How to do a Border Adjustment Tax that Succeeds Politically

For either a VAT (value added tax) or a BAT (border adjustment tax), the only way politically to get from here to there is:

Gradually.

Let the tax plan be to begin in 2018 at only 2% (or 4%), and be raised by 2% increments each year, until reaching the 20% that is typical (such as by import duties) for other nations, our trade competitors.

This would allow even incorrect fears among importers that somehow they would bear costs to be dissipated, as they would see plenty of time for currency prices to adjust, and thus for price disadvantage to be avoided.

Is it a good idea?

Without getting technical, the answer is Yes.

Currency adjustment will happen, but also the fact the U.S. isn't 1/2 or more of the world economy will allow also real change in relative costs (other markets under generally free trade will blend the adjustment with other nations who are also customers).

Doing this gradually is the only smart way.

The BAT, like a VAT, and letting either of these replace much of domestic corporate taxes (such as for instance setting the BAT rate equal to the corporate rate), would help level the playing field, in that foreign production would be taxed at a rate much closer to domestic production.

Why Health Care hasn't acted like a (simple) free market and has little price competition (regardless of Obamacare)

Graph via California Health Care Association

Before the Affordable Care Act, health care costs and insurance expense rose every year, often sharply.

As I wrote in 2010 here, people will pay whatever health care costs up to the limit of their ability to pay in order to get what they think is needed.   For much of care, having insurance makes price shopping feel beside the point.  Even for expensive care in terms of out of pocket cost, price shopping can be harder to do than we'd guess at first.  Often there is a feeling of little time.  Why not trust the insurance choices of network providers, because quoted non-network prices are often higher as one learns calling around the area one lives.  Of course the idea of a network to begin with is that price and quality have been shopped for....  But have they?

Health care insurers often have little opportunity to do effective price shopping in the U.S.!

Why?  For the reasons below.

What Prevents Price Competition:

1) Most doctors have banded together into associations to negotiate prices with insurers, so that there are in most places no significant (large enough patient capacity) competitors outside the near monopoly association groups to compete on price.

Two competing associations will naturally set their prices only a little apart.  For this reason -- most people prefer certain doctor or a certain specialist or group.  Insurance then hides the real prices of that doctor's services from the patients, who only pay a fixed co pay most often, such as $20 or $40, regardless of the price.

The somewhat lower cost association knows there is effectively no other choice available, except the somewhat higher cost association.

Therefore, they have zero need to lower prices to get enough customers.

As the other group raises prices, they can simply raise their own a similar amount without losing any customers.

2) Many possible types of competitors are prohibited by law--

As it's illegal to practice medicine without a license, meaning it's illegal to practice medicine without meeting the certain standards of what licensed doctors consider correct knowledge created by current and past licensed doctors and then taught by accredited medical schools.  Which are expensive here in the U.S.

New doctors going through these expensive schools to acquire this certain knowledge and then passing the licensing are economically compelled to join the higher-wage (existing) associations by student debt, and to avoid many of the overhead costs of offices by combining with other doctors in a group.

Thus there was and is little significant price competition in most areas.

This will not change merely by removing the Affordable Care Act.

One wonders if classic anti-trust legislation could even help, because even having 3 associations in an area may only have a small competitive effect unless they are all high-capacity, and there is at least some excess capacity.

It's feels more intuitive given patient doctor-preference or medical group preference that at least 3 high-capacity associations/groups (who are not price fixing together behind closed doors) in an area would be needed to get some actual price competition.  And that's only if there are sufficient sufficient doctors available for that competition, which is constrained by current laws about licensing and the outcome of medical student debt.

Democrats are the New Republicans

Imagine, if you are under the age of 40, that once, not really so long ago, one of the two major American political parties espoused the following ideals, and the other party did not believe in these ideals strongly at all.

• Free Enterprise -- That companies should operate in a market under the law without subsidies from government....  Without, for instance, subsidies for oil exploration.  ("According to...the Congressional Budget Office, capital investments like oil field leases and drilling equipment are taxed at an effective rate of 9 percent, significantly lower than the overall rate of 25 percent for businesses in general and lower than virtually any other industry." -- NYT)
• Market Solution for Health Care -- Health Care should be extended via a market solution: a regulated marketplace of private insurers and providers, a mandate, and subsidies for the poorest families (Nixon).
• Naive Free Trade -- Extend free trade everywhere possible, regardless of factors like currency manipulation.

So, which party was that?

The Republican Party.

Today, one party pays lip service to these ideals at times, but the other party truly believes in these ideals.

More of the true believers are Democrats.

I'd go further.

Today, it is the Democratic Party that believes in the Horatio Alger story, the upward mobility, the land of opportunity.

These are strong ideals, and the Democrats, having the real belief, should embrace the first two of these ideals, and Horatio Alger, more forcefully, publicly, rhetorically.

Free Trade, on the other hand has a complexity that is crucial:  Free Trade isn't actual unless the currencies freely float (click link to understand why).

...

I was surprised as I began to finish this post and looked up when Elizabeth Warren was a Republican because her party affinity history, wiki nutshell version, is just like my own:

"Warren voted as a Republican for many years saying, "I was a Republican because I thought that those were the people who best supported markets." She states that in 1995 she began to vote Democratic because she no longer believed that to be true, but she says that she has voted for both parties because she believed that neither party should dominate."

People, Elizabeth Warren has evolved some, but not that much.  It's the Republican party that has changed so drastically.

