Yes; $463b + $123b + $114b does equal a $562b deficit.

If you start from a $138 billion surplus. 

Just as my head was spinning from reading a bizarrely insulting post claiming that Douglas Holtz-Eakin (DHE) was lying about the Obama health care plan, anon/portly sent me this perplexing post by Brad DeLong.   But at least DeLong doesn’t call DHE a ”vile” liar.

Let’s start with DHE’s claim that, because of accounting gimmicks, the $138b projected surplus from the health care bill is actually likely to result in an extra $562b deficit over the next 10 years.  Notice the difference between those two numbers.  Now reread the title of this post.  Let’s see how many of you can figure out DeLong’s mistake:

Yep. It’s twue! It’s twue! BUT, DOUG, 463+123+114 DOES NOT EQUAL 562!!!! Has the New York Times no arithmeticians? Has the American Action Forum no calculators? Oh, the problems with writing your op-eds too quickly…

Well, someone is writing posts too quickly.  I recall that DeLong once claimed to have 8 arms.  Unfortunately, he can only use one brain at a time.  DeLong continues:

What do I think? I think the Medicare cuts dominate. Over the first ten years the net effects of the bill on the deficit are not a big deal. Thereafter, the swings in Medicare spending overwhelm the net impact of everything else. If any appreciable fraction of the Medicare spending growth rate reductions written into the bill come to pass, it is a huge present-value deficit reducer. I think that they will. So I view this bill as a severe long-run reduction in Medicare spending growth–through cutbacks to provider incomes, administrative changes that will hopefully get more care for the money, and increased cost-sharing–made palatable to a Democratic majority by the insurance reforms and the exchanges.

Let me get this straight.  We’ve been told for many years by economists of all political stripes that Medicare and Medicaid were on a tragectory to bust the budget, and something would eventually have to be done.  Of course in the past when Congress promised to cut Medicare, they generally reneged on their promises.  But let’s give DeLong the benefit of the doubt, the commission in the bill really does have more teeth than usual.  But does that make DeLong’s argument correct?  I don’t see how.  If Medicare was projected to bust the budget in future decades, then doesn’t it stand to reason that we already needed to cut Medicare and use the money for deficit reduction?  But Obama is basically saying; “we propose to have future governments do what everyone knows has to be done at some point anyway, but instead of having the Medicare cuts used for deficit reduction, we propose they be used to increase medical spending in other areas, such as subsidies for health insurance.”  Someone please explain to me how that makes this deficit neutral.  Imagine I was a gambling addict and was rapidly bankrupting the family.  Then I promised that in a few years I would set up a commission to restrain my gambling addiction.  Since that problem will soon be solved, let’s use the saving from my future reduction in gambling for a family vacation in Cabo.  Somehow I’m missing the logic in all this deficit reduction talk.  If you spend more money on government programs, you aren’t reducing the budget deficit.  And if you also promise to at some future time cut a program that was already unsustainable, and which was inevitably going to be cut anyway, I don’t see how that changes the picture.  (BTW, I think I may have plagiarized this example from Mankiw–if so I apologize.)

Brad DeLong continues:

As I see it, Eakin’s (vi) is wrong–the student loan provision is a real deficit-reducer, and is not a gimmick.

The issue isn’t whether it is a deficit reducer.  The real question is what is it doing in the health care bill?  At any given time Congress is doing many unrelated things that add to spending, and many unrelated things that save money.  A new weapons system adds to the defense budget, and base closings provide savings.  Why not put base closings in the health care plan as well?  To get serious for a moment, something belongs in the budget calculations if it is an integral part of the bill being considered.  But wasn’t the student loan reform something Congress was going to do anyway?  Don’t the Dems claim it is good public policy?  If so, it has no business being used to offset higher health care spending.  If there is one concept that all economists can agree on, it is opportunity cost.  The only relevant cost question is:   How much will the health care plan increase the deficit, as compared to not passing the health care bill?  I claim they would have reformed student loans anyway, hence it is irrelevant.

[As a side issue, I recall hearing some progressive on NPR talking about all the wonderful education proposals that would be funded by the saving from government student loans.  How many different places is this money going to be used?]

