EconomistMom.com
…because I’m an economist and a mom–that’s why!

EconomistMom.com

Welcoming Donald Marron to the EconoBlogosphere

May 30th, 2009 . by economistmom

Donald Marron is a smart economist who has worked for the Congressional Budget Office, the President’s Council of Economic Advisers, and the Joint Economic Committee–places I’ve worked as well–but Donald held higher positions in all three offices (he was “director” or “member” in all these places, not just a peon economist).  We even worked for the JEC at the same time, although Donald was on the “other side.”  We still always got along.  Having recently left the CEA (because it was the “other side’s CEA”), Donald’s just started his own blog, which I highly recommend and am adding to my Blogroll.  If you read Donald’s “About Donald” page, you’ll learn that what differentiates Donald from me is far more about the differences in our personal lives than differences in our professional experiences or opinions.  You see, Donald doesn’t have kids, and his personal travel blog (really fascinating to me!) illustrates the tradeoffs that allows in what I’m guessing is an overall budget constraint pretty similar to mine.  Wow–economists really do have lives beyond economics, even when they don’t have “just kids” keeping them busy!

Oh, and another connection that Donald doesn’t mention on his blog:  Donald’s dad, Donald B. Marron (Sr.?), serves on the Concord Coalition’s Board of Directors.

Welcome to the EconoBlogosphere, Donald!

The Problem With Raising the Bar on Raising Taxes

May 28th, 2009 . by economistmom

Harold Meyerson’s column in today’s Washington Post discusses California’s fiscal woes and how Proposition 13, passed 31 years ago, is to blame:

Amid the inflation of the late 1970s…the California model began to crumple. As incomes and property values rose, Sacramento’s tax revenue soared…frustrated Californians grumped to the polls and passed Proposition 13, which rolled back and then froze property taxes — effectively destroying the funding base of local governments and school districts…

Since 1978, state and local government in California has been funded chiefly by personal income taxes. Bank and corporation taxes have been steadily reduced. In the current recession, with state unemployment at 11 percent, tax revenue has fallen off a cliff.

But the problem with Proposition 13 wasn’t merely that it reduced revenue. It also made it very difficult to increase revenue. Raising taxes now requires a two-thirds vote of the legislature, though in 47 other states a simple majority suffices…

Harold’s got this exactly right… Proposition 13 gets it exactly wrong:  we don’t need to make it harder for politicians to raise revenue.  We need to make it harder for them to pass fiscally-irresponsible tax cuts.  That’s why pay-go rules–and ones that apply to tax cuts as well as spending increases–make sense.  Proposition 13 is like an anti-pay-go rule.

But what really fascinated me (made me wax nostalgic) in Harold’s column was the following:

The current Republican crop has refused in good times as well as bad to raise business or other taxes (increasing the tobacco tax, for instance, has failed each of the past 14 times it has come up for a vote). Abetted by little local Limbaughs who inflame Republican brains, they protest that the state already has the nation’s highest taxes. In fact, California ranks 18th among the states in percentage of personal income paid to state government…But the myth of soak-the-rich high taxation persists among Republicans — so much so that the GOP front-runner to succeed Arnold Schwarzenegger in next year’s gubernatorial election, former eBay CEO Meg Whitman, is calling for cuts in business tax rates even though the state is staring at a $21 billion deficit that it somehow has to close.

…because I think we should all be grateful that Meg Whitman is not our Secretary of the Treasury.  Does anyone remember what presidential candidate McCain had suggested?  (Here’s a link to the video clip, so you can wax nostalgic, too.)

Combining Tax Reform with Health Care Reform: I Think Len’s Onto Something Here

May 27th, 2009 . by economistmom

I’m very pleased to read Lori Montgomery’s story in today’s Washington Post, highlighting Len Burman’s idea to fund health care reform through a major reform of the U.S. tax system.  The centerpiece of Len’s tax reform proposal is a new national value-added tax (VAT):

“Everybody who understands our long-term budget problems understands we’re going to need a new source of revenue, and a VAT is an obvious candidate,” said Leonard Burman, co-director of the Tax Policy Center, a joint project of the Urban Institute and the Brookings Institution, who testified on Capitol Hill this month about his own VAT plan. “It’s common to the rest of the world, and we don’t have it.”…

And in a paper published last month in the Virginia Tax Review, Burman suggests that a 25 percent VAT could do it all: Pay for health-care reform, balance the federal budget and exempt millions of families from the income tax while slashing the top rate to 25 percent.

