I don’t think any health expert doubts that it is possible for the U.S. to spend far less on health than it does today while improving the general quality of health. Obviously this is the case because other countries do it.
Health care reform would be relatively easy if we were starting from scratch. But we aren’t. We not only have to design a new system if we hope to lower costs without impairing health care quality, but we also have to figure out how to get from here to there given that we have an enormously complicated health system involving massive government programs along with huge health insurance companies, increasing numbers of businesses dropping or reducing their health care benefits to workers, and a large and growing population of people with no health insurance at all.
It’s too soon to say what the outcome will be of the congressional debate on health reform. But one thing is for sure: unless we find a way of at least slowing the rate of growth of health spending it will not have delivered on our biggest health problem–its cost.
…But I like the simpler bottom line he used in his email promoting the column:
I conclude that we are paying far too much for what we get. Any reform that doesn’t significantly reduce costs is not worth doing.
…which is the idea that Stan Collender labeled the “reverse Nike” the other day. (Love it.)
Have a Happy 4th… Don’t expect any pithy thoughts from me for a few days–although perhaps you’ll get some silly ones.
Only budget dweebs like me would find this new CBO report on “Measuring the Effects of the Business Cycle on the Federal Budget” fascinating. The study estimates “cyclically adjusted” levels of revenues, outlays and deficits–those that would occur without the short-term fluctuations in the economy. As the report explains it:
A budget measure that filters out cyclical factors is useful in several ways. For example, some analysts use such a measure to discern underlying trends in government saving or dissaving (that is, surpluses or deficits)…the measure helps analysts estimate the extent to which changes in the budget are caused by movements of the business cycle and thus are likely to prove temporary…
During cyclical slowdowns and recessions, revenue growth automatically declines and growth in outlays, for example to pay unemployment insurance claims or provide benefits under the Supplemental Nutrition Assistance Program (formerly food stamps), automatically increases. The opposite occurs with upturns in the business cycle. The cyclically adjusted deficit or surplus is calculated to illuminate the federal budget balance as it would exist in the absence of those automatic cyclical movements.
So what do we learn from CBO’s estimates of “cyclically-adjusted” revenues and outlays (shown in Table 1 on page 5 of the report)? If we could remove the adverse effects of the recession, projected revenues would be higher (on the order of hundreds of billions of dollars each year) and outlays would be lower (on the order of tens of billions of dollars each year), so that projected deficits would be $300-$400 billion lower per year for fiscal years 2009 through 2011.
Some people argue we need not get all bent out of shape over the recently-worsening fiscal outlook, because recessions always have a way of worsening the budget situation, but recessions go away and eventually turn into expansions–which are always very good for the budget. But these cyclically-adjusted figures don’t provide much comfort, because they show that although removing the effects of the recession would add $235 billion, $344 billion, and $314 billion to 2009, 2010, and 2011 revenues, respectively, those revenues would still fall far short of covering (even) cyclically(-downward)-adjusted outlays. The report shows that in fiscal year 2011, unadjusted revenues are just 17.6% of GDP–below the (magical, mystical) 40-year historical average of 18.3%–but cyclically-adjusted revenues are 19.6%, well above it. That assumes the 2001 and 2003 tax cuts have expired at the end of calendar year 2010, by the way, yet that 19.6% is still pretty far short of the cyclically-adjusted level of outlays (21.8%). All this suggests that even when this recession goes away (literally rather than by cyclically-adjusted assumption), we still won’t have a revenue system that’s healthy enough to handle our expenses–and that’s even if the Bush tax cuts don’t get extended and turned into the Obama ones.
I’m not asking for taxes to be raised right now, but this CBO analysis shows it sure would be wise to plan for a change as soon as the economy’s on an upswing–because the upswing alone just ain’t gonna cut it.
Donald Marron and I agree about what’s wrong with the House climate bill passed last week–just another example of how economists on different sides of the political aisle often share more common ground than any other two people on different sides of the aisle. I’ve complained before about how odd it is to hear politicians who advocate for stronger environmental goals at the same time claiming that they don’t want a policy that actually raises energy prices. (News flash: then the policy wouldn’t actually change incentives, would it?) Donald emphasizes what a supreme waste of money the House-passed bill is. Even if on net it wouldn’t actually cost the government anything, the opportunity cost is huge:
The number one thing you should know about this bill is that the allowances are worth big money: almost $1 trillion over the next decade, according to the Congressional Budget Office, and more in subsequent decades.
