic fringe?

There are those who passionately promote the theory that the government can, on net, create jobs by taking money from one set of citizens and handing it to another. Does this make sense to you? Are these promoters easily fooled, willfully blind, or cunningly smart? Let's take a look under the covers and examine the source of this week's claim.

The White House Council of Economic Advisers is lead by three presidential appointees. Currently, these are Christina Romer, Austan Goolsbee, and Cecilia Rouse.

According to their biographies on the Council web site, these people have never held jobs outside of academia. Their positions at Princeton, Berkeley, and the University of Chicago were protected by lifetime tenure. Unemployment, to them, is a theory that cannot become a personal reality. What in their backgrounds makes them experts on the subject of job creation?

They never had to meet a payroll. They never had to raise money to fund their businesses from skeptical investors. They never bet their life savings on their own business judgment. They never had to scramble to pay off a banker who called in a loan. They never had to decide whether to take a calculated risk to expand their workforce hoping to take market share from a fierce competitor. They never had to make a judgment call on whether or not to launch an unproven new product. They never had to manage a reduction in force, explaining to employees that their jobs have been eliminated because the tax and regulatory burdens imposed by some new law forced them to cut costs. They never lost business to a government-subsidized competitor whose cost of capital was vastly lower than theirs. They never had to grease the palms of politicians offering constituent services to resolve a bureaucratic hangup caused by the labyrinthine government approvals these selfsame politicians inflict on many businesses. They never had to deal with a missed sales forecast caused by an economy so roiled by capricious and uncertain fiscal policy that frightened customers were holding back orders. They never had to deal with a key supplier that unexpectedly went bankrupt because their source of credit dried up as dollars got sucked out of the commercial economy into government debt. They never had to negotiate with angry landlords after being forced to shut down a business destroyed by spurious mass-manufactured class action lawsuits. They never had to stand up in front of disappointed investors to explain why they lost money that had been entrusted to them. And you can be sure that none of them ever fell on their face and had to pick themselves up, dust themselves off, and decide whether it was worth going through all of the joys described above to take another shot at building a business from scratch.

Go read their biographies. Do Christina, Austan, and Cecilia appear to you to be contributing members of the productive economy? Do you see any evidence that they've spent even a fraction of their careers creating jobs? What do you think qualifies these people to work as high level apparatchiks of a governing class determined to manage the businesses of others?

All three have Ph.D.'s from fancy universities. They are prize winning experts in macroeconomics. To have come this far you can bet that they are ambitious, articulate, well connected, and brilliant. Yet when the Council of Economic Advisers did its calculations to determine the number of jobs saved by the stimulus, they shamelessly counted assets and totally ignored liabilities.

People this smart cannot be easily fooled. People so visibly in the public eye cannot remain willfully blind.

No, these people and those that appointed them are cunningly smart. It's we who are the fools for listening to them. Long after these experts return to their sinecures in academia to train another generation of economists on the wisdom of central planning and Keynesian pump priming, it's we and our children and our grandchildren who will be paying the price.

Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com.

End to Two Grim Fairy Tales

This sums up exactly how I feel about these two men...

Well done, Mr. Breitbart, well done.

(emphasis is mine)

End to Two Grim Fairy Tales

By Andrew Breitbart

With the deaths of Sen. Edward M. Kennedy and Michael Jackson, the summer of '09 marked the merciful ends to Camelot and Neverland, iconic American fairy tales whose story lines should have come to merciful ends long ago when their charismatic protagonists took dark and irredeemable turns.

Our country was not built to support blood dynasties or to elevate the rich and famous to a higher ethical or constitutional plain. But through the power of celebrity, Mr. Kennedy and Mr. Jackson worked the media to twist truths. They manipulated their constituencies and fans to obscure their misdeeds. They played the faithful to confer this manufactured innocence on the rest of us. And, in the end, they placed themselves above the law.

My condolences go to the Kennedy and Jackson families, who should not be stained by the sins of their kin. But there is no time like the present to ensure that those masterfully produced, over-the-top, all-star televised funerals don't serve to canonize talented and charismatic men who failed to own up to their public wrongs and who continued to flaunt the behaviors that got them into trouble.

