Pearlstein: Federal Budget

Steven Pearlstein
Washington Post Columnist
Wednesday, February 6, 2008; 11:00 AM

Washington Post business columnist Steven Pearlstein was online Wednesday, Feb. 6, at 11 a.m. ET to discuss the debate over the federal budget.

Read today's column: Getting Past Nowhere On Budget

About Pearlstein: Steven Pearlstein writes about business and the economy for The Washington Post. His journalism career includes editing roles at The Post and Inc. magazine. He was founding publisher and editor of The Boston Observer, a monthly journal of liberal opinion. He got his start in journalism reporting for two New Hampshire newspapers -- the Concord Monitor and the Foster's Daily Democrat. Pearlstein has also worked as a television news reporter and a congressional staffer.

The transcript follows.

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NY, NY: How does the Bush admin. account for the huge amount of money requested for the Iraq war, if it is not in the defense budget ?

Steven Pearlstein: Much of it is in supplemental budget requests. One of the reasons for this -- I'm not defending it, just explaining it -- is that if you want to look at longterm budget trends, and if you don't assume we'll have lots of troops in Iraq forever, that its reasonable to think of it as an extraordinary item. Wherever you put in, however, its real money that is now contributing to the mushroom deficit and won't once (if?) it stops.

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South Range, Wis.: How would transferring about one half of our military expenditures into a Manhattan style renewable energy and energy independence program affect our economy in both the short and long term.

Steven Pearlstein: Not a likely prospects. Sorry. Let's not make the same mistake the Republicans did with homeland security, and assume if you throw lots of money at a problem, it will be solved. You waste a lot of money that way. We're increasing those expenditures and investments now at a rapid pace, and let's see how we absorb that before we talk about "Manhattan Project" approaches. This is how we get into these budget fixes.

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Oviedo, Fla.: No soup, er, vacation, for you! We need you on deck to think straight. Please stay glued to your desk for the duration. So NASA would evaporate under your plan? Them's fighting words here in central Florida, where layoff rumors are already rife with the shuttle winding down. How do you see NASA going forward, if at all??

Steven Pearlstein: NASA MANNED space flights, specifically space station and shuttle flights. Don't see much more upside there, at least as a national priority. Sorry. Exploration of outer space, which is cheaper and is more at the frontiers of knowledge -- that's probably worth doing, people who know more about these things tell me.

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New Canaan, Conn.: Who and when will the government or even a pundit, going to discuss how the budget will be funded?? Or how the debt will be paid or even reduced?

When will someone DARE to discuss the INCOME side of the budget? If one an one's home budget as W and co. run the country, wouldn't the home be forced to declare bankruptcy?

Steven Pearlstein: The US government is not bankrupt and it is not useful to talk in those dire terms. With some manageable adjustments that aren't the end of the world (despite what lobbyists and advocates tell you), we can put our budget on a sustainable path. It is really not that hard or that painful. Reducing the outstanding debt, which by the way is eating up 260 billion a year in interest payments, is a good longterm goal and in the big scheme of things is affordable for a country with a $14 trillion GDP. But first, let's stabilize the patient, shall we.

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Danvers, Mass.: What if the States went through this same exercise and each determined how much they should contribute to the budget of the Union, you know, not a top down budget, but a bottom up? How do you think the budget that arose from the states together would differ from the president's?

Steven Pearlstein: They would overspend for state assistance and matching funds and under-spend for things that our outside their normal vision. We don't need to go back to the Articles of Confederation. As I recall, it didn't work very well, John.

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Vienna, Va.: From Steve's column this AM:

On the operational side, the Pentagon could easily save $2 billion a year by requiring military families and retirees to make modest co-payments on their health insurance and Medigap policies.

We do already. I'm retired military and I pay $115.00 per quarter to enroll my wife and myself in "Tricare Prime" to receive medical services. not sure Steve realized that retirees pay already. Thanks, Michael

Steven Pearlstein: The Congressional Budget Office and others have identified this as an area for reform. As much as you think you might pay, it is less than most of the rest of us do, whether it is active families or retirees for the Medicare wraparound coverage.

