Standard and Poor's Downgrades Japan

Cross-posted from The Corner on National Review Online.

Japan has long had the highest debt-to-GDP ratio in the developed world, at approximately 200 percent of GDP. (The U.S. is around 60 percent.) Today, Standard & Poor’s, the bond-rating agency, downgraded Japanese sovereign debt from AA to AA-. Here is what S&P had to say (h/t ZeroHedge):

The downgrade reflects our appraisal that Japan’s government debt ratios–already among the highest for rated sovereigns–will continue to rise further than we envisaged before the global economic recession hit the country and will peak only in the mid-2020s. Specifically, we expect general government fiscal deficits to fall only modestly from an estimated 9.1% of GDP in fiscal 2010 (ending March 31, 2011) to 8.0% in fiscal 2013. In the medium term, we do not forecast the government achieving a primary balance before 2020 unless a significant fiscal consolidation program is implemented beforehand.

Japan’s debt dynamics are further depressed by persistent deflation. Falling prices have matched Japan’s growth in aggregate output since 1992, meaning the size of the economy is unchanged in nominal terms. In addition, Japan’s fast-aging population challenges both its fiscal and economic outlooks. The nation’s total social security related expenses now make up 31% of the government’s fiscal 2011 budget, and this ratio will rise absent reforms beyond those enacted in 2004. An aging and shrinking labor force contributes to our modest medium-term growth estimate of around 1%.

In our opinion, the Democratic Party of Japan-led government lacks a coherent strategy to address these negative aspects of the country’s debt dynamics, in part due to the coalition having lost its majority in the upper house of parliament last summer. We think there is a low chance that the government’s announced 2011 reviews of the nation’s social security and consumption tax systems will lead to material improvements to the intertemporal solvency of the state. We even see a risk that the Diet might not approve budget-related bills for fiscal 2011, including government financing authorization. Thus, notwithstanding the still strong domestic demand for government debt and corresponding low real interest rates, we expect Japan’s fiscal flexibility to diminish.

One thing that most Americans have yet to consider is what would happen if the bond rating agencies ever downgraded U.S. Treasury debt. Moody’s has indicated that U.S. debt could be downgraded later this decade. If this were to happen, interest rates would rise, further destabilizing our fiscal position and raising borrowing costs for ordinary Americans, and there would be a risk of significant instability in the financial markets.

Shooting the CBO First and Asking Questions Later

Cross-posted from The Agenda on National Review Online.

Today, in an earlier post, I wrote the following:

What’s ironic is that last year, the CBO projected a 2011 budget deficit of just $980 billion. What’s a $500 billion, 50 percent error among friends?

Indeed, I am the one who committed the error: that’s what I get for blogging immediately upon reading the CBO’s top-line summary, before I was able to read the entire report this afternoon. It turns out that $390 billion of the increase in the 2011 deficit was, according to CBO scoring, a result of the Tax Relief, Unemployment Insurance Reauthorization, and Job Creation Act of 2010 (see page 8 of the full CBO report). So, I owe an apology to the good people of the CBO.

However, Kevin Drum and others are also mistaken in arguing that “virtually all of [the $500 billion difference in projections] is due to the extension of the Bush tax cuts.” Page 9 of the full CBO report shows that only $103 billion of the $390 billion is attributable to renewing the Bush tax cuts: $98 billion for “tax rates, credits, and deductions initially enacted in 2001, 2003, and 2009,” and $5 billion for estate and gift taxes.

The rest of the provisions were unrelated to the Bush tax cuts: a patch in the Alternative Minimum Tax, a eternal budgeting device similar to the Medicare “doc fix”; a payroll tax holiday; a tax credit for purchases of equipment by businesses; and an extension of “emergency” unemployment benefits.

One of the most common complaints that conservatives have with CBO projections is that they do not take into account how changes in tax rates affect behavior and economic growth. Nick Gillespie makes an important point about the Bush tax cuts: the top decile paid more in taxes in 2008, as a share of total revenues, than they did in 2000. Conversely, the share of the bottom half of earners was lower in 2008 than it was in 2000. This, at least, confounds the widely accepted view that “tax cuts for the rich” under Bush worsened the deficit.

While we’re on the subject of the CBO’s new deficit projections, it’s worth highlighting some key passages from the new report (emphasis added):

CBO’s baseline projections…incorporate the assumption that current laws governing taxes and spending will remain unchanged. In particular, the baseline projections in this report are based on the following assumptions:

    * Sharp reductions in Medicare’s payment rates for physicians’ services take effect as scheduled at the end of 2011;

    * Extensions of unemployment compensation, the one-year reduction in the payroll tax, and the two-year extension of provisions designed to limit the reach of the alternative minimum tax all expire as scheduled at the end of 2011;

    * Other provisions of the 2010 tax act, including extensions of lower tax rates and expanded credits and deductions originally enacted in the Economic Growth and Tax Relief Reconciliation Act of 2001, the Jobs and Growth Tax Relief Reconciliation Act of 2003, and ARRA, expire as scheduled at the end of 2012; and

    * Funding for discretionary spending increases with inflation rather than at the considerably faster pace seen over the dozen years leading up to the recent recession.

The projected deficits over the latter part of the coming decade are much smaller relative to GDP than is the current deficit, mostly because, under those assumptions and with a continuing economic expansion, revenues as a share of GDP are projected to rise steadily—from about 15 percent of GDP in 2011 to 21 percent by 2021.

As a result, the baseline projections understate the budget deficits that would arise if many policies currently in place were extended, rather than allowed to expire as scheduled under current law.

Tyler Durden also makes some important points that have significant consequences for the stability of the dollar and of U.S. sovereign debt:

So between 2010′s $1.3 trillion, 2011 $1.5 trillion, and 2012′s revised $1.1 trillion, we have $3.9 trillion just in deficit costs to plug. And as Zero Hedge has repeatedly demonstrated the actual debt to be issued is usually about 33% higher than the deficit funding need, meaning that over the next 3 years the US will need to issue about $5 trillion in debt. Which means further debt monetization is guaranteed as foreign investors have now fully withdrawn and the Fed is all alone in gobbling up every dollar in gross issuance. QE3 is guaranteed and we are stunned that the market continues not to realize this.

Finally, there is a kind of epistemological divide in thinking about deficits. Those who believe that tax cuts are to blame for our deficit are, by definition, of the view that federal spending at 25 percent of GDP is acceptable, despite its deviation from the historical average of 20 percent. There is at least a plausible argument to be made that 20 percent of GDP should be enough for the federal government to fulfill all functions that are appropriate for it to take on.

What's Half a Trillion Dollars Among Friends?

Cross-posted from The Corner on National Review Online.

For those who see the Congressional Budget Office as the most accurate arbiter of future deficit projections, it’s worth noting that its latest projection for the 2011 budget deficit is $1.5 trillion, or 9.8 percent of GDP.