DeLong continues:

Eakin’s (v) is wrong too–some but not all of the increased Social Security taxes are associated with higher Social Security benefits in out-years.

He’s right that $53 billion is an upper limit on the future benefits incurred.  It still is an accounting gimmick, DHE is right about that, but we don’t know how large.  DHE should have said “between zero and $53 billion.”

DeLong continues:

Eakin’s (iii) is wrong as well–the $70 billion is real, and the extra costs of long-term care after year 10 are more than paid for by reductions in Medicare spending growth. (i), (ii), and (iv) are properly classified as gimmicks–but they are small change in the context of the overall federal budget, and attention should not be focused on.

I don’t buy this at all.  It’s clearly an accounting gimmick, but DeLong suggests it doesn’t matter because the massive Medicare savings in future decades will somehow wipe out these extra long-term care liabilities.  So we keep making promises to cover more and more conditions in the future–promises made to specific people, and at the same time we keep promising that there will also be huge cuts in Medicare, many of them dubious or unspecified.  When the Republicans suggested that the Dems might be planning to follow the European model, that is pull the plug on granny when the cost-benefit analysis says the procedure isn’t worth it, the Dems got all indignant, claiming the GOP was using scare tactics.  They probably were.  But I’m not scared about plugs being pulled, I’m scared the cost savings won’t materialize and we’ll end up with European-style taxes.  Of course Krugman says there’s nothing wrong with that.  I suppose he’s right, if you don’t mind a 25% cut in (PPP) per capita GDP.  My hunch is that the American people won’t look at things that way.

DeLong continues:

As somebody-or-other said, this is budget nihilism: if we assume that congress will reverse all actions it takes to reduce the deficit and yet require that congress only pass bills that reduce the deficit nevertheless, we are asking that congress pass nothing at all. Perhaps that’s what Douglas Holtz-Eakin thinks: that because we live in the Sewer of Romulus the best congress is the one that passes nothing at all. But if that is his argument, he should make it–and back it up. If that isn’t his argument, he should explain why he believes that “congress is likely to continue to regularly override” the reductions in Medicare spending growth in the bill.

I think both sides understand that this is really a debate about the projected Medicare cuts.  Just to review why the right has stronger arguments here than the left:

1.  Congress has generally reneged in the past on these cuts.

2.  It’s always been understood that Medicare was unsustainable, and had to be cut to keep the deficit from exploding.  Now they are planning to cut it in the out years, but use the money for insurance subsidies, not deficit reduction. 

I say we should blow up the whole system, and start over with DeLong’s huge HSA plan, financed by forced saving and government subsidies.  Then add a mandatory catastrophic plan, I don’t much care if it is single-payer public catastrophic insurance or private insurance, as long as people have the option of topping it off with extra private insurance.  DeLong recommended HSA plans so large that most people would pay for almost everything out of pocket.  Then get rid of everything else, Medicare, Medicaid, tax breaks on health insurance, state insurance regulations, etc.  Indeed I’d go back to the pre-FDA days, and let everyone do what Rush Limbaugh did.  Treat grown-ups like grown-ups.  Yes, I know it’s an impossible dream.  In the 21st century we’ll all be children.  The pioneer days are gone forever.

Just so I don’t get accused of “nihilism” I will take a wait and see attitude on Medicare.  If there really are reforms that save a lot of money, then I’ll give Obama credit.  I’m not a doctrinaire Republican, indeed I’m not a Republican at all.  Obama has done some good things in the war on drugs, the space program, and a few other areas.  But right now I see definite spending increases, and possible savings in a program that was unsustainable anyway.  I don’t regard that as “deficit reduction.”  I hope I’m wrong.



15 Responses to “Yes; $463b + $123b + $114b does equal a $562b deficit.”

  1. Gravatar of Thorfinn Thorfinn
    28. March 2010 at 17:58

    This should have been done on the basis of “money saved, people enrolled.” How about for every dollar of savings Congress can wring out of Medicare, it gets to put 75 cents of that towards coverage expansion? If Orzsag et al are right, we end up with the same outcome. If DHE is right, we don’t bust the budget. And Congress now has a reason to go through with tough cuts.