Given that President Obama's flailing medical care reform movement is in the process of being given new life under the fallen senator's name, our national health now depends on talking honestly. As Mr. Kennedy's political defenders would put it, it's time to speak truth to power.

Forty years have passed since Chappaquiddick. Immediately after the accident, Mr. Kennedy scrambled to organize the best and brightest to save his career, rather than to save the life of 28-year-old Mary Jo Kopechne.

Before the facts were gathered, as her family was being prepped for a cash payoff, the Massachusetts voter - in "shock" and "denial," the beginning phases of Elizabeth Kubler-Ross's grief cycle - was asked by the senator in a carefully constructed televised speech to look away from his misdeed in the name of his family's recent tragedies.

In a time of grief, the young senator framed his future as a referendum on Camelot. And the media didn't call him on it. The fix was in.

The result was Mr. Kennedy needn't do more than show up for work to atone for his calculated selfishness. Without apology or contrition, Mr. Kennedy crafted a public career in which he spent taxpayers' money - certainly not his own - to make up for his unspeakable behavior.

As long as he toed the liberal line, this trust-fund Robin Hood was protected by the liberal masses and the mainstream media. Hollywood did its job by not putting his story on the big screen.

Doing to the reputations of Clarence Thomas and Robert Bork what he did to Miss Kopechne only reinforced his value to the Democrat Media Complex as the memory of his brothers' more authentic Camelot began to fade.

A blogger at the Huffington Post went so far as to argue the liberal Miss Kopechne herself would have accepted her death on utilitarian grounds. "Who knows - maybe she'd feel it was worth it," Melissa Lafsky wrote.

No reading of Mr. Jackson's relationship with young boys seems kosher. Perhaps he didn't molest Jordie Chandler, but paying him eight figures to go away certainly should have put an end to the Peter Pan routine. Mr. Jackson was a singer and a dancer but his best instrument was playing the media. As long as he kept up the "We Are the World" routine - noblesse oblige to a beat - the media looked the other way.

In the language of the Democrat Media Complex, speaking ill of Mr. Jackson was racist. Speaking ill of Mr. Kennedy was ideological. Both were protected. Their foes were ignored or castigated.

By playing the media's institutional biases, both Mr. Kennedy and Mr. Jackson rose above the law.

While Mr. Jackson spent most of his time self-medicating and collecting children and expensive stuff, the untouchable Mr. Kennedy continued his destructive habits while giving his Massachusetts constituency and American liberalism a bounty of legislative accomplishments.

The supporters of Mr. Kennedy, and to a lesser degree Mr. Jackson, elevate and promote "social justice" and "economic justice" as the highest human goals. Upon the deaths of Mr. Jackson and Mr. Kennedy, the media continue to erase their ugly backgrounds hoping their eternal celebrity can serve these collective ideals.

But the rubes - those of us skeptical of moral relativism, media manipulation and the cult of celebrity - prefer "justice justice."

Only when the "elite" among us begin to see things like us - and not in the unrealistic fairy tales crafted by our liberal betters - will Americans begin to live happily ever after.

Andrew Breitbart is the founder of the news Web site breitbart.com and is co-author of "Hollywood Interrupted: Insanity Chic in Babylon - the Case Against Celebrity."

Seriously Unserious

In August our ubiquitous president became the nation's elevator music, always out and about, heard but not really listened to, like audible wallpaper. And now, as Congress returns to resume wrestling with health care reform, we shall see if he continues his August project of proving that the idea of an Ivy League Huey Long is not oxymoronic.

Barack Obama in August became a Huey for today, a rabble rouser with a better tailor, an unrumpled and modulated tribune of downtrodden Americans, telling them that opponents of his reform plan—which actually does not yet exist—are fearmongers employing scare tactics. He also told Americans to be afraid, very afraid of health-insurance providers because they are dishonest (and will remain so until there is a "public option" to make them "honest"). And to be afraid, very afraid of pediatricians who unnecessarily extract children's tonsils for monetary rather than medical reasons. And to be afraid, very afraid of doctors generally because so many of them are so rapacious that they prefer lopping off limbs of diabetes patients rather than engaging in lifestyle counseling that for "a pittance" could prevent diabetes.

