Commentary | Budget, Taxes, and Public Investment

Reform we can afford

On August 25, another economic shoe will drop, when the government announces new federal budget projections for large deficits over the next decade. Most economists shy away from predictions, but here’s one you can take to the bank: Whatever the number is, it will be interpreted as a reason to abandon or delay health care reform by pundits and politicians, and not just from the right.  This argument’s broad ideological appeal, however, signifies less about its intrinsic worth (which is near zero) and more about the sorry state of economic reasoning that characterizes policy debates inside the Beltway. Let’s run through the reasons why concern over the deficit should not impede the progress towards health reform.

First, and most simply, the one fleshed-out version of health reform that has made significant progress through Congress – the House reform bill – fully pays for its expansion of health coverage. That is, the proposed reforms that provide insurance for over two-thirds of the currently uninsured would  not add to the deficit. There’s a small caveat to this: included in the House bill is an admirable attempt to end a perennial budgetary gimmick that projects steep cuts in reimbursement rates paid to doctors under the Medicare program and then rescinds these cuts at the last moment. Ending this gimmick brings a cost that was in the past constantly disguised. This cost is roughly $239 billion over the next 10-years.

Even if we decide that this $239 billion must be identified as the net “cost” of the House bill, it’s worth noting that this amount is roughly 15% of the cost of the tax cuts passed during the Bush administration, or roughly 25% of the cost of spending on wars in Iraq and Afghanistan to date, or roughly two-thirds of the cost of the first 10 years of the Medicare prescription drug benefit enacted in 2003. None of these policy initiatives came with even a penny of dedicated revenue sources or offsetting savings specified elsewhere in the budget. Despite these more expensive precedents, somehow it’s being argued that health reform should be derailed because a bill that fully pays for new health coverage made the mistake of introducing some honesty to the budget process? This sounds like health reform is being held to much higher budget standards than, well, anything else in recent memory.

Second, it’s been exhaustively documented that over the long run, it is precisely the cost of health care that drives the deteriorating budget outlook. While it’s true that current versions of reform don’t provide a silver bullet for solving these long-run cost issues, they do provide a framework that will make cost control possible. Specifically, if the public plan option in the House bill is opened to all comers and if the proposals to give the Medicare payments advisory board genuine power over reimbursement decisions becomes law, then the House bill does indeed open real possibilities for cost-savings in the long-run. These are big ifs, for sure, but the other alternative on the table for cost-containment is simply the status quo – a proven failure. At some point, we need to begin reorienting the American health system towards achieving cost-savings. The House will not take us all the way there, but at least it’s a step in the right direction.

Third, inside-the-Beltway economic reasoning elevates balancing the federal budget above all other policy targets. To say this is myopic would be an understatement.  If households followed the rule that current outlays could never exceed incomes, few would ever be able to go to college, medical school, or even buy a car or house. The ability to incur debt for productive investments is a very valuable option. Put simply, even if health reform has no effect at all on closing long-run budget gaps, it should still be pursued. Even if health reform managed only to reduce the growth rate of private health insurance premiums to the rate achieved by Medicare per-enrollee spending, it would make American households much richer in the long run, even without any beneficial effect on the federal budget deficit.

In June, the White House Council of Economic Advisors (CEA) released a report that evaluated the economic impact of reducing the growth rate of health care spending over the next 10, 20, and 30 years. Crucially, the CEA report broke out the economic benefits of this cost containment into benefits arising from federal budget effects versus all other effects. The federal budget benefits of cost reduction are dwarfed by wider efficiency effects – explaining only 12% of the overall benefits of cost containment over the next decade and 28% of overall benefits over the next 30 years. In short, even if reform manages to constrain costs enough to push the federal budget towards balance, this will be a very small part of the overall benefits conferred by this cost containment. This is useful to remind ourselves that the economy and the federal budget are very different things – and it’s the health of the economy that should drive policy.

Finally, and most importantly, green eyeshades just have no place at all in current economic debates. The U.S. economy has lost 6.7 million jobs in the past 19 months as private spending (both by households and businesses) has collapsed. Literally the only thing keeping another economic depression at bay has been the very large rise in the federal budget deficit. It should be noted that the lion’s share (roughly 70 percent) of this rise in the deficit over the past year has been essentially mechanical:  reduced tax collections and increased mandatory safety net spending driven by the cratering economy, and not the result of legislation.

Because the economy needed an even bigger boost than this mechanical rise in the deficit allowed, the American Recovery and Reinvestment Act (ARRA) was passed and will add another $180 billion to the deficit in fiscal year 2009. However, even given this large increase in the budget deficit in 2009 it is almost certainly the case that more public relief and investments will be needed to stabilize the job market in coming years. To bring this back to the health reform debate, enacting health reform and subsidizing coverage expansions without paying for them in the first few years would actually have been the wisest macroeconomic course of action.

Maybe an analogy can help here. Normally, it would be considered a bad idea to dump a bucket of water on your living room rug. When that rug is on fire, however, it’s not just a good idea, it’s absolutely necessary. Insisting that health reform be fully deficit-neutral in the current macroeconomic environment is sort of like insisting that your pail has a water-tight top on as you pass through a living room that is ablaze: what may be a sensible rule in normal times becomes downright bizarre in times of crisis.

Beltway pundits would do well to repeat the following as many times as it takes to sink in: balancing the federal budget is a tool, not a target. To continue with the analogies, just as a hammer is the wrong tool for many jobs, balancing the federal budget is the wrong tool in the context of virtually all of today’s economic debates: it would short-circuit the economic recovery and could derail action on the crucially important job of reforming the health care system. It’s time conventional wisdom realized that not every problem is a nail.

See related work on Public Investment | Recession/stimulus | Health | Economic Growth | Budget, Taxes, and Public Investment

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