    Alternately, we could go down the Paul Ryan approach and voucher-ize Medicare (pegged to GDP growth). Budget problem solved, but Congress gets to divy up the vouchers as they please. To the extent they’re willing to cut vouchers for someone, they can extend coverage as much as they please.

  2. Gravatar of Bonnie Bonnie
    28. March 2010 at 20:13

    Regarding forced savings, if I’m mistaken I apologize, but I think the only way the SSI program passed judicial review was for the contributions to be considered a tax because while congress has the power to tax, it does not have the power to force savings. When viewed in this light, Medicare is a version of a mass HSA and forced savings. The problem with it, like most government programs is that it’s a shell game. It spends the money on other things and looks the other way while the money from the program is being extorted or abused. Power scooters anyone?

    I think we, as a public, get caught up in a morass when it’s time to solve problems and we think the Feds have to do something or nothing is done, or if it shrinks there will be a huge hole of people being left out in the cold. That is far from the original constitutional intent. There are other ways to solve problems than leveraging the power of Federal coercion, and history just does not bear out claims that people are dying out in the streets from being poor sans Federal aid.

    That is my main sticking point in the whole debate over health care because it flies in the face of being a free society when the govt. starts making health care choices for the masses supposedly so that some can get health insurance. I think this is not really about money or uninsured individuals because if it were about them then what justifies the regulation and limitations of the use of health care services by those who are not utilizing government programs, in addition to not really doing anything about how much health care programs bust the budget. If they want control over people, perhaps out of the same reasoning as prohibition, the way to do it is make the entire health care system a government program by making it so costly with insurance mandates one requires a subsidy just to get it. It’s obscene and I don’t understand how anyone can put up with it.

  3. Gravatar of JeffreyY JeffreyY
    28. March 2010 at 20:15

    Could you cite your claim that “Congress has generally reneged in the past on these cuts.”?

  4. Gravatar of Ram Ram
    29. March 2010 at 04:12

    I’m not sure what you mean when you write, “[t]he issue isn’t whether [the student loan provision] is a deficit reducer.” Maybe you don’t care about this, but the provision is projected to reduce the deficit. If the policymaker’s objective is to reduce the deficit, she may (1) increase revenues, or (2) reduce outlays. The student loan provision accomplishes (2) relative to current law. Why does it matter that the relevant cut doesn’t come from the health care sector?

    Your contention that the appropriate metric is opportunity cost, not deficit impact, is fair enough (this is Mankiw’s point, too). But, based upon the CBO’s projections, the bill (on the whole) reduces the deficit relative to current law. This line of argument suggests that if you want to reduce the deficit, you shouldn’t also increase spending since the revenues (or other spending cuts) needed to offset the increased spending are no longer available for reducing the pre-existing deficit. But…so what? Supporters of the health care bill never said that they wanted overall spending to remain at the same level (or go down). They WANT increased spending, but they also don’t want to increase the deficit. So they offset it. Where’s the problem?

    You seem to be attempting a more sophisticated version of the equivocation that Republican politicians have been making between deficit reduction and spending cuts. The deficit and spending are two distinct variables. You can reduce the deficit without reducing spending (by raising revenues). You might not like this, but this just shows that the deficit isn’t your only concern. It’s not their only concern either.

    The best way to do away with all of this confusion is to stop talking about the deficit. Let’s just say what we really want. Some people want spending to go down. Some people want it to go up. Plenty of both types want the deficit to go down, yes, but that doesn’t really mean that they want the same thing. In the former’s case, they want deficit reduction to mostly be spending cuts, and in the latter’s case they want deficit reduction to mostly be revenue increases. Saying we both want deficit reduction (or neutrality) obscures this fundamental difference.

  5. Gravatar of Ram Ram
    29. March 2010 at 04:16

    And to respond to JeffreyY, here is the CBPP on past Medicare cuts:

    In short, there have been a few instances where promised cuts didn’t happen, but those were the exception rather than the rule.