There are many good things the government could do with that kind of money. Perhaps reduce out-of-control deficits? Or pay for expanding health coverage? Or maybe, as many economists have suggested, reduce payroll taxes and corporate income taxes to offset the macroeconomic costs of limiting greenhouse gases?
Choosing among those options would be a worthy policy debate. Except for one thing: the House bill would give away most of the allowances for free. And it spends virtually all the revenue that comes from allowance auctions.
As a result, the budget hawks, health expanders, and pro-growth forces have only crumbs to bargain over. From a budgeteer’s perspective, the House bill is a disaster.
The potential revenues from climate change/carbon policy are one of those actually desirable ways to raise revenue that economists (from both sides of the aisle) like to dream about. That and limiting or eliminating the tax exclusion for employer-provided health care–you know, those ideas that go over really well with politicians and lobbyists… We need these additional sources of revenue, because it’s clear our federal revenue base is insufficient and will remain that way even after the recession is over. I’ll write more on that tomorrow.
Last Thursday the Congressional Budget Office released its analysis of the long-term budget outlook. (I think I got distracted for a few days by the news about Michael Jackson–a different “sustainability” problem…) The basic shape and scope of the long-term fiscal challenge hasn’t changed since CBO’s last long-term report (a year and a half ago), and neither has the lesson for policymakers, as CBO director Doug Elmendorf explains on his blog (emphasis added):
Under current law, the federal budget is on an unsustainable path—meaning that federal debt will continue to grow much faster than the economy over the long run. Although great uncertainty surrounds long-term fiscal projections, rising costs for health care and the aging of the U.S. population will cause federal spending to increase rapidly under any plausible scenario.Unless tax revenues increase just as rapidly, the rise in spending will produce growing budget deficits and accumulating debt. Large budget deficits would reduce national saving, leading to more borrowing from abroad and less domestic investment, which in turn would depress income growth in the United States.
Keeping deficits and debt from reaching levels that could cause substantial harm to the economy would require increasing revenues significantly as a percentage of gross domestic product (GDP), decreasing projected spending sharply, or some combination of the two. Making such changes sooner rather than later would lessen the risks that current fiscal policy poses to the economy. Although the policy choices that will be necessary are difficult, CBO’s long-term budget projections make clear that doing nothing is not an option: Legislation must ultimately be adopted that raises revenue or reduces spending or both. Moreover, delaying action simply exacerbates the challenge…
The message that we need to start to bring the spending and revenue lines closer together, and soon, isn’t new. Neither are the implications from the numbers in the CBO analysis which show what might be considered feasible alternative policy paths to take going forward–where CBO compares the outlook under their “extended-baseline scenario” (basically policy as specified in current law) with that under their “alternative fiscal scenario” (basically extending “current practice” versus current law). We know the greatest fiscal challenge is rising health care spending, and that the growth in that spending is due to two factors: (i) the aging of the population–which we cannot do anything about (or at least should not try to!), and (ii) rising per-capita health care costs–which we hope to get a handle on, but frankly don’t exactly know how to do it nor how fast it will work. But I’ve said many times before that tax policy is a much more reliable policy lever that we can do something about very soon, because the 2001 and 2003 tax cuts expire under current law at the end of 2010. And CBO’s numbers corresponding to their two scenarios–one assuming the tax cuts expire and the other assuming they are extended without being paid for–show that the tax policy lever is a pretty large one at that:
Comparing the year 2080 spending and revenue levels under the extended-baseline scenario with those under the alternative fiscal scenario (see Table 1-2 on page 6), the difference between primary (non-interest) spending in the two scenarios is 2.7% of GDP, and most of this spending gap is due to non-health spending (accounting for 1.9% of GDP) rather than spending on Medicare and Medicaid (just 0.8% of GDP). But the difference between revenues under the two scenarios is 4.0% of GDP, which means revenue policy accounts for about 60 percent (4.0/(2.7+4.0)) of the difference between the two scenarios when it comes to policy choices (leaving out the interest component).
