Friday, September 24, 2010

My Rotting Brain

Cross-posted from The Agenda on National Review Online.

Brad DeLong, the Berkeley economist, is concerned that “writing for National Review has rotted Avik Roy’s brain.” I’ll take it as a compliment, as that would at least imply that I once had a brain to begin with. I just hope that Rich Lowry reads DeLong’s stuff and decides to pick up my bar tab (or perhaps my cable TV bill).

DeLong is irked that I described the President as having “not shown a serious interest in entitlement reform.” To prove my ignorance, he cites figure A-3 from the Congressional Budget Office’s Long Term Budget Outlook. In this figure, from the CBO’s “extended baseline scenario,” the long-term projections the CBO issued this year are improved from those from last year. Hence, per DeLong, our long-term budget outlook is improved:
Why? Because of two "entitlement reforms" by Obama: the IPAB that puts a brake on the growth of Medicare costs, and the excise tax on high-cost health plans that raise revenue.

Rather than saying "the President has not shown a serious interest in entitlement reform," it would be closer to the truth for Avik Roy to say: "Obama did entitlement reform through the PPACA, and I did not notice."

Indeed, the fact that Avik Roy—and lots of other people—did not notice what current law plus PAYGO implies is what leads Doug Elmendorf at the CBO to fear that the policies enacted in the PPACA will not stand, and leads him to present an Alternative Fiscal Scenario in which the cost-containing and revenue-raising portions of the bill are repealed in fairly short order.

It is a fair criticism of Obama to say that his entitlement reforms may not last. It is not a fair criticism to claim that they were not done--or that he has "not shown a serious interest."

Why oh why can't we have a better press corps?
I would challenge nearly every sentence in there, including the last one (I’m no more a member of the press than is Prof. DeLong). He obliquely refers to the CBO’s Alternative Fiscal Scenario, implying that it only exists because reckless conservatives will repeal the fiscally responsible aspects of PPACA. So let us review the differences between the CBO’s “extended baseline scenario” and its “alternative fiscal scenario,” as described by the CBO’s Douglas Elmendorf (emphasis added):
[Under the extended-baseline scenario], the expiration of most of the tax cuts enacted in 2001 and 2003, the growing reach of the alternative minimum tax, and the way in which the tax system interacts with economic growth would result in steadily higher average tax rates. Those rising rates, combined with the tax provisions of the recent health care legislation, would push total revenues to 23 percent of GDP by 2035--much higher than has typically been seen in recent decades--and to larger percentages thereafter. At the same time, government spending on everything other than the major mandatory health care programs, Social Security, and interest on federal debt--activities such as national defense and a wide variety of domestic programs--would decline to the lowest percentage of GDP since before World War II…

The budget outlook is much bleaker under the alternative fiscal scenario, which incorporates several changes to current law that are widely expected to occur or that would modify some provisions of law that might be difficult to sustain for a long period. In this scenario, CBO assumed that Medicare's payment rates for physicians would gradually increase (which would not happen under current law) and that several policies enacted in the recent health care legislation that would restrain growth in health care spending would not continue in effect after 2020. In addition, under the alternative scenario, spending on activities other than the major mandatory health care programs, Social Security, and interest would fall below the average level of the past 40 years relative to GDP, though not as low as under the extended-baseline scenario. More important, CBO assumed for this scenario that most of the provisions of the 2001 and 2003 tax cuts would be extended, that the reach of the alternative minimum tax would be kept close to its historical extent, and that over the longer run, tax law would evolve further so that revenues would remain at about 19 percent of GDP, near their historical average.
A huge driver of the assumptions of the “extended baseline scenario” is that physician reimbursements hew to Medicare’s Sustainable Growth Rate and that Congress refuses to pass any future “doc fix” legislation. Republicans passed “doc fix” legislation when they were in power, and Democrats have repeatedly done so in this Congress. We can debate whether or not this is a good thing, but it is factually incorrect to deny that both parties are responsible. PPACA claims, preposterously, that “doc fixes” won’t happen in the future, and counts this toward its alleged budget savings.

