One More Thing . . .

. . . on that deficit commission. If I were Peter Orszag, I would be tearing my hair out. (Or maybe not, since he’s happily engaged to be married later this year.)

It’s obvious, and I’ve said it before, but I’ll say it again. The big long-term national debt problem is all about health care. This chart is from the January 2008 Budget and Economic Outlook of the Congressional Budget Office–for those keeping score, that’s one year before President Obama took office. It shows projected federal spending as a percentage of GDP.

The situation has gotten worse since then–overwhelmingly because of lost tax revenues due to the financial crisis and recession, not “big government” as some would have you believe–but the change over the last year is a rounding error compared to that huge light-blue wedge of Medicare and Medicaid. The health care bills now passed by both houses include, at the urging of Orszag and the administration, the most serious proposals ever put forward in Congress to curb the long-term growth of health care costs. In other words, no administration in the last few decades has tried as hard as this one to solve our nation’s main long-term fiscal problem (although they bungled their management of the financial crisis and financial reform).

And what do they get for their efforts? Popular backlash against “big government” and “deficits” and Scott Brown in the Senate (although Martha Coakley had a lot to do with the latter). If politicians were actually serious about deficits, they would vote for health care reform 100-0 in the Senate. And pigs would fly.

By James Kwak

50 thoughts on “One More Thing . . .”

  2. Even though from a long-term perspective health care costs will be the greatest drag on the future economy and therefore the logical first priority for the administration, it is not an immediate problem for those who still have some health care through their jobs or through Medicare. Loss of jobs and savings, seen as at the hands of Wall Street, is a far more immediate concern. The reluctance of the Obama administration to burn political capital to redress the fundamental flaws in the present finance and banking system in favor of health care reform, which it may have thought had had more popular support and therefore ease in passage, may have been a gross strategic error. Without a stable, fair, and appropriately sized financial system providing capital for long-term employment, questions of health care affordability are academic at best.
    Had the administration tended to the financial flames first, perhaps it would now have the increased political capital to tackle a suitable health care plan. Now it has an unchecked financial system and a health care plan on life support with no political capital left to spend to fix it.
    The smartest minds ignore the mood of the electorate – however unwashed – at their peril.
    I’m a disgusted progressive.

  3. More seriously:

    Mr. Johnson, Mr. Kwak:

    You talk about regulatory capture.
    Well, both of you have been “captured” by your academic, Democratic and corporate connections.
    So, good luck with the blog, I won’t be reading anymore.

    P.S. That was the first and probably only time in my life I got the first response on a post, something I’ve longed for for many years. So I’m grateful for that. Thanks.

  4. The CBO projections call for a deficit decrease of ½ of one percent of GDP after the first decade. They say this will happen because “the gross cost of the coverage expansion would probably exceed 1 percent of gross domestic product (GDP), but the added revenues and cost savings would probably be greater”.

    So it is not false to call this a “big government” solution. Whether you favor such solutions is a matter of personal ideology, not facts.

    More to the point, apply a ½ delta to the light blue curve in your chart, and what do you see? I know, I know; you see “no administration in my lifetime has ever tried as hard as this one to solve our nation’s long-term fiscal problem”. I see a drop in the bucket, and a highly tentative one at that.

    The CBO estimate elaborates:

    Relative to the legislation as originally proposed, the expected reduction in deficits during the 2020–2029 period is larger for the legislation incorporating the manager’s amendment. Most of that difference arises because the manager’s amendment would lower the threshold for Medicare spending growth that would trigger recommendations for spending reductions by the Independent Payment Advisory Board.

    So even that ½ of one percent of GDP reduction is predicated on rules passed today — that would not take effect until after 2020 — somehow binding that future Congress’s actions. Specifically, those rules would mandate that future Congress to cut Medicare spending. Talk about pigs flying…

    At the risk of repeating myself, any proposal to reduce health care costs that does not explain how it will increase supply or reduce demand is simply not serious.

    P.S. Your Atlantic article begins by quoting Jonathan Gruber. Perhaps worth mentioning his undisclosed conflict of interest recently outed by that well-known right-wing news site FireDogLake?

  5. Wow, you guys should adopt the Ostrich as your mascot. The issue isn’t that people don’t think there is a problem, it’s that they don’t believe the health care plan will do anything to solve it. It will just make a different set of political contributors richer.