Box 1-1 on page 7 shows that the 75-year fiscal gap under the extended-baseline scenario (where the tax cuts expire) is 3.2% of GDP, while the gap under the alternative fiscal scenario is 8.1% of GDP. (Note that the 8.1% figure is consistent with the recent Auerbach and Gale analysis which found a gap of 7 to 9 percent–my blog post on that here.) The difference in the 75-year fiscal gap under the two scenarios is 4.9% of GDP, while the difference in 75-year revenues is 2.8%, and the difference in 75-year outlays (including all spending on interest, even that associated with the tax cuts) is 2.1%. So this calculation also shows that revenue policy is responsible for about 60 percent of the difference between the two scenarios, and that extension of the tax cuts basically doubles the fiscal gap. (60 percent of the 4.9% of GDP difference between the two scenarios is 2.9%, which is nearly as large as the 3.2% of GDP gap under the extended-baseline scenario.)
Although what we do about the 2001 and 2003 tax cuts makes a huge difference in terms of the fiscal gap, the CBO analysis also shows it’s not a huge difference in terms of the likely effect of that policy choice on economic incentives. Page 11 of the report (and Table 5-2 on page 58) says that the effective marginal tax rate on labor income would be 35% if the tax cuts were allowed to expire as scheduled, versus 33% if they were extended. (The effective marginal tax rate on capital income would be just 19% even if the tax cuts expired, and under 17% if they were extended.)
I think policymakers should be paying attention to this CBO report and what it says about the policy levers available to us: how can we reverse course quickly before we crash into that fiscal iceberg? And with each possible turn of the steering wheel (pull of the levers), what are the costs versus the benefits? Which levers will work the most reliably to improve the fiscal outlook, with the lowest economic cost? It seems to me we are very focused and intent on grabbing a lever that is still pretty veiled and slippery right now–the one labeled “health care reform”–while totally ignoring the big sturdy lever labeled “Bush tax cuts.”
Back a few months ago when the American Recovery and Reinvestment Act of 2009 was signed into law, I tried to explain that the package was trying to do a lot of things–not just “stimulate” the short-term economy–and that in evaluating how well the package would “work,” we’d have to consider how it’s done on all those different fronts.
Yesterday Bruce Bartlett summarized some of the empirical evidence that’s come in thus far, pointing out that the “stimulus” hasn’t been very stimulating, but that we shouldn’t be surprised. To start, most of the package was intended to assist, not create new economic activity (new pieces of GDP):
Congressional Budget Office Director Douglas Elmendorf recently presented a report…in which he walked through some of the problems with implementing the stimulus program.
First of all, 60% of the stimulus package was never going to have much of a stimulative effect. These were programs like extending unemployment benefits and tax credits with no incentive effects that may have been justified on the merits, but don’t really do anything to increase growth or reduce unemployment.
And on top of that, the minority of the package that was supposed to be the true “stimulus” part has been the slowest to spend out:
…[O]nly 40% of the package went to programs like public works that have a high multiplier. Moreover, the programs with a low multiplier were the fastest ones to implement; those with a high multiplier take much more time to come online. According to Elmendorf, by the end of fiscal year 2009, which ends on Sept. 30, about a third of the least stimulative spending will have been spent vs. only 11% of the highly stimulative spending.
(How frustrating…) So what’s the big deal about throwing extra money at the problem? What’s wrong with much of the stimulus having an effect say a year from now by which time most economists now believe the recession will be over? (What’s wrong with throwing more water at a fire than what’s needed to put out the fire?) For one thing, we might not be able to afford the “wasted” deficit-financed spending (we may run out of water when we need it for later fires). For another thing, Bruce worries it may be hard to change our mind about that expansive fiscal policy even when there’s no more downward cycle to counter:
Many years ago John Maynard Keynes warned against using public works for stimulus for precisely this reason–they are too hard to reverse once the need for them has passed. With many economists already warning about inflation coming back in the near future, the ultimate legacy of the stimulus bill may be to make it harder to tighten fiscal policy when it will be needed.