If you don’t find that number astounding on its own merits, note that total projected revenues for 2011 are $2.2 trillion. In other words, taxes would have to go up on every American by 66 percent, at projected levels of economic activity, in order to pay for our 2011 spending commitments, including interest on the debt.

What’s ironic is that last year, the CBO projected a 2011 budget deficit of just $980 billion. What’s a $500 billion, 50 percent error among friends?

UPDATE: Some are pointing out that the extension of the Bush tax cuts is responsible for a portion of the difference between the CBO's 2011 and 2012 estimates, which is a fair point. However: (1) only in part: the rest of the difference comes from spending growing faster than predicted and economic growth growing slower than predicted; (2) the CBO's static scoring system underestimates the impact of tax changes on economic growth, exaggerating the fiscal impact of the tax cut extension. Check out the links above for a detailed discussion.

UPDATE 2: See my follow-up post for an important correction.

Weekend Links

Because you really didn’t have anything better to do this weekend than read about health policy.

I’m late to the party, but you have to smile at Harvard economist Greg Mankiw’s take on the fiscal responsibility of Obamacare:

I have a plan to reduce the budget deficit. The essence of the plan is the federal government writing me a check for $1 billion. The plan will be financed by $3 billion of tax increases. According to my back-of-the envelope calculations, giving me that $1 billion will reduce the budget deficit by $2 billion.

Now, you may be tempted to say that giving me that $1 billion will not really reduce the budget deficit. Rather, you might say, it is the tax increases, which have nothing to do with my handout, that are reducing the budget deficit. But if you are tempted by that kind of sloppy thinking, you have not been following the debate over healthcare reform.

I’m sure there will come a point where we all get sick of Xtranormal, but it hasn’t happened yet, so check out this hilarious video entitled “Medical Loss Ratio Explained,” which explains the Obamacare debate better than I could with a year’s worth of blog posts:



One thing that the Left does well, but the Right does poorly, is talk about how real people are affected by health care policy. The Heritage Foundation has launched a series of videos to address this issue, and here is the latest (h/t InsureBlog):

The Fiscal Risk of Employer Dumping under PPACA

Cross-posted from The Agenda on National Review Online.

There’s been much discussion on the blogosphere of whether or not repealing PPACA is fiscally responsible. I actually agree with a lot of what Ezra Klein says in this piece, in which he responds to conservative criticisms that Democrats manipulated the CBO to provide favorable projections for the new law.

However, I also agree with Kevin Williamson’s basic point: the government has a history of underestimating future spending, and overestimating future tax revenue. Hence, just because the CBO says PPACA will reduce the deficit doesn’t mean it will actually happen.

Indeed, as I write today for National Review Online, there are features of PPACA that are highly likely to result in far greater spending than PPACA anticipates:

David Brooks, in a recent New York Times column, highlighted Obamacare’s most serious flaw: PPACA incentivizes companies to drop health coverage for their employees. Employers who drop coverage have to pay a fine, but the fine is cheaper than offering health insurance, and even the employees can be better off — they buy their insurance on state-based “exchanges,” where they can take advantage of the law’s new subsidies. (Americans making less than 400 percent of the federal poverty level are eligible for subsidized coverage on the exchanges.) AT&T has calculated that it would save $1.8 billion a year by dumping its workers into the government’s lap.

Companies are keeping quiet about their plans for now, but make no mistake: If Obamacare remains the law of the land, nearly every corporation in America will do what AT&T has contemplated. So will cash-strapped state governments.

Last March, the CBO projected that 26 million people will take advantage of Obamacare’s exchange subsidies in 2019, at a cost of $109 billion that year. But that number is based on the assumption that of the 162 million people who have employer-sponsored insurance today, only 4 million — 2.5 percent — will switch.

In other words, the projection of $109 billion is absurdly low; it underestimates Obamacare’s cost by trillions of dollars.

In a recent Politico column, former budget officials Douglas Holtz-Eakin and James Capretta calculated what would happen if the CBO’s estimates were somewhat off. By their math, if the households below 250 percent of the federal poverty line ($55,125 for a family of four) that now have employer-sponsored health insurance were to migrate to Obamacare’s exchanges, spending on those exchanges would more than triple, resulting in trillions of dollars in additional liabilities.

Ezra responds to this issue in a more recent post:

Let me talk about employer dumping, which I’ve left out until now. The basic concern here is that employers will stop being such nice guys and giving people health care and instead dump them into the exchanges so they can buy it at subsidized rates. I don't think this will happen: If we were going to see it, we'd have seen it in Massachusetts, which, like the ACA, makes it much cheaper for employers to dump workers into the exchanges. But there's no evidence (pdf) that it’s been happening. Employer coverage has been shockingly resilient given the recession.

That said, I can see the argument that it’d be good if it did happen. Basically, it would mean that employers stop paying employees with health-care insurance and begin paying them with cash. That’s basically how the Wyden-Bennett bill worked, and both Brooks and I liked that bill. If it happens in an unstructured way in the ACA, it could cause more disruption, but it could also be a positive step that makes the bill look more like Wyden-Bennett.

Austin Frakt also came out with a detailed post on the subject, in which he responds to the work of Holtz-Eakin et al.:

One thing I believe is not included [in Holtz-Eakin’s estimate] are the income and payroll taxes levied on the higher wages those additional exchange-enrolled people will receive…I don’t know how much in income taxes would be collected, but it is something Holtz-Eakin and Smith could compute. It would somewhat offset the $1.4 trillion gross price. (The CBO likely calculated the offset, so one could just triple it. I haven’t yet found the CBO’s figure on this. Have you?)

Another question is whether all employers who theoretically might benefit from “dumping” will actually drop offers of coverage firm-wide. Holtz-Eakin and Smith don’t assume they all will cut coverage in this way (firm-wide). That’s because if coverage is not offered to lower-wage workers (for whom dumping is economically beneficial to employers), it can’t be offered to higher wage workers either. But there’s another proposed route: “[T]here may be incentives for firms to ‘out-source’ their low-wage workers to specialist firms (that do not offer coverage) and contract for their skills.”

Of course, this is something firms can (and do) do today. Moreover, it’s not costless to outsource. There are transaction costs that would partially offset the benefit. Thus, it is not likely that all firms for which outsourcing would appear beneficial (and which don’t already out-source) would do so. Finally, if this were something all firms that could theoretically benefit would do, we should see a considerable crowd-out effect in Massachusetts. So far, there is no evidence of it.

I’m not saying that the ACA won’t contribute to erosion of employer-sponsored coverage. It will. But it isn’t likely to be as an extreme reaction as some predict, nor will it cost as much as Brooks thinks. The $1.4 trillion price tag he suggested ignores some offsetting factors. It’s just not plausible.

