There’s a theme that I’m hearing sounded with increasing frequency—that the budget passed by the House, the budget proposed by the Progressive Caucus, and the budget (more of the template of a budget, actually) proposed by President Obama last week are steps in a negotiation. Courtesy of John Taylor here’s the problem with the negotiation:

If your definition of compromise is one in which the two parties, i.e. the Administration’s February budget and the Ryan budget passed by the House, meet in the middle, that doesn’t get us anywhere near where we need to go.

Fifty years ago an American president, who had been one of the leaders who had brought victory at a time of grave national crisis, warned of the political and economic forces that would make a return to the pre-crisis America difficult or impossible. Then as now many politicians are doing their damnedest to make sure that the conditions necessitated by the crisis become permanent. If they’re successful some people will become very, very wealthy while most of us will find it increasingly difficult simply to get by.

Robert Samuelson decries the lack of seriousness in budget proposals in Washington:

We won’t make much progress until (a) Democrats concede that spending control requires genuine cuts in Social Security and Medicare, which now total $1.3 trillion annually and represent 35 percent of federal outlays; and (b) Republicans acknowledge that, even after significant spending cuts, tax increases will be needed to balance the budget. Last week, there was little sign of either. President Obama rebuffed Social Security and Medicare cuts. Most Republicans held fast on taxes.

What we have instead is a public relations war. Both parties propound brands of wishful thinking designed to make it seem that they’re accomplishing more than they are.

and the Wall Street Journal illustrates why we won’t be able to fill the hole created by excessive spending solely by taxing “the rich”, however defined:

The top 1% of taxpayers—those with salaries, dividends and capital gains roughly above about $380,000—paid 38% of taxes. But assume that tax policy confiscated all the taxable income of all the “millionaires and billionaires” Mr. Obama singled out. That yields merely about $938 billion, which is sand on the beach amid the $4 trillion White House budget, a $1.65 trillion deficit, and spending at 25% as a share of the economy, a post-World War II record.

Say we take it up to the top 10%, or everyone with income over $114,000, including joint filers. That’s five times Mr. Obama’s 2% promise. The IRS data are broken down at $100,000, yet taxing all income above that level throws up only $3.4 trillion. And remember, the top 10% already pay 69% of all total income taxes, while the top 5% pay more than all of the other 95%.

We recognize that 2008 was a bad year for the economy and thus for tax receipts, as payments by the rich fell along with their income. So let’s perform the same exercise in 2005, a boom year and among the best ever for federal revenue. (Ahem, 2005 comes after the Bush tax cuts that Mr. Obama holds responsible for all the world’s problems.)

In 2005 the top 5% earned over $145,000. If you took all the income of people over $200,000, it would yield about $1.89 trillion, enough revenue to cover the 2012 bill for Medicare, Medicaid and Social Security—but not the same bill in 2016, as the costs of those entitlements are expected to grow rapidly. The rich, in short, aren’t nearly rich enough to finance Mr. Obama’s entitlement state ambitions—even before his health-care plan kicks in.

Both political parties are either posturing or wrong in their prescriptions for the federal budget. While Mr. Ryan’s budget proposal, recently passed by the House of Representatives, solves Washington’s problems, it does so by offloading it onto seniors and, ultimately, onto state and local governments. While it may be arithmetically possible for people to save enough in their primes to live decently in their dotage it is neither practically possible nor economically desireable. It would mean that they would consume too little to produce healthy economic growth. I want to remind Mr. Ryan and the Republicans in Congress that the reason that Medicare was passed in the first place is that without it the problem of poverty among the elderly, a problem that falls on state and local governments, is severe.

President Obama and the Democrats are wrong, too. Raising taxes and cutting defense to the level that would be needed to pay for the programs they want would cripple the economy and be strategically risky.

We can’t wait for a great and statesmanlike legislator to come along. We’ve got to make do with the poor saps (the original draft of this post used stronger language) we’ve got. As the old Magic 8 Ball used to put it, outlook not so good.

In a recent comment thread this comment, by a regular commenter who IIRC is an emergency medicine physician, caught my attention:

@Andy- Medicare pays 20%-300% more than private insurance for equivalent procedures.

If that’s the case, why isn’t cutting reimbursement rates a viable method for reducing Medicare costs? That’s not a rhetorical question—I really would like to know the answer. Also, if private insurance and Medicare paid the same amount for 100% of procedures, why would that result in physicians rejecting Medicare patients in droves? That’s a claim that’s frequently made of cutting Medicare reimbursement rates and I’m skeptical.