Today OMB Director Peter Orszag testified before the House Budget Committee on the Obama Administration’s proposal for statutory PAYGO. In his prepared testimony (and repeatedly in his responses to questions), Peter made reference to the fiscally irresponsible policies enacted during the Bush Administration:
This [PAYGO rule] may seem like a relatively easy rule to follow, but history suggests it is not. One way to see this is by looking at three relatively recent pieces of legislation that violated the PAYGO principle: the 2001 and 2003 income tax reductions, or EGTRRA and JGTRRA, and the Medicare Modernization Act of 2003, which created the Medicare Part D prescription drug benefit…[T]hose three bills together increased the 75-year fiscal gap—the difference between sustainable and unsustainable budgets—by roughly 3 percent of GDP…[i.e.,] nearly doubled the long-term fiscal gap. The difference, then, between adhering to and violating PAYGO is not a question of few billion dollars around the edges—but rather can go to the heart of the nation’s fiscal path.
Yet he defends the Administration’s PAYGO proposal, which allows those (fiscally irresponsible) policies passed in the Bush Administration to be extended without any offsets (i.e., continued in a fiscally irresponsible way), with the following (emphasis added):
Some have criticized the Administration for designing the PAYGO Act to reflect current policy rather than current law in these areas. These critics, however, have provided no indication of how they would offset the costs of continuing current policy in these areas, and I have seen no credible proposals for such offsets. The most plausible result of applying the PAYGO Act to a continuation of these current policies would therefore be waivers of the statute in these cases. Such waivers would establish a harmful precedent that could undermine the statutory PAYGO regime and lead to waivers for new policy, allowing policymakers to avoid the PAYGO budget constraint. The Administration therefore believes it is better to design statutory PAYGO in a credible way to minimize the potential for waivers, and that is what our proposal does.
As I’ve suggested in a recent post, one very effective way to offset the costs of any of these policies, such as the Bush tax cuts, would be to just not do it (those policies). Having no way to pay for it shouldn’t lead us automatically to the conclusion that we must do it without paying for it. (We could come to that conclusion more thoughtfully perhaps, maybe even within the Obama Treasury and the tax-writing committees of Congress, if we weighed the costs of the additional debt against the economic benefits of the tax cuts and decided the benefits outweighed the costs.) As Doug Holtz-Eakin noted in his testimony at the same House Budget Committee hearing, the Administration’s PAYGO proposal goes far further into setting specific tax and spending policies than budget process rules are supposed to dictate: “PAYGO should provide a level playing field among such initiatives and these proposals do not. In effect, the [Obama] Administration’s proposals tilt the playing field toward their preferred policies”…and which happen to look strangely similar to those fiscally irresponsible policies of the Bush Administration.
But the Administration’s basic argument is that a current-law baseline standard for PAYGO, where any extension of the Bush tax cuts would have to be offset with other tax increases or reduced spending, is just too strict a diet that would surely be broken–and then there would be no dietary discipline at all. They argue we can stick to a stricter, yet realistic, diet once we get past this one last binge. (I have made this diet analogy before.)
In her prepared testimony, Alice Rivlin of the Brookings Institution seems to (somewhat painfully/regretfully) acknowledge the Administration’s “incredible diet” argument:
Critics of the Administration’s proposal point out that allowing these adjustments to a current law baseline amounts to accepting the damage already done to future budgets that these bizarre legislative provisions were designed to hide. They argue that in making these exceptions Congress would be ducking the responsibility to face the consequences of its past lack of budgetary courage. I agree that these are four examples of legislative sleight of hand covering up future bad news. But the bad news must be dealt with head-on in a comprehensive policy process. Keeping these four legislative anomalies in the current law baseline for PAYGO purposes, would only guarantee that PAYGO would be immediately waived and its future usefulness seriously impaired.
(But I’d note that keeping these policies out of the policy baseline and PAYGO rules enables these policies to effectively circumvent a “comprehensive policy process.”)