Let’s summarize the counter-arguments raised by Ezra and Austin and go through them one-by-one:

1. Employers in Massachusetts didn’t dump their employees, so it’s unlikely to happen nationwide.

It’s not as straightforward as Ezra may believe to extrapolate the Massachusetts experience nation-wide. There are several reasons for this. Most importantly, most large employers have offices in multiple states; they are unlikely to dump coverage in one state while maintaining coverage in another. Also, the cost of insurance continues to increase, to a point that is increasingly unsustainable for companies; that, combined with PPACA’s “Cadillac tax,” increases the incentive for more employer dumping in the future.

2. Even if dumping did happen, it would be a good thing, because it would help foster more of an individual market for health insurance.

As to fomenting an individual market: yes, it would be better if we had a market for health insurance in which individuals purchased insurance for themselves, rather than receiving it willy-nilly from their employers. However, the individual market under PPACA will be heavily subsidized by the government, dramatically increasing federal spending—which is the whole point of the Brooks/DHE critique. If the exchanges weren’t subsidized, or at least subsidized less heavily, Ezra and Austin would have a stronger argument.

3. The fiscal impact of employer dumping is less than DHE and others estimate, because DHE’s estimates leave out the regained payroll taxes that would accrue to the government.

Austin is right to point out that there is at least some revenue that would flow back to the government from payroll taxes. But it’s not clear that this offset would be significant; indeed, whatever its size, it is guaranteed to get smaller over time, because health care costs rise far faster than wage growth. The PPACA subsidies are designed to guarantee that individuals pay no more than 10 percent of their income for health insurance; hence if wages stay flat and health care grows, the government’s liability grows over time.

4. Maybe employer dumping wouldn’t happen firm-wide: firms will outsource their low-wage work, and continue to offer coverage to their higher-wage employees.

It’s possible that some employers might try the strategy that Austin suggests of using outsourcing to maintain health coverage for their employees. As Austin himself points out, this is something that firms can do today. Furthermore, increasing unemployment, by incentivizing firms to outsource peripheral capabilities to lower-wage countries, leads to higher welfare spending and lower tax revenues: i.e., increased deficits.

To me, this is the real debate we should be having about the fiscal prudence of Obamacare. And then, we need to ask: how would the CBO score Obamacare if it were required to make more realistic assumptions about employer dumping?  Here’s hoping that someone in Congress asks the CBO to do just that.

Fiscal Responsibility and Repealing PPACA

Cross-posted from The Agenda on National Review Online.

Jonathan Cohn and Ezra Klein make a valid and important point about the new House majority’s push to repeal Obamacare. Here’s Cohn:

The media is playing [the repeal resolution] as a pointless stunt, because the Senate would never pass it and President Obama would never sign it. This seems unfair to me. Repeal of health care is among the very top priorities for these Republicans. Passing such a bill has important symbolic value.

But precisely because I do take this seriously, I'm curious: Will the Republicans ask the Congressional Budget Office to score the bill? Say what you will about the process that produced the Affordable Care Act, but it was not rushed and it did not try to game the budget accounting process. On the contrary, Democrats went to great pains--and, arguably, suffered tremendous political damage--because they were determined to produce a bill that the CBO would pronounce as deficit-reducing.

They succeeded, too. CBO projections suggest that the Affordable Care Act will reduce the deficit by more than $100 billion over ten years, which is not bad--indeed, not bad at all--for an initiative that will allow 30 million more people to get insurance and push the entire health care system in the direction of more efficiency. It stands to reason that if the Republicans repeal the bill, they will be increasing the deficit by an equivalent amount.

Ezra, in a detailed post, points out some of the apparent inconsistency in GOP’s position:

House Republicans are in a pickle: One of their new rules says that new legislation must be paid for. But the health-care bill reduces the federal deficit by more than $100 billion over the next 10 years. Luckily, they've figured out an answer to their problem: They've decided to simply exempt the repeal bill from the rules. That means they're beginning the 112th Congress by lifting their own rules in order to take a vote that will increase the deficit. Change we can believe in, and all that.

Republicans are aware that this looks, well, horrible. So they're trying to explain why their decision to lift the rule requiring fiscal responsibility is actually fiscally responsible. Majority Leader Eric Cantor got asked about this, and he returned the reporter's serve with a volley of nonsense. "About the budget implications, I think most people understand that the CBO did the job it was asked to do by the then-Democrat majority, and it was really comparing apples to oranges,” Cantor said. “It talked about 10 years' worth of tax hikes and six years' worth of benefits. Everyone knows beyond the 10-year window, this bill has the potential to bankrupt this federal government as well as the states."

That's all well and good -- but it's not true. Take Cantor's core point: The health-care reform bill includes "10 years' worth of tax hikes and six years' worth of benefits." There's nothing philosophical about this statement. It can be checked with a simple look at the spending tables the Congressional Budget Office published in their analysis of the bill. And when you look at those tables, Cantor's statement falls apart.

I have a piece out today, on National Review’s main page, that discusses this problem in depth. The basic point is that, while conservatives are rightly cynical of CBO projections about Obamacare’s deficit-reducing features, as a matter of parliamentary procedure, the CBO’s opinion is extremely important.

If Republicans manage to take back the White House and gain majority control of the Senate in 2012, they are almost certainly going to have to use the reconciliation process to repeal Obamacare. I note in the article:

As we learned last year, the reconciliation process is different from the normal legislative process. The Senate parliamentarian, using Congressional Budget Office estimates, certifies measures that, either by raising taxes or by cutting spending, will reduce the budget deficit. Only deficit-reducing measures can be passed using reconciliation.

The problem for Republicans is that the CBO estimated that the PPACA would reduce the deficit by $132 billion over the 2010–2019 period. Because of amendments passed in late 2010, it’s likely that the CBO’s estimate of the cost of repeal will be even higher in 2013. Hence, a simple, two-paragraph repeal measure won’t get through reconciliation.

This is where the agenda of the next Congress comes in. In place of comprehensive health-care reform, House Republicans are promising to reverse some of Obamacare’s most unpopular elements: for example, the new 1099 provision, which requires that all businesses issue an IRS form 1099 for any payments to vendors of more than $600 per year. The CBO scores this measure as raising $18 billion for the government over ten years: indeed, that’s why it was included in the PPACA in the first place. If Congress reduces Obamacare spending elsewhere to “pay for” this tax cut, ultimate repeal could become more difficult.

The individual mandate is a more worrisome example. Last June, the CBO projected that repealing the individual mandate would reduce the deficit by $252 billion in the 2011–2020 timeframe. Under current law, the CBO is counting on some people under PPACA paying the fine for not purchasing health insurance, thus increasing revenues to the government; however, repeal of the mandate would generate savings by reducing the number of people who rely on Medicaid and exchange subsidies. If the mandate is eliminated, repealing the rest of Obamacare will become $252 billion harder.

Hence, if Republicans in the 112th Congress succeed in eliminating some of these provisions, they may increase the fiscal cost, as scored by the CBO, of repealing the rest of Obamacare in the next Congress. In addition, every unpopular tax increase that is eliminated now will need to be offset by additional tax increases or spending cuts, which complicates things when the real repeal effort starts in 2013. Republicans, therefore, may be setting a trap for themselves.