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Boston: What would be the budget implications if the next president and Congress put the war supplemental back into the normal budget? From a financial standpoint, will our past and future expenditures on the war in Iraq be the straw that broke the camel's back with all the other fiscal issues we will face in decades to come with baby boomers retiring, infrastructure falling apart, etc.?

Steven Pearlstein: That's not the big problem, where it is accounted for. It does allow them to play games with the Congressional budget process a bit, but let's now get down into those weeds, please.

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Boston: I love the folks who argue that letting the Bush tax cuts expire will really be an unfair redistributing of wealth. The redistribution came when the all taxpayers took on increased debt and interest payments to pay for tax breaks that predominantly benefited the top few percent of wealthiest people in the U.S. Who is right from your perspective?

Steven Pearlstein: Liberals put too much emphasis on the Bush tax cuts and overstate their impact on income redistribution.

First of all, taken alone, the income tax cuts actually made the tax system more progressive, not less, because the percentage cuts (not dollar cuts) that went to poor and middle class were actually higher. The real regressivity comes when you add in the inheritance tax elimination, which I deal with by taxing unrealized capital gains at death. That's a clever way to meet the conservative argument that the inheritance tax is double taxation, since for most of the big estates, the income, in fact, hasn't been taxed even once.

The other thing I'd say is that a 35 percent top marginal rate for individuals and a flat 35 percent corporate rate is probably as high as you want to go. When you add state taxes and payroll taxes, you start getting up to tax rates on earned income of 50 percent, which is where I draw the line. After that, you do start to get more serious distortive effects on effort and tax compliance.

That doesn't mean you can't raise more money. What it means is that you hold the rate there and widen the base by closing as many loopholes as necessary to raise enough money to support needed government services. We need to raise more than we are now, both to close the deficit and do some things we should have been doing all along. But my opinion is we also don't need the federal government to spend more than 20 percent of GDP. That ought to be a cap, and we should figure out how to prioritize our spending within that. And that means not doing stuff that may be nice but not essential.

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Washington, D.C.: I realize trying to fix the entire budget in a column requires some compression, but I'm a bit confused by your suggestions for Social Security. And given that I work full-time on Social Security solvency issues, I'm probably not the only one.

You say we should, "raise the payroll tax limit to $250,000, raise the retirement age one month every two years and use a more progressive formula for indexing cost of living. And, voila, we can save a beloved program without cutting benefit levels for the poor and middle class."

By "use a more progressive formula for indexing cost of living," are you referring to the progressive price indexing plan that Robert Pozen (a member of the President's Commission on Social Security) designed, and which the President has endorsed? I'm not objecting to it - it's an honest approach - but it doesn't index the cost of living. Rather, it reduces growth in initial benefits for 70 percent of participants. Under current law, average initial benefits (the level you get at age 62) grow with average wages, so benefits are a constant percentage of wages. In jargon, the "replacement rate" is constant. Under progressive price indexing, that replacement rate would fall steadily. Lower income workers would not be affected, and the cuts would be highest for the richest.

Again, I know you have limited space, but something like, "cut scheduled benefits in a progressive and gradual manner, so that the burden would fall more heavily on richer retirees and those retiring far in the future" would have been more accurate.

Steven Pearlstein: Fair point. That's probably how I should have phrased it.

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Washington, D.C.: Does the Republican party benefit more from the current budget morass than the Democrats? When we were on the path to retiring the debt, it became an excuse for tax cuts. High deficits can be used to criticize new spending programs Rs don't like, while the Ds don't really have an ability to credibly criticize R spending, especially when it is wrapped up in "homeland security" or "the war on terror." Propose a tax, get devoured.

Steven Pearlstein: The deficit/budget morass favors neither party. It favors those running against incumbents.

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McLean, Va.: Not learning much from manned space flight? But... but... that's how we got Teflon! Surely Teflon is worth a few billion a year, right?

I'd suggest that the only time the country's space program is remotely worth its expenditures is when the quid pro quo is not only scientific learning but also a national security interest. In other words, not since the end of the Cold War.

Steven Pearlstein: I think the current manned space flight programs, specifically the space station and the shuttle, are in that zone of diminishing marginal return.