In that paper, Len explains that the VAT would do more than pay for universal health care; the health care voucher system it would fund would contain cost controls (limits on what the vouchers could buy), which along with elimination of the health care tax exclusion would reduce overall health care spending.   Len estimates that the new VAT would thus do more than just fund health care reform, it would free up a lot of the current claims on the income tax system:

All told, the income tax would have to finance about $450 billion less in health spending than it does at present.  In addition, there would no longer be a tax exclusion for employer-sponsored insurance (ESI), a $168 billion income tax expenditure in 2009…Thus, the income tax base would become substantially larger.

Why is that larger income-tax base such great news?  Because it means that income tax rates could be cut and/or the deficit could be reduced.  Those sound like two “winner” ideas:  lower tax rates now, for us, or lower tax rates (and a stronger, more sustainable economy) later, for our kids and grandkids.

So when Len concludes in his paper that his proposal faces a lot of challenges, because “there is the reluctance of politicians to do anything that creates winners and losers” and that “[t]ax reform and health reform will both lead to that result”, I think he sells his idea short, neglecting the beauty of his combining tax reform with health reform in the way he’s done.  The public and politicians don’t like the idea of tax reform when any revenue neutrality, or especially the revenue-gaining side of that revenue neutrality, is obvious.  The Tax Reform Act of 1986 was revenue neutral, involving losers as well as winners, and yet passed largely because the public and the politicians didn’t focus so much on the losers, because the proposal raised revenue from corporations and lost revenue collected from households (i.e., gave tax cuts to them).  (Most non-economists don’t get the notion that corporations don’t ultimately pay the corporate income tax–actual people do, whether they be consumers, workers, shareholders, etc.)  Similarly, I think that a proposal for a new tax (such as a VAT) will go over much better if it immediately buys something perceived as a really good thing–such as universal health care.  People won’t think of it so much as a nasty fundamental tax reform effort that would inflict pain on those very people (politicians included) who most enjoy the current income tax system and all its inefficiencies, just the way it is.  (Len makes the point that fundamental tax reform will go nowhere anytime soon unless it hitches a ride on the health reform train.)  And if the new VAT buys even more than that, allowing income tax rates to be cut and the deficit to be reduced, then even if there are some truly hard choices (such as cost controls and reduced tax subsidies) wrapped up in that attractive package, I think it could look like an overall winner.

I think Len’s really onto something here.

The Next Crisis

May 26th, 2009 . by economistmom

Economy.com’s Mark Zandi gave the Friday luncheon speech at the National Tax Association conference last week (the Obama Administration’s Austan Goolsbee gave the Thursday speech).  Mark said the “worst is over“–not that the recession is over, but that the downward spiral seems to be in less of a freefall lately, and Mark now predicts the recession will end in October of this year.  (I believe he even confidently predicted a very specific October 10th–with a big grin on his face.)  Mark did warn, however, that the recovery will not be “V-shaped,” but “U-shaped”–that this time the steepness of the drop will not be matched with an equally quick and dramatic recovery, because of continued weakness in the housing sector and hence personal consumption, and the lingering drag that’s been put on state and local governments.

But even more interesting to me was Mark’s choice for the final slide in his powerpoint (sorry, do not have the slideshow to link to) which was called “The Next Crisis.”  It was a chart showing U.S. government debt (federal, state, and local combined) as a share of GDP, which he was predicting would reach 100 percent within ten years.  (By reference, CBO has estimated that under President Obama’s budget proposals, federal-only net debt would reach more than 80 percent within ten years.)  As our nation reaches that extraordinarily high level of public debt, it will be another crisis, because it’s likely to cripple the flow of funds to our economy as interest rates rise and the ability to borrow from increasingly-reluctant foreign lenders reaches its limits.  It’ll be the next crisis though, not this crisis, because right now the federal government is indeed the “spender of last resort,” and those in the private sector (households and businesses) are busy getting back to living within their means (i.e., saving more).  In a few more years it will be the government’s turn to start saving again, when it’s obvious that the next crisis is not just coming, but here.

