The Real Arithmetic of Health Care Reform
By DOUGLAS HOLTZ-EAKIN
Published: March 20, 2010
ON Thursday, the Congressional Budget Office reported that, if enacted, the latest health care reform legislation would, over the next 10 years, cost about $950 billion, but because it would raise some revenues and lower some costs, it would also lower federal deficits by $138 billion. In other words, a bill that would set up two new entitlement spending programs — health insurance subsidies and long-term health care benefits — would actually improve the nation’s bottom line.
Could this really be true? How can the budget office give a green light to a bill that commits the federal government to spending nearly $1 trillion more over the next 10 years?
The answer, unfortunately, is that the budget office is required to take written legislation at face value and not second-guess the plausibility of what it is handed. So fantasy in, fantasy out.
In reality, if you strip out all the gimmicks and budgetary games and rework the calculus, a wholly different picture emerges: The health care reform legislation would raise, not lower, federal deficits, by $562 billion.
Gimmick No. 1 is the way the bill front-loads revenues and backloads spending. That is, the taxes and fees it calls for are set to begin immediately, but its new subsidies would be deferred so that the first 10 years of revenue would be used to pay for only 6 years of spending.
Even worse, some costs are left out entirely. To operate the new programs over the first 10 years, future Congresses would need to vote for $114 billion in additional annual spending. But this so-called discretionary spending is excluded from the Congressional Budget Office’s tabulation.
Consider, too, the fate of the $70 billion in premiums expected to be raised in the first 10 years for the legislation’s new long-term health care insurance program. This money is counted as deficit reduction, but the benefits it is intended to finance are assumed not to materialize in the first 10 years, so they appear nowhere in the cost of the legislation.
Another vivid example of how the legislation manipulates revenues is the provision to have corporations deposit $8 billion in higher estimated tax payments in 2014, thereby meeting fiscal targets for the first five years. But since the corporations’ actual taxes would be unchanged, the money would need to be refunded the next year. The net effect is simply to shift dollars from 2015 to 2014.
In addition to this accounting sleight of hand, the legislation would blithely rob Peter to pay Paul. For example, it would use $53 billion in anticipated higher Social Security taxes to offset health care spending. Social Security revenues are expected to rise as employers shift from paying for health insurance to paying higher wages. But if workers have higher wages, they will also qualify for increased Social Security benefits when they retire. So the extra money raised from payroll taxes is already spoken for. (Indeed, it is unlikely to be enough to keep Social Security solvent.) It cannot be used for lowering the deficit.
A government takeover of all federally financed student loans — which obviously has nothing to do with health care — is rolled into the bill because it is expected to generate $19 billion in deficit reduction.
Finally, in perhaps the most amazing bit of unrealistic accounting, the legislation proposes to trim $463 billion from Medicare spending and use it to finance insurance subsidies. But Medicare is already bleeding red ink, and the health care bill has no reforms that would enable the program to operate more cheaply in the future. Instead, Congress is likely to continue to regularly override scheduled cuts in payments to Medicare doctors and other providers.
Removing the unrealistic annual Medicare savings ($463 billion) and the stolen annual revenues from Social Security and long-term care insurance ($123 billion), and adding in the annual spending that so far is not accounted for ($114 billion) quickly generates additional deficits of $562 billion in the first 10 years. And the nation would be on the hook for two more entitlement programs rapidly expanding as far as the eye can see.
The bottom line is that Congress would spend a lot more; steal funds from education, Social Security and long-term care to cover the gap; and promise that future Congresses will make up for it by taxing more and spending less.
The stakes could not be higher. As documented in another recent budget office analysis, the federal deficit is already expected to exceed at least $700 billion every year over the next decade, doubling the national debt to more than $20 trillion. By 2020, the federal deficit — the amount the government must borrow to meet its expenses — is projected to be $1.2 trillion, $900 billion of which represents interest on previous debt.
The health care legislation would only increase this crushing debt. It is a clear indication that Congress does not realize the urgency of putting America’s fiscal house in order.
Douglas Holtz-Eakin, who was the director of the Congressional Budget Office from 2003 to 2005, is the president of the American Action Forum, a policy institute.
nytimes.com
Vile?
