The Fiscal Conundrum

Doug Mataconis posts at OTB on a chart from Henry Blodget I’d planned to comment on, too:

The take-away? If we’re going to fix this problem, most of the work is going to have to be done on the spending side of the ledger.

I won’t bother posting the chart. Cruise on over to one of the links above to take a gander at it. It illustrates, depressingly, the discrepancy between federal income and outlays and the scope of the outlays for Social Security, Medicare, and Medicaid.

I made a comment over there that I’ll repeat here.

Arithmetically you cannot balance the budget simply by cutting defense spending. Strategically it would be ill-advised. Arithmetically, you can balance the budget simply by cutting discretionary spending—barely (if you include military spending). Strategically it would be ill-advised and operationally nightmarish. Do we really want to eliminate funding for courts, the FBI, food inspections, and so on? That doesn’t mean that defense or discretionary spending must be absolved from cuts, merely that we can’t achieve fiscal sanity just by cutting defense and other discretionary spending.

Although arithmetically we can bring the budget into balance by increasing taxes practically I think the idea is suspect. Two reasons: deadweight loss and it does nothing to control the growth in spending. That doesn’t mean that tax increases must be off the table, merely that it’s pretty unlikely we’ll be able to balance the budget simply through tax increases.

Theoretically we could achieve something resembling fiscal sanity through economic growth. Practically I think it’s extremely unlikely. Consider this chart of year-on-year GDP growth. Over the period of the last 25 years we haven’t even netted 3% growth in GDP per year. If we were growing like China, maybe. 3%? Not a chance. If you think we’ll grow our way out of our fiscal problems without raising taxes or cutting spending, I welcome your demonstration of how that will be accomplished. A hint: it won’t be accomplished by insulating buildings as the governor of Colorado recently suggested.

Practically I don’t believe it’s possible to arrive at anything resembling fiscal sanity without cutting healthcare costs (particularly at the state and local level). In order to cut healthcare costs while preserving some reasonable level of public health all of the stakeholders will suffer: insurance companies, hospitals, physicians, Medicare beneficiaries, and on and on to include nearly all Americans. Proposing suffering is never popular and, generally speaking, not a good way to get elected or re-elected.

Politically arrving at anything resembling fiscal sanity will require tax increases, defense cuts, cuts to discretionary spending, and cuts in entitlements, particularly Medicare. The formula proposed by Simpson-Bowles was probably about right although I’m not as convinced about the details.

Today neither political party is convinced of that.

15 comments… add one
  • The CBO has another chart which I personally like better.

    Today neither political party is convinced of that.

    QFT

  • john personna Link

    You need a “:” in your otb link.

  • Thanks for the tip. It wasn’t a missing colon but an extraneous scheme (protocol) introduced by the goofy Wordpress user interface.

  • john personna Link

    You know Andy (or at least I believe) that “tariff” used to be a bigger slice on the revenue side before this whole free trade thing happened.

    One question might be how that should be “right-sized” going forward.

    I think I favor 3-5% uniformly on all goods, without preference or trade penalty. (I think we’re too big to piddle with punitive tariffs.)

  • There is no conundrum here since the solution to this problem is obvious as the nose on your face Dave.

    Solution: the null set.

    There, what do I get for finding the correct answer?

  • Practically I don’t believe it’s possible to arrive at anything resembling fiscal sanity without cutting healthcare costs (particularly at the state and local level).

    Just a nitpick, you should clarify that we need to cut socialized healthcare costs. When people are paying for their own healthcare costs those costs are no different than what they’re paying for other consumer goods in their lives. Is the nation on the road to ruin because people today are living in grander houses than their grandparents did back in their day? Is the nation on the road to ruin because people today spend more of their income on eating out than did their parents? Healthcare is a superior good and people, while not happily, will spend more of their income on it compared to the alternative choices available to them because they value the results that derive from their spending choices. What people don’t value is being forced to spend the money on other people’s health for they believe that they have better personal uses for that tax money in their own lives.

    This is a problem with redistribution, not with healthcare service levels.

  • Drew Link

    Shorter Tango: Reintroduce price to the health care consumer, and stop with all these Rube Goldberg proposals.

    I know – broken record…..

  • steve Link

    “When people are paying for their own healthcare costs those costs are no different than what they’re paying for other consumer goods in their lives.”

    ” Reintroduce price to the health care consumer, and stop with all these Rube Goldberg proposals.”

    As I have noted many times, private insurance pays much more for the same care that Medicare provides. I am convinced, as is Uwe Reinhardt, that Medicare does not act as a floor supporting private costs. If it were a floor, private insurance would need to pay just 1% more to make sure their patients get care. Rather, it makes more sense to see private insurance as leading in raising costs. Medicare needs to raise fees to keep close enough to the private carriers so that enough docs will see their patients.

    I am doubtful that we can solve Medicare costs w/o addressing private costs.

    Steve

  • Drew Link

    steve –

    It appears you have totally missed my point. This is not a competition between 3rd party payer A vs B, its whether the consumer is exposed to price and makes decisions accordingly, just as they do in the vast majority of their economic decisions.

    As long as everyone is on an expense account we have no hope of cost containment. When the payers of the expense account go under…………quality and availability will be the only solution. Ugly.

  • john,

    Sorry, I don’t know much about tariff’s so am reluctant to comment.

  • steve Link

    Drew- I do not see how we manage first world quality medicine w/o insurance, which is essentially what you are arguing for. Most of our expenditures are made by a minority of people. Most of our spending goes to more expensive procedures. Only the children of wealthy parents could afford premie baby care w/o insurance. Same with most cancer care, major surgeries.

    What people forget is that any kind of care that requires a dozen highly trained people, with access to 24 hour care and follow up, is going to be expensive. In countries that control costs better than we do, these procedures still cost a lot. So, yes, we could probably save a small amount of money by making people more directly exposed to their spending in areas like primary care, but even then we should approach that cautiously. There is literature showing that people can and will not pay for drugs or tests that will then result in higher costs in the future.

    For me, insurance has always been the central conundrum of health care. I dont see how we maintain quality care w/o it. It is very difficult to control costs with it, at least as we envision insurance in the U.S.

    Steve

  • There is literature showing that people can and will not pay for drugs or tests that will then result in higher costs in the future.

    That’s the reason I always put the proviso “consistent with reasonable standards of public health” in my prescriptions for healthcare reform. To the best of my knowledge there is no extant study that suggests that demand side only reform will lower costs without lowering public health as well, possibly to unacceptable levels.

    BTW, a transition to a more market-based system can’t be accomplished solely by reforming the demand side. There’s a supply side, too.

  • steve Link

    “There’s a supply side, too.”

    Yes, but that is even more complicated. There is a significant body of literature showing that providers can create their own demand. Increasing supply has risks also.

    Steve

  • john personna Link

    Gosh Drew, does everything with a market price get cheaper every year?

    Or, does price “ration scarce goods?”

  • As I have noted many times, private insurance pays much more for the same care that Medicare provides. I am convinced, as is Uwe Reinhardt, that Medicare does not act as a floor supporting private costs. If it were a floor, private insurance would need to pay just 1% more to make sure their patients get care. Rather, it makes more sense to see private insurance as leading in raising costs.

    I’m skeptical of this since so much of our health care is either paid for by the government or is heavily subsidized. Yes even “private insurance” is subsidized by special tax treatment that employer provided insurance plans usually get. Disentangling that whole mess would take some very deft analysis.

    I’m also skeptical of your portrayal of Uwe Reinhardt’s findings.

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