It’s a long article, but it explores a lot of the implications of this problem. Let me know what you think.

Why Obama's Deficit Commission Makes Me Miss Bill Clinton

Cross-posted from National Review Online.

UPDATE: National Review Online has posted an audio version of this article. So, if you’re puttering around the house and you feel like listening to someone read this article on your behalf, this mp3 file is for you:

It’s an oft-repeated joke in Washington: When the going gets tough, the tough appoint a commission. Presidents appoint commissions so they can say that they’re “doing something” about a politically thorny problem without actually making any difficult choices.

But congressional commissions aren’t always the joke they’re made out to be. In 1988, as the Cold War came to an end, Congress organized the Base Realignment and Closure Commission as a way of reducing our military footprint. The unorthodox idea was to close obsolete military bases on strategic merit, rather than the parochial interests of individual congressmen. The BRAC process was an enormous success, and the “peace dividend” that BRAC generated did much to balance the budget in the 1990s.

In 1997, Congress created the National Bipartisan Commission on the Future of Medicare as part of the Balanced Budget Act of that year. Led by Sen. John Breaux (D., La.) and Rep. Bill Thomas (R., Calif.), and with a staff headed by an unknown 26-year-old named Bobby Jindal, the Breaux-Thomas Commission put together the most credible plan for Medicare reform ever to receive bipartisan support. Unfortunately, because of the political dynamic fostered by the Monica Lewinsky scandal, that plan never made it into law.

President Obama sought to draw on the credibility of these commissions when, last January, he established the National Commission on Fiscal Responsibility and Reform. The president had already signed the $1 trillion stimulus package and was assembling the votes to push Obamacare through the House. He needed to throw a sop to those who were complaining about deficit spending. And a sop is what he got.

The commission, as designed, consisted of 18 members: six appointed by the president, six appointed by the House, and six appointed by the Senate. President Obama chose former Wyoming senator Alan Simpson, a moderate Republican, and Erskine Bowles, who was chief of staff in the Clinton White House, to lead the commission. Obama’s other appointments consisted of one Republican and three Democrats, and the House and Senate each sent three Democrats and three Republicans. For anyone keeping score, that adds up to ten Democrats and eight Republicans.

This was a commission set up for failure. In order to endorse a formal proposal, the commission required 14 votes out of 18: 78 percent of the commission’s members. When you consider the fact that Andy Stern, a left-wing laborite, was never going to vote for any serious deficit-reduction measure, you’re talking about 14 out of 17, or 82 percent. It’s hard enough to get a simple majority of politicians to agree on deficit-reduction measures, let alone a four-fifths majority. And that’s before you consider the fact that Republicans, who are normally more sympathetic to deficit-reduction measures, were outnumbered: Even if all eight of them supported the commission’s findings, six out of ten Democrats would also need to join in.

Given these odds, it’s somewhat miraculous that the commission came up with any useful ideas at all. To its credit, the Commission made constructive proposals for capping discretionary spending, reforming Social Security, and simplifying the tax code (albeit with substantial tax hikes).

But the commission utterly failed in the area in which it needed most to succeed: steering our health-care entitlements onto a sustainable path.

According to the long-term outlook of the Congressional Budget Office, nearly the entirety of the growth in federal spending -- and hence the entirety of the growth of our fiscal cancer -- is driven by runaway spending on health care: Medicare, Medicaid, the Children’s Health Insurance Program, and Obamacare’s exchange subsidies. In contrast, over time, Social Security and other discretionary spending will actually stay relatively constant as a percentage of GDP.

When it comes to health care, the commission’s plan would hardly prevent a fiscal collapse: Instead, it would guarantee one. By replacing the meaty plan of the old Breaux-Thomas group with a hodgepodge of half-measures, the commission did nothing to address the fundamental flaws in government health policy.

First off, this being President Obama’s commission, repealing Obamacare was off the table. Hence, any consensus would involve endorsing and ossifying the budget-busting aspects of our new health-care law: the massive expansion of Medicaid and the huge new insurance subsidies for lower-income individuals. (The CLASS Act, a new entitlement for long-term care, was a notable exception; the commission did recommend its repeal, if it cannot be adequately reformed.) Spending on these programs is certain to exceed CBO projections, and tax rates can’t increase fast enough to make up the difference.

The commission missed other opportunities for reform. Instead of eliminating the employer tax exclusion—the tax break that allows employers but not individuals to buy health insurance tax-free—the Commission proposed tinkering around the edges: capping the deductible amount at the 75th percentile of premium levels and reducing the “Cadillac tax” on expensive health plans.

In contrast, real reform would either eliminate the exclusion altogether, or give individuals the same tax break, so that individuals could buy insurance for themselves. This reform alone would transform our health-care system and is arguably more important than any other. Instead of seizing this opportunity, the commission chose to dabble in it.

On Medicare, the commission did its least bad work. The core problem with Medicare is this: If people are able to get an unlimited amount of health care for free, they will use more of it than they need. There are two ways to solve this problem: (1) giving seniors more control over their own health-care dollars, so they have an incentive to spend the money wisely; or (2) empowering government bureaucrats to deny care when they find it too costly. It won’t surprise you to learn that the commission leaned toward option number 2.

The commission did make some constructive proposals on the free-market side: It proposed (very modestly) increasing the degree to which seniors share in the costs of care, and it proposed (again, modestly) restricting the ability of private insurers to offer “Medigap” plans that wipe out Medicare’s cost-sharing provisions. The commission proposed ending the practice of reimbursing hospitals and doctors for bad debts caused by failure to collect co-payments from patients, something that should have been done a long time ago.

But they proposed these measures only to pay for increased spending elsewhere, and other needed reforms were nowhere to be found. The commission didn’t address the need to index the Medicare retirement age, nor the need to means-test Medicare benefits. Paul Ryan’s proposal to gradually shift Medicare from a defined-benefit to a defined-contribution plan—one that would do much to solve the fiscal problem—was shriveled into a symbolic pilot program within the Federal Employees Health Benefits System.

The rest of the commission’s proposals for Medicare involve enhancing the reach of Obamacare: expanding the authority of the Independent Payment Advisory board; applying Medicaid-style drug-price controls to Medicare; and accelerating the implementation of the legislation’s Medicare pilot projects.

On Medicaid, a $500 billion–a–year (and growing) program that has somehow managed to become a fiscal crisis and a humanitarian crisis at the same time, the commission proposed essentially nothing. They aspire to “restrict and eventually eliminate” a Medicaid tax loophole that states use to bilk the federal government, for savings of around $5 billion a year, though they didn’t specify how to do it. They hope to pass some administrative costs to the states, for a “savings” of under $300 million a year. They recommend that Washington grant waivers to certain states, under a plethora of conditions, to experiment with their own ideas for Medicare reform.