  6. Please don’t be so sloppy with your graph presentations. The x axis may be totally obvious (years, duh) but the y axis is unlabeled. Is this percentage of estimated federal spending? Trillions of dollars? Percentage of GDP?

    Also it is not good enough to have the description in the main body of the text (I scanned but didn’t see it) – many people will just look at the graph

  7. AS your chart clearly shows, Medicaid and Medicare are the problem. as far as gov’t deficits. So a great idea would be to take a couple of gov’t run programs and EXPAND them as a way to reduce deficits. Great idea!

  8. Read the last sentence right before the picture.

    What I would like to have seen is the CBO’s projected effect of the health care bill plotted on the same graph. But that would have made the rest of the text sound ridiculous, so the omission is understandable.

  10. Good point…there is no health delivery reform in the current bill. There’s only so much reform one can accomplish in a crisis, and then only if you pick the right one to start with.

  11. Your comment about having health care through work and the more immediate concern about loss of jobs and savings ignores the fact that every day, more and more companies are having to choose between offering health care and employing people. I work for one such company that struggles to keep expenses down in the face of continuously rising health insurance costs, and where do we end up looking for expense savings given that reality? In our payroll.

  12. It is not my problem to identify appropriate mouth-pieces for the Obama administration’s policies. :-)

    Re: Krugman, I will just cite Glenn Greenwald’s response. In short, this is a prime example of Krugman putting his inner “partisan hack” ahead of his inner “world-class economist”. That is my humble opinion; read the whole exchange and decide for yourself.

    (Even Yves Smith and local hero Russ are on my side on this one, I think.)

  13. Glenn Greenwald has also touched on this (link below). Ted, the issue isn’t that Gruber shouldn’t be quoted based on his expertise or lack there of, its that we don’t have an accurate picture of who he is when he fails to disclose that he’s being paid by th epeople whose policy he’s analyzing and publicly endorsing. We all railed when GW Bush’s Administration did it vis No child Left Behind – no reason the Obama Administration shouldn’t be held to the same standard.

    http://www.salon.com/news/opinion/glenn_greenwald/2010/01/16/krugman/index.html

  14. Nemo, I just want one straight and honest answer from you related to the post just above at 12:05. Would you also like to see a graph plotting federal spending as % of GDP after Bush’s tax cuts and UNFUNDED medicare prescription benefit vs. if he didn’t plotted on the same graph???

    Since you seem to be so concerned about fairness, you can put that graph showing the difference with two plotted lines on your blog.

    Let me make an educated guess that when Bush made those tax cuts and UNFUNDED Medicare prescription benefit, there is no post you made at the time (or since) asking to see those two lines plotted on a graph is there???

  16. I didn’t ask you for a mouthpiece, I asked you who YOU thought was better qualified. Apparently you prefer snark to providing constructive suggestions.

  17. You see the real problem is expansion is going to happen no matter what. What most fail to see, and I think Mr.Kwak points out, is that unless we get a handle on this it’s going to drag us down. The cost of money right now is low, so low that our banks are pretty much getting it gratis. We will miss the opportunity to get things done in a low cost environment and that we will regret for many years to come. There were many siren calls from others about the coming fall in housing and no one paid attention. It seems we are not listening to the siren calls coming from those whose jobs it is to watch this exact thing. Thanks Mr. Kwak and Mr. Johnson.

  18. I don’t understand why intelligent people blow trumpets for half a$$ed solutions that pretty much boil down to extortion levied against those poor fish who must finance their own health care. All you knee jerk Democrats misunderstand you will never get a progressive society out of the likes of Clinton and Obama, no matter how much articulate feel good smoke they blow up your…. (well, you get the idea)

  19. I would like to see honest debate on health care, not partisan hacks on both sides presenting data in misleading ways. Unfortunately, our public discourse is totally dominated by the latter.

    I think health care is a (very) complex issue, and I am a little tired of James’s preferred narrative of the Democrats being saints and the Republicans villains. I am equally hostile to the opposite narrative. News flash: Pretty much all of them are villains.

    If you display a “problem” on a graph measured in GDP, and then talk about a “solution” measured in billions, you are being highly misleading. Borderline lying, in fact. If you are going to make a post claiming that this health care bill is the biggest effort at debt reduction in your lifetime, you need to do a little better than that.