This also seems as good as anywhere else to explain in a little more depth why I’m skeptical of the advisory board as a method of reducing Medicare costs. The political issures are obvious: as Peter Suderman points out even Democrats don’t favor the cuts that the board wouild require.

My understanding is that what is being discussed in the Independent Payment Advisory Board is an appointed board of experts who are tasked with restraining the growth in Medicare spending to the non-Medicare rate of medical inflation. The CMS Actuary made this remark back in April 2010:

In general, limiting cost growth to a level below medical price inflation alone would represent an exceedingly difficult challenge.

but there are more other reasons to doubt its effectiveness. First, in order for the IPAB to fulfill its mandate it must restrain the growth in Medicare costs without affecting either coverage or quality. To do that all of the following conditions must obtain:

1. There must be sufficient spending for procedures that are currently covered termination of coverage for which will affect neither coverage nor quality that it accomplishes substantial reductions in Medicare spending.
2. The costs of procedures that are covered that will be performed as alternative to the uncovered procedures will be less than the costs of the procedures they’re replacing.
3. Providers will not perform additional covered procedures to make up for the lost billing.

The last is merely another way of saying something I’ve repeated frequently around here: the assumption is that providers will take a pay cut willingly.

Simon Johnson James Kwak has a plan for dealing with Medicare’s deficit:

So what should we do? Most importantly, we have to recognize that there are two separate problems, and they are not equal. The primary problem is health care inflation. The secondary problem is the long-term Medicare deficit. That’s a secondary problem because it’s largely a result of the primary problem.

Of these two, the Medicare deficit is the easier problem to solve: index the payroll tax to actual health care costs. This should automatically solve the Medicare deficit because as Medicare’s costs go up, its funding will go up at the same rate.*

I suspect that Dr. Johnson Kwak should have run the numbers before making this suggestion. Using numbers from the Trustees Report for Medicare spending and from the Census Bureau for aggregate incomes, I calculate that Medicare spending constituted 3.77% of total incomes in 2001, 6.33% of total income in 2009, and has risen at roughly 7% since then, i.e. 6.77%, 7.24%, and so on. In other words the >s?Johnson Kwak Plan would have resulted in a tax rate for Medicare spending alone that doubled every ten years.

Not only does that constitute a powerfully regressive tax (as Dr. Johnson Kwak himself acknowledges) that’s an intolerable rate of spending increase whether the money comes from the payroll withholding for Medicare or from the general fund.

As the federal budget plan for 2011, already months late, finally passes the House of Representatives on its way to the Senate from whence it will be signed by the president, roughly six months late, we already seem to be deluged with proposals for the 2012 budget.

There’s the Ryan plan, the “People’s Budget” produced by the Congressional Progressive Caucus, the “Gang of Six” plan produced by Democratic and Republican senators, and now President Obama’s plan. Paul Krugman characterizes them aptly in his column:

For the contrast between Mr. Ryan last week and Mr. Obama on Wednesday wasn’t just about visions of society. There was also a difference in visions of how the world works.

Indeed there were and I found them visions that varied from mistaken to delusional to demagogic. But it likely explains why the 2011 budget was so late: there are conflicting and irreconcilable visions of how the world works and all parties finally came together on the single point they could agree on (getting re-elected).

A couple of digressions. First, I think that Dr. Krugman in using the phrase “call Mr. Ryan’s bluff” is wrong. I don’t believe that Mr. Ryan is bluffing and Dr. Krugman has produced no evidence that he is. I think the phrase he’s looking for is either “call Mr. Ryan’s bet” or, even better, “upping the ante”. Second, is President Obama’s budget really serious? I’m skeptical. To see what I mean let’s use the example Dr. Krugman does: Medicare Part D. We’re currently spending about $50 billion per year on it. Using Dr. Krugman’s numbers if we were to save 40% of that it would save about $20 billion per year. While that’s a start when we’re borrowing anything from a half trillion to a trillion per year it’s a drop in the bucket. Total Medicare spending is expected to grow at the rate of 7.5% a year over the next ten years or so. $20 billion sounds like a lot but it’s just a fraction of the amount by which Medicare is expected to grow.

My second digression is on “The People’s Budget”. Could any naming be less felicitous? Not only does it bring to mind The People’s Republic of China and other communist states it would appear to be a direct reference to Lloyd George’s 1909 People’s Budget, a budget that increased Britain’s welfare state by a substantial increase in taxes. It lost the Liberal Party seats in Parliament, took more than a year to pass, and only passed after the land tax was removed.