Bill Maher Explains the Problem of Fiscal Irresponsibility

May 23rd, 2009 . by economistmom

bill-maher

Parts of comedian Bill Maher’s LA Times op-ed are a little inappropriate for EconomistMom’s website, but there’s enough I can quote here that shows Bill’s perspective is not really that different from mine.  (Thanks, Brooks, for pointing this out to me.)  Bill’s focus and motivation for the column begins with California’s fiscal woes, but he’s really explaining, more generally, his principle of why “superheroes can’t save” us and how we are all the “villains”:

You see, our state is designed to be ungovernable because we govern by ballot initiative, and we only write two kinds of them: “Spend money on things I like” and “Don’t raise my taxes.” More money for teachers and firefighters? Check “yes”! High-speed rail? “Cooool!” Drug treatment for former child actors? “Sure, why not?” But don’t even think of taxing me for any of it.

That’s not an answer! Newt Gingrich had it right when he said, “People don’t elect presidents who tell them to sacrifice. They elect presidents who solve problems for them so they don’t have to sacrifice.”

Right, like Obama should solve global warming by working a little harder in his secret White House lab and coming up with a car that runs on seawater and emits gold doubloons. Someone who magically gives you everything and asks nothing in return? Bernie Madoff tried that plan; it didn’t work.

This is why our founders wanted a representative democracy, because they knew that if you give the average guy the chance, he’ll vote for a fantasy world with no taxes and free beer.

California used to be like the rest of the country, following the instructions in the Constitution and everything. But then we chucked that, and now our state is governed not by elected representatives but by special-interest people standing in front of the supermarket with clipboards asking, “Would you like to sign a petition to cut your taxes?” And then that becomes law. Proposition 14C: Two weeks paid leave for hangovers and universal teeth whitening, paid for by Central Valley cow gas. “Vote ‘yes’ on gain, ‘no’ on pain.”

So the state will probably go bankrupt. It’s sad that we’ll be closing the schools, but you’ll want to keep the kids at home anyway, because we’re closing all the prisons and letting all the rapists out.

That’s a lot more entertaining than how I usually put it.  Bill would probably agree with me that what we really need for fiscal responsibility is a benevolent dictatorship–forget this representative democracy stuff.  (Of course, Bill would probably suggest he should be anointed that benevolent dictator.)


Why Is President Obama Favoring the Bush Tax Cuts Over His Own?

May 21st, 2009 . by economistmom

goolsbee-obama

I posed this question to Obama economic advisor (Council of Economic Advisers member), Austan Goolsbee, today at a National Tax Association conference in Washington.  I merely pointed out that the single most costly item in the Obama budget is the extension of most of the “Bush tax cuts”–$2 trillion worth out of $2.6 trillion of them, entirely deficit financed–and that by the Obama Administration’s own choice their own tax cut, the extension of the Making Work Pay tax credit, in contrast is being held to a deficit-neutral standard, linked to an offset that no one in Congress seems eager to pursue (carbon revenues which no one wants to actually raise).  So I asked which tax cuts does Austan like better, those Bush tax cuts or the Obama ones?  Because it still puzzles me why the Obama Administration would present a budget that lowers the bar on the Bush tax cuts over their own.  Austan took my question with good humor and style, regretting that he had called on me, then pointing out that I was bringing up the old “baseline issue” and launching into the Obama talking point about how the Obama budget actually reduces the deficit (relative to Bush policy extended) by $2 trillion.  I followed up insisting that I was not getting at the baseline issue but merely asking him about their choices about tax policy–that even with a policy-extended baseline and the large revenue reductions implied by it, that doesn’t mean that extension of those “middle-class” Bush tax cuts, specifically, is the only way to get there.  I merely wanted to know: Why does President Obama think the Bush tax cuts are more worthy than his own?

Austan then said something about the label “Bush tax cuts” being just semantics.  He never really answered the heart of my question.  But here’s another label for those deficit-financed Bush tax cuts that might not just be semantics:  “NOT the largest tax increase in American history.”  My friends at the conference reminded me that that’s probably the honest answer to my question.