    There are good things to say about the health care bill, namely that it provides coverage to lots of people who do not currently have it. But to suggest it has any realistic chance of meaningfully affecting the deficit is laughable.

    For the record, I oppose any extension the Bush tax cuts, because I think they were a mistake. But that is completely irrelevant. The topic at hand is not me, or my blog, or Bush. The topic is James, this blog, this particular post, the health care bill, and its effect on the deficit.

  20. You say: “it is not an immediate problem for those who still have some health care through their jobs” and then [almost in the same breath] say “Loss of jobs and savings, seen as at the hands of Wall Street – is a far more immediate concern.”

    Obama is burning political capital necessary to stem off the hundreds of millions that “wall street” is using to spread lies and fear among those that watch television. You will never convince me that wall street has the public in ming when it is against healthcare or fincial reforms. And though the pulse of the people may be beating the drum of wall street – it is not doubtful if that beat is in their best interest. No one is ignoring the mood of the electorate – [they are] just amazed with how they got there.

    It would be nice – it the poeple knew the truth – then their mood would be different.

  21. You know, that blue wedge indicates what costs will be with subsizided profits on mandated insurance payments. There is no medical care cost reduction with either denying care or eliminating profits. Given that the administration pre-empted Congress through closed-door agreements with the for-profit players in this nation clusterfuck, denying care – business as usual – is their only option left.

    I suppose they can always try to reduce the dark blue wedge instead. That’ll certainly help with turnout. For people like James, year’s end Coakley will be the new Zelig!

  22. “both of you have been “captured” by your academic, Democratic and corporate connections.”

    Did I miss the first part of your argument – you know, the bit where you explained what your argument was?

  23. Actually, I was referring to my previous post – whether you choose to tackle health care reform first, or financial reform. People are afraid to lose what they’ve got in health care; they’re more than willing to draw and quarter the financiers. What gives you the most traction?

  24. If what you are saying that both health care and financial reform are important, I agree with you. They are linked, and there is a tremendous amount of rent-seeking in both systems. But my point was how do you spend you political capital most effectively so as to ultimately reform both, and wind up with capital remaining to address the rest of the mess? Real financial reform during the depths of the meltdown, then health care reform, would have been a better investment. The problem is that health care debates would have been pushed out to after the midterm elections and therefore vulnerable. What a Faustian bargain the administration had before it…

  25. Burning political capital he didn’t need to burn, perhaps. What if the health care debate took place in an environment of reduced financial sector influence and lowered risk? Now Obama has to fight two battles simultaneously, with an unconvinced electorate.

  26. The problem is this isn’t holding them to the “same standard.”

    Armstrong Williams had a direct conflict of interest. Promoting administration policies was his job. He was compensated for doing that, and failing to do so would have caused him immediate financial damage. He’s the corporate PR department engaged in astroturfing.

    Gruber had at worst an indirect conflict of interest. His economic modeling contract wasn’t in jeopardy if he attacked the administration. The only risk he had was that if he spoke out against it, he might not get more contracts in the future. Of course, the same would be true of him if he didn’t have a contract with the administration and criticized it.

    I’m all for having him disclose his indirect conflict, but the idea that his nondisclosure and Williams’ are at all comparable is ludicrous. After all, no one is clamoring for every interview with Greg Mankiw to include “Dr. Mankiw’s pronouncements should be considered in light of his obvious jockeying for a position in the next Republican administration.”

  27. Shhh…I’m not here anymore.

    Even more seriously:
    I hope Mr. Johnson and Mr. Kwak enjoy their ringside seats as what will become known as the Second Great Depression engulfs the world over the next one to two years, due in no small part to their influence and the pernicious influence of professors and ‘idiots-in-ties’ in general.
    Thanks to them(Mr. Johnson, Mr. Kwak) and to policy wonkdom fools(academics) in general, the needed efforts to maintain effective aggregate demand will not be continued, never mind the slaying of zombie banks. This will ensure that millions upon millions of men, women, and children will be thrown into poverty in very short order.

    Miserable wretches!
    I solemnly prophesy that your ideas, your actions and your in-actions will drag the world into an abyss of suffering the likes of which haven’t been seen since the 1930s!
    Taleb was too kind to you!