I am overwhelmed with questions about these budgets. First, Paul Ryan and the Republicans in Congress. The tax cuts of the early years of the Bush presidency did very little to stimulate the economy: mostly, they were saved. Why would a return to the rates that prevailed under Clinton be economically harmful? The cuts weren’t economically beneficial. And should military spending really be exempt from budget cutting? It’s the largest item of discretionary spending and I find it incredible that there’s nothing from it that can be spared.

Next, the Progressive Caucus. Have you never heard of deadweight loss? Can you really believe that a 49% maximum tax rate will not result in less economic activity? How many jobs are you willing to sacrifice to a war on the wealthy? And why not propose a wealth tax and attack the enemy’s front line?

To President Obama. How can you restrict tax increases to those making over $250,000, expand the use of our military, and exempt two-thirds of the budget (Medicare and Social Security) from cuts? Details, please.

Finally, some assertions.

1. We cannot continue to borrow a half trillion or more per year without repercussions. That’s not just too much relative to U. S. GDP, that’s too much relative to world GDP.
2. Medicare costs cannot be allowed to grow indefinitely at three times the non-healthcare rate of inflation. No foreseeable level of tax increases will produce that much revenue and the consequences for the economy, already being felt, will be disastrous.
3. No advisory board will be able to control Medicare costs, no advisory board can, and anybody familiar with modern views of planning can possibly believe that they can. You are dealing with intelligent actors. For every action taken by an advisory board there will be counter-moves.
4. “Medicare as we know it” is doomed by the laws of arithmetic. There will be cuts to benefits. Deeming that reality as “cruel” is either delusional or political posturing, not serious.

One of these days I really need to write a long, analytical post about the things I learned in economics class in college that just don’t work that way. To put it in some perspective when I took economics Keynes was king, the Phillips Curve (a rule of thumb relationship between unemployment and inflation which fell into disrepute in the 1970s) was holy writ, and the term “rent-seeking” hadn’t been coined (although there was plenty of it going on).

I’ll just give one example: in many industries there isn’t a great deal of competition. Some industries, e.g. cable TV, are organized as local monopolies. Others, e.g. healthcare insurance, are localized cartels.

Any number of industries have an industry leader that dominates the industry with 90% or more of the market and a handful of second tier companies that scramble for the rest. Think “personal computer operating systems” and you’ll get the general idea. I’m not sure what the situation is now but that used to be the case in everything from lampshades to bowling balls.

And then there’s wages. Has anybody done any work on the social nature of wages? The notion that wages are set by the market is at best an exaggeration. Social structures within organizations are imnportant, too. For example, you can’t have an engineer earning more than the director of engineering (even if engineers are a lot harder to come by).

Matthew Yglesias has a a very interesting graph that illustrates how the pupil-teacher ratio has decline since 1970. Go on over and take a look at it. He draws one reasonable conclusion, namely, that reducing class size hasn’t been terribly effective in improving public school education and then makes a poor suggestion:

The better approach for any given lump of teacher compensation money is to plow it into ensuring that you’re recruiting and retaining the best possible teachers. In other words, just pay the teachers you have more money and hope that generates more and better applicants for positions in the future.

On pupil-teacher ratio anybody familiar with the literature knows that’s the case. Reducing very large classes to smaller classes will help. For ordinary students reducing class sizes below some moderate level doesn’t do much and, as you can see, what we’ve done over the last 40 years is reduce moderate class sizes to smaller class sizes. Much more than 40 years ago in the first school I attended class sizes ranged from about 45 to about 60 students. I don’t mean grade levels. I mean class sizes. 45 to 60 kids in a room. Cutting that to 25 kids in a room was a big improvement. Reducing the number farther to 15—not so much.

As to his other suggestion consider the following graph:

As you can see teacher salaries have risen sharply in current dollars. The increase has outpaced inflation and in recent years has been more than twice the rate of inflation. Or, in other words, we’ve been following MY’s suggestion for decades.

Next suggestion, please.

For the last week and a half I have done very little but assemble records, fill out tax forms, fill out forms from various financial institutions and have them witnessed, notarized, guaranteed and so on, and harangue with financial institutions’ customer service representatives. Here is a sample dialogue that actually took place yesterday:

Customer service representative: May I help you?

Me: Yes. [I identify myself.] After my call to customer service last week you sent me a form. I received the form and have some questions.

Customer service representative: Perhaps I can help you with those.

