Glenn Hubbard, dean of the Columbia Business School, has an op-ed in this morning’s Wall Street Journal titled “We Can’t Tax Our Way Out of the Entitlement Crisis”. Dr. Hubbard’s argument is pretty simple: raising taxes to the level they’d need to be to pay for current levels of benefits would be disastrous to economic growth. Here’s his prescription:
We can also secure a firm financial footing for Social Security (and Medicare) without choking off economic growth or curtailing our flexibility to pursue other spending priorities. Three actions are essential: (1) reduce entitlement spending growth through some form of means testing; (2) eliminate all nonessential spending in the rest of the budget; and (3) adopt policies that promote economic growth.
While I’m in general agreement with his ideas, I think they’re unhelpful in a number of ways.
First, while aggregating Social Security and Medicare as “entitlements” may be useful politically the policy issues in the two programs are quite different. Insolvency of the Social Security system, defined as the Micawber point at which outlays exceed income, is far away and easily dealt using the tools we’ve used in the past in managing Social Security, namely changing the Social Security Retirement Age, tweaking the marginal rate for employers and employees, and tweaking FICA max.
We might even borrow to deal with the Baby Boomer goat passing through the fiscal python.
And none of these measures might be necessary at all if Dr. Hubbard’s measures (2) and (3) are adopted.
Insolvency in the Medicare system is enormous and near at hand and, frankly, nobody has a good solution to the problem without price controls. Since I’m allergic to price controls, I’ve argued here repeatedly for a revolution in the way health care is delivered in this county. That could have the effect of price controls using the regular market system without fiat pricing but I have no more belief that will take place than I believe that I’m going to sprout wings and I’ll start flying around the room.
Second, there’s growth and there’s growth. I’m not going to go to the bother of researching the actual numbers but it’s intuitively obvious to me that growth in the income of those at the highest income decile contributes little if anything to the so-called Social Security Trust Fund (because of FICA max), that in recent decades most of the income growth has been on the part of that decile, and that has been due to a combination of technology, policy, and the roll of the dice.
Consider for a moment if all of the income growth in the last thirty years had been on the part of the middle income deciles, all of which fall handily within the scope of FICA. We wouldn’t even be discussing insolvency in the Social Security system but the problems of Medicare would still be enormous and looming.
The problems of Social Security have been incorrectly framed as not enough people paying the tax. That’s true as far as it goes but it only tells part of the story. The reality of the last couple of decades is that there hasn’t been enough income growth in the lower deciles that are subject to the tax.
All Ponzi schemes collapse, and regardless of how you phrase it, both of these programs are using current income earners to pay money to former income earners. Not a recipe for long-term success. I don’t think it’s practical to cut the programs off at the knees, as some would argue is necessary, but I do think that it is useful to look at how we want to provide for the elderly and the poor from a clean sheet of paper, then move to that model. As it is, I think the problems are insoluble over the long term, but only because we are not looking at the underlying model the programs are based on, which is frankly decades out of date with reality.
Once again the more serious problem is Medicare which will reach insolvency during the next administration whomever is elected and the costs of which are rising faster.
Social Security isn’t a Ponzi scheme. It doesn’t meet the definition although there are some superfiicial similarities. The problems with Social Security are demographic and political not physical.
BTW, Jeff, one of the things I really respect about you is that you actually put your money where your mouth is: you’re consistent about your self-sufficiency ideals.
I get that a lot. People don’t necessarily agree with me, but they find it hard to argue inconsistency.
George Will once said something very perceptive: “Who wills an end must will a means to that end.” I don’t think it’s useful to propose a goal without taking a shot at a strategy for attaining it, nor a strategy without taking a shot at a plan. Empty words don’t do it for me.
I am somewhat idealistic, certainly, but I also have a pragmatic streak. I’m not willing to see the situation of the late 1800s, which gave rise to progressivism, recur. It’s just that I think the Progressives’ solutions were often ill-considered and, over the long term, quite damaging. I want us to help those truly in need, but I care about outcomes. So the first question we should ask about any government program, and one that we should ask every time we vote funding for it, is whether or not it is accomplishing its goals. If it is, or if it’s too soon to tell, fine. If not, we should figure out what would work better.
I agree with you that Medicare is in a true crisis, while Social Security may or may not get into a crisis in the medium term (depending on how we manage it). I probably disagree with you in the long term: I simply don’t see how, absent importing a lot of workers, we can get SS through the Baby Boomer years; we simply are starting with too much accumulated debt. So if we evaluate that a system is failing, or will fail, the next question is what to do about it. Since SS is further off in the future, let’s just talk about Medicare for now.
I tend to favor far more free-market approaches (not quite laissez-faire, but fairly close) to solving economic problems (that is, problems of distribution of scarce resources), because in my appreciation of history and in my experience, they tend to produce better outcomes for more people over time. There is a place for government intervention where markets are causing pain, as long as that intervention is very strictly limited to prevent both ossification, bureaucratic or factional (both of which which keep programs going even when they are no longer needed, and even when they are actively counter-productive), and to ensure that the problem is only taken up by government when there is no other reasonable alternative.