Sen. Olympia Snowe, the Maine Republican whom Democrats hope will lend a patina of bipartisanship to their health legislation whenever it gets written, says that one thing we learned from the cacophonous town halls of August is "that there are many people who are satisfied with their health insurance." Actually, long before this debate began we knew that a large majority of Americans have insurance, and a large majority of that majority are content with their care. That is why the president has become shrill: There is no underlying discontent commensurate with the scale of the changes he is trying to propel.

Another reason that reasonable people are wary of any government plan for a grandiose rearrangement of the health-care sector's 17 percent of the economy is that, regarding grandiosity, the president, after less than eight months in office, is a recidivist. His health-care crusade comes after a $787 billion stimulus (which has effectively made the Energy Department into the nation's largest venture-capital firm, scattering scores of billions of dollars to speculative energy investments) and the semi-nationalization of two car companies. August ended with the unembarrassable administration uttering a $2 trillion "Oops!" by estimating that the 10-year budget-deficit projection is about $9 trillion rather than $7.1 trillion. The supposed means of paying for the president's $1 trillion health-care plan include substantial Medicare cuts that will never happen, and the auction of carbon-emission permits that, instead, would be given away by the Waxman--Markey cap-and-trade legislation the House has sent to the Senate.

That legislation is a particularly lurid illustration of why no serious person nowadays takes seriously Washington's increasingly infantile bandying of numbers. The point of cap-and-trade is to impose a ceiling on the nation's greenhouse-gas (GHG) emissions—primarily carbon dioxide. The legislation endorses the goal of holding the global carbon--dioxide level to a maximum of 450 parts per million by 2050. That. Will. Not. Happen.

Steven Hayward and Kenneth Green of the American Enterprise Institute do the math. The 450 level is less than the 2030 projected level for all countries other than the Organization for Economic Cooperation and Development's 30 developed nations. Which means the global goal would be unreachable even if in 2030 those 30 disappear—if they have zero emissions. Waxman--Markey endorses the goal of reducing all of this nation's GHG emissions 83 percent below 2005 levels by 2050. In 2005, the United States' carbon-dioxide emissions were 6 billion tons, so an 83 percent -reduction would permit about 1 billion tons—what America's emissions were in 1910, when the population was 92 million and the economy was one twenty-fifth of today's. But by 2050, the population probably will be about 420 million, so per capita carbon-dioxide emissions would have to be 2.4 tons—one quarter of 1910's per capita emissions.

Hayward and Green say that historical data indicate that the last time emissions were that low was 1875. And even before that, before widespread use of fossil fuels, wood burning by Americans may have produced more than 2.4 tons per capita. Today France, which generates approximately 80 percent of its electricity by nuclear power, and Switzerland, which generates most of its electricity by nuclear or hydropower, have per capita emissions of 6.59 and 6.13 tons, respectively.

Obviously Hayward and Green are correct that meeting the 2.4-ton goal "is not going to be seriously attempted." So why do the same politicians who want to radically expand government's control of health care pretend otherwise? Because they are not serious people. Which is why so many Americans are seriously alarmed.

- Newsweek, George Will

The Myth of Free-Market Health Care in America

Why other Western countries offer no panacea for American woes

Shikha Dalmia | July 30, 2009

ObamaCare is in retreat. That much was clear the moment the president started springing B-grade Hollywood references to "blue pills and red pills" in its defense during his news conference last week. But before ObamaCare can be beaten back decisively, its critics need to answer this question: How did his plan for a government takeover of roughly a fifth of the U.S. economy get this far in the first place?

The answer is not that Democrats have a lock on Washington right now—although they do. Nor that Republicans are intellectually bereft—although they are. The answer is that both ObamaCare's supporters and opponents believe that—unlike Europe—America has something called a free market health care system. So long as this myth holds sway, it will be exceedingly difficult to prescribe free market fixes to America's health care woes—or, conversely, end the lure of big government remedies.

The fact of the matter is that America's health care system is like a free market in the same way that Madonna is like a virgin—i.e. in fiction only. If anything, the U.S. system has many more similarities than differences with France and Germany. The only big outlier among European nations is England, which, even in a post-communist world, has managed the impressive feat of hanging on to a socialized, single-payer model. This means that the U.K. government doesn't just pay for medical services but actually owns and operates the hospitals that provide them. English doctors are government employees!