  6. Gravatar of scott sumner scott sumner
    29. March 2010 at 04:22

    Thorfinn, Good ideas, but it’s hard to get agreement. The Dems may prefer a bigger government than the GOP, and then both sides play a game of chicken with the deficits. The Dems endgame is to try to make the GOP accept higher taxes, whereas the GOP hopes for lower spending. But neither side can easily push in the direction. Given those goal differences, it’s hard to work out a compromise.

    Bonnie, I agree that the federal government should not be at all involved in health care—that is the best solution.
    If they are going to be involved, I prefer the forced saving approach. To get around the constitutional issue, you could say it’s not really “forced;” someone could pay taxes instead (like the 401K) and in that case almost everyone would “voluntarily” choose the HSA saving approach.

    Jeffrey, All I can recall is that I have read this assertion many times, in mainstream news outlets. They put Medicare cuts in so it looks the the spending bill conforms to certain limits, and then after it is passed the rescind the Medicare cuts. Perhaps someone can confirm this for me.

  7. Gravatar of scott sumner scott sumner
    29. March 2010 at 04:54

    Ram, A lot of your points make sense, but you missed my point about the student loans. Consider the following case:

    During a normal year Congress does 100 actions which increase the deficit by $350 billion, and 100 actions that reduce the deficit by $350 billion.

    Now assume Bush plans to start a new war with Iran, but people are concerned about the budget impact. Bush tells his advisers; “Make it look like the war doesn’t cost anything.” So the war resolution also includes those 100 items that were going to be passed anyway, and they offset the $300 billion war, producing a surplus of $50 billion. Yes, it does produce a surplus of $50 billion, I agree. But it also further unbalances the non-defense budget by $350 billion, so the net cost to the entire budget is $300 billion–what the war costs.

    Bush’s mistake is that those other things were going to happen anyway, so the net effect of the decision to go forward with war is an additional deficit. By the way, I didn’t even consider the higher taxes on the rich. Obama had planned to do those anyway, to deal with the budget deficit, now they are going toward the health care bill. Now we’ll need other taxes for the budget deficit.

    I do agree with you broader point about money being fungible, and hence debates about the deficit are often really about spending and tax priorities. But given that uncertainty, there’s not much to say about DHE. If it is in the eye of the beholder, then he is certainly not a vile liar.

    Regarding Medicare cuts, I’d like to see a unbiased source, not a supporter of Obama-care. Medicare costs have been exploding. I’d guess small cuts did stay in, but bigger cuts to physicians got rescinded.

  8. Gravatar of Ram Ram
    29. March 2010 at 05:48

    I concede that Holtz-Eakin isn’t a vile liar. As for the CBPP, it is a left-leaning organization, but the points made in the piece I cited strike me as fairly uncontroversial (the piece has been referenced by a number of mainstream news outlets, if that helps). In general, fatalism about benefit cuts seems to go hand-in-hand with fatalism about tax increases, which means that the idea of deficit-neutral spending increases is unrealizable in practice. I don’t find this view particularly persuasive, since it flies in the face of legislative history.

    As for the student loan provision, I don’t think your example of war with Iran is very helpful. It is non-obvious that the student loan reforms could have been counted on, absent the HCR legislation. The reforms effect a reduction in large subsidies to the banking industry, which is precisely the sort of benefit cut many would be fatalistic about. So I think your choice of baseline only makes sense in hindsight.

    If your complaint is that the bill just shifts forward in time a bunch of easy choices for reducing the deficit, while delaying many hard choices induced by passage of the HCR bill, then I think that is partly fair, partly unfair. The bill is full of inconvenient things, including tax increases and benefit cuts, that it is not clear we were willing to do otherwise. Plenty of legislators who would’ve staunchly opposed those measures as part of a purely deficit-reducing package favored them in order to finance coverage expansion, which they considered a worthwhile objective. It is true, though, that many hard choices remain, and many of these have been made harder by the passage of the HCR bill. As a proponent of the bill, I welcome those hard choices (I have a few ideas about how to solve them, of course).

    My point is that these choices are hard for people who oppose the HCR bill, because for them the easiest choice is just to repeal the bill. These choices are easier for proponents, who understand that they are being made in service of a worthwhile objective. Again, the whole debate reduces to favoring/opposing spending increases of various kinds. The discussion of deficits (including your student loan complaint) clouds that more important debate, in my view.

