Talking Fiscal Policy (Too) at Jackson Hole
August 23rd, 2009 . by economistmom
First, no, I wasn’t “talking it” there–I wasn’t invited. But at least a few “fiscal hawkish” people were there (the photo is courtesy of one of them), and it seems that the fiscal policy discussions might have been the most interesting part of the mostly-monetary-policy Federal Reserve conference (sponsored by the Federal Reserve Bank of Kansas City). From the Wall Street Journal’s Jon Hilsenrath (who, lucky him, is there in Jackson Hole):
JACKSON HOLE, Wyo. — Central bankers don’t make tax and spending decisions, but fiscal policy was a major focus of this year’s Federal Reserve conference here in the Grand Tetons. Three questions drew attention at a Saturday morning sessions: Are deficits a threat to the outlook that needs more attention? How well is the Obama Administration’s fiscal stimulus plan working? And is more stimulus warranted?
The answers to the questions: Yes. It not clear. And no.
Large, long-term deficits could cause “serious economic disruptions,” said economist Alan Auerbach of the University of California at Berkeley, who co-authored a paper presented here with William Gale of the Brookings Institution, a Washington think tank largely populated by Democrats. Over the next decade, they estimated, the U.S. budget deficit will add up to $10 trillion, and possibly more. Credit markets, they added, have begun to signal a risk of U.S. government default, something unheard of just a few years ago.
In their paper, the authors gave the Obama administration’s stimulus plan a mixed report card. While stimulus was needed, they said, it came a little too late and wasn’t optimally designed. For instance, some of the administration’s spending programs haven’t been implemented quickly. Other programs, like the Making Work Pay tax credit for low-income households, weren’t originally conceived as stimulus…
Alan and Bill also point out that the U.S. failed to provide enough stimulus in the 1930s (and Japan similarly failed in the 1990s), because of too much worry about the budget deficit–too much “fiscal hawkishness.” But today?
But today, the two economists said, more stimulus isn’t warranted — in part because the economy shows signs of recovering and in part because of [more legitimate?] worries about long-term fiscal woes.
And yes, I did hear the news that snuck in during happy hour on Friday (and halfway through the Jackson Hole conference), about how the Administration’s ten-year budget outlook (which will come out Tuesday) will show a $2 trillion deterioration–to deficits totaling something over $9 trillion. It is “new news” even though CBO had already estimated the President’s budget to lead to ten-year deficits of $9.1 trillion, because: (i) it means the Administration’s economic forecast has deteriorated significantly since the spring and leads one to wonder if CBO’s update (also coming out Tuesday) will move to a still worse outlook (maybe $10 trillion as Alan and Bill predict?); and (ii) the Administration had previously reacted to the CBO’s previous ($9.1 trillion) forecast with an acknowledgment that yes, if the deficits turned out to be as high as that, then that would be an “unsustainable” fiscal situation. From an AP story back in March (emphasis added):
White House budget chief Peter Orszag said that CBO’s long-range economic projections are more pessimistic than those of the White House, private economists and the Federal Reserve, and that he remained confident that Obama’s budget, if enacted, would produce smaller deficits.
Even so, Orszag acknowledged that if the CBO projections prove accurate, Obama’s budget would produce deficits that could not be sustained.
“Deficits in the, let’s say, 5 percent of GDP range would lead to rising debt-to-GDP ratios that would ultimately not be sustainable,” Orszag told reporters.
I think we can anticipate that the Administration will spin their new $9 trillion+ projection in a couple ways: (i) the economy has been struggling worse than we anticipated because of the lingering effects of failed Bush economic policy, that weak economy has taken a toll on revenues, and these worse-than-expected economic conditions are largely beyond the Obama Administration’s control; and (ii) this makes the case for doing something (quickly) about health care reform all the more critical, because health care costs are the greatest threat to our fiscal outlook and so should be our greatest fiscal policy priority.