…And Bob Greenstein of the Center and Budget and Policy Priorities also seems to acknowledge this is really a “second best” strategy when it comes to fiscal responsibility:
The budget resolution adopted this year also makes clear that the cost of extending the expiring reductions in middle-class taxes and the estate tax enacted in 2001 and 2003 will not be offset. Given the long-term fiscal problem the nation is facing, and the inevitable need for higher revenues and slower spending in coming decades, I believe it is unwise to extend any expiring tax cuts or relief from required reductions in spending without offsetting the cost of those extensions, and I wish that enactment of a pay-as-you-go rule would ensure that they would be paid for. But, it is clear that the majority of lawmakers do not believe these extensions should be paid for and that, regardless of whether a statutory pay-as-you-go rule is enacted that applies to those extensions, Congress will not let those provisions expire or offset the cost of extending them.
Bob Greenstein then defends the Administration’s PAYGO exemptions by going back to the diet analogy (emphasis added):
A number of critics of the President’s proposal to except the cost of extensions of current policies from the pay-as-you-go rule have made their point by analogy, comparing the proposal, for instance, to a promise to abide by a diet that excludes chocolate cake or other highly caloric desserts from dietary restrictions. Such analogies are clever, but inaccurate; they miss the mark. A more apt analogy is with a promise to limit caloric intake in order to lose weight. If a person promises to eat nothing for 30 days, the promise is meaningless and clearly will not help achieve the desired outcome.The person will violate the promise every day, and after the person takes the first bite each day there is no useful yardstick to encourage the dieter to stop eating before he or she is satiated. If, however, the person sets a daily caloric intake at a reasonable level, the pledge might actually help the dieter stop overeating. It is true that the promised diet would be meaningless if the caloric intake is set at such a high level that the dieter can eat virtually anything he or she would like without exceeding the limit. But anyone who thinks the Congressional appetite for tax cuts and entitlement increases would be satisfied once Congress extends the expiring policies has not been paying attention. Drawing a line at extending current policies thus should help significantly in promoting fiscal responsibility.
First, I don’t see the current-law baseline, which assumes the Bush tax cuts expire and we return to Clinton-era tax policy, as analogous to eating nothing. Second, I would argue that setting the “diet” at the Bush-policy-extended baseline isn’t “reasonable” (sustainable) and will only leave us still too fat. Finally, Bob’s pointing out the insatiable appetite of Congress for fiscally-irresponsible policies doesn’t give me much faith that any diet (even with a weaker constraint) will do any good–they can violate an easy diet just as well. I guess I’m saying it’s going to take a lot more than following a gimmicky diet–it’s going to take true internal willpower.
And to top off what should be called “PAYGO Day,” today the Concord Coalition released this issue brief on the Administration’s statutory PAYGO proposal. Here’s a link to our blog post about it, on Concord’s Tabulation blog.
Stan Collender argued earlier this week that the debate over statutory PAYGO is “totally theoretical, having little to do with reality, completely premature, and largely irrelevant.” He called it a “condiment” (and not the “main ingredient”) in the federal budget process. But with all the exemptions in the President’s proposal for statutory PAYGO, maybe it’s the equivalent of only a watered-down, store-brand ketchup–far from the “bite” of a wasabi mustard, if you know what I mean.
On Thursday we’ll get to ponder this question further, when the Obama Administration’s budget director, Peter Orszag, testifies before the House Budget Committee.
The Brookings Institution just released an updated paper by their own Bill Gale and Alan Auerbach (of UC Berkeley) on “The Economic Crisis and the Fiscal Crisis: 2009 and Beyond” (here is the pdf of the complete paper). Watch Bill’s nice interview above, in which he summarizes what he sees as the biggest take-away points from their analysis.
I like to dig into the economic nuts and bolts of this sort of paper, while also carrying my own big-picture policy biases of course, so here are my own favorite points in the paper…
First, there’s the gradual and yet sudden way in which we have gotten to such a bad fiscal place:
“How did you go bankrupt?” Bill asked.
“Two ways,” Mike said. “Gradually and then suddenly.” –Ernest Hemingway, The Sun Also Rises…
The collapse of the budget happened both gradually and suddenly. The gradual, but sizable, decline that occurred from 2001 to 2008 was primarily the result of policy – tax cuts and spending increases. The sudden, sharp decline that occurred from 2008 to 2009 was primarily the result of the economic downturn and the financial interventions.