Updated: Let People Keep Their Old Swiss Cheese Policies

(Originally published 11/12; Update, 11/15, at bottom)
Just a quick post before other duties.  Some thoughts based on my 2 years of blogging on health care.

President Clinton has opened a helpful topic, which from the short NPR news summary I will paraphrase as: Change the ACA (Affordable Care Act) and let people keep their old policies.

I think this is actually a good idea.  There's little harm in letting people keep Swiss cheese health insurance policies by their own choice.  They can transition to better policies over time, by their own choice.

The premiums on those Swiss cheese policies will still rise due to health care inflation, and yes they will have less-than-complete insurance, but that's by their choice, without financial penalty.

And give these old policies the same premium subsidies according to the ACA income level subsidy formulas!

In fact, giving them the subsidies helps encourage them to eventually upgrade to better insurance.

It won't hurt the new ACA in any pronounced way I can see, at the moment. 

While insurers will need to raise some premiums for their new ACA-compliant policies now on the exchanges, since they provide maternity care and will have somewhat fewer enrollees, this won't likely be a huge increase.  And, lower income enrollees will still get subsidies to make their insurance affordable anyway.

There's little difference on that end, but a lot of difference politically, and in terms of choice.

Choice is always good.

It's a great opportunity for the President to show he's non-partisan while accomplishing some good -- choice helps people in subtle ways.

----

Update 11/15

Insurers are said to be concerned about not having enough young enrollees.   Since insurers will be required to notify those keeping an old-style (Swiss cheese) policy of what that old policy lacks in coverage vs a new comprehensive policy, most younger people choosing to buy insurance at all would make the rational choice to buy the new comprehensive coverage since the cost of premiums is fixed vs their income by subsidy.

Insurers should be allowed to increase premiums mid-year.  Policy holders with subsidies would see no increase.  Insurers net profits are still limited by the payout loss ratio requirement, so they could not use this as a windfall.

If there is legal barrier to insurers raising prices in this way, new provision should simply give them that freedom across the board, across the nation.

Finally, a much smaller group -- higher-income policyholders seeing higher premiums in a few months for their new, comprehensive policies without any subsidy -- these households can typically afford to pay a little more, although that increase could be reasonably limited by law for this single year, perhaps to 5%, as a safety cap, and with required notification to policyholders that should the increase be larger than needed, the law requires the insurer to rebate excess premiums at year's end. They would be simply seeing the "true cost" of coverage, with less subsidy.  Insurers would be fine in each scenario, as the majority of their increased costs will be covered to begin with via subsidies.  The key being that they are allowed to increase premiums mid-year.

Why Now Is Crunch Time For The "Tea Party"

I've suddenly realized the behind-the-scenes situation making "tea party" Republicans in Congress so ardent to do-everything-now, why we hear "we can't wait any longer."   It really is crunch time for the Tea Party.

You see, the problem is They've Got No Time Left.

Every economic belief they are based on is becoming like sinking ground.

And it's not about the Affordable Care Act (Obamacare).

One very uncomfortable bit of information slowly seeping into national awareness (and around the world) is that the U.S. stimulus worked much better than the experience of nations going the route of austerity.   As time passes, years now, we are doing better, and big inflation is nowhere in sight, and....  And there is something even worse for the Tea Party...(just keep reading).

But first, look at the real effect of the Stimulus.

Want to know what the U.S. would look like now without the Stimulus of 2009-2011?

To see a nation with many parallels to the U.S. consider Spain: housing boom, housing bust, rising deficits due to falling tax revenues and unemployment supports....but then an interesting difference.

What Spain did next was not a sustained Stimulus like the U.S., with support of central bank Quantitative Easing (QE).  No.

Too soon Spain chose austerity.  And Spain also wilted under the austere (and foolish) European Central Bank which acted as the U.S. Fed did in the early 1930s.  Result?  Spanish unemployment topped out around 27%, recently.....

So, little stimulus, no QE....and plenty of cutting spending results in....  A Spanish Great Depression (II).

But that's not the worst of it for the Tea Party....

The Tea Party has been a message.

They've relied on a story that our "debt is unsustainable" and that we "can't continue like this."

More than anything, this is their story, their message, their crucial one leg to stand on.

And it turns out this proposition is demonstrating itself false, and this new fact is just now becoming visible to careful observers:

As China and other nations have been selling US Treasuries on net for months this year, and interest rates have stayed low, low, low.....

Let me summarize that: massive deficit spending, years of QE, and.....very little inflation, and finally China and the world were selling U.S. debt for months (instead of buying it), and the result is....continuing low interest rates!

The tea party story is just false.

Full stop.

So, perhaps unconsciously, perhaps with some internal party alarm already send through the trenches, the tea party "conservatives" rightly know they have little time until the public begins to become aware of the complete falsehood of their main idea.

Whether it is conscious or unconscious, they feel they need to Act Now, so that they will be able to pretend or believe, later, that the amazingly low interest rates on U.S. Treasuries (our national debt) are due (after the fact) to tea party resolve to improve the budget of the U.S.

That this will be completely false will be beside the point.  (Unless an articulate someone can wake up independent voters to this fact.)

And that such a fast rate of reduction in federal expenditures actually slows economic growth is also beside the point.  Everything is beside the point.

They need to move quick, and then take credit.  It is about public perception, and keeping up appearances.

They need to keep fooling some of the people all of the time.