The Corner

Health Costs and Budgets, Again

Jonathan Chait today goes another round on health-care costs and budget policy, answering (without linking to) my reply to him of last week. It’s hard to avoid a somewhat self-referential post in response, so let me beg your pardon in advance.

He begins with some awfully flattering notions about my supposed influence on the Republican policy agenda, which I suppose is necessary for the rest of his case to hold together. I wish it were true, of course, but as I spend most of my time arguing for ideas on health care, taxes,  mobility and poverty, monetary policy, immigration, and other minor matters that are by no stretch the Republican agenda of the moment I have a harder time spotting all that influence. Maybe it will just take some time to show itself. I’ll try to be patient, and I appreciate his confidence.

Chait doesn’t really answer my attempt to correct his description of the trends in health-care cost growth and their causes over the last decade, and therefore his notion that conservative worries about health spending had somehow been proven wrong. Instead, his argument this time is that my correction of him somehow contradicted things I’ve written in the past. I don’t think it did.

For instance, he notes that I have argued that Obamacare will increase cost inflation (which I have, and still do; the administration seems to expect that too, at least in the projection window of their latest estimates of national health expenditures) and suggests that the fact that cost inflation was the same in 2011 as in 2010 and 2009 (after having fallen in each of the previous six years) means a resurgence of cost inflation just won’t happen. He seems awfully sure, but we’ll have to see.

Chait also notes that I’ve argued that repealing and replacing Obamacare is essential to any meaningful effort to bring down health costs and then, mostly through creative use of ellipses, tries also to blur the difference between Medicare and Obamacare as drivers of cost growth in some past articles of mine. I would gladly repeat any of the items he’s quoting, and again I don’t see what evidence he has in mind to suggest they’re at odds with anything I’ve said since. He then somehow repeats the claim that Obamacare has been responsible for some portion of the health-care cost slowdown, though as far as we know at this point that slowdown ended (or has been on pause since) the year before Obamacare was enacted.

He continues to conflate overall cost growth in health care with the growth of federal health spending, and so suggests that my past (and present) worries ignore the fact that health inflation had been slowing. But I don’t see where I’ve ignored that. As I’ve noted, including in my response to Chait, cost inflation slowed from 2003 to 2009 (which doesn’t mean that costs were coming down, they were just growing more slowly, they’ll almost certainly always grow), while federal spending grew significantly. Cost inflation is no longer coming down, or at least it wasn’t as of 2011, and everyone agrees that federal health costs are rising and are set to explode in the coming years even if you just consider demographic factors and assume no other cost inflation — which of course is highly implausible. So there is not a contradiction between wanting to address the perverse incentives in our system that tend to drive costs up and seeing that the rate by which they have gone up is lower than it was a decade ago. That’s especially so if you believe (as I do) that some of the drivers of the cost deceleration are threatened by Obamacare.

In his first post, Chait said that I opposed all incremental steps or half measures on health care. I explained in response that the comments he took that way really expressed opposition to additional Medicare price controls in particular. Chait responds by just re-quoting my opposition to those price controls and my endorsement of a broader reform of our health system in the direction of defined-contribution federal subsidies. If there were ever a large “grand bargain,” I argued, Republicans would have to demand some fundamental health reforms. But that hardly contradicts the notion that, if there is not a grand bargain, Republicans can and should press for some smaller incremental reforms — I’ve argued that and sought to lay out what they might be in some detail, for instance here.

Fundamental Medicare reform is one place where an idea I’ve championed has gained adherents in the last two years—though obviously in no way because I championed it. Paul Ryan’s proposal for a premium-support reform of the program has indeed become something like Republican orthodoxy since about 2011. I think that’s great, because Medicare reform is clearly essential to avoiding a fiscal disaster, and this reform — basically having Medicare Parts A and B work like Parts C and D — shows great promise as a means to contain costs as our society ages while preserving the guaranteed, comprehensive Medicare benefit. Am I absolutely certain it will work, as Chait suggests? Of course not. And I’ve written that plainly, here for instance. Part of what appeals to me about the proposal is that if it didn’t work the cost of the failure would fall on federal budgets, not on seniors. Since Ryan’s version of it is designed to go into effect in a decade, I think it’s important to enact it soon, so that it might actually take effect before the worst of the demographic bulge is upon us.