A hint of this messaging comes from the Obama Administration’s Christina Romer, who had this to say to WSJ’s Jon Hilsenrath (from same story, although I’m not sure if she was actually in attendance at Jackson Hole; emphasis added):
Christina Romer, who chairs Mr. Obama’s Council of Economic Advisers, said reducing the deficit is a priority for the Obama Administration and that health care reform, which could bring down government health care spending in the long-term, is part of the administration’s solution to the problem. “Deficits do matter,” she said. “No one believes that more than the president.”
And you can expect that I’ll remind readers on Tuesday that we have a revenue crisis as much as a health care crisis, and that in a lot of ways fixing the revenue system would be easier than fixing the health care system, and that we shouldn’t be ignoring that big and reliable tax policy lever even as we struggle to find the handle on the health care one.
Diane,
Re that excerpt from WSJ:
Christina Romer, who chairs Mr. Obama’s Council of Economic Advisers, said reducing the deficit is a priority for the Obama Administration and that health care reform, which could bring down government health care spending in the long-term, is part of the administration’s solution to the problem. “Deficits do matter,” she said. “No one believes that more than the president.”
Does the Administration actually project that, over the long term, federal spending on healthcare will be lower with some form of “reform” per their preferences, including expansion of federal health coverage to 47 million (or close to it) more people, vs. the status quo? Or, when they talk up the importance of their “reform” for reducing projected federal spending on healthcare, are they just referring to the effect of cost-containment measures within reform, somehow forgetting about that other little element in their “reform”, the cost of expanding coverage to 40+ million more people?
I assume they are not making the claim that federal spending will be lower with reform (i.e., that the cost-containment measures fully/more than compensate over time for the cost of expanded coverage), or that if they are making such a claim, it has not been scored as such or even anywhere close to it (quite the contrary), nor backed up by independent analysis (again, quite the contrary).
Is my assumption correct, that even the Obama Administration acknowledges that federal healthcare spending over short, medium, and long-term will be higher, not lower, with “reform” (along the lines of current bills or the general outlines Obama has indicated) vs. continuation of the status quo?
If so, why aren’t the media calling them on it every time they say things like what Romer says above?
And that even leaves aside another important point, which is that, given our already unsustainable long-term fiscal imbalance, reducing projected federal spending on healthcare was already necessary, and if we use such savings to even partially offset incremental spending (expansion of coverage), we will have to dig even deeper to address the fiscal imbalance we already face.
Just to add an analogy for good measure (on top of other analogies I’ve posted on other threads), if my assumption is correct that even the Obama Administration believes that “reform” as a whole (cost containment measures AND expansion of coverage) will increase federal healthcare spending even over the long-term vs. continuation of the status quo, then their emphasis on the need to reduce projected federal spending on healthcare as a large part of the rationale for “reform” is like their telling an obese person who needs to lose weight to start eating large quantities of Hershey bars on the basis that the caffeine and the sugar will increase his metabolism and cause him to burn calories at a faster rate and thus lose weight — leaving aside the fact that the Hershey bars contain far more calories than the number of incremental calories burned due to the caffeine and sugar.
I think we can all agree with Diane’s summation that revenues deserve attn. Also in the discussion of reform you can note the tenative statments– reform /could/ bring down federal expenditures– probably not in the short term but perhaps in the longer term if medical cost inflation is checked. Of course too even if only insurance premiums grow at a lower rate, that leaves money in the pocket of Americans that can make tax increases easier to tolerate, or expand economic activity which then enhance revenue. But be it directly or indirectly these new deficit estimates really do mean that revenue enhancement is not optional. It is manditory.
… we have a revenue crisis as much as a health care crisis …
We have a fiscal crisis much more than a health care crisis.
Exactly one electoral cycle ago the left was denying there was any “crisis” regarding Social Security, it was an abuse of the word, we could carry forth as things are for years and improve them in due time. Same thing today with health care. (There’s a Lake Woebegone effect at play: people have heard so much in the press about the troubles of the health care system that they report in polls that yes they think it needs fixing … but at the same time 80% say that with their own health care they are happy or very happy. Not a crisis, that.)
