Today the Chair of the President’s Council of Economic Advisers, Christina Romer, delivered these remarks at the Center for American Progress. (Full text of speech is here.) Based on the selected excerpts, it’s clear that the purpose of the speech was to make the case that health care reform is what the Administration regards as the most important, most essential step to getting back on a sustainable fiscal path. Dr. Romer’s final point (as excerpted on the White House website), emphasis added:
“In health care reform we have an opportunity to navigate the difficult path between long-run fiscal responsibility and sensible short-run macroeconomic policy. Done correctly, health care reform can genuinely slow the growth rate of health care costs and thus put us on a path to greatly reduced budget deficits in the long run.”
Earlier in her speech, Dr. Romer referenced the fiscal outlook paper by Alan Auerbach and Bill Gale–a paper that points out that much of the fiscal “problem” was caused by Bush Administration policies. Dr. Romer suggests that thus much or most of the “problem” is not the Obama Administration’s fault, and the longer-term imbalance would be largely solved if we just (”correctly”) reform health care (emphasis added):
“(Economists) Auerbach and Gale calculate that roughly half of the long-run deficit is due to the policy actions of the past 8 years. According to a study by the Center on Budget and Policy Priorities, just 3 percent of the long-run fiscal problem is due to the ARRA. The rest of this yawning gap is due to projected rises in spending on entitlement programs, primarily Social Security, Medicare and Medicaid. Some of this is the result of the aging of the population. But the far greater source is the fact that health care costs, both public and private, are rising much faster than GDP.”
But right from those economists’ (Auerbach and Gale’s) mouths:
The long-term fiscal problem is to some extent a medical care spending growth problem,in that the projected growth in Medicare and Medicaid is perhaps the single most important cause of the growing imbalance between projected revenues and expenditures. Under the projections that employ Administration policy, 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, but would still leave a fiscal gap of almost 5 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 more than 3 percentage points annually over the next 75 years. That is, 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.
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 estimated gap is increased by more than 5 percentage points of GDP just by continuation of the policies that were enacted during the Bush Administration.
In other words, even if policymakers could miraculously figure out how to keep health costs rising at only the growth rate of the economy–eliminating all of the excess growth of health costs–that would still not close the fiscal gap. And if they’re just wildly successful and cut the excess growth of health costs by more than half, a gap of 5 percent of GDP would remain, which coincidentally is the gap created by the continuation of Bush Administration policies. In other words, we’d have to be wildly successful at cutting excess health costs, only to be left with a gap that represents the cost of President Obama’s choosing to continue the fiscally irresponsible policies the Bush Administration started.
Oh, and the buzz about Christina Romer’s speech today was that the Administration seems to be coming around to the idea of taxing employer-provided health care–or at least the version that imposes an excise tax on high-end health insurance plans and thus doesn’t seem as much a “tax on real people.” That’s good news because the excise tax is both a better strategy for raising revenue (from a broader-than-above-$250K tax base) as well as a more “correct” strategy to help contain health costs as part of health care reform.