President Bush’s State of the Union address included two economic proposals that are especially worthy of consideration and prompt action. In an election year, it is difficult to find any issues that do not set people off into endless arguments. These two should be exceptions.
The first involves housing. After a reference to the “Hope Now” alliance, which put together a coalition of lenders to stanch the flow of foreclosures, he said, “And Congress can help even more. Tonight I ask you to pass legislation to reform Fannie Mae and Freddie Mac, modernize the Federal Housing Administration and allow state housing agencies to issue tax-free bonds to help homeowners refinance their mortgages.”
What is significant about this is that it is not an economic stimulus package, but it will make any economic stimulus package more effective — by helping to stabilize the housing market.
The reforms at the three federal housing agencies mostly involve bringing them back into a market they had been priced out of. The maximum loan sizes for Fannie Mae, for example, were well below the median house value in many markets across the country, so they were not a factor in mortgage markets there. Unfortunately, that meant that their lending standards were not a factor either, and we see what that got us.
The proposal to extend the tax exemption to state housing authorities who wish to use bond revenue to refinance homeowners’ mortgages could be a very effective way to intervene in a troubled market. These bonds would be a good way to attract capital into a sector that sorely needs it at this time.
More importantly, it is a way to deal with the fact that the foreclosure problem is not distributed evenly across the country. It is a much bigger problem in some states than in others, and state-level action could be a way to deal with those differences, complementing the federal economic stimulus.
The second economic proposal deals with health care. President Bush reported, “I have proposed ending the bias in the tax code against those who do not get their health insurance through their employer. This one reform would put private coverage within reach for millions, and I call on the Congress to pass it this year.”
The bias that the president refers to comes from the fact that health insurance premiums are a deductible expense for employers, but not for individuals who do not itemize their deductions. (Even if they do itemize, medical insurance premiums are subjected to limitations that rarely allow the full cost to be counted against income.)
The tax deductibility unfairness is compounded by the fact that health insurance is tied to employment. That is increasingly painful in a high labor turnover economy like ours.
If you lose your job, you have the right to keep your insurance — paying what is usually a higher monthly premium — for a few months, but after that you are on your own. And buying health insurance as an individual isn’t easy or inexpensive.
One of the attractions of this proposal is that it doesn’t have to change employer health care insurance plans. That can still be a deductible expense for them. But if an individual, employed or unemployed, pays the premiums, then that would be tax deductible for him or her.
The proposed change to the tax code would reduce the effective cost of health insurance premiums to individuals and encourage them to obtain coverage. The hope, and reasonable expectation, is that the expanded pool of buyers will attract insurers to the market for individual coverage.
Eventually, in the longer term, the ability of individuals to purchase health insurance on their own will pressure employer-paid group insurance plans to improve their efficiency and lower their costs. Instead of having a nearly unbreakable link between your job and your health care insurance, employer-sponsored plans will have to be more competitive and more attractive to workers. It is hard to see how that would be a bad thing.
Neither the home mortgage refinancing proposal nor the health insurance proposal is inherently political, at least in the partisan sense, and that may help their prospects. The increase in FHA, Fannie Mae and Freddie Mac mortgage loan-size caps are part of the economic stimulus bill already passed by the House and that increases the chances that they will be approved once the dithering is done — leaving just the health care and state mortgage refinancing pieces, and neither should be all that controversial.
Still, this Congress has justly earned its reputation as the place where ideas go to die, and it would be unwise to hope for action on a proposal simply because it would be good for the economy.
James McCusker is a Bothell economist, educator and consultant. He also writes a monthly column for the Snohomish County Business Journal.
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