But when the credit rating of the US goes bust, that will be a true crisis nobody can deny.
S&P formerly projected that at 2027, but it’s pretty clear the future has been moved forward by 10 years or so.
That could put it at the end of Obama’s own stay in office — on his watch. Yeah, maybe the ship was aimed at the iceberg back in Ronald Reagan’s time — but he’d be the captain on the bridge who hits it. And that should be his #1, #2, #3, #4 and #5 concern.
Especially when one considers how much momentum, inertia, there is in the fiscal ship of state and how much time and effort it is going to take to turn it.
Taking $100 billion annual of revenue and spending it on health care … and then and another $80 billion of potential revenue and giving it to the energy companies (when CBO says they’d have been made whole with 15% as much) to start cutting CO2 maybe 15 years from now, to produce small benefits 100 years from now … that wasn’t a “crisis” expenditure either. But that’s a whole lot of potential revenue combined looking to be made unavailable to deal with the real crisis.
“Fiscal crisis” again includes spending, tax increases alone will never cover the whole gap, and politically they are not coming without spending cuts as part of the “deal”. And if one thinks tax increases are hard to enact, cutting spending is a whole lot tougher, just ask the “Hands Off My Medicare!” crowd.
But cutting millionaires out of Medicare and Social Security benefits closes the fiscal gap just as much as raising taxes to pay benefits to them — and is a whole lot less damaging to the economy, so it is past time to start working up some such ideas seriously.
“…reform /could/ bring down federal expenditures– probably not in the short term but perhaps in the longer term…”
I’m always very impressed by politicians who say they’ll create commissions and take other steps that will reduce government spending starting later, after they are out of office. That’s so very convincing.
No doubt it will be much easier for later politicians to make spending cuts that current ones can’t.
Well, maybe not easier — but they may become a whole lot more motivated about it when water is pouring through the hole in the hull and they are bailing.
Brooks,
You’re right; reform as currently envisioned by all of the bills in Congress that include a mandate to purchase will cost more than the current system. But the current system is profoundly immoral. It cannot be defended by anyone except as “I got mine, Jack, f*#& you”.
I think we need to reboot the entire process. Rather than quarreling about some “vertical” division of the insured pool between “all-private” and “all-public” coverage plans, we need to divide coverage at some “horizontal” point which is a significant percentage of the previous year’s taxable income — twenty percent? — up to some fairly high maximum, say $30,000. Everyone would belong to this ginormous risk pool of adults under 65, of which something like 5-10% would exceed the “kick in” point and make covered claims.
This government-run “catastrophic” plan should include one complete physical each year for adults and doctor visits for children with modest co-pays. Kids who don’t have one of the horrible genetic conditions are usually super-cheap to insure, so this would be a minor cost to the plan.
Premiums should be the same for everyone of the same age, rising through life, since for most people income does as well. Subsidies would be available for the premiums but should not be very high because the costs will be inherently limited by the “catastrophic” nature of the plan.
Below the “kick-in” point adults could purchase private policies or go it alone and self-insure. With the danger of enormous claims eliminated, the incentives for private insurers would become more like any other profit making enterprise. They would serve their customers, instead of scheming to eliminate them.
Before a claim could be made from the catastrophic plan, documentation that the “deductible” had been met by a private insurer or by direct payments to providers. Electronic medical records could automate this process over time.
Yes, this would to a degree “renege” on the “if you like your current plan you can keep it”, but not entirely. One can expect that the providers of current groups would be eager to participate in such a risk-limited provision of “pre-paid doctor visits”, which is essentially what they would be pedaling. There would be “Cadillac” plans with coverage for alternative therapies and “Chevvies” only good for services from a capitation-paid primary provider. I personally think that people would like to keep choice in this area, and that the “minimum standards” proposed after five years would be profoundly unpopular.