But apart from England, most European countries have a public-private blend, not unlike what we have in the U.S.

The major difference between America and Europe of course is that America does not guarantee universal health insurance whereas Europe does. But this is not as big a deal as it might seem. Uncle Sam, along with state governments, still picks up nearly half of the country's $2.5 trillion annual health care tab.

More importantly, contrary to popular mythology, America does offer public care of sorts. It directly covers about a third of all Americans through Medicare (the public program for the elderly) and Medicaid (the public program for the poor). But it also indirectly covers the uninsured by—at least in part—paying for their emergency care. In effect, anyone in America who does not have private insurance is on the government dole in one way or another.

This is not radically different from France, where the government offers everyone basic public coverage, of course—but a whopping 90% of the French also buy supplemental private insurance to help pay for the 20% to 40% of their tab that the public plan doesn't cover.

Meanwhile, in Germany, about 12.5% of Germans who are civil employees or above a certain income opt out of the public system altogether and rely solely on private coverage—even though they know it is well nigh impossible to return to the public system once they switch. And more Germans likely would go private if they were not legally banned from doing so.

The most striking similarity between America, France and Germany, however, is the model of "insurance" upon which their health care systems are based. In other insurance markets, the more coverage you want, the more you have to pay for it. Consider auto insurance, for instance. If you want everything—from oil changes to collision protection—you'd have to pay more than someone who wants just basic collision protection. That's not how it works in health care.

For the same flat fee—regardless of whether it is paid for primarily through taxes as in France and Germany or through lost wages as in America—patients in all three countries effectively get an ATM card on which they can expense everything (barring co-pays) regardless of what the final tab adds up to. (Catastrophic coverage plans are available in America, but the market is extremely limited for a number of reasons, including the fact that most states have issued Patients Bill of Rights mandating all kinds of fancy benefits even in basic plans.)

Thus, in neither country do patients have much incentive to restrain consumption or shop for cheaper providers. In America and Germany, patients don't even know how much most medical services cost. In France, patients know the prices because they have to pay up front and get reimbursed by their insurer later—a lame attempt to ensure some price consciousness. But since there is no cap on the reimbursed amount, the French sometimes shop for doctors based on such things as office decor rather than prices, according to a study by David Green and Benedict Irvine, researchers at Civitas, a London-based think tank. (Green and Irvine reported this as a good thing.)

So what are the consequences of this "insurance" model and how are the three countries coping with it? America, as Obama continuously reminds us, spends 16% of its gross domestic product on health care—the highest percentage in the world. If current trends persist, in 75 years health care will consume about 50% of the GDP—and all of the federal budget. But France is not doing a whole lot better. Its health care system is the third most expensive in the world with over 11% of its GDP going toward health care—nearly three times more than the amount in 1960. The French fork over more than 20% of their income in taxes for public coverage (and another 2.5% to purchase supplemental private coverage)—yet their public program suffers from chronic deficits. Germany, similarly, spends about 11% of its GDP on health care with Germans contributing more than 15% of their income toward buying health care.

If France and Germany are not spending even more on health care, one big reason is rationing. Universal health care advocates pretend that there is no rationing in France and Germany because these countries don't have long waiting lines for MRIs, surgical procedures and other medical services as in England and Canada. And patients have more or less unrestricted access to specialists.

But it is unclear how long this will last. Struggling with exploding costs, the French government has tried several times—only to back off in the face of a public outcry—to prod doctors into using only standardized treatments. In 1994, it started imposing fines of up to roughly $4,000 on doctors who deviated from "mandatory practice guidelines." It switched from this "sticks" to a "carrots" approach four years later, and tried handing bonuses to doctors who adhered to the guidelines.

Meanwhile, in Germany, "sickness funds"—the equivalent of insurance companies—have imposed strict budgets on doctors for prescription drugs. Doctors who exceed their cap are simply denied reimbursement, something that forces them to prescribe less effective invasive procedures for problems that would have been better treated with drugs. But the most potent form of rationing in France and Germany—and indeed much of Europe—is not overt but covert: delayed access to cutting-edge drugs and therapies that become available to American patients years in advance.

