Letter From Washington: The Good And The Very, Very Bad In The President’s Proposed Budget

by Eli Lehrer on February 15, 2011

photo by therapybeagles/Flickr, used under a Creative Commons license

Given its sheer length and size, everyone should be able to find something to like and something to dislike in the $3.7 trillion budget President Obama has sent to Congress. In my very personal judgment, here are the best and worst discrete provisions:

The best thing in the budget: cuts to the Army Corps of Engineers. While the Corps certainly does some good, many of the projects it undertakes are pure pork and destroy the environment to boot. One Corps project, the Mississippi River Gulf Outlet–a little-used shipping channel best known as the Mister Go—intensified the storm surge coming into New Orleans and made Katrina’s worse than it otherwise would have been. Others have destroyed endangered species habitat, drained wetlands, and helped to build tract homes on areas best left as something close to wilderness.

A smaller budget may, at long last, force the Corps to begin prioritizing its spending rather than leaving it to politicians—something former Sen. Russ Feingold (D-WI) pushed hard on but never succeeded in passing. A smaller Corps could do a lot of good repairing levees and, frankly, undoing some of the damage it has already done.

The worst: the new, badder than ever offshore affiliated reinsurance tax. This tax, which never gains much momentum in Congress but has many ardent supporters, would, for all intents and purposes, impose a huge tariff on international reinsurers using affiliated reinsurance. (Something all insurers do.) This would lift stock prices and profits for a few U.S.-based insurers but devastate markets where insurance is hard to get, limit availability of insurance altogether in the most disaster prone areas, and drive up prices for consumers. Even worse, the version of the tax that the Obama administration is pushing this year is, despite its description in the budget, a particularly noxious version of the proposal rather than the lightweight one that the administration pushed last year.

While there might have been some sort of rough work-around for the administration’s previous tax, this version appears likely to destroy the availability of catastrophe-oriented insurance policies for a large percentage of the country while raising prices for those who do get them, and it probably won’t collect much tax revenue either. The tax, quite simply, needs to die…quickly.


On the same topic, I’ll be in Tallahassee today for a press conference to draw attention to the extreme problems associated with the proposed offshore affiliated reinsurance tax and the problems it would cause for Florida.

My real fear for Florida isn’t what some very good economic studies have predicted and a simple rise in the price of reinsurance (see here for a summary of one) but, rather, an end to the availability of insurance period for many individuals.

The problem lies in the specifics of market performance: most capacity for natural disaster risks comes from jurisdictions outside of the United States. U.S. based reinsurers—W.R. Berkeley most prominently—simply don’t like to write catastrophe risk at all.  Whatever capacity came in from U.S.-based insurers, and, at some price, some would, would be a lot more expensive than what comes from oversees.

Since Florida places controls on primary insurance rates and its impossible for any but the largest insurer to write coastal Florida insurance without some reinsurance, a price spike resulting from tax policy could well disable a good part of the market. Florida’s already enormous Florida Citizens Property Insurance Corporation could grow even larger and pose an even greater threat to Florida taxpayers.


I was in Atlantic City over this past weekend and, numbers nerd that I am, decided to look up casino employment there. It’s down: Employment in Atlantic City is down from nearly 50,000 to less than 40,000 from the early 1990s (as is gaming revenue) but hotel rooms and non-gaming revenue are both generally up there.

Some of this change may come from contracting out: as celebrity chefs have arrived and their employees may not get counted as casino employees. But, nonetheless, there’s significant evidence that casino employees have become hugely more productive over the past few decades. The same has happened in Las Vegas. And the recession has intensified it. Payrolls have dropped more quickly than revenues.

This sort of thing may explain some of the slowness of the recovery and, for that matter, the stagnation of incomes for less skilled workers even as gaming-related take home pay has risen. Customer-contact service jobs at high-end casinos, which have take-home pay (mostly tips) of $70,000 to $200,000 are some of the best jobs that people with few formal skills can get: if they’re becoming more scarce it makes a recovery slower and prospects less certain for some individuals.

In the end, rising productivity does tend to lift all boats. But that doesn’t mean that some people—even in jobs that can’t be moved elsewhere—will have a tough time of it.

Until next week,

Eli Lehrer, Vice President, Washington, D.C. Operations

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