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This is how we get into these budget fixes.: As opposed to spending a trillion dollars trying to fix a foreign policy problem in Iraq that wasn't really a problem?

Steven Pearlstein: Well, that's another, although as most budget wonks say,that doesn't affect the long run trajectories much as long as it is temporary.

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Waynesboro, Va.: One-third of Medicare spending probably causes more harm than benefit, explaining at least in part the large expenditure/poor outcome paradox. How do we rein in this unnecessary and harmful spending?

Steven Pearlstein: It is true that all of our medical spending is excessive, compared to other countries that spend half as much and get better results. Not sure Medicare is any better or worse, although it ought to be clear now that we need to manage care in the most costly cases, starting with chronic illness and end of life care.

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NW, DC: I am actually a federal employee. The fed budget scares me too. I know most will say the federal government is bloated, get rid of the employees, cut, cut, cut! however, now that I am in the government, i now see this budget SCREAMS politics, politics, politics! From the congressional earmarks to the administration earmarks that support universities, and other non-profit organizations tooth and nail. I see the letters from congressmen advocating grant dollars for obscure labs and programs that literally cannot survive without federal support and the letters state such. I see the folks lobby congress and the agencies on a daily basis on their respective issues. These token dollars add up. And when a university builds its new science/engineering building via Senator whoever, who in that state really cares the entire nation paid for that building. All they realizes is the potential for new opportunity. (We could also point to the support/subsidy of industries, but i hope most understand that.)

All that said, do you really think Americans understand how much of our economy depends on federal spending? the lack of competitiveness in the allocation of federal dollars or the correlation of that spending and growth in industry?

Steven Pearlstein: Earmarks are pretty hard to defend. But we should understand one thing: in many cases, they merely misallocate federal spending, not increase it, because the money comes from existing programs and the earmarks don't necessarily raise the total spending for those programs.

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McLean, Va.: This may be a lightning rod of a question, but: isn't the Iraq expenditure really not all that much? If we end up spending $70B this year on Iraq, but we have a $3T budget, that's only 2 percent. That's like budgeting $3,000 for a vacation and buying a $70 souvenir.

Look, I know that $70B is a lot of money and it could be used in other useful ways. But isn't it really just a rhetorical device when people complain about the economic harm it's doing? The question is whether it serves our interest, and you could have a robust debate about that. But if it is, then isn't spending 2 percent, or even a bit more, perfectly reasonable?

Steven Pearlstein: Let's not get too caught up on this, alright. It is a lot of money in the short term and we should start spending less. We've done what we can, pretty much, and we need to start winding this down and let the Iraqis and their friends in the region pick up the ball. That will help with the shoft-term deficit, but not the longer term problem, however.

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Chicago, Ill.: John McCain was recently quoted in the New York Times as claiming "every time in history we have raised taxes it has cut revenues". Is it fair to say that this goes beyond the usual half-truths that candidates often utter and achieves the status of an egregious falsehood?

Steven Pearlstein: That's a four pinochio lie, as the Post's one-man truth squad, Michael Dobbs, likes to put it.

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Woodbridge, Va.: Read your column today, a nice idea, but it will never happen. In an environment where allowing tax cuts that were written with expiration dates to actually expire are termed "tax increases", your loophole closing would be political suicide for Democrats. I can see the campaign ad now - "Joe Democrat voted 32 times to raise your taxes" (Joe is a member of the finance committee, so he voted twice for each of the 16 items on your list).

It's a great idea, though, if we could only wake up to the idea that, you know, things cost money, so if you want the government to do things, they gotta, you know, raise money.

Steven Pearlstein: I just disagree. With a skillfull political leader in the White House, Democratic or Republican, these can be turned into political plusses: How I'm going to save your Bush tax marginal rate income tax cuts. People aren't stupid and given even a fighting chance, they'll back someone who puts the country's fiscal house in order and eliminates special interest tax breaks and makes the tax code a bit more progressive within an overall program of shared sacrifice. We need to stop saying that it can't be done, because those things get to be self-fulfilling after a while. The missing ingredient has been presidential leadership. And when we have had it, as during early Clinton and George HW Bush and later Reagan, we actually made progress in these areas.