  28. The issue is not just what he disclosed; it is also what administration spokespeople and their allies disclosed.

    John Kerry, on the Senate floor:

    “Don’t listen to me on the transformational changes. Listen to a fellow by the name of Jon Gruber, who is a very respected and renowned economist from MIT, and here is what he writes…”

    This sort of thing is not a trivial oversight; it is a deliberate attempt to portray someone as an “independent expert” when they are, in fact, taking hundreds of thousands of dollars from the Administration. It is indefensible.

  30. You grab for “First Post!” then give an “OMG I’M SO OUT OF HERE U GUYS SUX!” comment in which you also gush about finally getting first post, then expect people to take you seriously? Wow. Just wow.

  31. North of the border we do have a federal government structural deficit of est. $20B accumulated over the past 4 years of Conservative governance. This was accrued from fiscal prime-the pump-politics of electioneering over this 4 year period. The stimulus of more than $60B adds to the overall deficit. It is true that the fed govt in Washington over the past year has increased their structural deficit which was due to the financial mess and its collateral economic and social damages. The loss in tax receipts is onerous at state and fed levels. Too bad that heads cannot be banged together in Congress.

  33. It is pure dishonesty what you are doing here.

    Being serious about Debt Reduction is about ending entitlements. And Republicans, bless them, will vote for that when the chips are down, and in just a couple years looking at your graph, so will the Dems.

    You are pissed Republicans used “Medicare cuts” as an argument to keep more people from being given coverage. Your goal isn’t / wasn’t debt reduction, so please can it.

    We will not being more with less, we will be doing less… the only plausible solution is to let the market run fee, and hope like hell Pharma keeps finding things to keep fat from dying.

    In any other country, a fat American would be dead at 60, we are a miracle of modern economy and science.

  34. God I hope this post is a joke. Because if it’s not a joke, here’s my response – Republicans, God bless them, will vote every time to short shrift the poor and middle class and chip away at social safety nets {which protect them too} but can never seem to find that same resolve to take the bitter pill of a tax increase to help dig the country out of the economic holes that they seem increasingly able to pull off.

  35. People who stay up at night worrying about the national deficit would do well to consult “Figure 2: Historical Behavior of Private Sector Surplus and Government Sector Deficit as a percent of GDP,” at this website:

    http://neweconomicperspectives.blogspot.com/2009/07/sector-financial-balances-model-of_26.html

    and then realize that the public sector’s deficit exactly equals the private sector’s surplus $-4-$. Do you really think that with 10% unemployment and nearly 20% unemployment what the private sector needs to do right now is net-save? Let me emphasize: this is not an argument for endless deficits! When unemployment is low and AD is robust, that is the time to start worrying about rolling back the deficit. Focusing on the causes of the deficit or speculating on the size of the deficit relative to the economy fifty years from now is at best a distraction. As long as the United States maintains sovereign control over its own money supply, the size of the deficit, in and of itself, is meaningless. What matters is how the money created by the deficit is spent.

  37. Previously you copied and pasted excerpts from the CBO analysis pointing out that the measures on the table, according to the CBO, will redcue the deficit over time but it would be a very minor, drop in the bucket reduction over time. Their analysis does not add in potential cost savigs from numerous pilot programs included in the Senate legislation. Doesn’t it stand to reason that there’s upside gained there?

    Has any other ‘universal healthcare providing’ country {all the ones out there with exponentially lower costs than the US} kept their healthcare costs lower than the US purely as a function of the demand/supply core tenets you keep coming back to? I am asking seriously because I don’t know. I would think one could point to the NHS and their advisory board as the centrally controlled mechanism that controls demand and supply – would this be an example? Or would this qualify as top-down market intrusion to a true demand/supply curve?

    Regardless, if attempted here it’d be deemed a Nazi gas chamber from the fringe right {I mean the Right}.

  38. The problem is that the goal of the administration has not been to fix healthcare, but to allow Obama to sign a bill that has “healthcare” in the title.

    So they have done very little by way of giving guidance, and supported killing those measures that have the best chance of reigning in costs.

    70% of the people wanted the bill with the public option this summer, today, 33% want the bill without the public option.

    Obama and Reid have screwed the pooch, and they have done so because they want to wave a piece of paper like Neville Chamberlain.