Given that Medicaid is the program most immediately in crisis, with the potential to drive large states such as New York and California into bankruptcy, the commission’s silence on Medicaid is breathtakingly irresponsible. It’s one thing for the Commission not to endorse real Medicaid reform: but to not even propose it?

If you’ve managed to get through the preceding 1,300 words, let me summarize them in one: punt.

On December 3, the commission’s findings received the support of eleven of its members, well short of the 14 it needed to make an official endorsement. (Those opposed included Max Baucus, all of the House members save John Spratt, and—wait for it—Andy Stern.) But on the critical issues surrounding health-care entitlements, the commission, as a group, got nowhere.

Is there hope for Americans concerned about our fiscal dysfunction? Yes, some. The commission’s final report does contain a few measures that the next Congress would do well to consider. The path forward, however, is most likely to revolve around proposals put forth by individual commission members. James Capretta praises the plan from Paul Ryan and Alice Rivlin, which, while imperfect, far exceeds the commission’s work in wrestling with health-care entitlements. Importantly, come January, Representative Ryan will be in charge of the House Budget Committee, and will be thereby able to put some of his ideas into actual legislation.

Ultimately, the failure of the National Commission on Fiscal Responsibility and Reform was a failure of leadership. One man could have done much to encourage the commission to take bolder steps and tackle the hardest issues. Unfortunately, that man was President Obama. Who could have figured that Obama would make Americans miss Bill Clinton?

The Fiscal Commission on Health Care Reform

Cross-posted from The Agenda on National Review Online.

The National Commission on Fiscal Responsibility and Reform has put out its anticipated report, entitled “The Moment of Truth.” In this post, I summarize the Commission’s recommendations on health care policy, with minimal editorializing. I’ll put out a subsequent post with my assessment of the actual quality of these recommendations.

Overall, the Commission aims to achieve $4 trillion in deficit reduction through 2020, by capping revenue at 21% of GDP (higher than historical averages) and reducing the deficit to 2.3% of GDP by 2015 (it’s currently 8%). Because Medicare and Medicaid are such are such huge components of federal spending, achieving these fiscal goals requires substantial changes to our government’s involvement in health care. These include:

Modifying the employer tax exclusion. Currently, employer-provided health insurance is excluded from taxable income, something that grossly distorts our health care system by taking purchasing decisions out of individuals’ hands and placing them in the hands of HR bureaucrats. I have advocated eliminating this exclusion entirely as a way to increase revenue and lower health costs. The Commission advocates capping the deductible amount at the 75^th percentile of premium levels in 2014, and freezing the cap (i.e., not indexing it to inflation) from 2018 to 2038. The Commission also advocates reducing Obamacare’s “Cadillac tax” to 12% from 40% on high-cost plans.

Reforming the Medicare Sustainable Growth Rate (SGR) “doc fix”. The “doc fix” requires the government to reduce payments to doctors and physicians if health costs exceed the Sustainable Growth Rate, a blend of health inflation, GDP, and other measurements. Congress keeps overruling the SGR and paying doctors and hospitals at higher rates; bringing payment rates in line with SGR in 2012 would require a 23% cut to physician and hospital payments. The Commission recommends freezing rates at current levels (i.e., continuing to spend well above SGR levels), enacting a 1% cut in 2014, and directing Medicare to come up with a new payment system that would “cost about $22 billion less” than freezing payments at current levels. That is to say, the Commission advocates punting the SGR situation and saving costs elsewhere to make up for the excess spending.

Reform or repeal the CLASS Act. The CLASS Act, a voluntary entitlement for long-term care, was famously described last year by Kent Conrad as “a Ponzi scheme of the first order, the kind of thing that Bernie Madoff would have been proud of,” but Conrad voted for it anyway. The Commission advocates reforming the CLASS Act “in a way that makes it credibly sustainable over the long term”—good luck with that—or repealing it.  Because the CLASS Act will rake in more money in the near term but lose money in the long term, it is considered a deficit-reducing measure within the CBO’s ten-year scoring window. Hence, repealing it will require matching tax increases or spending cuts.

Paying for SGR reform and CLASS Act repeal. The Commission recommends offsetting the above SGR and CLASS Act reforms above with a long litany of reform measures that are projected to save $391 billion from 2012 through 2020:

• Waste, fraud, and abuse ($9 billion in savings from 2012 through 2020). “Increasinging the ability of CMS to combat waste, fraud, and abuse” (don’t laugh) “by providing the agency with additional statutory authority and increased resources.”
• Increased cost-sharing ($110 billion). Reforming Medicare cost-sharing rules, by increasing the amount seniors pay for increased health spending. This is key to any serious attempt to reform Medicare. The Commission recommends a single combined annual deductible of $550 for Medicare Parts A and B (hospital and medical care), with 20% coinsurance up to $5,500, 5% coinsurance from $5,500 to $7,500, and 0% cost sharing above $7,500.
• Restrict Medigap plans ($38 billion). This is another key element of serious Medicare reform: restricting the ability of private insurers to write plans that piggyback off of Medicare coverage, incentivizing seniors to overspend on health care. The Commission recommends prohibiting Medigap plans from covering the first $500 of an enrollee’s cost-sharing liabilities and no more than 50% of the next $5,000 in liabilities.
• Extend Medicaid drug rebate to dual eligibles ($49 billion). Currently, seniors who are eligible both for Medicare and Medicaid pay the private-sector (i.e., market-rate) prices for drugs through the Medicare prescription drug benefit. The Commission advocates requiring pharmaceutical companies to give these individuals the much-lower Medicaid rates.
• Reduce “excess” payments to hospitals for medical education ($60 billion). At present, Medicare provides supplemental funding to hospitals in order to subsidize the cost of training medical interns and residents (recent medical school graduates). The Commission advocates reducing these payments using a new formula.
• Cut Medicare payments for bad debts ($23 billion). Medicare reimburses hospitals and doctors for deductibles and copays owed those providers by patients, giving hospitals and doctors no incentive to track down those missed payments. The Commission recommends ending this practice.
• Accelerate Obamacare home health savings ($9 billion). The Commission recommends moving up the timetable for changes to reimbursements for home health providers, as mandated by PPACA, by several years.
• Eliminate state gaming of Medicaid tax gimmick ($44 billion). According to the Commission, many states game the system by taxing hospitals and doctors, and then using those revenues to pay for more health care delivered by those hospitals and doctors. Because the federal government gives states more Medicaid funding if the states “spend” more, this system allows states to effectively force Washington to fund profligate Medicaid spending. The Commission recommends “restricting and eventually eliminating this practice,” but declines to give specifics.
• Place dual eligibles in Medicaid managed care ($12 billion). Because the government reimburses doctors and hospitals at much lower rates in Medicaid relative to Medicare, putting these patients on Medicaid will save the government money. It will also reduce administrative redundancy.
• Reduce funding for Medicaid administrative costs ($2 billion). The Commission advocates passing these costs onto the states.
• Allow expedited application for Medicaid waivers in well-qualified states (no savings specified). The Commission advocates allowing ten states to opt out of the traditional Medicaid system, if they meet a set of “certain objective threshold criteria,” in order to come up with innovative new approaches.
• Malpractice reform ($17 billion). The Commission advocates incremental reforms to the malpractice litigation system, such as creating specialized health courts, allowing safe haven rules for providers who follow best practices, imposing a statute of limitations, etc. The Commission advocates that Congress “evaluate the impact” of “statutory caps on punitive and non-economic damages”: a victory for Democrats.
• A pilot voucher program through the Federal Employees Health Benefits (FEHB) system ($18 billion). The Commission advocates using the popular FEHB program as a vehicle for road-testing a voucher system that could be adapted to Medicare at some unknown point in the future.