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Los Angeles, Calif.: Bush's proposed 2009 budget freezes most domestic spending and limits payments to hospitals and other providers under Medicare. You think? Maybe Bush's Administration was too busy searching for Iraq WMDs and enabling resurgence of the Afghanistan Opium market to understand that signing into law the $41+ billion/year Medicare Drug Program was not the fiscally conservative thing to do. It was unvarnished pandering to Senior Voters but certainly not fiscally conservative.

With the economy and Bush's $4 trillion increase in the Federal deficit as important election issues (including making Bush's tax cuts permanent or not), aren't Republican candidates painting themselves into the proverbial corner without good options by supporting Bush's Iraq invasion and Federal tax-cut/spending priorities? If Republicans continue going lock-step down the Bush sinkholes, won't it bode badly for them in Nov 2008?

Steven Pearlstein: Some good points there. But what I want to talk about is your suggestion that limiting increases in fees to health care providers is necessarily a bad thing in every instance or is bad for seniors. This is how we get ourselves into this run. Because there are people like my friend Bob Greenstein and colleagues at the Center on Budget and Policy Priorities whose knees always jerk in the direction of kicking the hell out of anyone who wants to cut Medicare or Medicaid spending from the "baseline," which means cutting the growth in this spending to something less than historical trends. That, by definition, means that we will never solve the problem, because the trendlines are the problem -- increases in health spending that exceed normal inflation, exceeed population growth, and accept as given that health care costs will grow faster every year than the incomes of the people paying for it. It has to stop. And one way to make it stop, as I suggested, is to limit growth tot he growth in national income and then make the people who are best in a position to make such decisions decide how to rationalize the spending of this fixed, but generous, amount of money. In the jargon of budget wonks, that is a "cut" from baseline. Fine. But let's not equate that with bad policy. It's GOOD policy, NECESSARY policy, policy that is going to save this programs and make them work better. And I just wish the liberal side of this discussion would stop the annual kabuki dance of painting anyone who suggests that if we reduce the incomes of the most highly paid doctors and the most profitable hospitals anywhere in the world, it is bad for seniors or the poor. It is nothing of the sort. Politically speaking, providers have been hiding behind beneficiaries for decades, and we need that to stop.

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Waynesboro, Va.: Steve Pearlstein for President!

Steven Pearlstein: Could we start, perhaps, with a raise and then move on from there?

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New York, N.Y.: Steve, Great suggestions today. You've got my vote. I've got a comment on Medicare/Medicaid. I can't figure out for the life of me how we spend so much on these programs. The rates the government pays under these programs is way under what any private insurer pays. No respecting doctor can make a living seeing Medicare/Medicaid patients.

Let me a bit technical: My wife is a doctor in an inner city hospital in NYC and she is paid a salary by the hospital. 90 percent+ of her patients are on Medicaid. For each Medicaid patient she sees, the hospital collects about $35.

She could barely make ends meet if she was in private practice. If you estimate she can see about 125 patients per week for let's say 48 weeks that means she could gross($35x125x48)=$210,000 per year. This sounds nice, but once you subtract rent, malpractice, staff etc., she'd be better off being a public school teacher.

My point is I can't see where all of this money is going. It makes me wonder how much is getting siphoned off or abused in the bureaucratic morass. Thanks!!!

Steven Pearlstein: Its a very complicated question, although I like your mode of analysis. The truth is that Medicare patients probably pay their way, Medicaid patients in New York almost surely don't, which means they are subsidized by other "payers" -- in this case, patients with private insurance. My guess is that your wife is underpaid, but there are many other docs at her hospital who are, frankly, overpaid because they are in specialties that, for reasons that are hard to understand and even harder to justify, get more generous reinbursement rates. Medicare and the insurers are working on this, but man they are slow about it.

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Austin, Tex.: It's my understanding that the FY '09 budget request has a 407B deficit which doesn't include 3 quarters of War funding. Projecting from the 70B required for the first quarter doesn't that make the deficit about 600B? (Not including the extra SS income that reduces the actual numbers also.)