Good examples of bad interventions: almost anything to do with medical care outside of operating first responders and requiring public hospitals to treat all comers with emergency conditions; elimination of corporations’ fiscal and legal liability for massive accidents or bad management, as in 9/11 (the airlines/airports for poor security) or recent investment house failures (poor risk management); chasing after “profiteering,” “greed,” or any other term chosen to represent markets working in adversity, as in trying to decree the laws of supply and demand inoperative (usually with regard to gas prices) every time there’s a big storm.
So let’s take Medicare. The whole point of the program, as I understand it, is to ensure that there is non-emergency care available for those who need it and cannot afford it. A laudable goal, on humanitarian grounds. (One wonders why the people pushing for single-payer health care, though, aren’t pushing for single-payer food.) But how can we meet such a goal? There are two ways to look at getting to a goal: what are our opportunities, and what are our obstacles. Let’s start with obstacles.
The biggest obstacle to providing everyone with any health care imaginable is the cost, driven by the large and increasing demand, finite availability of resources and poor regulatory and tax policy. Another large obstacle is that scarce goods can only be rationed two ways: by pricing mechanisms or by fiat. (And we’ve explicitly excluded pricing mechanisms in our formulation of our goal, as the point is to catch people who cannot afford basic services under whatever pricing mechanism is in effect.) Since demand will rapidly outstrip supply in a case where everyone needs at least some of a good at some point and there is zero effective cost to obtaining that good, we must have a system that rations by fiat. The third large obstacle to creating an effective system is the nature of politics and the nature of bureaucracy: both (for different reasons) will tend to push programs to grow in size and cost and permanency over time and neither has effective negative control mechanisms to stop that push (and the Federal government bureaucracy, since the imposition of the civil service system, has no effective positive control mechanism, either; at least we can vote the politicians out of office, in theory).
Can we address each of these shortcomings? The cost can certainly be addressed to some extent. Much of the growth comes from a few sources: cartelization of the medical industry, the dysfunctional nature of our medical insurance system1, the tendency of insurance companies to pay for almost any care without regard to cost (often at gunpoint, as the law tends to run over attempts not to do this), giving the tax breaks for insurance to companies rather than individuals. It would be politically painful to change these things, but it could be done. In the abstract, the rationing problem could be overcome by simply creating a list of essential medical services that the government would pay for, and paying for those services for all comers regardless of any other concerns2, while not paying for any other services. But that theoretical fix cannot be done in practice, because of the third hurdle: the nature of representative politics and entrenched bureaucracies. Their nature would be to grow the list indefinitely, until they came up against a practical real world limit.
Unless, in other words, we are willing to fix those two problems, we cannot solve Medicare. Now, those problems are fixable, in theory. We could eliminate the civil service protections and make civil servants serve at the pleasure of the President. I’m not altogether opposed to that, but there are obvious problems (obvious because they happened before) with giving too much power to the President. That could be fixed by moving the regulatory formation away from the bureaucracy and back to Congress, leaving the executive only enforcement powers. That would, my opinion, be an unalloyed good thing, but I don’t think Congress would like it. (Too much like work.) But to fix Congress’s nature — or, really, temper it to prevent the untrammeled growth of any such program as we might propose — would require creating a hard ceiling that Congress couldn’t touch. For example, we could limit Congress’s power to tax, or we could impose term limits, or we could make Congressional pay inversely correlated with the Federal budget. Again, I don’t see any of these as things that we could practically accomplish.
So frankly, I don’t think that the Medicare problem is fixable. The system will collapse, because we are already living beyond our national means, and because the political environment mandates that we live ever further beyond our means until collapse occurs, at which point those causing the collapse hope to be well beyond the reach of the consequences. We can make policy and tax changes that would prolong the time before the collapse, but the collapse appears inevitable to me.
Hopefully, you see some way around this.
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1It’s not really insurance, the way we pay for health care. Insurance is protection against unknown events, while we use health “insurance” to pay for recurring expenses (drugs for chronic diseases, for example) and predictable expenses (like eyeglasses, or well child visits). In that sense, we are actually doing an inefficient form of cost leveling across subsets of the population. We can come up with a more efficient way to do that, but I suspect that given the list of services that fall into that category, most people would be incensed at any system that didn’t hide what we were doing. If you were to go up to someone and tell them that they had to pay $20/month to pay for glasses for other people, and if they ever need glasses, they could get them free as well, I suspect that the reaction would predictably break down along the lines of those who wear glasses and those who don’t. Rent seeking is one of the downsides of our dysfunctional system.
2It seems to be the case that attempting to determine who should and who should not be covered by a means tested program results in higher costs than simply covering everyone without question. The latter eliminates the record keeping and compliance problems that bedevil every means tested program we have. Over time, ever increasing attempts to target the programs more and more finely result in asymptotically appreciating burdens and costs.
It wasn’t Will that originated it. I think it’s Aristotle.
Not exactly. I remember vividly when it was being argued in the 1960’s. The purpose of Medicare is to prevent the elderly from being pauperized by medical bills.
Basically, I think that technology might save us if we can pry it out of the medical cartel’s hands. Otherwise, yes, I think the system will collapse.
We should stop using the term “entitlements” altogether. People aren’t “entitled” to Social Security and Medicare benefits. They earn them by contributing to them.
See
http://www.aafr.org/2008/08/26/please-dont-call-them-entitlements/