The point is that there is no health care model, whether privately or publicly financed, that can offer unlimited access to medical services while containing costs. Ultimately, such a model arrives at a crossroads where it has to either limit access in an arbitrary way or face uncontrolled cost increases. France and Germany, which are mostly publicly funded, are increasingly marching down the first road. America, which is half publicly and half privately funded, has so far taken the second path. Should America offer even more people such unlimited access through universal coverage, it too will end up rationing care or facing national bankruptcy.

The only sustainable system that avoids this Hobson's choice is one that is based on a genuine free market in which there is some connection between what patients pay for coverage and the services they receive. That is emphatically not what America or any Western country has today. Looking to these countries for solutions, as Obama and other advocates of universal health coverage are doing, will lead to false diagnoses and false cures.

Shikha Dalmia is a senior analyst at the Reason Foundation and a columnist at Forbes. This article originally appeared at Forbes.

Gay Marriage, Democracy, and the Courts

The culture war will never end if judges invalidate the choices of voters.

By ROBERT P. GEORGE

We are in the midst of a showdown over the legal definition of marriage. Though some state courts have interfered, the battle is mainly being fought in referenda around the country, where “same-sex marriage” has uniformly been rejected, and in legislatures, where some states have adopted it. It’s a raucous battle, but democracy is working.

Now the fight may head to the U.S. Supreme Court. Following California’s Proposition 8, which restored the historic definition of marriage in that state as the union of husband and wife, a federal lawsuit has been filed to invalidate traditional marriage laws.

It would be disastrous for the justices to do so. They would repeat the error in Roe v. Wade: namely, trying to remove a morally charged policy issue from the forums of democratic deliberation and resolve it according to their personal lights.

Even many supporters of legal abortion now consider Roe a mistake. Lacking any basis in the text, logic or original understanding of the Constitution, the decision became a symbol of the judicial usurpation of authority vested in the people and their representatives. It sent the message that judges need not be impartial umpires—as both John Roberts and Sonia Sotomayor say they should be—but that judges can impose their policy preferences under the pretext of enforcing constitutional guarantees.

By short-circuiting the democratic process, Roe inflamed the culture war that has divided our nation and polarized our politics. Abortion, which the Court purported to settle in 1973, remains the most unsettled issue in American politics—and the most unsettling. Another Roe would deepen the culture war and prolong it indefinitely.

Some insist that the Supreme Court must invalidate traditional marriage laws because “rights” are at stake. But as in Roe, they are forced to peddle a strained and contentious reading of the Constitution—one whose dubiousness would undermine any ruling’s legitimacy.

Lawyers challenging traditional marriage laws liken their cause to Loving v. Virginia (which invalidated laws against interracial marriages), insinuating that conjugal-marriage supporters are bigots. This is ludicrous and offensive, and no one should hesitate to say so.

The definition of marriage was not at stake in Loving. Everyone agreed that interracial marriages were marriages. Racists just wanted to ban them as part of the evil regime of white supremacy that the equal protection clause was designed to destroy.

Opponents of racist laws in Loving did not question the idea, deeply embodied in our law and its shaping philosophical tradition, of marriage as a union that takes its distinctive character from being founded, unlike other friendships, on bodily unity of the kind that sometimes generates new life. This unity is why marriage, in our legal tradition, is consummated only by acts that are generative in kind. Such acts unite husband and wife at the most fundamental level and thus legally consummate marriage whether or not they are generative in effect, and even when conception is not sought.

Of course, marital intercourse often does produce babies, and marriage is the form of relationship that is uniquely apt for childrearing (which is why, unlike baptisms and bar mitzvahs, it is a matter of vital public concern). But as a comprehensive sharing of life—an emotional and biological union—marriage has value in itself and not merely as a means to procreation. This explains why our law has historically permitted annulment of marriage for non-consummation, but not for infertility; and why acts of sodomy, even between legally wed spouses, have never been recognized as consummating marriages.

Only this understanding makes sense of all the norms—annulability for non-consummation, the pledge of permanence, monogamy, sexual exclusivity—that shape marriage as we know it and that our law reflects. And only this view can explain why the state should regulate marriage (as opposed to ordinary friendships) at all—to make it more likely that, wherever possible, children are reared in the context of the bond between the parents whose sexual union gave them life.