As you stated, we now spend 260B per year on servicing the debt, doesn't that mean my children and their children will have less to spend for schools and roads and other infrastructure stuff. It's nice to say it doesn't matter because we have a 14 trillion dollar economy, but 260B would fund universal health care. No telling what we won't be funding 20 years from now because balancing the budget and paying off debt really doesn't matter in a 14 trillion dollar economy.

Steven Pearlstein: Let's not get too nitty here. The $407 deficit doesn't include most of the war funding, but it does include some presidential spending intiatives that won't get approved. So it matters what baseline you're using. And one thing I'm very clear about: when we start getting into discussions about baselines, we need to stop.

Let's just say that, on a steady state basis, we're now headed into the permanent $400 billion deficit range, and rising from there, unless we make some structural changes to spending and revenue raising.

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Waynesboro, Va.: Seriously, Steve, if you were president, how much of what you propose do you think could get done politically? And do you think any of the current batch of candidates have an intention of tackling the problem?

Steven Pearlstein: I would only say that I see in Obama the potential to provide some real leadership here and get the country in the frame of mind to do things differently and accept a fiscal regime of fair and shared sacrifice (i.e. cuts in spending and raises in revenues). I'm a bit disturbed by his recent pandering to seniors, but more generally he is more willing to take on interest groups that Hillary. McCain, also, has good bona fides in this regard.

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Austin, Tex.:"Well, that's another, although as most budget wonks say, that doesn't affect the long run trajectories much as long as it is temporary."

Temporary? 100 years or even 20 years is not temporary. We will be in Iraq or some surrounding equivalent for at least 20 years and maybe longer. It's not temporary and the budget for DOD and the Wars are 780B per year.

(500B for the Military and 280B for the war, projecting from a 70B request for the first quarter of the war.)

Steven Pearlstein: Look, we're not going to be in Iraq with serious troops for 100 years or even 20. That's not what John McCain said or what he meant. So let's not be silly about this, okay. To have 10,000 solidiers in Iraq for another decade isn't like having 160,000 troops there for another decade. We can debate whether 10,000 is necessary or not -- I tend to doubt it--but that is probably what McCain has in mind.

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Alexandria, Va.: Steve, welcome back. sometimes don't appreciate your insight and comments until I find them missing.

Question is: Please explain MedPac. How do you envision it functioning and why do you not think it would be quickly corrupted in its mission by the same lobbying, special interests and insurers etc. Also please explain to the best of your knowledge why Medicare can't negotiate for lower drug prices. It doesn't make sense to me that I can buy quality brand name drugs from Canada at substantially less than in the states.

Steven Pearlstein: Medicare should come up with a process by which it announces what it is willing to pay for a new drug based on an independent, professional cost benefit analysis. And if the drug company wants to sell it for that amount, great. If not, it can offer it outside the Medicare program to anyone who wants to pay. Free country, free markets, hip hip hurray. Medicare should also be clear with the drug companies that we are not going to pay more than 10 or 15 percent more than the average paid by other industrialized countries (we should pay more because we are a richer country and we are home to an industry that generates lots of good economic activity). What that means is that the industry will have to pay more attention to pricing both here and abroad, and stop using US customers and taxpayers to pay too high a share of their R&D costs. It also means that they may decide not to invest in some drugs because Medicare won't pay ridiculous sums for drugs that don't generate huge improvement in outcomes. And if that is the case, so be it. This is what we need to get use to -- the idea that we can have everything and anything that the medical community wants to produce, no matter the cost. This is all about tradeoff, folks, and we shouldn't get bamboozled by the drug makers into thinking that everything and anything they come up with is so precious and important that all rate payers and taxpayers have to pay for it. When its worth it, we should. And when its not, we should tell them they're free to sell it to someone else.

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Woodbridge Va.:"But my opinion is we also don't need the federal government to spend more than 20 percent of GDP. That ought to be a cap, and we should figure out how to prioritize our spending within that. And that means not doing stuff that may be nice but not essential."

Be careful, your starting to sound like a Republican and a conservative one at that.