Here’s a recent post from Krugman where he calls Douglas Holtz-Eakin (DHE) “vile,” for making the argument that there is a lot of deceptive accounting in the Obama health care bill. DHE provides 7 examples of deceptive accounting, and Krugman only addresses two of them. I read both of Krugman’s arguments several times, and couldn’t make heads or tails of them. Here is the debate in a nutshell.
1. The Obama people claim the bill will lower the deficit by $138 billion over the next 10 years. DHE claims that’s a gross exaggeration, and that it will probably greatly increase the deficit.
2. One argument made by DHE is that the tax increases start almost immediately, but the costs incurred under the program (such as health care subsidies), don’t start until 2014. Krugman then produces a graph that shows this to be a “lie.” Maybe someone can explain the graph to me, but I see it as confirming what DHE argued. In the first 4 years it shows about $90 billion in revenue, and trivial expenditures (I’d guess around $20 billion.) So it looks to me like nearly half of the projected savings occur because the taxes are hiked before the big subsidies kick in. Isn’t that exactly what DHE claimed? Krugman seems fixated on the fact that there is still a surplus in the 2014-19 period. Yes, but it is much smaller than the $138 billion figure claimed by Obama. If this was the only accounting gimmick claimed by DHE, then I could see Krugman crying foul—by itself it isn’t enough to turn a deficit into a surplus. But it is only one of 7 accounting gimmicks discussed by DHE, and not even the most important. And DHE is undoubtedly correct that it is an accounting gimmick, and it does inflate the 10-year deficit reduction estimate by about $70 billion, if Krugman’s graph is correct.
3. What does Krugman consider to be the other deception in the DHE column?
Wait, it gets worse: Holtz-Eakin implies that there are hidden, delayed costs:
“Consider, too, the fate of the $70 billion in premiums expected to be raised in the first 10 years for the legislation’s new long-term health care insurance program. This money is counted as deficit reduction, but the benefits it is intended to finance are assumed not to materialize in the first 10 years, so they appear nowhere in the cost of the legislation.”
Claims that the plan is window-dressed to look good in its first decade only to go sour later might sound plausible – except for the fact that the CBO projects bigger deficit-reduction in the second decade of the reform than in the first decade, something that wouldn’t happen if lots of costs were being hidden by being pushed off into the future.
Can anyone make heads or tails of Krugman’s argument? Again, it seems obvious that this is another accounting gimmick. There are “hidden, delayed costs.” They are accounting for the front-loaded revenues but not the implied obligation to provide long term health care. I’m no expert here, and perhaps there is a flaw in DHE’s argument, but Krugman certainly doesn’t provide one. Instead he changes the subject by talking about the next 10 years. But he acts as if the 10 to 20 year out CBO forecasts are reliable. Here’s what Krugman said about the CBO is 2003:
Last week the Congressional Budget Office marked down its estimates yet again. Just two years ago, you may remember, the C.B.O. was projecting a 10-year surplus of $5.6 trillion. Now it projects a 10-year deficit of $1.8 trillion.
And that’s way too optimistic. The Congressional Budget Office operates under ground rules that force it to wear rose-colored lenses. If you take into account — as the C.B.O. cannot — the effects of likely changes in the alternative minimum tax, include realistic estimates of future spending and allow for the cost of war and reconstruction, it’s clear that the 10-year deficit will be at least $3 trillion.
I can’t argue with any of that, we will have nearly a $3 trillion deficit in just Obama’s first two years. More importantly, this point applies equally well to the health care bill, as DHE notes:
Finally, in perhaps the most amazing bit of unrealistic accounting, the legislation proposes to trim $463 billion from Medicare spending and use it to finance insurance subsidies. But Medicare is already bleeding red ink, and the health care bill has no reforms that would enable the program to operate more cheaply in the future. Instead, Congress is likely to continue to regularly override scheduled cuts in payments to Medicare doctors and other providers.
Krugman knows that the CBO is required to assume that Congress will keep its promises, but he also knows that they almost always decide at the last minute to back off threats to cut Medicare. I’m not saying it can’t happen in the future, but DHE’s argument is really no different from Krugman’s2003 argument that we should assume any projected rise in the ATM will be delayed. Congress always does a last minute fix.