The Washington Post’s Steven Pearlstein: Born Again?

May 20th, 2009 . by economistmom

Steven Pearlstein has a column in today’s Washington Post called “Budget Scolds Shouldn’t Drown Out the Chorus Calling for Health Reform.” I guess I qualify as one under Steven’s definition:

In the political menagerie that is Washington, there exists a species known as the budget scold — analysts, advocates, editorial writers and politicians who possess a fierce determination to bring the federal budget into better balance.

Budget scolds have a wonkish demeanor and a skeptical outlook. They possess an undue fascination with rules and processes, and speak in the arcane language of baselines, sunsets and pay-fors.

Perhaps I find the terminology “budget scolds” a little less insulting than E.J. Dionne’s characterization of us as “deficit carpers“… But Steven truly puzzles me when he launches into his case for telling me/us to “back off”:

There have been times when the budget scolds have saved the country from short-sightedness and pulled us back from the fiscal brink. There have been other times — and this is one of them — when their well-intentioned hand-wringing borders on the politically naive and threatens to derail much-needed reforms.

What is it about our “hand-wringing” this time that will “derail” something wonderful from happening, when in the past it has “saved” us from fiscal ruin?  Why will our worrying about the costs of health care reform prevent our nation from pursuing the benefits of such reform?  Steven later refers to our worry as putting a “straightjacket” on the prospects for health care reform.  I think our worry is more akin to putting on a “thinking cap” on health care reform.  Budget constraints don’t derail reforms; they force smarter, more thoughtful reforms that weigh costs against benefits and prioritize accordingly.  How do humans behave when unconstrained?  Think all-you-can eat buffets or open bars or my example in my very first blog post about being turned loose in a shopping mall for a five-minute all-you-can-grab “free” shopping spree when you are later handed the bill… The outcome is never pretty, and there’s typically a lot of post-binge regret.

So what is different this time around, that makes reminders of those budget constraints now obstructionist rather than helpful?  Steven tries to explain:

Do you think, maybe, we could cut the guy [aka President Obama] a little slack? After all, he’s been in the job all of four months. He inherited two wars and the worst economic crisis in 75 years. And he came to office after an eight-year orgy of tax cutting and spending.

Ah, so what’s different is it’s President Obama’s policies now…  I do agree with Steven that this President’s a lot more likeable, inspiring, and smart.  And I voted for him and support most of his policy proposals.  But let’s face it:  what Steven describes as that “eight-year orgy” of tax cuts (and spending, but really Steven mostly means the tax cuts) is largely being continued in President Obama’s budget.  As I’ve pointed out before, the Obama budget chooses to continue $2 trillion worth of the $2.6 trillion (over 10 years) in Bush tax cuts–and not just continue them, but deficit finance them.  (Extension of the “Bush tax cuts” is the largest single piece of deficit spending in President Obama’s budget, by far.)  I know that Democrats (including myself and my various bosses on the Hill) criticized the Bush tax cuts for years as being “obscene” because of  both their cost and their distribution (tilted too much to the rich), but that cost part–that it added trillions of dollars to the debt and the burden left to our kids–was still most of the “obscenity” of it all.  Are those tax cuts no longer part of some obscene “orgy” now that they’re being proposed by President Obama and could very well become known as the “Obama tax cuts” from now on?

And speaking of those (obscene) tax cuts, in today’s online discussion of Steven’s column on washingtonpost.com, Steven had this response to a reader, where Steven seems to space out on the sheer magnitude of these deficit-financed tax cuts, while acknowledging that he’s not that fond of all the tax cuts in the President’s budget (emphasis added):

Washington, D.C.: Health care reform is important; I certainly want to see it happen. But I can only truly embrace a plan that doesn’t tie our hands further. Don’t you think that with all of the spending on the stimulus, bailout, etc., something (like tax cuts) has got to give?

Steven Pearlstein: Yes, I wish Obama had not given out so many tax cuts. Its not a huge impact on the budget, but I think it was unnecessary. Middle income people value tax cuts but they value a good budget even more.

Finally, Steven closes his column with this:

In all of history, no revolution was ever made by budget analysts. Health reform requires leaders with the foresight and confidence to take a leap into the unknown.