Chait’s post suggests that this sense of urgency, not just about Medicare but in general, might be what most bothers him. In responding to his original argument last week, I wrote:

This is one irony of our entitlement debate: the two sides disagree less than you might think, they’re just talking about different things. The left, in essence, says we don’t need to do anything right now so we need not worry, while the right says we’re eventually going to have to do something so we might as well figure out what. The difference between them is about whether it makes sense to prepare for the future.

Today’s post suggests this difference indeed runs deep. Aside from the cost-inflation question, where again I think Chait still doesn’t see that the data he is citing do not show what he is arguing, Chait’s post focuses on the question of what he calls “expansionary austerity” — which he defines as “the notion that the high budget deficit is not merely a long-term problem but a short-term one as well, and that immediate cuts to the budget are appropriate and may even stimulate rather than hamper growth.”

I do think high deficits are a problem and should be trimmed, not only in some imaginary tomorrow but also today, and I think the 25 percent growth in domestic discretionary spending in the first two years after the recession was excessive and misplaced, so that the modest reductions in the further growth of that spending achieved over the past two years were worthwhile, and more significant reductions would have made sense too.

I certainly think, and have argued, that such reductions are a second-best option and that meaningful entitlement reform would be far more constructive. But reforms of our health entitlements are not in the cards at this point, and as far as I can see that is largely a function of a profound radicalization of the Democrats on entitlements. When I first worked on these issues in the late 1990s, the Clinton White House was proposing a per capita cap on Medicaid spending and “managed competition” for Medicare (which was the Larry Summers response to the Breaux-Thomas proposal, and was essentially premium support with competitive bidding). Either idea would be considered rabid Neanderthalism by today’s Democrats. As the fiscal problems of these programs have gotten much worse, the Democrats have moved away from any willingness to fix them. It’s going to be difficult to make any progress while that’s the case. So for now, we are stuck with discretionary cuts in the near-term.

But I wouldn’t suggest, and haven’t, that such reductions would themselves drive growth — I’m very much with my colleague Jim Capretta in warning Republicans away from such arguments. And (unlike most conservatives and Republicans, alas) I also think monetary easing should go in tandem with fiscal restraint in circumstances like the ones we face now — ideally governed by a Fed rule setting a level nominal-GDP target. So I have not argued that the problem with deficits and debt is that they’re holding back growth right now. Chait wants to link me to the Reinhart-Rogoff paper, but I’m afraid I just don’t see his basis for doing so. You don’t have to believe that debt is reducing growth a lot right now, and that cutting it would increase growth a lot right now, to think it’s worth doing. The case against progressive Keynesianism doesn’t rest on a single regression.

I think we face short-term problems of overspending and medium and long-term problems of massive entitlement under-funding, and so we need to find ways to spend less in the near term and to reform our entitlements in the medium and long-term so that they can continue serving their longstanding purposes without forcing an enormous expansion of the government’s size and role and a dramatic transformation of the relationship between our society and our government. But above all we face a problem of inadequate growth — a problem that, as I’ve tried to argue, did not begin with the recession or with Barack Obama and that requires some serious rethinking of our approach to economic and social policy that neither party has been willing to undertake. The kinds of reforms I would urge are aimed at making such growth possible. It doesn’t strike me as accurate to describe that view as demanding austerity. In a 2011 essay that Chait noted in his first post, I argued that:

The fact is that we do not face a choice between the liberal welfare state on one hand and austerity on the other. Those are two sides of the same coin: Austerity and decline are what will come if we do not reform the welfare state. The choice we face is between that combination and a different approach to balancing our society’s deepest aspirations. America still has a little time to find such an alternative. Our moment of reckoning is coming, but it is not yet here. We have perhaps a decade in which to avert it and to foster again the preconditions for growth and opportunity without forcing a great disruption in the lives of millions, if we start now.

I think that was right, and is right. It seems to me that what divides Chait and me may be the question of whether the fact that we have a little time means we should do nothing now — and whether the fact that the economy is sluggish means we can do nothing now. It is an old cliché that when it comes to economics, conservatives think the short-term is a function of the long-term and liberals think the long-term is a function of the short-term. They’re both right. But I don’t think either view would support an argument for inaction in the face of the fiscal prospects we now confront.

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