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What's Getting a Hearing This Week

Early in a new administration, it's not uncommon for there to be a torrent of congressional activity on multiple fronts, and the economic crisis has only added to the sense of urgency. While much of the business world will be digesting the results of the banking stress tests and figuring out whether the banks will be able to raise their required capital, several new topics will be coming up on Capitol Hill.

On Tuesday, the Senate Finance Committee is looking at "financing comprehensive health care reform." Health care, of course, was probably President Obama's top economic priority during the campaign, at least until September 15 and the collapse of Lehman Brothers. A long list of witnesses from research universities and the usual set of think tanks will be presenting their perspectives.

The economic crisis has changed the prospects for health care reform in at least three important ways. First, the sharp increase in budget deficits caused by a plunge in tax revenues, and the need for new programs to combat the crisis, has increased complaints that we cannot afford health care reform.

Second, however, our increasingly precarious fiscal situation has strengthened the argument that we need health care reform, since health care costs are the biggest part of the long-term budget gap. Third, and perhaps most importantly, the crisis has shaken Americans' instinctive preference for free-market solutions. The increase in economic insecurity is sure to make at least some people more favorable toward schemes that have a strong social insurance component, which could strengthen the prospects for comprehensive reform.

On Thursday, the House Financial Services Committee will be asking "How Should the Federal Government Oversee Insurance?" That, of course, is a loaded way of asking the question, since currently the federal government barely oversees insurance at all; insurance regulation is a matter for the states. A battle has been going on for decades within the insurance industry over whether there should be uniform federal regulation. In general, large companies that do business in many states favor having one regulator and a consistent set of regulations, while smaller companies are against it; another dividing line is that companies that do business mainly in states with lax regulation like things just the way they are, while companies that do business mainly in states with tight regulation want to see things changed. The AIG fiasco may provide enough political impetus for something to actually happen. This would be ironic, since AIG got into trouble because of its financial derivatives business, which most insurers don't participate in, but it's a political opportunity nonetheless.

However, the most important hearing of the week may be Tuesday's session of the Senate Homeland Security and Governmental Affairs Committee to consider the nomination of Cass Sunstein, a prominent Harvard Law School professor and potential future Supreme Court nominee, to the obscure-sounding position of Administrator of the Office of Information and Regulatory Affairs in the Office of Management and Budget.

There is no chance I know of that Sunstein's nomination will be held up, but he could play an important role in the administration. Although Sunstein is best known as a constitutional law scholar, he is also an expert on regulation, and recently has become a convert to the exploding field of behavioral economics. In his position, he will be overseeing regulation in the Obama administration; a Time Magazine article recently speculated that Sunstein would use the position to apply behavioral economics (or other law-and-economics) principles to government regulation.

I'm not even sure that makes sense as a concept - and many attempts by non-economists to apply economics to the law have been less than convincing - but we'll have several years to find out.

--James Kwak

By James Kwak  |  May 11, 2009; 6:04 AM ET
Categories:  The Week Ahead  
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