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Finding the Path to Reduced Deficits

October 26th, 2009 . by economistmom

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.

4 Responses to “Finding the Path to Reduced Deficits”

  1. comment number 1 by: Brooks

    Re: Romer’s remark that:

    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

    How many times is the Obama administration going to get away with such spin before the media (new and traditional) start asking at least most of the time “Show us projections, provide the assumptions and explain the means to those results”.

    Has the Obama administration offered (1) long-term projections of a “bent curve” and related figures that show at what point, despite initially substantially increasing federal healthcare spending, “reform” will supposedly yield lower federal healthcare spending vs. current projections, and how changes (first higher, then supposedly lower) net out in NPV terms, and (2) a related set of assumptions and supporting explanations of policy changes that will produce that result?

    If they have provided the above, someone please tell me. Otherwise this is one of the biggest jokes I’ve seen in a while, adding a large new entitlement, “offsetting” it with spending cuts and tax increases that in some cases won’t really materialize anytime soon, and in all cases represent a level of budgetary sacrifice that we will eventually have to make anyway, and telling the nation that it’s the key to solving our long-term fiscal imbalance.

    Or perhaps they have the healthcare spending equivalent of Nixon’s “secret plan” to win in Vietnam.

    Their argument seems to be:
    1. We need to reduce the rate of excess cost growth of federal healthcare spending to solve our long-term fiscal imbalance problem.
    2. We’re doing something about healthcare (the something we’re doing is actually increasing federal spending, but never mind that).
    3. Therefore, what we’re doing is both good and necessary.

    Kind of reminds me of the business model of the Underpants Gnomes http://www.kossan.se/roliga-filmer/south_park_underpants_gnomes_.htm

    I don’t know if embeds work here, but I’ll try below:
    http://www.kossan.se/roliga-filmer/south_park_underpants_gnomes_.htm
    Kossan.se

  2. comment number 2 by: AMTbuff

    “Done correctly” would, at a minimum, mean reducing costs in the current Medicare and Medicaid programs before adding new liabilities. “Done incorrectly” is worse than doing nothing at all.

  3. comment number 3 by: Brooks

    Here’s something for which I’m willing to pay more taxes — or even expand the deficit, albeit insignificantly: Federal funding for both internal (e.g., federal government commission) and external (private sector — think tanks, universities, etc.) to produce a variety of potential solutions to our long-term fiscal imbalance problem, with projections scored by a neutral entity (e.g., CBO) via appropriate methodology (not limited by some aspects of CBO methodology). Such results would address the problem holistically and comprehensively and identify trade-offs in that context. Within that more rational framework, the “offsets” nonsense would be exposed, and incremental spending on a new entitlement (subsidies for the uninsured) would not be viewed in the abstract per some faux morality that ignores trade-offs, but rather as either worth or not worth incremental sacrifices (beyond the sacrifices we already face due to the long-term fiscal imbalance). Similarly, stimulus spending, if it is assumed to be not something that improves our debt-to-GDP over the long-term but rather something that mitigates suffering today at the expense of tomorrow, will be considered vis a vis that trade-off. And all other fiscal policy decisions will similarly be considered as part of the whole and thus in terms of trade-offs, which would be rational from both an economic and moral perspective, and hopefully the result would the achievement, much sooner than otherwise, of some “Grand Compromise” of tax increases and cuts in projected spending, and rational choices within each in terms of an fuller and more accurate picture of trade-offs and choices among those trade-offs based on our values and priorities.

    What would it cost to fund such an initiative? $10 million? Hell, it would be worth $100 million or more for the reasonable chance of more rational and responsible fiscal policy decisions, coming sooner rather than later.

    * As I’ve said before, “offsets”, if implemented, are better than nothing because they may mean doing the inevitable sooner than otherwise, but tax increases and spending cuts that are inevitable anyway are not really “offsets” to incremental spending just because they are labeled as such for rhetorical/political purposes.

  4. comment number 4 by: Jim Glass

    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.”

    Being that they keep selling health reform over and over with this message, while presenting exactly $0.00 in actual cost reductions “done correctly”, and instead using all kinds of games to cover up big cost increases, I’m beginning to suspect future generations may look back at this spiel as a candidate for biggest bill of goods ever sold in fiscal history.

    Yes, the Underpants Gnomes do tell the methodology here. (I was going to link to them myself, diseased minds think alike).

    More analytically, former CBO head Douglas Holtz-Eakin has his say about how the politicians are gaming CBO into scoring actual cost-increasers into cost cutters…

    “You may see a pattern developing. The Senate Finance Committee undertakes political economy malpractice, but the CBO does not mention it. There is a good reason: It can’t.”

    … And the Tax Foundation gives us pie charts of how these bills are financed.

    Wow, the Baucus bill’s cost is covered 44% by spending cuts!

    We all believe that, right?

    Although exactly how all those spending cuts are actually going to be done, and “done right”, is not precisely specified.