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."