As an actual conservative Republican, I agree with you to a point but also keep in mind that often focusing spending on "essential critical" programs overfunds short term projects and underfunds long term needs. The Cruise missile program was derided as an unworkable nice but not necessary boondoggle right up to the start of Gulf War I. The 1990s savings derived from the "Peace Dividend" were repaid many times over in blood and treasure when we ended up going to war with the Army we had rather than the Army we could have had. Even on the domestic side, there are numerous programs that seem wasteful at the time but pay big dividends. I remember Allen Simpson giving a Golden Fleece award to a program that studied the sex life of flys. Two years later that program produced a tetsi fly breeding blocker that eradicated African Sleeping Sickness.

Steven Pearlstein: I'm happy to sound like a Republican, as long as its a good Republican.

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Arlington, Va.: I know that no one cares, but your proposal to raise the retirement age consistently frustrates those who are nowhere near retirement age and who are now funding a system that will have no money by the time we reach 75, much less 65.

Steven Pearlstein: Nobody is talking about 75. Please, let's not exaggerate. And this is a good example of how we have to change this conversation. You can complain all you want about how unfair it is to raise the retirement age to 69 for somebody just starting out. But let's remember a couple of thing. First, that person will probably live to 90, will be much healthier at 65 than people are today, on average, and will have more years on Social Security than any previous generation, on average. And let's remember that, as much as you don't like this, it is better than having greatly reduced Social Security benefits for those 30 years. That is the choice, that is the tradeoff. Because you simply can't have a solvent program and keep everything like it is now. It doesn't compute. Take a slightly less good program as the better alternative to no program at all -- and if it bothers you so much, start saving more so you can afford to retire earlier than 69! It's a free country. You can do that. And if you put aside $20 a week for the rest of your working life, you can afford it.

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Alexandria, Va.: Please expand your explanation on "taxing estates for unrealized capital gains." What has been the effect of the 15 percent capital gains tax and do you support its continuance.

Steven Pearlstein: I think that, in the context of a tax system that taxes corporate profits at the corporate level, an additional tax on capital of 15 percent is probably enough.

On the taxing of estates: Right now, a person who holds stock or real estate doesn't pay capital gains taxes on increasing values until he sells it. And if he dies, the current law is that he never pays the capital gains tax, Nor does the person who inherits those assets. And so it is the best way to avoid paying capital gains taxes -- never to sell and then die. Well, if we would simply collect the tax on death, it would raise $36 billion a year, according to the Joint Tax Committee, more than the current inheritance tax. We could allow for a stretched out payout in the case of family businesses and farms. But in my opinion, it is the best way to tax inheritances, and if we need a bit more money, we could have a very modest inheritance tax paid by those who inherit more than, say, $5 million.

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Austin, Tex.:"but there are many other docs at her hospital who are, frankly, overpaid because they are in specialties that, for reasons that are hard to understand and even harder to justify, get more generous reimbursement rates. Medicare and the insurers are working on this, but man they are slow about it."

Man I just don't get where you are coming from, so maybe you could help me. Specialist get paid more because of insurers pay more for specialty procedures. Our method of reimbursement creates the incentive for Docs to go into those Specialties. How are the insurers working on this problem? Isn't this just the market at work?

Steven Pearlstein: No, its more compliated than that. Medicare also is a culprit here. But there is no reason in the world why surgeons should get paid so much more than family docs or obs. It gets very complicated as to why that is so, but people are working on it. Unfortunately, nobody wants to reduce the pay to overpaid docs, they only want to increase the pay of the underpaid docs. And this kind of one-way ratchet only increases the fiscal pressure on health care costs.

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Beaumont, Calif.:"Getting Past Nowhere on the Budget" is another one of your outstanding and thought-provoking pieces. Your suggestion that military families and retires make modest co-payments should be extended to the millions of public safety employees across the country that are being paid for primarily by local tax payers. This would add billions more to the savings/cost sharing needed in the health industry.

If Obama wins the election in November (and I sure hope he does) you should be on his list of candidates to serve on an Economics Planning and Reform Committee. Seriously, he needs assistance of vision thinkers like you. Congratulations on another great article!

Steven Pearlstein: Well, that's a good place to end things today. Thank you for your nice comment. And I hope to "see" you all next week.

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