Of course budget analysts don’t cause revolutions (if we were that exciting we’d be invited to more parties)–but perhaps, by Steven’s own earlier admission, they’ve helped our nation avoid some fiscal disasters.  The role of the “fiscal hawk” (a bit better-sounding than “scold” or “carper”) is to force policymakers to “get a grip”–not to encourage them to jump off a cliff with “faith” in a presently-invisible fiscal parachute that might or might not materialize.

So I conclude that Steven has somehow become “born again” in the glow of our very inspirational new President.  (About a year ago, I was highlighting here how well Steven explained how our nation’s “living beyond our means” was catching up with us.)  But as inspiring as I find the President, too, I know that he still doesn’t have it all right (he isn’t fiscally perfect, as his budget demonstrates), and that he still has to work with a much more imperfect Congress.

Former McCain Advisor Doug Holtz-Eakin Calls for Bipartisanship in Health Care Reform

May 18th, 2009 . by economistmom

It’s uplifting to follow former campaign advisors after they leave the campaign trail.  McCain campaign economic advisor Doug Holtz-Eakin (also former director of the Congressional Budget Office and former chief economist for the Bush Administration’s Council of Economic Advisers) is a case in point.  Now Doug is free to say what he really thinks is necessary to come up with wise fiscal policies (in this case, in health care reform): working with the other side, not against them.  His policy paper contains lots of good ideas that most economists (whether Ds or Rs) agree on, such as engaging in comparative effectiveness studies and sharply reducing the tax exclusion for employer-provided health care (which is the largest tax expenditure in the federal budget).  In his conclusion, Doug argues that now the politicians need to come together on ideas like these just like the economists (who are no longer working on campaigns) have:

Republicans should work with Democrats to demonstrate bipartisanship of the outcome at every stage. When a bill is considered in committee, at least one prominent Republican should be willing to vouch that the bill, while perhaps not perfect, represents the kind of compromise that bipartisan efforts require. If not, Republicans should depart the process.

The strategy should involve engagement with all stakeholders, especially the states. States have made numerous efforts at significant reform. “Blue” states such as Massachusetts and “red” states like Utah have passed bipartisan reform. The agreement of these stakeholders will raise the legitimacy of any federal reform as well as avoid undercutting their own efforts.

Each side should be permitted a key objective at the outset. Republicans should veto any new federal government insurance plan and demand fiscally responsible reforms to existing programs. In return, they should acknowledge the need to expand coverage in the near term and include a path to broad coverage.

The United States is in need of deep reforms to the health-care sector of its economy: it spends too much, covers too few people, and gets too little for the money. Bipartisan reforms that stress a reformed delivery system, better value in care, respect for state-level reform efforts, more efficient insurance markets, and better tools can address the deep problems of our health-care system in a fiscally responsible way. These reforms should be in the interest of Democrats and Republicans alike.

Taxes Would Have to Go Up by HOW Much?!

May 17th, 2009 . by economistmom

Bruce Bartlett had another great Forbes column last week, explaining what the latest Trustees’ reports on Social Security and Medicare imply about the tax increases required to cover the currently projected gaps between the spending in these programs and the revenues dedicated to funding these programs.  His answer is prominently highlighted in the title of the column:  “The 81% Tax Increase.”  Pretty shocking, mainly because when you hear “81%” right next to the word “tax,” what comes into your mind is maybe an 81% tax rate–or maybe even an 81% tax rate levied in addition to whatever effective tax rate you’re already paying.  But let’s look at how Bruce comes up with this 81% tax increase:

[T]he personal income tax [will raise] about 10% of GDP in coming years, according to the Congressional Budget Office… [and] taxpayers are on the hook for Social Security and Medicare by these amounts: Social Security, 1.3% of GDP; Medicare part A, 2.8% of GDP; Medicare part B, 2.8% of GDP; and Medicare part D, 1.2% of GDP.  This adds up to 8.1% of GDP. Thus federal income taxes for every taxpayer would have to rise by roughly 81% to pay all of the benefits promised by these programs under current law over and above the payroll tax.