If marriage is redefined, its connection to organic bodily union—and thus to procreation—will be undermined. It will increasingly be understood as an emotional union for the sake of adult satisfaction that is served by mutually agreeable sexual play. But there is no reason that primarily emotional unions like friendships should be permanent, exclusive, limited to two, or legally regulated at all. Thus, there will remain no principled basis for upholding marital norms like monogamy.

A veneer of sentiment may prevent these norms from collapsing—but only temporarily. The marriage culture, already wounded by widespread divorce, nonmarital cohabitation and out-of-wedlock childbearing will fare no better than it has in those European societies that were in the vanguard of sexual “enlightenment.” And the primary victims of a weakened marriage culture are always children and those in the poorest, most vulnerable sectors of society.

Candid and clear-thinking advocates of redefining marriage recognize that doing so entails abandoning norms such as monogamy. In a 2006 statement entitled “Beyond Same-Sex Marriage,” over 300 lesbian, gay, and allied activists, educators, lawyers, and community organizers—including Gloria Steinem, Barbara Ehrenreich, and prominent Yale, Columbia and Georgetown professors—call for legally recognizing multiple sex partner (“polyamorous”) relationships. Their logic is unassailable once the historic definition of marriage is overthrown.

Is this a red herring? This week’s Newsweek reports more than 500,000 polyamorous households in the U.S.

So, before judging whether traditional marriage laws should be junked, we must decide what marriage is. It is this crucial and logically prior question that some want to shuffle off stage.

Because marriage has already been deeply wounded, some say that redefining it will do no additional harm. I disagree. We should strengthen, not redefine, marriage. But whatever one’s view, surely it is the people, not the courts, who should debate and decide. For reasons of both principle and prudence, the issue should be settled by democratic means, not by what Justice Byron White, in his dissent in Roe, called an “act of raw judicial power.”

Mr. George is professor of Jurisprudence at Princeton University and founder of the American Principles Project (www.americanprinciplesproject.org).

Why Taxing the Rich makes no Sense

...For the record, this guy wrote a book titled "Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy"... this goes beyond simple "conservative vs. liberal" rhetoric.

A Surtax On The Top 1%

Bruce Bartlett, 07.31.09, 12:00 AM EDT

This is a very bad way to pay for health care reform.

It seems almost certain at this point that whatever health reform legislation is ultimately enacted by Congress, its principal funding will come from a surtax on the top 1% or so of taxpayers. This is a very bad idea for reasons that have little to do with the economic effects of taxation.

It's wrong in principle to enact a government program with broad benefits that is so narrowly funded. It ensures that the financing of health reform will be precarious and its political support will rest on a weak foundation. This will make it easier for a future conservative government to gut the program or abolish it altogether as was done with welfare in 1996.

For more than 200 years, economists have generally accepted Adam Smith's basic principles of taxation. The first and most important is this: "The subjects of every state ought to contribute towards the support of the government ... in proportion to the revenue which they respectively enjoy under the protection of the state."

This has come to be called "the benefit principle"--that there should be a linkage between the taxes one pays and the benefits one receives from government. Of course, some taxes will necessarily fund programs for which no direct benefit exists--national defense being the classic example--and some spending will aid those who lack the ability to pay. But that still leaves a lot of government programs that can be financed largely by their beneficiaries.

The best examples of the benefit principle in action are Social Security and Medicare, which are financed by payroll taxes dedicated solely to financing those programs. This linkage has enormous virtues, both political and economic. Economically, the burden of the payroll tax is significantly reduced because the vast majority of workers know they will get back every penny they pay plus a significant return. Thus they tend to view the payroll tax less as a tax and more like the deductions from their pay for a 401(k) or health insurance. Rather than discourage work effort, the payroll tax actually reinforces it.

Politically, the payroll tax has made Social Security virtually invulnerable to attack, as we saw just recently when George W. Bush was completely unsuccessful in generating support for privatizing a portion of Social Security. This is precisely why Franklin D. Roosevelt insisted on such a conservative financing mechanism even though many of his advisers argued strenuously in favor of general revenue financing, which would have been much more progressive.

As Roosevelt told one of those advisors, Luther Gulick, "I guess you're right on the economics. ... We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions and their unemployment benefits. With those taxes in there, no damn politician can ever scrap my social security program. Those taxes aren't a matter of economics, they're straight politics."