When Elmendorf refers to the “several [other] policies that would restrain growth in health care spending,” he is primarily referring to the Cadillac tax. Insofar as the Cadillac tax is a simulacrum of ending the employer tax exclusion, conservatives like me favor it, and we must note for the record that within PPACA it was watered down not by Republicans but by labor unions.

Another big driver of the CBO’s alternative scenario is the assumption that discretionary spending would “fall below the average level of the past 40 years relative to GDP, though not as low as under the extended-baseline scenario.” Based on the Pledge to America, it is Republicans who favor the more aggressive domestic spending reductions, not Democrats.

On the tax side, DeLong is apparently arguing that taxation should go up from the historical average of 19 percent of GDP up to 23 percent: a 21 percent tax increase on every tax-paying citizen and business in America. If that’s his position, that’s fine, but surely he can accept that others aim to reduce the deficit with a greater emphasis on spending cuts, and that it is realistic to assume that the public will resist a 21 percent tax increase. Let’s not forget that the Democratic Congress is in favor of extending the Bush tax cuts to everyone except those making more than $250,000 a year, significantly slimming the fiscal disagreement between the two parties on that issue.

So, where exactly is the entitlement reform in PPACA? DeLong refers to Medicare’s new Independent Payment Advisory Board, but that board only has the limited power to cut reimbursement to doctors and physicians, and not to restructure or reform Medicare benefits. Similar efforts to restrain costs, such as the aforementioned Sustainable Growth Rate, have failed miserably, and there’s no reason to believe the IPAB will succeed where these other efforts have failed. For what it’s worth, the CBO scores the savings from IPAB at $28 billion over the first ten years of the law—a paltry sum, given the Board’s alleged centrality to entitlement reform.

Puzzlingly, DeLong refers to the “Cadillac tax” as entitlement reform: but this tax applies only to private insurance, not to Medicare or Medicaid, and therefore has nothing to do with curbing entitlement spending. Sure, it raises taxes, but those taxes will be raised not to pay down Medicare or Medicaid, but instead to fund an expansion of Medicaid and an entirely new individual insurance subsidy.

If DeLong means to include things like Don Berwick’s “Center for Medicare Innovation,” well, the law is spending a whopping $10 billion on this program over ten years, and the CBO projects savings of a less-whopping $1.3 billion for its work. Finally, if he is counting the $500 billion in savings from eliminating Medicare Advantage subsidies as “entitlement reform,” he will once again need to explain why that money is being used to create new entitlements and expand Medicaid, rather than for improving Medicare’s solvency. He doesn’t mention these things, so one could just as easily conclude that he agrees with conservative skeptics.

If PPACA had eliminated Medicare Advantage subsidies, and raised taxes, without spending all of the savings on the Medicaid expansion or the new exchange subsidies, DeLong could justly claim that the law was a major advance in fiscal responsibility, and pillory Republicans who opposed it. But instead, the law contains trillions of dollars in permanent new spending obligations: the mirror image of entitlement reform.


  1. Aside from Ryan's plan, which Republicans ran away from, what is the Republican plan to cut spending? Most of the increase up to 23% comes from Medicare and Medicaid. Any idea why Republicans, after passing SGR, have not used it?

    "Based on the Pledge to America, it is Republicans who favor the more aggressive domestic spending reductions, not Democrats."

    In between cases on call, but IIRC, non-defense discretionary spending grew significantly under Bush. Are they just assuming it will go back to pre-Bush era levels?


  2. Hi Steve, the Republican plan to cut spending is to revert to 2008 spending levels (which is a big cut) and freeze discretionary spending going forward. It's a legitimate approach to spending restraint. Then it's fair to ask, what next after that. But that's a reasonable start.

    As to SGR, SGR didn't work because the physician incentive to overtreat overrides the long-term, indirect disincentive to hew to SGR.

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