  39. James,

    You just dropped a nuclear warhead on your credibility. Obama’s plan simply calls for cutting Medicare and shifting the costs elsewhere. That’s no real reduction in healthcare costs at all. The focus shouldn’t be on the pocket that we take the money out of to pay for healthcare, but instead, reducing the need for healthcare, and making healthcare delivery more efficient. Obama has botched a major opportunity.

    When we took on the challenge of putting a man on the moon, did we have our congressmen huddle in a room to design the rocket? No! What makes us believe they can redesign something as complex as our healthcare system?

    More on this subject on my blog:

    http://ragingcapitalist.blogspot.com/2009/08/health-care-reform-rise-up-mr-obama.html

  40. I hope that everyone realizes that there will have to be a second bite at the depression apple, which will happen, sort of a “W” with the last uptick actually flat. So, here we are, knowing what is happening, and none of us having a whit of power to stop it. I have to believe that no “insider” reads this blog!! I haven’t seen or heard a supporter of any of the cogent wisdom which perfuses this post, time and again, by Simon and James, by many part time contributors, and many of the wonderful bloggers who join the conversation. I am rightfully cynical that no actual reform will be enacted, on finance, health care, energy, or the military-industrial complex, until it all falls apart and the peoples’ representatives (newly elected) who forsake the oligarch’s political contributions, decide that the only way for this country to survive itself will be to become very different in what we enact as legislation. There is much to talk about, and a big “I told you so” to be delivered in about three or four years, or maybe much sooner.

  41. Ed’s may have hit and run, but he’s right.

    There is no long term deficit problem. The problems that deficit terrorists worry about disappeared in the early 1970’s. The reason we haven’t collectively figured this out is because it suits the ruling class’s ideology.

    Gold standard thinking and the analogy of government spending as household spending does not apply in a floating currency fiat money economy. Government deficit spending increases net financial assets in the private sector dollar for dollar.

    So we want to reduce private sector wealth by attacking the deficit? Now? Really? You may as well walk around and shoot random poor people in the face!

    Read MMT economists:
    http://bilbo.economicoutlook.net/blog/
    http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/

  42. I would argue that healthcare reform, done with a public option and without what now appears to be a give-away to insurance and drug companies, gives you mor etraction with voters. In tough economic times, no one wants to loose what they have, and that applies doubly to healthcare. But without significant change, many employers are already looking to drop healthcare, so they can keep paying people. Excoriating the banks is all well and good (and long overdue), but that won’t keep people working and it won’t keep people healthy.

  44. Would it be possible to provide a detailed post while you believe the current health-care bill will succeed in reducing long-term health care cost? Perhaps this administration needs some help explaining it to the rest of us.

  45. Why, every time people get worried about the deficit, is the real rat hole we’re pouring our money down never mentioned? I refer to our bloated military, able to run over any force in the world — or maybe all of them at once — ten times over. Weapons systems, contractors, 900 foreign bases. We could probably cut this in half if we stayed out of unnecessary wars.

    Yet this octopus can bared run a Haitian relief effort.

    If we have to be an empire, it should at least benefit us in our daily lives. But it doesn’t.

    Naw — got to take cash to pay down the deficit from the poor people and the old people …

  46. The fact that the “single payer” health reform has gone away from the bills being discussed in Congress means to me that there is no health care reform happeing – that being said I want to touch on another issue. I begin getting SS checks in April and that prepective is bringing me to re-define the term “60’s radical”. Why is it that all solutions that make any headway in Congress have to do with benefiting those that are doing well and hurting those who are not. I believe that we need another party (a true third party) in our electorial process but in the reality of current stacked politics I do not see how any “real” change can happen to fix the morase of budget problems we have.

  47. Wow, a 70-year forecast. Good for a laugh 70 years from now. Oh I forgot: we’ll all be dead by then.

  48. If Medicare and Medicaid are expanding, it’s because the nation is getting older and poorer. The proposed health bill in the Senate is mostly an insurance giveaway. The house bill was better, but it’s still a lousy bill simply because people are mandated to buy insurance. So now your pre-existing condition won’t stand in the way but you’ll probably be charged double. Nothing was done to stop the state monopolies or to provide real competition; and the CEOs will continue to pay themselves millions if not billions.

    What I want to see is some politician willing to save our social programs by cutting back on the military budget and stop funding undeclared wars.

  50. The long term health care problem can be significantly reduced by eliminating the free or nearly free benefits government employees receive.m Exactly why am i paying for their health care and retirements anyway?

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