Another good example of the benefit principle at work is the gasoline tax. Since the roads are primarily used by drivers, it's appropriate that they pay the bulk of the cost of construction and maintenance. At the state and local level many taxes are largely paid by those who benefit from them. According to a National Conference of State Legislatures study, about a fourth of all state taxes are earmarked for particular programs. At the local level, property taxes are the principal funding source for education, police and fire protection--services that largely accrue to homeowners.

There are other problems as well in financing health reform with a surtax on the rich. One is that health spending is likely to rise much faster than revenue from the surtax. The Congressional Budget Office has warned about this problem, noting that its own estimate of the health legislation significantly understates the long-run cost.

That is because CBO doesn't estimate program costs out more than 10 years due to unreliability past that point. Unfortunately, Congress is able to use this constraint to game the system. It often phases in new programs very slowly so that their cost is low in the early years, with the true cost only reflected in the out-year estimates.

In the case of the House bill, the 10-year cost is a little more than $1 trillion, implying a cost of $100 billion per year. In fact, spending in the first three years is virtually zero. By the 10th year spending will be more than $200 billion and rising at 8% per year. This suggests that the cost of health reform will be more than three times greater in the second decade after enactment than the first.

However, CBO notes that revenue from the surtax is not likely to rise faster than the economy as a whole or about 5% per year. As a consequence, relative to current law, "the proposal would probably generate substantial increases in federal budget deficits during the decade beyond the current 10-year budget window."

This problem will be worse if the wealthy are more aggressive in their use of tax planning than CBO thinks. As I noted in a previous column, self-incorporation alone would reduce a wealthy person's marginal tax rate to 35% from a proposed 45%. Economist Robert Carroll of the Tax Foundation thinks revenue from the surtax will probably be 40% less than CBO is estimating.

Former Clinton Treasury economist Len Burman notes a basic unfairness in the way the surtax is calculated. Normally, taxes are assessed on net income, but the surtax will be assessed on adjusted gross income, thus depriving rich people of perfectly legitimate business deductions. In addition, the use of AGI as a tax base will raise the maximum tax on capital gains and dividends above the 20% rate proposed by Barack Obama in his budget.

Burman, who has no ideological qualms about raising taxes on the rich, thinks this is a "stupid" way of raising new revenue since we have the Alternative Minimum Tax that already takes away many deductions from the rich, such as that for state and local taxes. The result, Burman says, will be to make the income tax system "even less coherent than it is now."

Economist Bill Gale of the liberal Brookings Institution also objects to using a surtax to pay for health reform. If we are to raise income taxes, he thinks it should be for deficit reduction, not to finance additional spending. Like most economists, Gale thinks it is insane for Congress to do health reform without touching the vast tax subsidy for health insurance that has created many of the problems it is trying to fix.

Finally, as a political matter, Democrats need to ask themselves whether they really want to become known once again as the party of class warfare. Mark Penn, who was Bill Clinton's pollster, has warned that this could drive wealthy voters, who shifted heavily toward the Democrats between 2004 and 2008, back into the arms of the Republicans. (According to exit polls, only 36% of voters making more than $200,000 voted for John Kerry in 2004; 52% voted for Obama in 2008.

Penn says that Clinton's 1993 increase in the top tax rate was "a major factor" in the Democrats' loss of Congress in 1994. In 1995, Clinton himself admitted publicly that he raised taxes "too much" when he boosted the top rate to 39.6% from 31%.

I continue to believe that if we are to expand health insurance for the uninsured, it should be with a dedicated funding source that is largely financed by the beneficiaries. I think a value added tax would be the best way to do this, but there are certainly other alternatives that can be considered, such as raising the payroll tax. The worst option would be a surtax on just 1% of taxpayers.

Bruce Bartlett is a former Treasury Department economist and the author ofReaganomics: Supply-Side Economics in Action and Impostor: How George W. Bush Bankrupted America and Betrayed the Reagan Legacy. He writes a weekly column for Forbes.com.

Translating Obamacare into Plain English

By Bill Frezza

Forget for a moment whether you believe healthcare is an inalienable right like freedom of speech or a service one purchases like auto repair. Do you prefer honestly debating the issue or hiding behind Orwellian doublespeak?