Implementing Obamacare’s cost-saving measures as soon as possible. The Comission recommends directing Medicare “to design and begin implementation of [PPACA’s] Medicare payment reform pilots, demonstrations, and programs as rapidly as possible.”

Allow IPAB to cut payments to hospitals. For all the talk about “death panels,” the Medicare Independent Payment Advisory Board, which is tasked with reducing Medicare spending, is essentially only allowed to cut payments to doctors if health costs grow too quickly. The Commission advocates allowing IPAB to cut payments to hospitals as well.

Establish a long-term global budget for total health care spending. The Commission recommends “requiring both the President and Congress” to make further recommendations about reducing health spending.

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.

Matthew Yglesias on Health Care Reform

Cross-posted from The Agenda on National Review Online.

Yesterday, in the interests of reaching a compromise solution to the budget deficit, I proposed a $300 billion tax increase—by eliminating the federal subsidy for employer-purchased health insurance—and asked for suggestions from the other side for corresponding spending cuts. In response, Matthew Yglesias pointed out to me that there are no $300 billion-a-year programs that one can simply eliminate in the same way that one can raise taxes.

That is true, and it is one of the main reasons that we should have an extremely high bar for launching new government programs (like PPACA) that are very difficult to unwind, should they later prove inefficient or ineffective. Nonetheless, we will need to come up with ways to reduce spending, and I continue to welcome suggestions in that regard.

Yesterday, Yglesias published a constructive post on health care reform. The most interesting paragraph is the final one:

Meanwhile, I think the real issues are obscured by continuing conservative obsession with repealing the Affordable Care Act. In a big-picture sense, what ACA is doing is transitioning American health care for the 64-and-under set into a means-tested voucher program. Meanwhile, the big conservative proposal is to transition American health care for the 65-and-over set into a means-tested voucher program. That doesn’t necessarily strike me as an unbridgeable chasm of principle. What if all Americans, regardless of age, got their health care through a means-tested voucher program that included a public option?

It would be great if all Americans, regardless of age, got their health care through a means-tested voucher program (though I will part ways with Yglesias on the beneficence of the public option). As I have pointed out in the past, this is what the Swiss do, and it works remarkably well. The Swiss do not offer any government-run insurance options, but they do require that participating private insurers are non-profit entities. The key feature of the Swiss system is that everyone purchases insurance for himself, rather than having it purchased on his behalf by employers or government agencies. The elimination of the employer tax exclusion is an important part of bringing such a system to the United States.

If liberals and conservatives are able to come together around such a framework, we could make great strides both for the health care system and our precarious fiscal situation.

A Tax Increase Conservatives Should Support

Cross-posted from The Agenda on National Review Online.

We often hear that a bipartisan compromise on the federal deficit will require both spending reductions and tax increases. Conservatives, in their ideal world, would eliminate the deficit entirely by reducing spending. From what I read, though I could be misunderstanding their position, many liberals don’t believe that the deficit is a serious concern; those that are concerned would certainly emphasize tax increases over spending reductions. Hence, those in the “sensible center” seek to split the difference and combine tax increases with spending reductions.

The problem with most tax increases, especially the ones large enough to make a dent in the deficit, is that they hinder economic growth, and thereby growth in tax revenue. Hence, over the medium-to-long term, one dollar in tax increases does not reduce the deficit as well as one dollar in spending reductions. And, of course, some taxes do more to hinder growth than others.

This gets me to the one tax increase that conservatives should support: the elimination of the tax break given to employers for purchasing health insurance for their employees. This tax break costs the Treasury over $300 billion a year—real money—and is one of the biggest reasons why health care is so expensive. Not only would eliminating this tax break reduce the deficit, but by unleashing an individual market for health insurance, it would slow down, and possibly reduce, the amount the government spends on health care, further reducing the deficit.

Because most of us (under 65) get our insurance through our employers, we have little to no choice in what kind of insurance we get. Instead of buying insurance for ourselves, like we do with every other kind of insurance, your employer’s human resources specialist does it for you. You may not even know the HR specialist personally: how is she supposed to know what kind of insurance is right for you?

There are other inefficiencies that flow from this system. Employers save money by buying insurance in bulk: one-size-fits-all plans for all of their employees. If you want to change jobs, or if you lose your job, your insurance doesn’t go with you, creating significant economic insecurity. Losing your insurance this way is especially bad if you have a chronic disease, because a new insurer will lose money insuring someone with a preexisting condition.

A one-page bill, eliminating the tax break, would have improved our health care system far more than Obamacare’s 2,300 pages ever will. Unfortunately, when John McCain proposed just that in the 2008 campaign, Barack Obama attacked it as a tax increase (which it is).

And the President kept his campaign promise. Obamacare, instead of eliminating the employer tax break, doubled down on the employer-sponsored system, by forcing employers with 50 or more workers to provide health insurance for all of their employees.

Imagine if, instead of PPACA, we had passed that one-page bill. Not only would we have made a huge dent in the deficit, but we would have dramatically improved the ability of those with preexisting conditions, and those between jobs, to keep their insurance. We would have unleashed torrents of innovation into the design of affordable health insurance products for young and healthy people.

One criticism of the one-page law is that it would be too disruptive to existing insurance arrangements. But there are ways to address this, such as by phasing out the tax break over time, or by creating a transitional period during which individuals could purchase, without penalty, the same policies they had previously obtained through their employers.

The good news is that many mainstream liberals are open to eliminating the employer tax exclusion. Last year, before PPACA had been written down, Ezra Klein wrote, “If you want to pass health care reform, it probably has to be done.” And to be completely fair, PPACA does contain a provision that weakly simulates such a reform: the “Cadillac tax” on high-cost health plans, the one that labor unions forced Democrats to substantially water down, so that it doesn’t kick in until 2018 (if ever).

So, to those like Matt Yglesias who write that conservatives don’t care about the deficit, or those like Jonathan Chait who compare Republican budget proposals to the Special Olympics, I say: Here’s a $300 billion tax increase that conservatives should rally behind. Is there a $300 billion spending cut, excluding national defense, that liberals could support in return?