At this point began fifteen minutes of my asking questions, systematically going down the form I’d received and quoting it with the customer service representative having the same form in front of him, he mostly muttering.

Me: So, you really don’t know the answers to my questions?

Customer service representative: No. That’s Traveler’s Insurance’s form.

Me: Can you give me the name and telephone number of a contact at Traveler’s Insurance who might be able to help me with my questions?

Customer service representative: No.

Me: You sent me this form?

Customer service representative: Yes.

Me: You don’t know anything about the form?

Customer service representative: No, I don’t.

Me: Can you give me the name and contact information of somebody else there who might know something about the form or have contact information at Traveler’s Insurance?

Customer service representative: No.

Forty-five minutes go by in a similar vein. Finally, I’m connected to a supervisor (who, for all I know, is the person at the next desk). After twenty minutes of questions the supervisor agrees that what she’s told me is that I should cross out 75% of the form and write my own form. Am I wrong to be skeptical about this procedure? If anyone ever asks you to be the executor of his or her estate, run screaming from the room. Or make sure their affairs are completely in order before they die.

At least I’ve completed the first leg of my annual ordeal—my personal federal and state income taxes. Now onwards to my mother’s estate’s and trust’s taxes.

James Hamiilton has a post on reforming the healthcare system that I commend to your attention. He begins with two premises:

1. The historical growth of federal expenditures on health care is unsustainable.
2. Changing the path requires denying some medical services for someone who would otherwise receive them.

and goes on to characterize the debate as among different strategies for deciding which services don’t get provided:

• (a) The government can limit the procedures it will pay for and the people who are eligible to receive them.
• (b) The insurance company or other third party can limit the procedures they will pay for and the people who are eligible to receive them.
• (c) If (a) and (b) both say no and you don’t have the money yourself to pay for it, then you do not receive the treatment.

Also of note is one of the comments to James’s post:

As a physician, here are some of my thoughts on this topic:

I agree with your first premise and your conclusion. On premise #2, I would differ in suggesting that some medical services need not be denied to someone who would otherwise receive them. One could, instead, dramatically slow or stop medical growth to bring costs inline with GDP growth. In this fashion, for example, a person could continue to get a cardiac stent for a heart blockage, but would not be automatically covered for some future $1million heart stem cell transplant. It is generally more palatable to not give someone something than to have to take away something already given. Perhaps the GDP denominator could grow will holding the medical expense numerator in check.

It is a common misconception that there exists a positive, more-or-less linear, correlation with cost of medical care and life span. The data, instead, support strong diminishing returns on health care investment. For example, sanitation, clean water, vaccinations, reductions in smoking, aspirin use, treatment of high blood pressure and cholesterol are all rather cost effective on a per capita basis. Many of these are actually public health issues and not strictly medical. More so, the most cost effective are those in the domain of public health and these are also most responsible for gains in years of life over the last century.

There are a several major reasons that costs continue to grow unsustainably in the United States, but most of these actually do relatively little to increase life span. Looking at CBO data, one would see that one of the biggest problems has been our growing appetite and adoption, over the same last 20 years, for new medical technologies and services.

Many of the other comments return to a common theme: other OECD countries spend a lot less why can’t we? I’ll address this question first. Other OECD countries began their healthcare systems with varying degrees of socialization at a significantly lower cost point and with a much lower demand for provider and patient autonomy than we have here. We could have a healthcare system with substantially lower costs but we can’t have our healthcare system at substantially lower costs. We can’t even transition to a system with a slower trajectory of rising costs at our present level of spending.

As to the other comment as I’ve said before I don’t believe that you can reasonably attribute the costs here to greater use of technology. The Japanese use more imaging that we do, not less, and the costs in their healthcare system aren’t growing out of control. Capital expenditures and consumables are declining in hospital budgets, not expanding. What is increasing is wages, for many if not all jobs in the healthcare sector.

I think that James’s prescription may be necessary but I don’t believe it’s sufficient. As has been said here before, physicians are capable of generating their own demand. Further, as we reduce what we’re willing to cover with tax dollars (or borrowing) providers will potentialize the areas that remain. Unless, that is, you believe that they are willing to take a pay cut. I don’t.

Consequently, I think that we’re going to need much more basic changes in our healthcare system to keep it within the bounds that we can afford and still maintain a reasonable level of public health. This is not a someday problem it’s a today problem. Healthcare costs are already making U. S. products less competitive than they otherwise would be on world markets and the healthcare sector, underwritten by government spending, is already sucking investment out of sectors that could use it to better effect.