Let any “standards” be applied to the providers by strengthening local review boards and public education that empowers them. Get rid of the egregiously inept, and you will find that quarrels about Tort Limitations will ease. A minority of doctors performs a majority of malpractice.
In the I/T industry it has been determined that 10% of programmers create 80% of the “bugs” in programs. “Malware” for sure.
Jim,
You can’t cut millionaires out of Medicare because they’ve paid into it along with everyone else. In fact, since there’s no “cap” on the Medicare contribution of 3% of gross salary (which includes income from self-employment but not stock options and the like), most millionaires have probably made large contributions to the system. It would be wrong to bar them from claiming benefits from a system to which they have contributed so much.
Other than that, your observations can’t be faulted. Voters — left and right — wear blindfolds about “their” subsidy, credit or spending. Every one else’s outlay is greasy, rancid pork — doubtless from the Bahamas (let’s see who knows about “Bahama Bacon”) — but mine is high-quality animal protein. Organic, free-range high-quality animal protein.
Anandakos,
Seems like we agree that (1) the federal spending-reduction argument is bogus, at least for “reform” as a whole (including the massive expansion of coverage) per bills and general proposals, (2) if we are/were looking at a “take it or leave it” choice between “reform” in its entirety (i.e., with that expansion of coverage and thus higher federal spending), a legitimate argument advocating such “reform” would be a moral argument*. That’s why I’ve been linking to and giving Eugene Robinson credit for this column http://www.washingtonpost.com/wp-dyn/content/article/2009/08/10/AR2009081002455.html . I would note, though, that although I praise Robinson both for making an important distinction and for calling out the bullsh*t on his side, I disagree with him on his moral framework in which he treats the deficit impact as if it were not part of the overall moral question. It is. Given our already unsustainable projected long-term fiscal imbalance and the fact that we already face (eventual) very substantial sacrifices, a moral calculus regarding some particular humanitarianism today that adds to our fiscal imbalance and thus adds to the eventual sacrifices and pain in the future must weigh the pain then against the alleviation of pain now (among other considerations, economic and moral). If you’re interested in elaboration, see my explanation here http://www.prospect.org/csnc/blogs/beat_the_press_archive?month=08&year=2009&base_name=post_covers_up_for_town_hall_h&3#comment-6286040 and my more general point here http://keithhennessey.com/2009/08/03/lynchpin/comment-page-1/#IDComment30252580 (the asterisks in my comment there were produced by some problem that site was having).
Re: your concept of universal catastrophic coverage and preventive care, I don’t know enough to have an opinion on it, but I’ve seen David Walker advocate something along those lines http://www.cnbc.com/id/15840232?video=1152838103&play=1
* Unless there is a strong argument (which I haven’t heard) that somehow this increase in federal spending would reduce private healthcare costs so much that most Americans would be better off.
The phrase should have been “that they would be peddling”. It didn’t look right when I wrote it, but….
Brooks,
Certainly, the immorality of inter-generational debt transfer for personal gain rather than national investment is also a serious issue. I did not mean to exclude it by highlighting the greed that fuels the shouters backing the current “you’re off the island since you can’t pay” system.
I want a catastrophic system along the lines of what I mooted to be on average completely paid for by premiums. No profit would be made by the government, but in any given year there would be a slight surplus or a slight deficit because actuaries aren’t completely perfect. But over a ten year period premiums should cover claims very closely.
Obviously there are Americans who can’t afford even catastrophic premiums so there would have to be support for them. But I expect that some of the current payments by Medicaid for the sorts of treatments covered by the catastrophic plan could be diverted to premium subsidies.
The other major element of Medicaid payments, to dependent children, would also be covered by the big Federal plan as well. So some not insignificant portion of current Medicaid spending could be used to premium subsidies. Clearly, the actuaries and people who study this all the time would score it were it considered more widely.
Why would it necessarily be better to provide this coverage through a public (government) plan rather than through private insurers?