Ezra Klein on Paul Ryan

Cross-posted from Critical Condition on National Review Online.

Ezra Klein has an excellent post up on the recent spate of articles on Paul Ryan. Here is Klein on Ryan’s proposal for Medicare reform:

Ryan’s proposal is an admission of the reality. And so now we get to have a conversation. How would you prefer to see growth slowed? Medicare becomes a private program and you have to buy your own private insurance with checks that pay for less and less? Or Medicare puts you and 40 million of your closest demographic friends into a big pool and goes to the medical industry and says that if they want access to these millions and millions of customers, this is how much they can charge?

This is exactly the conversation we need to be having. Not a demagogic conversation in which each side complains that the other side is “cutting” Medicare: but rather one in which each side says, “here is how we propose to create a fiscally sustainable health care system.”

From 1969 to 2008, the average annual growth in the Consumer Price Index was 4.3%; overall U.S. health spending increased 9.7% per year over the same period. But Medicare? From 1969 to 2008, Medicare grew at an average annual rate of 11.5%. (For those who prefer more recent history, the numbers are 2.8%, 7.0%, and 8.5%, respectively, from 1999 to 2008.) That growth rate is likely to increase as the Baby Boomers start to retire. And there is simply no way for the United States to survive with a Medicare system that is growing at three times the rate of inflation.

Klein breaks down the philosophical difference quite well. Liberals believe that imposing price controls is the way to bring down costs. Unfortunately, price controls have been tried over and over again in the Medicare system, with no long-term effect on Medicare expenditures. This is because doctors and patients will always find ways to outwit the system, and regulators are left playing a game of price-control whack-a-mole, in which Washington will always be a few years behind the curve.

Price controls, in a system where health care is “free” at the point of care, give patients and doctors no incentive to think about value: is it worth spending $100,000 on this high-tech cancer treatment that may extend your life by four months? The British approach is to say no one can have that treatment, because it’s too expensive. The free-market approach is to incentivize companies to set lower prices for their products, so that they will be widely adopted, and to assign higher value to those products that patients find to be genuinely life-enhancing while assigning lower value to incremental advances.

Another side effect of price controls is the destruction of the American pharmaceutical, biotechnology, and medical technology industries, which employ more people than do Detroit’s Big Three, and do much more for our economy and our quality of life.

The alternative approach, advocated by Paul Ryan, is to let patients buy their own insurance for themselves, instead of getting it from their employers or the government. This way, they can shop for value, and weed out wasteful or needlessly expensive plans. The market-based system incentivizes individuals to act responsibly, which generates enormous savings in aggregate. This is how it’s done in Switzerland, whose government spends only 2.7% of GDP on health care, compared to our government’s 7.4%. Switzerland has universal coverage, with graduated subsidies for those in need, and arguably the highest-quality health care system in the world.

The Swiss have achieved every goal that liberals seek from a health-care system, excepting those for whom abolition of the private sector is also an important objective. Could it be that, just as in foreign affairs, Switzerland is a place for common ground in health care policy?

Health Care And The Long-Term Budget Outlook

Happy thoughts for your weekend barbecue.

As many readers will be aware, on June 30, the Congressional Budget Office put out its 2010 Long-Term Budget Outlook. This year’s LTBO is notable because it incorporates the CBO’s view of the impact of Obamacare on the long-term fiscal situation. The CBO provides two sets of projections: an “extended-baseline scenario” which contains unrealistic assumptions about the willingness of Congress to rein in spending and raise taxes; and a more realistic “alternative fiscal scenario” that assumes that the Medicare Sustainable Growth Rate (a.k.a. the “doc fix”) continues to get patched, and that tax revenues hold steady at 19% of GDP. Here is how the spending looks:

As you can see, if you exclude government spending on health care (the top area of the graph), federal spending actually goes down over time as a percentage of GDP. In other words, the entire fiscal crisis is being caused by health care spending.

But wait, there’s more, because the above chart doesn’t include interest payments on the debt. When you include interest, the chart looks like this:

In 2055, based on these projections, when today’s college students are getting ready to retire, interest on the debt will be 19.8% of GDP, whereas tax revenues will be 19.3% of GDP. In other words, every dollar spent by the government in 2055 will be borrowed from someone else. In 2055, according to these projections, federal debt will be 410% of GDP.

Enjoy your weekend!

Podcast: The Health Care Overhaul and the Deficit

Sounding off on the budgetary bloggers of Pennsylvania Avenue.

Yesterday, I spoke with Ben Domenech, Managing Editor of the Heartland Institute’s Health Care News, about the recent tit-for-tat between the two titans of Washington fiscal wonkery: Congressional Budget Director Douglas Elmendorf, and White House Office of Management and Budget Director Peter Orszag. Here is the full audio (performance by browser may vary):

The Heartland Institute’s health care subsidiary, Consumers for Health Care Choices, does a nice weekly podcast on health care policy, to which you can subscribe via iTunes.

Obama Budget Chief: "I Wholly Agree" That Budget Is Unsustainable

But it's somebody else's problem.

Peter Orszag, Director of the White House’s Office of Management and Budget, responded in a blog post to Congressional Budget Office Director Peter Elmendorf’s blunt take-down of Obamacare. Unfortunately, his response is more spin than reality:

CBO Director Doug Elmendorf recently gave a presentation on health costs and the fiscal outlook. Doug concludes that the federal budget remains on an unsustainable course even after enactment of the Affordable Care Act, and I wholly agree with him.

There should be no ambiguity about whether we face unsustainably large deficits over the medium- and long-term. We do. That is why the Administration’s Budget proposes significant additional deficit reduction and that is also why the President has formed a bi-partisan Fiscal Commission charged with recommending measures to achieve medium term fiscal sustainability and to meaningfully improve the long-run fiscal outlook.

Yeah, so after passing a trillion-dollar entitlement, let’s propose a non-binding commission to come up with suggestions that we can blame Congress for not doing anything with!

The fact that more action must be taken on the deficit even after enactment of the Affordable Care Act, however, is a distinct question from whether the health legislation helps to improve our fiscal course — which it does.

In particular, CBO estimates that the Act will reduce the deficit by more than $100 billion over the next ten years and more than $1 trillion in the ten years after that. That’s more deficit reduction than has been enacted in over a decade.

Given that this assertion has been refuted countless times, I won’t bother with it. At this point, there are only two camps of honest people: those who believe Obamacare will blow up the budget, and that this is a problem; and those who believe that Obamacare will blow up the budget, and that this is not a problem (because wealth redistribution is more important, and because the wealthy can be taxed more if needed).

Perhaps more importantly, the Act has the potential to fundamentally transform our health system into one that delivers better care at lower cost. This potential isn’t fully captured in CBO’s numbers, and that’s appropriate. CBO produces its estimates based on what has happened in the past, and we have never enacted such a fundamental transformation.