Second, it used to be we could talk about the “longer run” being the “unsustainable” part of our fiscal future. But now that “unsustainability” is evident within the ten-year budget window (”the future is now”):
Under the Administration’s budget, the figures are not quite as bad as under continuation of Bush Administration policies, but are troubling nonetheless. The ten-year deficit is projected to $9.1 trillion. The deficit declines to 4.0 percent of GDP by 2012. By 2019, although the economy is projected to have been at full employment for several years, the deficit rises to 5.5 percent of GDP (a structural deficit about equal to the 2009 figure); spending rises to 24.5 percent of GDP (the highest since World War II, except for the current downturn), the debt-to-GDP ratio rises to 82 percent (the highest since 1948), and net interest payments rise to 3.8 percent of GDP (the highest share ever and larger than defense or non-defense discretionary spending). All of these figures are poised to rise further after 2019, implying that the situation is unsustainable.
Third, the longer-term outlook has gotten worse, and hence the fiscal gap more challenging to close:
We estimate a long-term fiscal gap – the immediate and permanent increase in taxes or reduction in spending that would keep the long-term debt-to-GDP ratio at its current level – to be about 4-6 percent of GDP under the assumptions in the CBO baseline and about 7-9 percent of GDP under the assumptions in the adjusted baseline or the Administration budget. The debt-to-GDP ratio would pass its 1946 high of 108.6 percent by 2037 under the CBO baseline, but much sooner – in 2025 and 2026, respectively – under the adjusted baseline or the Administration budget. Under all three scenarios, however, the debt-to-GDP ratio would then continue to rise rapidly, contrary to its sharp decline in the years immediately after 1946.
And one might be surprised that closing the gap won’t be easy even with low (even zero percent) interest rates:
Low interest rates will slow the accumulation of national debt, but do not necessarily help in addressing the fiscal gap. The fiscal gap arises from two sources: the debt already in place and to be accumulated in the near term, and the implicit liabilities that loom in the more distant future. Lower interest rates reduce the cost of servicing the debt, but raise the adjustment needed to offset large future imbalances. Calculated over the infinite horizon, the long-term gap is actually higher if one assumes that the government will face a zero interest rate for the next 20 years.
(You can think of this as the iceberg ahead isn’t growing as fast, but on the other hand, it’s suddenly a lot closer, and we have a lot less time to reverse our crash course. A zero percent interest rate means those future liabilities aren’t “discounted” anymore–it’s as if those future liabilities are right here, right now, and we have to give up much more today to fill in those “back-to-the-future” fiscal holes.)
And the long-term fiscal crisis can’t even be solved by pursuing health care reform, even one that turns out to be hugely successful in controlling costs:
Under the projections using the Administration’s baseline, cutting the annual growth rate of health spending by 1.5 percentage points for 10 years would reduce the long-term fiscal gap by 1.5 percent of GDP; the same reduction for 30 years would reduce the gap by almost 4 percent of GDP. To eliminate the long-term gap through reductions in health spending growth alone, the growth rate of spending on Medicare and Medicaid would have to fall by 3 percentage points annually over the next 75 years. That is, [health] expenditures currently projected to grow at a rate nearly 2.5 percent faster than GDP during the next ten years would instead have to begin falling immediately as a share of GDP.
Bottom line is that the Bush tax cuts–and now extension of the Bush tax cuts as proposed by the Obama Administration–have nearly doubled the fiscal gap:
Even if rising health care costs are an important component of the long-term problem, they are not necessarily “the” cause of the fiscal gap. The gap has been increased by more than 5 percentage points of GDP just by continuation of the policies that have been enacted during the Bush Administration.
