Wall Street of course is disappointed in the earnings reports coming out these days, but the earnings reports are not so bad as to have caused this general slump in what was a nice mid-summer rally. The more fundamental reason is the stalemate on taxes in Washington, with President Clinton indicating he will veto any tax cuts Republicans send up unless they give him what he wants on prescription drugs for Medicare. The only tax cut that seems sure to make it now is repeal of the 3% telephone tax. There is still, though, optimism that Senator Roth's pension fund legislation, which passed the House a week ago with only 25 nay votes from the Democrats, will make it through to the September reconciliation bill and make it into law. This in itself would be enough to lift the markets, as they see it developing. Remember in April I thought the markets would move sideways until after the political conventions, when there would be increased competition to appeal to the electorate in ways that would spur a market advance. Roth, chairman of Senate Finance, is expected to announce a September schedule for mark-up sometime this week, perhaps later today.
On the prescription-drug issue, there is an assumption among Republican leaders that the President does not want a compromise because the issue polls so well for the Democrats... and thus could provide the margin of victory for Al Gore. It was curious to me that on the Larry King show Tuesday night, Dick Cheney said the GOP had to do something about prescription drugs for Medicare... without being prodded. It may be the Bush campaign realizes it is on shaky ground with its own prescription-drug plan. In his NYT column Wednesday, economist Paul Krugman makes the case against the Bush plan in a way that makes perfect sense. It is one of the few times I have agreed with Krugman but it is microeconomic analysis he is dealing with here, not macro: http://www.nytimes.com/library/opinion/krugman/072600krug.html
That is, if there is to be prescription drugs offered in Medicare, it makes sense to have the broadest insurance pool, including those who need prescription drugs and those who don't. At Polyconomics, for example, we have a prescription drug plan, which the young folks pay for even though they do not need the pills we seniors get. If the younger staffers could opt out of the company plan and save the premiums for other uses, they would do so if they were smart, and they are. In other words, like Social Security itself, either everyone does it via the government, or the government does not get involved at all. If Bush shifts ground in the direction of Clinton/Gore, it would be difficult for the President to then say he will veto the tax cuts – especially the relatively inexpensive estate-tax legislation which is popular with many of the Democrats. Grace-Marie Arnett, president of the Galen Institute, who advises us on health-care matters, puts it this way:
Yes, there is a serious problem with adverse selection in the Republican plan, which is why they are offering open-ended subsidies to insurance companies. It is not the perfect plan and it shows the great difficulty of trying to fashion a drug benefit apart from overall Medicare reform.
The adverse selection problem would be mitigated if Medicare were to be reformed so private companies could compete by offering a range of benefits, just as they do in the Federal Employee Health Benefit Program. Drug coverage would need to be included in virtually all the plans if they wanted to be competitive, but the plans would compete on price as well as other benefits to win customers.
The serious danger of the Clinton plan is that it would set up one government-directed prescription drug plan for each (as yet unspecified) region, and eventually it would crowd out private coverage, just as Medicare has crowded out basic health insurance for those over age 65. Then the government masters could have their way in deciding which drugs people would or would not get, with few other options, and price controls would quickly follow. The Republicans are trying to create a plan that would give people choice and would get them thinking about an FEHBP model for overall Medicare. The plan is flawed, but the philosophy is right. Grace-Marie.
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PS.... On another front, Jack Kemp has begun a campaign to persuade George W. Bush to seriously consider Steve Forbes as Treasury Secretary. The "Club for Growth" has already joined in the effort to make sure a supply-sider is at Treasury in the Bush administration.