Here we agree. Yes, the CBO does not capture the best-case scenario for Obamacare, but it is most certainly not the worst-case scenario, either.

The new law incorporates the most promising ideas from economists and leaders from across the political spectrum to control health care costs. As I have written before, this includes the vast majority of the options CBO itself suggested for reducing long-term health care cost growth. And we now have a variety of new institutions that will be devoted to guiding policy toward higher-quality and lower-cost outcomes.

The new law incorporates ideas from liberal economists and progressive politicians—few of which, if any, will work, because they ignore a fundamental truth about health care: subsidized health insurance leads to more health care spending.

The bottom line is that we are on a long journey toward fiscal sustainability — but that should not diminish the importance and potential of the Affordable Care Act.

A long journey that has been made longer by Peter Orszag.

CBO's Elmendorf Bluntly Rebukes Obamacare

Remember when health care reform was supposed to be about “bending down the cost curve”?

On Wednesday, Congressional Budget Office Director Douglas Elmendorf spoke at a conference on health care reform hosted by the Institute of Medicine, the health arm of the National Academy of Sciences. “The rising costs of health care will put tremendous pressure on the federal budget during the next few decades and beyond,” said Elmendorf. “In CBO’s judgment, the health legislation enacted earlier this year does not substantially diminish that pressure.”

As Keith Hennessey put it Friday (h/t Reihan Salam), “Never before have I seen a CBO Director so bluntly refute the policy claims of a President and his Budget Director.” Elmendorf’s presentation, which included slides, helps to visualize the problem.

As you can see from the chart above, the two biggest drivers of federal spending on health care entitlements are the effects of aging (i.e., the retirement of the Baby Boomers), and the effects of excess cost growth (i.e., the rising cost of health care). Dealing with the first problem is theoretically easy, but politically difficult: raising the retirement age and/or means-testing Medicare benefits.

Dealing with the second problem involves free-market healthcare reforms that neither Elmendorf nor Obama consider. “It is not clear what specific policies the federal government can adopt to generate fundamental changes in the health system,” writes Elmendorf; “that is, it is not clear what specific policies would translate the potential for significant cost savings into reality.”

Elmendorf is a centrist technocrat; this is what makes his rebuke of the President so striking. But technocratic centrism, in the context of Washington policy-making, is liberalism by default. As a result, while Elmendorf correctly notes that Obamacare will do nothing to curb health-care inflation, he is strikingly optimistic in believing that Obamacare won’t make the problem substantially worse. And small wonder: his projections rely significantly on the research of White House consultant Jonathan Gruber, who happens to have been the intellectual father of Obamacare.

As Megan McArdle and Ross Douthat have noted, Obamacare’s advocates have made many outlandish claims about the law’s benefits. (I wish I could find the 2009 piece in which the editors of The New Republic claimed that if Obamacare passed, people would no longer die of cancer.) Now that the law has passed, those advocates are quietly back-tracking, especially on issues of cost.

A more realistic analysis by PriceWaterhouseCoopers projects that in 2019, because of Obamacare, the average household will pay an additional $9,500 per year for health insurance, on top of the increases caused by conventional health inflation. For a family making $75,000, that is like a hidden income tax of 13 percent, on top of all the other taxes we already pay. One way or another, Elmendorf’s benign cost projections will soon bump up against reality. Let us hope that the law is repealed before we ever have to say “we told you so.”

A Non-Cranky Defense Of The Gold Standard

Cross-posted from The Agenda on National Review Online.

In today’s New York Times, Ross Douthat takes on Rand Paul and paleoconservatism on the Civil Rights Act and other issues. “Like many groups that find themselves in intellectually uncharted territory,” writes Douthat, “they have trouble distinguishing between ideas that deserve a wider hearing and ideas that are crankish or worse. (Hence Ron Paul’s obsession with the gold standard and his son’s weakness for conspiracy theories.)”

Douthat is being a bit unfair here. Paleoconservatism isn’t intellectually uncharted territory; whatever its faults or merits, its acolytes built the philosophical foundations of Cold War conservatism. But I don’t want to digress into a pedantic discussion of the intellectual foundations of paleoconservatism. Rather, I want to take on the idea that advocacy of the gold standard is a crankish obsession, one that is intellectually (and perhaps morally) on par with opposing the Civil Rights Act.

If the gold standard is merely a crankish obsession, then the ranks of obsessive cranks include not only Ron Paul but also Friedrich Hayek, Robert Mundell, Jude Wanniski, Robert Bartley, Jack Kemp, and Steve Forbes. That is to say, most of the leading exponents of supply-side economics. (Note that this roll call includes two Nobel laureates.) Indeed, sound-money policies have been at the core of conservative monetary policy from the beginning. It wasn’t too long ago that opponents of the gold standard, like William Jennings Bryan, were thought of as the cranky ones.

It is true that the gold standard is an unfashionable idea in Washington, but it is a mainstream one within the financial community. This is unsurprising on both fronts. The financial community is the consumer of government debt, and is therefore intensely attuned to the relationship of monetary policy to the value (i.e., default risk) of that debt. Investors see over and over again the pattern by which governments depart from hard-money policies (such as the gold standard) in order to engage in deficit spending, and then devalue their currencies in order to reduce the value of the debts they then incur. It is a story that all too frequently ends in credit default and economic collapse. The financial community sees no reason why the United States should be immune from the laws of economics.

On the other hand, the political class is attuned to the value of increasing government debt; that is, of building and rewarding political constituencies with high state spending and low taxation. So it is natural that a return to the gold standard is considered eccentric in Washington.

This is not to say that there aren’t thoughtful, disinterested critiques of the gold standard; there are (Milton Friedman comes to mind). But if we continue on our present fiscal course, it is only a matter of time before the bond vigilantes now ravaging Greece make their way across the Atlantic. When that happens (if not before), countries like China and Russia will take concrete steps to dissociate themselves from the U.S. dollar. Given that few other currencies are ready to take the dollar’s place, don’t be surprised if their next move is a transition back to a metals-based monetary system.

Medicare's Bookkeeper: Obamacare Will Increase The Cost Of Health Care

Don't say we didn't warn you.

Richard Foster, the Chief Actuary of the Centers for Medicare and Medicaid Services (CMS), released a report on Friday in which he details many of the significant flaws of the Patient Protection and Affordable Care Act. (An actuary is someone who uses statistics, such as death rates and hospitalization costs, as a quantitative way of setting insurance premiums.) Foster estimates that Obamacare will increase federal health expenditures by a net of $251 billion from 2010-2019, even though the President once sold the law as a way to "bend down the cost curve." Most notably, as we and others have argued, the law will drive up the cost of health insurance for ordinary people. Plenty of others have summarized Foster's findings (see Philip Klein and Grace-Marie Turner), so I won't. Read the report for yourself.

(P.S. The Census should conduct a count of the number of government officials with square-rimmed eyeglasses, mustaches, and oddly patterned neckties.)