  9. Gravatar of Don the libertarian Democrat Don the libertarian Democrat
    29. March 2010 at 10:13

    “Again, the whole debate reduces to favoring/opposing spending increases of various kinds. The discussion of deficits (including your student loan complaint) clouds that more important debate, in my view.”

    That’s what I was trying to say, but not as well. I was also trying to make one other point: Words like “fantasy”, “gimmick”, “games”, “could this be true?”, “so-called”, “blithely”, “takeover”, “rob”, “unrealistic”, “on the hook”,”bleeding”, “steal”, are pejorative and insulting. I guess some people think they’re verbal bouquets.

    Then, you’ll notice that DHE uses a number of qualifiers: “could”, “if”, “would need to”, “expected”, “intended”, “anticipated”, “promise”, “expected”, and “projected”. Maybe it’s because I was once an Ordinary Language Philosopher whose mentor was John Searle, or maybe it’s because I’m a ( whispered: not yet published ) novelist, but words matter to me.

    Krugman’s tone was certainly insulting. But so was DHE’s. What’s more, he used one of the most standard and obvious rhetorical moves in what passes for argumentation today, which is to Negatively Characterize everything that your opponent says, while being careful to qualify what you’re actually advancing. The point is to emphasize the negative connotation, which is an opinion, while leaving room for yourself to deny that you were making predictions, since you were really just offering opinions. Oddly, you can’t really predict the future.

    Of course, depending upon your view, you gloss over or rationalize the insults your side offered. I prefer a different mode of discussion.

  10. Gravatar of scott sumner scott sumner
    30. March 2010 at 05:22

    Ram, You newest comment is 100 times more intelligent than Krugman’s. If he had written what you wrote I never would have replied. I think both your perspective and DHE’s perspective are defensible. The only specific point I’ll add is that DHE didn’t contest that the taxes would be implemented, he accepted the tax increases would occur. So he didn’t use a procedure that was impossible to meet. Having said that, their is some truth to your assertion that the skepticism of the right set the bar pretty high.

    Don, Here’s the difference. Krugman insulted DHE, whereas DHE didn’t insult anyone. Since you are planning on being a novelist, I am sure you are aware that calling another blogger “vile” is very different from calling Congress “unrealistic.” DHE was basically criticizing a process as being very misleading. He didn’t call any single person vile.

    In our society it has always been understood that you can say things about impersonal institutions like Congress, Citibank, the military, academia, etc, that it wouldn’t be acceptable to say about a fellow economist.

    I often argue that other bloggers arguments are silly, bizarre, etc. I never call other bloggers vile, stupid, cruel, etc. There is a difference. If you don’t see a difference, then we’ll just have to agree to disagree on this point.

  11. Gravatar of Nathan Nathan
    30. March 2010 at 10:13

    I think maybe the reason that Krugman gets so worked up over this is because he has a monolithic view of his political opponents. If you take all of the arguments being made by conservatives against the health care reform bill, the position as a whole is incoherent and hypocritical in the extreme. On the one hand, you have the argument that of course everyone knows that Medicare spending needs to be cut so let’s assume those cuts as our baseline, and on the other hand you have the political strategy of demagoguing any cuts to Medicare as pulling the plug on Grandma. So while it may not be the same people making both arguments, if you look at your opposition as a monolithic whole, then it might make you a bit crazed. So maybe that’s why Krugman overreacts.

  12. Gravatar of Link « Free Radical Link « Free Radical
    30. March 2010 at 10:14

    [...] 30, 2010 Free Radical Leave a comment Go to comments Sumner is doing a very good job over on Money Illusion of moderating a debate among some prominent economists regarding the impact of healthcare reform [...]

  13. Gravatar of Ram Ram
    30. March 2010 at 11:58

    Dr. Sumner — thanks. DHE may not question the tax hikes, but whatever it is that makes him worry that the spending cuts won’t happen probably ought to make him worry that the tax hikes won’t happen, either. I, on the other hand, think that both spending cuts and tax hikes do happen every so often, and I’m optimistic that they’ll both be (almost fully) implemented in this case.