To summarize, all 7 of DHE assertions are correct. Krugman tries to change the subject by looking at different issues, like whether the front-loaded revenue is, by itself, enough to turn a deficit into a surplus. It’s not, but DHE never claimed it was. Then Krugmanswitches the subject from the 10 year to the 20 year forecast, and relies on incredibly rose-tinted assumptions. And after all this, he doesn’t lay a glove on DHE. At best, Krugman might argue that DHE has a few weaknesses in his argument, although I don’t see any. Or that the issue is up for debate. But instead he claims DHE is a “vile” person who “lies.” What in the world is wrong with Krugman? I’d love to hear from his supporters. Is this how you should refer to a respected economist with which you have an honest disagreement? When I think of the term ‘vile,’ books like Mein Kampfcome to mind, not accurate and responsible NYT columns by DHE. Recently I accused the Republican Party of a disturbing anti-intellectualism. But what can one make of this comment by Krugman?
time to scratch Holtz-Eakin off my shrinking list of reasonable, reasonably honest conservatives.
That’s remarkably arrogant given that DHE’s column is quite reasonable, especially compared to Krugman’s insulting and sloppy reply. Indeed Krugman’s comment suggests that he is the one who’s mind is already made up. I’m going to keep reading Krugman, but I have to admit he isn’t making it easy.
Actually, I’m not really worried that Krugman will stop reading conservatives; where else would he get the material for his slash and burn posts? What worries me more is that his liberal readers will assume that they no longer have to pay attention to conservative arguments. At least until some day they wake up and it’s 1980 all over again, and they’ll all look around and wonder what happened. After all, Krugman told us not to worry, the deficits aren’t a problem
I get a lot of worried mail along the lines of “how on earth will we ever be able to pay off our debt”? Look, there are real worries — but the math per se isn’t very hard.
The Obama administration’s budget(pdf) predicts that by 2020 we’ll have net federal debt of around 70% of GDP and a budget deficit of around 4 percent of GDP. Now, you don’t have to go to a zero budget deficit to make headway on the debt — a budget deficit of 2-3 percent of GDP would imply a steadily declining debt/GDP ratio. So if you believe the administration’s budget estimates, we’ll need to find another 1-2 percent of GDP in revenue or cost savings.
Interestingly, back in 2003 the deficit outlook was nowhere near as bad as today. But Krugman seemed much more worried:
But what’s really scary — what makes a fixed-rate mortgage seem like such a good idea — is the looming threat to the federal government’s solvency.
That may sound alarmist: right now the deficit, while huge in absolute terms, is only 2 — make that 3, O.K., maybe 4 — percent of G.D.P. But that misses the point. “Think of the federal government as a gigantic insurance company (with a sideline business in national defense and homeland security), which does its accounting on a cash basis, only counting premiums and payouts as they go in and out the door. An insurance company with cash accounting . . . is an accident waiting to happen.” So says the Treasury under secretary Peter Fisher; his point is that because of the future liabilities of Social Security and Medicare, the true budget picture is much worse than the conventional deficit numbers suggest.
. . .
I think that the main thing keeping long-term interest rates low right now is cognitive dissonance. Even though the business community is starting to get scared — the ultra-establishment Committee for Economic Development now warns that “a fiscal crisis threatens our future standard of living” — investors still can’t believe that the leaders of the United States are acting like the rulers of a banana republic. But I’ve done the math, and reached my own conclusions — and I’ve locked in my rate.
I’m surprised he wasn’t also storing cans of peanut butter in his basement, if he thought things were really that bad. But who holds these views today? According to Krugman it’s the WSJ:
The rate rise that the WSJ is making so much of is an increase in 10-year rates from 3.67 percent on 3/22 (and 3.61 percent at the beginning of the month) to 3.91 percent on 3/25.
Now compare July 2003: the 10-year rate rose from 3.56 percent at the beginning of the month to 4.49 percent at the end.
Correct me if I’m wrong, but I don’t remember a lot of stories calling that spike in rates a sign of imminent US bankruptcy. Mostly it was taken as a sign of increased optimism about the economy.
Your take-home exam question: why the difference in treatment now?
I suppose Krugmanis hinting that the WSJ was blaseabout deficits when a Republican was in the White House, but becomes apocalyptic when a Democrat is in office. That’s probably right. Now here’s my take home question to you guys: Why was Krugman so apocalypicback in 2003, and so blase about much bigger deficits today?...
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