(So how is it that the Obama Administration chooses to work so hard on controlling health care costs–a very tall order–while pretty much “rolling over” on the Bush tax cuts?…)
And the Obama Administration’s call for a new statutory PAYGO rule which would exempt the extended Bush tax cuts is something Bill Gale can’t help but remind his former colleague Peter Orszag that he shouldn’t (and doesn’t really) like:
The Administration’s willingness to adopt a baseline that extends the Bush tax cuts is no minor matter and it colors several issues…
In every year since 2001, the Administration has requested that the tax cuts be made permanent and in every year Congress has refused to do so – even when Congress was in Republican hands and even when the budget projections suggested future surpluses. Now that even the CBO baseline projection is for large deficits throughout the ten-year budget period, it does not seem obvious that the tax cuts should be extended. It is certainly is not obvious that the extension should be incorporated into the Administration’s baseline…
[A]llowing PAYGO not to apply to extension of the Bush tax cuts is simply an enormous budget gimmick.When the Bush Administration proposed such a change, Gale and Orszag (2004b, p. 9) wrote that in the light of the (in retrospect relatively benign) fiscal imbalances that existed at that time: “…the temptation to turn to budget gimmicks may prove overwhelming. Policymakers and the public should be especially aware of at least five tricks …[including] policies that allow politicians to ignore budget issues – such as not reinstating budget rules that require spending and tax changes to be self-financing, or even worse, the [Bush] Administration’s proposal in last year’s budget to allow the tax cuts to be made permanent without showing any change in the budget baseline.”
Alan and Bill conclude:
Recent developments…have caused a change in circumstances. Huge short-term deficits have accelerated the arrival of the future that policy makers have been choosing to ignore. And capital market disruptions have reduced the likelihood that growing U.S. fiscal imbalances will be tolerated. Thus, the United States will soon enter a new phase of fiscal policy decision-making. Although huge deficits are not desirable in the short term, they are nonetheless understandable. Once – or as – the economy recovers, though, the need to impose fiscal discipline will be a short-term and urgent problem that will require difficult choices that policy makers have so far refused to make. Worse still, if the economy recovers only very slowly or not at all, those decisions will still need to be faced, but in the context of a weaker economic situation.
Suddenly, the not-so-happy fiscal future is now. Rather than blame the past leadership for how we got here, what will the current leadership do to make the best of it going forward?
Donald Marron provides a very clear explanation of why it’s so hard to find offsets to pay for expanded health coverage that indeed would cover its costs over the longer run (emphasis added):
In short, it is particularly challenging to find offsets for new health spending, since that spending tends to rise faster than other parts of the budget. That suggests that offsets that are also driven by health spending might be particularly attractive. CBO notes that one potential source of such offsets would be reductions in other health spending. On the revenue side, the obvious potential source would be reductions in the tax exclusion for employer-provided health insurance.
Finding an offset that would truly offset rising health costs is hard to do, because there are so few parts of our economy that can be expected to grow so much faster than the economy like health care costs do. So yes, daring to touch (scale back or even eliminate) the big tax exclusion is a really good idea because it has the potential to raise an amount of revenue that would rise along with health care costs (and it would improve incentives to help “bend down” health costs at the same time). And yes, reducing other health spending would also save an amount of money that would tend to rise with the costs of the new health spending. But a still surer way to save an amount of money that grows with the costs of the new health spending? Don’t do the new health spending.
Now, I don’t really mean to suggest that’s a good idea in the context of health care reform (to just not do it), but I use the example to illustrate that this general principle applies to the costs of any new government spending (or tax cut) that’s proposed that the Administration and Congress seem to have trouble paying for. When you can’t find a way to pay for it, the answer shouldn’t automatically be “so let’s not pay for it.” The best answer could very well be “let’s not do it.” I say this because (it’s well known that) I’ve always disliked the deficit-financed Bush tax cuts, and I dislike them even now that they may become the deficit-financed Obama tax cuts. When politicians “explain” that we can’t possibly pay for the extension of these tax cuts because that would be “the largest tax increase in American history” (or variants of the same argument), the right response is not “so don’t pay for them.”
This is even better than Mark Zandi telling us the recession will end on October 10th. Austan comes across as capable and cool here, which I’m sure is reassuring to the American people (or at least viewers of the Colbert Report). I tried to embed the video here, but something funny’s going on… so here’s the link instead. Listen for Austan’s story of the firefighter; it’s a pretty good analogy.