The math is correct:  if federal personal income taxes start at around 10% of GDP, and an additional 8.1% of GDP is needed to fill the gaps, then if the gaps in Social Security and Medicare are to be filled entirely by an increase in federal personal income taxes, they would have to be increased by 8.1/10.0 = 81%.  But the psychological framing that goes on in one’s mind which may lead one to envision an 81% tax rate is way overblown, because the bottom line is that even if we did fill all of the Social Security and Medicare gaps (going out over the “infinite horizon” by the way) with an increase in the personal income tax only, the overall effective personal income tax rate would be 10 + 8.1 = 18.1% of GDP–or an overall effective personal tax rate of 18.1%, which is far less scary (and much smaller) than 81%.  Also, when you consider that all federal taxes currently add up to about 20% of GDP, the increment to the overall effective federal tax rate would be just over 40 percent of the 20% rate, rather than 81 percent of a 10% rate.  So adding 8.1% of GDP to federal taxes overall would imply raising the level of taxation from 20% of GDP to, yes, closer to 30% of GDP (20% + 8.1% = 28.1% tax rate)–but nowhere near something as scary-sounding as an “81% tax increase” (which sounds like an 81% tax rate).

I love Bruce’s straight-forward math and his bottom-line point that people have to start facing the reality that either we’ll have to be willing to see benefits pared back at least somewhat or else we’ll have to put up with this level of tax increases:

The reality, which absolutely no one in either party wishes to face, is that benefits are never going to be cut enough to prevent the necessity of a massive tax increase in the not-too-distant future. Those who think otherwise are either grossly ignorant of the fiscal facts, in denial, or living in a fantasy world.

But I just worry that emphasizing a figure like “The 81% Tax Increase” just keeps those anti-tax, tea-party-loving folks–and maybe even the bulk of more open-minded Americans–resistant to the idea of any solution involving any part of the tax side of the equation.  I mean, wouldn’t it evoke a much different reaction if Bruce had titled his column something like “The 28% Tax Rate to Keep Our Current Commitments to Social Security and Medicare”?

How Health Care Reform Is Sort of Like a Costco Membership

May 15th, 2009 . by economistmom

costco-cards

In today’s Wall Street Journal, the President’s budget director, Peter Orszag, explains that the fiscal challenges facing the U.S. government are almost entirely driven by the rise in health care costs, so that the best way to get the math right (to bring government spending more in line with government revenues) is to pursue major health-care reform.  But Peter’s not talking about reform that would reduce spending by reducing access to subsidized health care; he’s talking about expanding coverage and saving money at the same time.  How does this work?  As Peter explains:

The good news is that there appear to be significant opportunities to reduce health-care costs over time without impairing the quality of care or outcomes. In health care, unlike in other sectors, higher quality currently seems to be associated with lower cost — not the opposite…

How can we move toward a high-quality, lower-cost system? There are four key steps: 1) health information technology, because we can’t improve what we don’t measure; 2) more research into what works and what doesn’t, so doctors don’t recommend treatments that don’t improve health; 3) prevention and wellness, so that people do the things that keep them healthy and avoid costs associated with health risks such as smoking and obesity; and 4) changes in financial incentives for providers so that they are incentivized rather than penalized for delivering high-quality care.

Already, the administration has taken important steps in all four of these areas…

But more must be done. To transform our health-care system so that it improves efficiency and increases value, we need to undertake comprehensive health-care reform, and the president is committed to getting that done this year. Once we do, we will put the nation on a sustainable fiscal path and build a new foundation for our economy for generations to come.

But wait–more, for less?  There are lots of skeptical fiscal policy experts out there, as New York Times columnist David Brooks points out:

[W]hat exactly is the president proposing to help him realize hundreds of billions of dollars a year in savings?

Obama aides talk about “game-changers.” These include improving health information technology, expanding wellness programs, expanding preventive medicine, changing reimbursement policies so hospitals are penalized for poor outcomes and instituting comparative effectiveness measures.