  14. Gravatar of StatsGuy StatsGuy
    30. March 2010 at 21:00

    Drawn as I am to minutae, I must contend with the quixotic yearning for the pre-FDA days of drug marketing. The term “snake oil salesman” was not coincidental. Nor do we need to look far to get a sense of what the drug industry would look like without the FDA – we have the market in herbal supplements and vitamins pre-2007, which was only as tame as it was because they were still regulated as food (truth in advertising and purity requirements.

    Is this a paternalist argument? No, but it is an argument for fixing some of the main problems – notably, the degree of harm that can be caused, the lag time in observations, the noisy statistical nature of outcomes, the lack of centrally gathered information (which is required to assess causation for noisy mechanisms), and the ease with which companies can avoid liability by declaring bankruptcy 5 years after problems emerge. Surely there are better ways of fixing these problems than the FDA – aren’t there always? – but to yearn for the pre-FDA days? A world where companies have every incentive NOT to gather or keep information? If I recall, the primary reason the FDA was formed was to ensure _purity_ of existing drugs, because under the pre-regulatory system you could never even be sure the label was accurate? I’m aware of the studies showing FDA delays in approval cost lives, but I’ve never been certain what the counterfactual is, and I recall these studies being conducted before FDA streamlined its process. Meanwhile, some at Cato seem to have forwarded a position of “informed choice” – something like truth in advertising/labeling + a public subsidy for information. I don’t consider this “pre-FDA” however; such a regulatory system is not even comparable to pre-FDA.

    On Romney/Mass – Salon has an insightful (but partisan) piece on this. I’m sure it won’t be overlooked in the primary in 2012.

    BTW, I recall Peter Orszag – the health care architect – essentially admitting that the program would not cut costs in the short term and saying the point was to expand coverage. Can’t find the quote. The hope is that new knowledge systems will allow better cost control, but I am highly skeptical. In the end, someone has to ration…

  15. Gravatar of scott sumner scott sumner
    31. March 2010 at 05:20

    Nathan, If you are right it reflects very poorly on Krugman. Remember he spent most of his life in academia, where there are lots of very bright and very idealistic right-wingers. He would run into these people all the time. If he’s not able to recognize the difference between someone like DHE and a Republican party hack, well then I hardly know what to say. You just have to have some common-sense about the world, not look at it like a cartoon. There are shades of grey everywhere.

    Ram, On the other side, even if the tax hikes occur, and I agree they will, they will also bring in far less revenue than estimated. Even moderate to liberal economists concede that raising top rates will produce behavioral changes that offset some of the revenue gains. I seem to recall that the best estimates are that raising the top rate provides about half the revenue you’d expect if people did not take extra steps to avoid taxes. So for every $1 trillion expected, we’ll probably get another half trillion. That’s a huge problem that DHE and I never even mentioned. And I am more of a supply-sider than the average economists, so I think the revenue losses will be even more that 50%.

    There is also reason to be concerned about whether the Cadillac plan tax will ever occur. It was delayed until 2018!! That tells me Congress has no stomach for a Cadillac tax—I hope I’m wrong.

    Statsguy, I think the worst thing about the FDA is how much it inhibits pain management. Millions of Americans suffer from chronic pain because they cannot legally get effective medication.

    I am also dubious of comparisons with the pre-FDA era. Lots of things were worse in the old days. Doctors didn’t wash hands before operations, for instance. We’ve made great improvements in knowledge of medicine since the old days, and a lack of regulation won’t put us back into the medical system circa 1900. Instead, I’d expect the market to develop methods for conveying useful information.

    Of course the big problem with drugs is that they are over- proscribed due to insurance. I take a medication that I really don’t need, which costs $2000 a year, only because it’s covered by insurance.

    Regarding cost control, I am also pessimistic. There are two and 1/2 ways to control costs. The two big ones are getting rid of the tax deduction for insurance and having people pay for most procedures out of pocket (HSAs). The smaller one is tort reform. This bill addresses none of these three issues (as I don’t take the Cadillac tax seriously.)

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