I was planning on titling the column about President Bush’s
State of the Union Address “The Good, The Bad, and The Ugly.” I
figured the “Bad” would refer to his leaving out, as he has done in
previous SOTUs, any serious discussion of spending restraint. Well,
I am happy to report that Bush’s speech last night forced me to
revise that to “The Good, The Pretty Good, and The Ugly.”
The Good: Bush’s proposal to extend the tax
deduction for health insurance to individuals while also capping
the deduction at $7,500 per individual and $15,000 per family is a
great idea. This will reduce the cost of health insurance for those
who don’t have access to employer-based coverage, especially those
with low incomes. According to a Congressional Budget Office
paper (pdf), a 10 percent decrease in the cost of
health insurance would result in a 5.7 percent increase in health
insurance coverage for those not in a group plan. But for those
with low income (200% or below the poverty level), the increase
would be 8.4 percent.
Since Martin Feldstein’s important 1973 paper, “The Welfare Loss
from Excess Health Insurance,” most economists who have examined
the issue have concluded that the current tax deduction for health
insurance leads to over-consumption of health care.
Over-consumption of health care naturally leads to higher prices
for health insurance. By capping the tax deduction, Bush’s proposal
removes much of the incentive for wealthier people to buy expensive
health insurance policies that result in over-consumption of health
care. And that incentive appears to be a big one: Over one quarter of all health benefit tax expenditures
go to families making $100,000 or more.
The Pretty Good: Bush spent time emphasizing
balancing the budget through spending restraint and reforming
earmarks. Admittedly, it’s about four years past due, but better
late than never. There is one big reason why Bush needs to push
balancing the budget in the coming year and that’s to preserve his
signature domestic policy achievement, tax cuts. It’s important to
remember that the political lefties are only concerned about the
deficit when either there are tax cuts to defeat or there are taxes
they want to raise. With Bush’s tax cuts set to expire at the end
of 2010, the political left will surely use the deficit as
justification for letting them expire. However, if by that time the
deficit has become a surplus, that justification is gone.
My only complaint with this part of Bush’s speech was that he
didn’t make any recommendations for programs that should be
eliminated. He could have mentioned corporate welfare programs, on
which the U.S. Government currently spends over $70 billion. Oh
well, maybe next year.
The Ugly: This would be Bush’s energy plan.
Ugh. This will have a lot of negative effects on the economy.
Indeed, some of it already has. Oil jumped to $55 a barrel yesterday on news of Bush’s
plan to boost the strategic oil reserve.
Bush wants to “invest” (read more tax credits and subsidies) in
renewable fuels. I suspect that these not only don’t make us less
dependent on oil — foreign or otherwise — but prolongs
our dependence. First, tax breaks and subsidies relieve much of the
market pressure on producers to make renewable sources more
cost-effective. As long as government policy gives them an
advantage over other forms of energy production, renewable energy
will continue to be less cost effective. Second, it directs
investment capital away from other alternatives that might prove
more effective. Investment capital will go toward the areas with
the least restrictions, and tax credits and subsidies make products
like ethanol, wind, and solar easier to invest in. Other types of
alternatives, that might prove more cost effective, get short
shrift. By redirecting investment capital toward energy production
that is less cost effective, it prolongs our dependence on oil. And
Bush’s proposal for a mandatory fuel standard to require the use of
35 billion gallons of renewable and alternative fuels? That only
makes the problem worse by guaranteeing producers of renewable and
alternative energy that people will have to buy their products.
Thus, Bush makes some important moves in the right direction on
health insurance and government spending. However, he continues to
push for policies that will only make energy markets worse. I guess
we should look at the bright side. At least he didn’t repeat that
we are “addicted to oil.”
David Hogberg is a senior analyst at the National Center for
Public Policy Research. He also hosts his own website, Hog
Haven.