Do you support open and transparent deliberation or do you believe that "change" justifies the use of misinformation, intimidation, and obfuscation?

Are you thinking through the likely consequences of the detailed healthcare "reforms" being proposed or are you more invested in making sure that your tribe - be it Red or Blue - "wins" this particular legislative fight?

Do the questions above matter or is your remedy for one screwed up presidency piling on another one?
How happy were you when our last President bamboozled the country into a hasty war in search of non-existent "weapons of mass destruction?" Were you shocked that he had no plan to secure the peace after achieving military victory? Once entangled, were you surprised that it took years of blood and treasure to set things right?

Then why are you comfortable watching this President stampede the country into the remodeling of 18% of our economy in search of non-existent "savings" that cannot possibly come from expanding the menu of government entitlements? Will you feign surprise when it becomes undeniable that Congress has no idea how to pay for the new benefits being proposed?

Don't get me wrong. Maybe a majority of Americans really do want every citizen to be taken care of according to his needs while "the rich" are forced to pick up the tab according to their ability. Many other countries work that way, although the definition of "rich" has a way of expanding as quickly as the entitlements. And maybe we do want wise central planners telling our doctors how to treat us. But before we enshrine this into law, doesn't it make sense to have an honest debate?

Here is how my dictionary defines "insurance."

Insurance - coverage by a contract binding a party to indemnify another against specified loss in return for premiums paid.

Compare this to the definition of the word "welfare."

Welfare - financial or other assistance to an individual or family from a city, state, or national government.

As Congress attempts to remake the healthcare industry, which are we talking about - insurance or welfare?

Health insurance - like fire insurance and life insurance - is a financial product sold by underwriters who offer a menu of services with prices based on an actuarial analysis of risk. The average premium paid for coverage has to be higher than the average payout for covered services or else the underwriter goes broke. Health insurance does not magically deliver "free benefits." Even if coverage comes through your employer, the premiums paid could have otherwise gone into your paycheck. Plans vary from high deductible coverage of only the most severe catastrophes to gold plated reimbursement for every sneeze and sniffle. Medical services are not "rationed" by insurance companies, they are contractually provided as specified in the product you or your employer buys. Some employers buy fancy plans and others cheap out depending on what kind of employees they need to attract.

Welfare is the ultimate in "free benefits." It is run on a pay-as-you-go basis. Plans are structured by community activists, not actuaries. Payouts are usually based on need, although middle class welfare programs are often the most expensive. Of course welfare has to be rationed because there is no price mechanism to balance supply and demand, no need to generate profits, and the provider can't go out of business - although California is testing that proposition. Rationing has nothing to do with what recipients "deserve," it comes from the fact that government treasuries are not infinite.

Once we agree to speak plain English, is it so disastrous to take the time to carefully consider what we're getting into? Do we really want Congress to pass a 1,000 page trillion dollar medical welfare bill that guarantees every American free healthcare regardless of their ability to pay? Are we willing to let recession-battered Federal and State governments go deeper into debt to support this? Are we ready to turn most doctors into civil servants so we can set their salaries? And are we prepared to raise everyone's taxes a little bit today and a lot tomorrow to pay for it all?

If you are a current recipient of medical welfare - namely Medicare or Medicaid - are you willing to share your benefits by having a fixed amount of services spread over an additional 45 million people? Please don't pretend that Medicare is not welfare, we agreed to speak English. If Medicare were really "insurance" with premiums set by actuaries, then why do both tribes agree it is destined for bankruptcy? You say it's because the nation is aging? Insurance companies don't go broke when their customer base grows, they make more money. And if national aging is the cause of Medicare's ultimate bankruptcy, how are things going to be improved by adding another 45 million people to the rolls who can't even afford bare-bones insurance?

Telling the truth is fundamental to running a democracy. Calling things what they are is integral to telling the truth. We'd better get started if we hope to pass policies that don't themselves need to be "reformed" before the ink is dry.

Bill Frezza is a partner at Adams Capital Management, an early-stage venture capital firm. He can be reached at bill@vereverus.com. If you would like to subscribe to his weekly column, drop a note to publisher@vereverus.com.