Nearly everybody believes these are good ideas. The first problem is that most experts, with a notable exception of David Cutler of Harvard, don’t believe they will produce much in the way of cost savings over the next 10 years…

The second problem is that nobody is sure that they will ever produce significant savings. The Congressional Budget Office can’t really project savings because there’s no hard evidence they will produce any and no way to measure how much. Some experts believe they will work, but John Sheils of the Lewin Group, a health care policy research company, speaks for many others. He likes the ideas but adds, “There’s nothing that does much to control costs.”…

…and there’s even some nay-saying, or at least back-pedaling, among the very same health care leaders who the President claimed pledged to cut $2 trillion in health care spending, according to a report by Robert Pear which also appeared in today’s New York Times (emphasis added):

After meeting with six major health care organizations, Mr. Obama hailed their cost-cutting promise as historic.

“These groups are voluntarily coming together to make an unprecedented commitment,” Mr. Obama said. “Over the next 10 years, from 2010 to 2019, they are pledging to cut the rate of growth of national health care spending by 1.5 percentage points each year — an amount that’s equal to over $2 trillion.”

Health care leaders who attended the meeting have a different interpretation. They say they agreed to slow health spending in a more gradual way and did not pledge specific year-by-year cuts.

The Washington office of the American Hospital Association sent a bulletin to its state and local affiliates to “clarify several points” about the White House meeting.

In the bulletin, Richard J. Pollack, the executive vice president of the hospital association, said: “The A.H.A. did not commit to support the ‘Obama health plan’ or budget. No such reform plan exists at this time.”

Moreover, Mr. Pollack wrote, “The groups did not support reducing the rate of health spending by 1.5 percentage points annually.”

He and other health care executives said they had agreed to squeeze health spending so the annual rate of growth would eventually be 1.5 percentage points lower.

The promise of cost savings through major health care reform which includes expanded coverage is oddly (or EconomistMom-ly) similar to the promise of saving money on the family budget by getting a membership to Costco.  How so?

  • A membership to Costco requires an up-front investment of the annual membership fee for the privilege of shopping there and the potential to reap savings in the future so that your investment (membership) will ideally pay for itself.
  • What exactly you are buying the right to in terms of future shopping options is uncertain at the time you pay the membership fee; you don’t know exactly what goods will be available for purchase at Costco over the next year, how stable the selection will be once you find some things you indeed like to purchase, or how great the prices will be compared to the prices at other stores (which don’t require a membership fee).
  • Whether you actually save money from your Costco membership depends on how you view/use your Costco option.  Will you buy things you would have bought at a more expensive store anyway?  Will you buy only what you need and not have to waste any, given the humongous sizes of the things one must put up with at Costco?  Or might you end up buying things you would not otherwise have bought?  In other words, will the Costco membership actually expand your consumption possibilities, rather than help to constrain, restrain, or ration them?  (When one “has to spend money to save money,” which side wins?)
  • If  you prove disciplined enough with your family budget and that Costco card (buying from Costco only those things you would have bought anyway from other stores), how much of your family budget is actually able to benefit from the Costco savings?  What are the tradeoffs in terms of selection/product variety and convenience?  Do I often choose the more expensive retail option anyway, because I’d rather pay more and get it more quickly and easily, and get bundles of goods better tailored to my short-term (as opposed to multi-year) consumption needs?  (Yes, and I’m sure there are other moms out there who’ve been stuck with a hundred bags of fruit snacks or dozens of boxes of mac and cheese that their kids have tired of long before you’ve gotten through consuming them…)  And would I be willing to have the Costco membership work to help me save more money if it required that I give up the option of shopping at the more convenient but more expensive stores?  (No.)
  • My family’s had our Costco membership for about 15 years now (it began as a “Price Club” membership); why, we’re even “Executive” members now.  If you asked me now whether I’ve saved money on net for our family budget by having had the membership and spent the thousands of dollars each year there, I’m not sure what the answer would be (yes or no), and I’m not sure how I’d begin to quantify that even if I had kept track of all my Costco purchases.

So the promise of health care cost savings from health care reform is quite a bit like the promise of family budget savings from a Costco membership.  It’s certainly good to have lower-cost options available to us.  But we don’t know exactly what we’ll be able to buy with those options in the future, we don’t yet understand what tradeoffs we’ll face, and we certainly have no guarantees we’ll end up making better choices just because we’re faced with better options.  I certainly wouldn’t take any presumed future savings from my Costco membership and go use it to buy a new car–even through Costco.

« Previous Entries